Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

<ul>
<li>The market remains skeptical about the prospects for SJM as its expansion with Grand Lisboa Palace is now delayed to 1Q2021.</li>
<li>Bullish tone will slowly return after Phase One US/China trade deal is signed next week.</li>
<li>The stock has considerable run room its all time high of HK23 in 2013--before the Beijing regulatory crackdowns.</li>
</ul>
<div class="content-caption"></div>

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/113/033/original/ObjectChart.aspx.gif?1578437086" class="editor-image img-responsive" data-smartkarma-image-id="113033"></figure>

Morgan Stanley upgraded SJM last week. With good reason.

 One of the central realities of investing in the gaming sector is that above all, it’s a game that rewards patient investors to a greater extent than what is widely perceived. Part of this misperception springs from the nature of the business itself. As creatures of government in a sense, casino operators results are published for the world to see each month. It is if they are suspicious characters on parole hauled before a financial judge each month who pronounces them innocent, guilty or well behaved, according to the results on the casino floor. In this world of massive media overkill, headwinds and tailwinds have become part of the calculation analysts  must consider when making a call on a given equity or market.
 No algorithm exists that can accurately calculate the depth and length of headwinds.  They can originate as is the case in Asia gaming, inside the political/ /ideological/regulatory complexity of the Beijing government’s policy decisions. The Macau SAR’S relations with Beijing are a positive, yet it is clear who will probably make the final calls on the terms on which concessionaires will have their gaming licenses renewed. We have seen how the consequences of Beijing’s concerns, if not anger, about what was perceived as abuses in overaggressive marketing to Chinese VIP by casinos and money laundering.
 Its series of 2015 crackdowns on currency movements, junket practices, smoking bans, and enforcement of ATM and face recognition had two impacts. First, it stopped the sustained bullish rise in gaming sector stocks ignited by the massive share of total revenue generated from VIPs. And that in turn, created “VIP refugees” who were redirected both by junket operators and their own fears, to other Asian gaming nations.
 There is little question that the ebullient VIP growth in markets like the Philippines, Cambodia and Vietnam, owe much of their vitality to the flow of Chinese VIP play that began after the 2015 crackdowns and continues until this day.
 The same situation now applies to mass markets. China’s population and growing middle class are the mother lode of in tourist arrivals to gaming jurisdictions throughout Asia.
 Yet during the 2015 period through 2019, we have seen Macau beginning to recover from Beijing centered headwinds, further exacerbated by macro events such as the US/China trade dispute about to finalize a Phase One deal. There are continuing headwinds about the Yuan, about GDP growth and the political turmoil in Hong Kong.
 The slowly improving picture in Macau, despite the relentless blowing of headwinds and exit of “refugee play” signals that the significant swerve of marketing focus to mass and less dependence on VIP by Macau operators has become the core of a newly forming bull case for the sector stocks.  This prospect we believe is already baked into most stocks in the sector. Investors are clearly aware that massive tourist growth for Macau is the rationale behind the approximately $6.5B in new investment major operators have in progress for Macau.
 But price recovery, while slow, has been steady for leading operators. But not for all. And that is where we see opportunity for viable entry points on some stocks. While the entire sector trades continue to be significantly off their pre-crackdown long term highs, their march back north varies.
 For one reason or another, some of them understandable, the trade of SJM Holdings Ltd. (HK: 0880) still languishes in a trading range we believe does not yet reflect the improving mass outlook in Macau.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/113/034/original/SJM-Holdings-Limited.jpg?1578437220" class="editor-image img-responsive" data-smartkarma-image-id="113034"></figure>
<div class="content-caption">SJM's footprint is large but needs the Cotai property to recapture market share.</div>
We believe the market is telling us that it sees much of the bearish outlook for SJM as self inflicted wounds connected to what appears to be in interminable, not fully explained delays in the opening of its US$5B mega property, the Grand Libsoa Palace at the Cotai.
 2019 GGR
 Overall GGR for 2019 has come in at US$$36.4B, a 3.2% decline, y/y nearly all attributable to the lagging VIP segment. Mass was up 8% y/y. SJM has found itself between the proverbial rock and a hard place in the Macau firmament: On the one hand, it has lost VIP market share since 2014. It has lagged badly in mass as well by  its tardiness in expanding room and gaming capacity  thus allowing competitors to poach market share by expanding their property footprints at the Cotai.
 
 From a high of HK$23 in 2014, SJM share of Macau’s  GGR market has shrunken to 14%, challenged in all market segments by more product brought on the market by Wynn, Sands China,  and Melco, among others. So making a bull case for the stock is a heavy lift to be certain. The catalyst expected to move SJM north appear uncertain and too far away to entice investor interest even at the low entry point that now exists. We look at the stock in another way: And that is, the innumerable delays in the arrival of the Grand Lisboa Palace could also be a positive.
 SJM’s 3Q results (Oct 2019) showed net gaming revenue of HK$805M down 3.2% y/y. Adjusted EBITDA was HK$950M up 3.4% y/t/ This was attributable among other reasons for a 1.5% increase in Adjusted EBITDA margin over 10.8%.
 Profits were up in Q3 to HK735M, up 4.5% y/y.
EPS: HK$0.54
Beta: 1.15
YTD 2019: Stock is up 32.95%. We believe among peers now, it has more run room ahead despite delays in the arrival of GLP.
 SJM had cash/equivalents on hand of HK$1,603M against debt of HK15.329M.
 Room occupancy ran over 90% for the period. That is mostly due to the total paucity of rooms in the SJM portfolio now.
 It’s a mixed result. But skepticism continues we believe, as a theme in the trade directed at the succession of delays in management’s call on just when the GLP will open. And that is where we believe, the key reason for the stock’s sluggish trading pattern remains.
 As a sometimes contrarian, what I see is the possible value of the delay in that GLP will debut in a more robust market in 2021.
 GLP is presently scheduled to enter the market by either late this year or early 2021. With the arc of mass growth continuing and the property’s addition to supply coming, its opening at the Cotai will likely come at a time when both mass will be larger and VIP continuing a modest recovery from where it is now. We think a combination of diminishing macro  headwinds, sustained growth of mass and slow recovery of VIP will propel SJM’s revivial of  the market share it has lost steadily since 2014 as it’s new and more exciting supply comes on stream with the opening of GLP.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/113/035/original/grand-lisboa_7-696x418.jpg?1578437331" class="editor-image img-responsive" data-smartkarma-image-id="113035"></figure>
<div class="content-caption">This huge property will be a shot in the arm to SJM market share gains and earnings. But when?</div>
Morgan Stanley has lifted its outlook on SJM relative to the early 2021 opening of GLP. We think it’s a buy now anticipating the debut to rebuild its market share significantly and fast.
 Below we compare the price history of some leading operators in Macau to show the degree of recovery in their trades:
 For context we looked at all time highs vs. current trades on a few selected Macau centric issues to impart a sense of how much recovery key stocks in the Macau sector have achieved during a period marked by macro headwinds and sharp declines in VIP:
<ul>
<li>Wynn Resorts Ltd. (NASDAQ:WYNN). All time high             2/14: US$228. Current price at writing: $142</li>
<li>Las Vegas Sands (NYSE:LVS) USD$118.40</li>
</ul>
Price at writing: USD$70.
<ul>
<li>Sands China Ltd: (HK1928): 1/14: HK$59.75</li>
</ul>
Price at writing: HK$43.30
<ul>
<li>SJM Holdings Ltd. (HK 0880)10/13: HK$23.750</li>
</ul>
Price at writing: HK$9.450
 All the peers noted above already have operating properties at Cotai and have benefitted materially from that premier location—except SJM. Over the past 5 years, SJM’s market share of VIP has fallen 25% partially compensated by mass which grew 8%.
 SJM operates the Grand Lisboa Hotel with 400 rooms plus another scattered 20 small locations on Macau.
 The GLP will bring 1,900 rooms and suites to Cotai with an estimated 700 tables and 1,200 slot machines. The property will also feature a full complement of MICE facilities for conventions and meetings, entertainment and shopping. (Note: In its most recent statement, management acknowledged that as of now, not all the retail shops have been rented).
 With input from on the ground associates in Macau, we have sensitivity tested our projections of what we believe the GLP will produce when fully opened by early 2021.
Our estimate of revenues: HK$15.7B
Morgan Stanley’s number is HK$12.756B. The difference lies in the speed or ramp up of mass I see based on discussions with my associates.
EBITDA: I am estimating HK$2.B.
Morgan Stanley is putting it at HK$1.6B
 I believe my rationale for a slightly better performance than the MS projection lies in the consensus view of our group of the year one ramp up. We assume opening very early in 2021. We think the MS projection is likewise valid but neither of these projections can realistically forecast what if any, macro headwinds, or even further construction delays may yet be in the crosshairs.
 Right now best estimates are that the property’s final cost will come in at around US$4.9B to $5.1B. Since announcing the project back in 2014, SJM management has continually encountered construction cost rises and revised the final price tag. This has not endeared the company to many investors who continue to believe that yet more revisions to cost may come.
 Conclusion
 We are forecasting a 4% to 5% total increase in 2020 Macau GGR bringing the total to around US$38B. We see more mass growth rises related to diminishing macro headwinds bringing back refugee VIP. This means that GLP will enter a recovering market with a stronger mass segment overcoming somewhat more of the VIP deficit than may be expected, according to our best sources.
 Sitting where it is now, we think there will be growing recognition by investors as the year unfolds, that the long awaited, long delayed, GLP property will produce highly significant accretive earnings for the company. But more crucial, it will stem the tide of market share loss and begin to recover much of the lost play.
 That is related to the historic arc of casino openings. New properties always benefit from crossover trial in their early months. But as the novelty wears down, they continue to hold market share based on the excitement of the product. In GLP SJM will deliver such a product. And as that recognition spreads, we believe investors will recognize that the stock is still relatively cheap and could well begin accumulating far earlier than what may be normally expected.
 Risks
The track record of management since the first announcement of the GLP project back in 2014, has not been good. Recurring revisions as to construction delays, rising costs and missed deadlines have put many investors off the stock. And to an extent, it still does. But despite this the stock is up for the year reflecting some level of confidence that on fundamentals, it remains cheap. Further construction delays deep into 2021 could hit the stock.
 And always the unknowns of macro headwinds can intrude on any bullish outlook for Macau.
This year also begins the process of reconcession talks between the 6 licensees and the government. While most expect renewal, it is the terms that still remain elusive to forecasting. Will they be seen as punitive? Will gaming taxes be raised? Will further regulations dampen even the slow recovery in VIP play? Will the mass segment begin to slow if the China economy takes a hit? No one knows.
 There are clearly other Asian gaming stocks that present a more diversified bet on the overall bullish outlook for the entire segment. But we still think that SJM, languishing at its current trade with prospects for its new property inching ever close in the consciousness of investors, presents a relatively low risk against a possible upside that could bring the stock to around HKS$12 within the next 160 days.
Our consensus panel believes that SJM is best noted as a "left behind" stock while many of its peers have moved significantly back toward long range highs. All have much run room left. Our sense is that there is more inside SJM than most of the others.


The market remains skeptical about the prospects for SJM as its expansion with Grand Lisboa Palace is now delayed to 1Q2021.
Bullish tone will slowly return after Phase One US/China trade deal is signed next week.
The stock has considerable run room its all time high of HK23 in 2013--before the Beijing regulatory crackdowns.





Morgan Stanley upgraded SJM last week. With good reason.

 One of the central realities of investing in the gaming sector is that above all, it’s a game that rewards patient investors to a greater extent than what is widely perceived. Part of this misperception springs from the nature of the business itself. As creatures of government in a sense, casino operators results are published for the world to see each month. It is if they are suspicious characters on parole hauled before a financial judge each month who pronounces them innocent, guilty or well behaved, according to the results on the casino floor. In this world of massive media overkill, headwinds and tailwinds have become part of the calculation analysts  must consider when making a call on a given equity or market.
 No algorithm exists that can accurately calculate the depth and length of headwinds.  They can originate as is the case in Asia gaming, inside the political/ /ideological/regulatory complexity of the Beijing government’s policy decisions. The Macau SAR’S relations with Beijing are a positive, yet it is clear who will probably make the final calls on the terms on which concessionaires will have their gaming licenses renewed. We have seen how the consequences of Beijing’s concerns, if not anger, about what was perceived as abuses in overaggressive marketing to Chinese VIP by casinos and money laundering.
 Its series of 2015 crackdowns on currency movements, junket practices, smoking bans, and enforcement of ATM and face recognition had two impacts. First, it stopped the sustained bullish rise in gaming sector stocks ignited by the massive share of total revenue generated from VIPs. And that in turn, created “VIP refugees” who were redirected both by junket operators and their own fears, to other Asian gaming nations.
 There is little question that the ebullient VIP growth in markets like the Philippines, Cambodia and Vietnam, owe much of their vitality to the flow of Chinese VIP play that began after the 2015 crackdowns and continues until this day.
 The same situation now applies to mass markets. China’s population and growing middle class are the mother lode of in tourist arrivals to gaming jurisdictions throughout Asia.
 Yet during the 2015 period through 2019, we have seen Macau beginning to recover from Beijing centered headwinds, further exacerbated by macro events such as the US/China trade dispute about to finalize a Phase One deal. There are continuing headwinds about the Yuan, about GDP growth and the political turmoil in Hong Kong.
 The slowly improving picture in Macau, despite the relentless blowing of headwinds and exit of “refugee play” signals that the significant swerve of marketing focus to mass and less dependence on VIP by Macau operators has become the core of a newly forming bull case for the sector stocks.  This prospect we believe is already baked into most stocks in the sector. Investors are clearly aware that massive tourist growth for Macau is the rationale behind the approximately $6.5B in new investment major operators have in progress for Macau.
 But price recovery, while slow, has been steady for leading operators. But not for all. And that is where we see opportunity for viable entry points on some stocks. While the entire sector trades continue to be significantly off their pre-crackdown long term highs, their march back north varies.
 For one reason or another, some of them understandable, the trade of SJM Holdings Ltd. (HK: 0880) still languishes in a trading range we believe does not yet reflect the improving mass outlook in Macau.

SJM's footprint is large but needs the Cotai property to recapture market share.
We believe the market is telling us that it sees much of the bearish outlook for SJM as self inflicted wounds connected to what appears to be in interminable, not fully explained delays in the opening of its US$5B mega property, the Grand Libsoa Palace at the Cotai.
 2019 GGR
 Overall GGR for 2019 has come in at US$$36.4B, a 3.2% decline, y/y nearly all attributable to the lagging VIP segment. Mass was up 8% y/y. SJM has found itself between the proverbial rock and a hard place in the Macau firmament: On the one hand, it has lost VIP market share since 2014. It has lagged badly in mass as well by  its tardiness in expanding room and gaming capacity  thus allowing competitors to poach market share by expanding their property footprints at the Cotai.
 
 From a high of HK$23 in 2014, SJM share of Macau’s  GGR market has shrunken to 14%, challenged in all market segments by more product brought on the market by Wynn, Sands China,  and Melco, among others. So making a bull case for the stock is a heavy lift to be certain. The catalyst expected to move SJM north appear uncertain and too far away to entice investor interest even at the low entry point that now exists. We look at the stock in another way: And that is, the innumerable delays in the arrival of the Grand Lisboa Palace could also be a positive.
 SJM’s 3Q results (Oct 2019) showed net gaming revenue of HK$805M down 3.2% y/y. Adjusted EBITDA was HK$950M up 3.4% y/t/ This was attributable among other reasons for a 1.5% increase in Adjusted EBITDA margin over 10.8%.
 Profits were up in Q3 to HK735M, up 4.5% y/y.
EPS: HK$0.54
Beta: 1.15
YTD 2019: Stock is up 32.95%. We believe among peers now, it has more run room ahead despite delays in the arrival of GLP.
 SJM had cash/equivalents on hand of HK$1,603M against debt of HK15.329M.
 Room occupancy ran over 90% for the period. That is mostly due to the total paucity of rooms in the SJM portfolio now.
 It’s a mixed result. But skepticism continues we believe, as a theme in the trade directed at the succession of delays in management’s call on just when the GLP will open. And that is where we believe, the key reason for the stock’s sluggish trading pattern remains.
 As a sometimes contrarian, what I see is the possible value of the delay in that GLP will debut in a more robust market in 2021.
 GLP is presently scheduled to enter the market by either late this year or early 2021. With the arc of mass growth continuing and the property’s addition to supply coming, its opening at the Cotai will likely come at a time when both mass will be larger and VIP continuing a modest recovery from where it is now. We think a combination of diminishing macro  headwinds, sustained growth of mass and slow recovery of VIP will propel SJM’s revivial of  the market share it has lost steadily since 2014 as it’s new and more exciting supply comes on stream with the opening of GLP.

This huge property will be a shot in the arm to SJM market share gains and earnings. But when?
Morgan Stanley has lifted its outlook on SJM relative to the early 2021 opening of GLP. We think it’s a buy now anticipating the debut to rebuild its market share significantly and fast.
 Below we compare the price history of some leading operators in Macau to show the degree of recovery in their trades:
 For context we looked at all time highs vs. current trades on a few selected Macau centric issues to impart a sense of how much recovery key stocks in the Macau sector have achieved during a period marked by macro headwinds and sharp declines in VIP:

Wynn Resorts Ltd. (NASDAQ:WYNN). All time high             2/14: US$228. Current price at writing: $142
Las Vegas Sands (NYSE:LVS) USD$118.40

Price at writing: USD$70.

Sands China Ltd: (HK1928): 1/14: HK$59.75

Price at writing: HK$43.30

SJM Holdings Ltd. (HK 0880)10/13: HK$23.750

Price at writing: HK$9.450
 All the peers noted above already have operating properties at Cotai and have benefitted materially from that premier location—except SJM. Over the past 5 years, SJM’s market share of VIP has fallen 25% partially compensated by mass which grew 8%.
 SJM operates the Grand Lisboa Hotel with 400 rooms plus another scattered 20 small locations on Macau.
 The GLP will bring 1,900 rooms and suites to Cotai with an estimated 700 tables and 1,200 slot machines. The property will also feature a full complement of MICE facilities for conventions and meetings, entertainment and shopping. (Note: In its most recent statement, management acknowledged that as of now, not all the retail shops have been rented).
 With input from on the ground associates in Macau, we have sensitivity tested our projections of what we believe the GLP will produce when fully opened by early 2021.
Our estimate of revenues: HK$15.7B
Morgan Stanley’s number is HK$12.756B. The difference lies in the speed or ramp up of mass I see based on discussions with my associates.
EBITDA: I am estimating HK$2.B.
Morgan Stanley is putting it at HK$1.6B
 I believe my rationale for a slightly better performance than the MS projection lies in the consensus view of our group of the year one ramp up. We assume opening very early in 2021. We think the MS projection is likewise valid but neither of these projections can realistically forecast what if any, macro headwinds, or even further construction delays may yet be in the crosshairs.
 Right now best estimates are that the property’s final cost will come in at around US$4.9B to $5.1B. Since announcing the project back in 2014, SJM management has continually encountered construction cost rises and revised the final price tag. This has not endeared the company to many investors who continue to believe that yet more revisions to cost may come.
 Conclusion
 We are forecasting a 4% to 5% total increase in 2020 Macau GGR bringing the total to around US$38B. We see more mass growth rises related to diminishing macro headwinds bringing back refugee VIP. This means that GLP will enter a recovering market with a stronger mass segment overcoming somewhat more of the VIP deficit than may be expected, according to our best sources.
 Sitting where it is now, we think there will be growing recognition by investors as the year unfolds, that the long awaited, long delayed, GLP property will produce highly significant accretive earnings for the company. But more crucial, it will stem the tide of market share loss and begin to recover much of the lost play.
 That is related to the historic arc of casino openings. New properties always benefit from crossover trial in their early months. But as the novelty wears down, they continue to hold market share based on the excitement of the product. In GLP SJM will deliver such a product. And as that recognition spreads, we believe investors will recognize that the stock is still relatively cheap and could well begin accumulating far earlier than what may be normally expected.
 Risks
The track record of management since the first announcement of the GLP project back in 2014, has not been good. Recurring revisions as to construction delays, rising costs and missed deadlines have put many investors off the stock. And to an extent, it still does. But despite this the stock is up for the year reflecting some level of confidence that on fundamentals, it remains cheap. Further construction delays deep into 2021 could hit the stock.
 And always the unknowns of macro headwinds can intrude on any bullish outlook for Macau.
This year also begins the process of reconcession talks between the 6 licensees and the government. While most expect renewal, it is the terms that still remain elusive to forecasting. Will they be seen as punitive? Will gaming taxes be raised? Will further regulations dampen even the slow recovery in VIP play? Will the mass segment begin to slow if the China economy takes a hit? No one knows.
 There are clearly other Asian gaming stocks that present a more diversified bet on the overall bullish outlook for the entire segment. But we still think that SJM, languishing at its current trade with prospects for its new property inching ever close in the consciousness of investors, presents a relatively low risk against a possible upside that could bring the stock to around HKS$12 within the next 160 days.
Our consensus panel believes that SJM is best noted as a "left behind" stock while many of its peers have moved significantly back toward long range highs. All have much run room left. Our sense is that there is more inside SJM than most of the others.



 

SJM Holdings Ltd: Headwinds and Self Inflicted Wounds Keep Strong Bull Case Hidden