SJM to see positive cash flow in 2024

Fitch Ratings has revised the Outlook on SJM Holdings Limited’s (SJM) Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative as the outlook reflects the robust recovery in visitation and gaming revenue in Macau, despite the economic downturn in China. The recovery, together with the continued ramp up of Grand Lisboa Palace (GLP), is likely to improve SJM’s leverage metrics to within the ‘BB-’ threshold in the coming years, said Fitch.

“The rating also reflects the potential for further weakness in China’s economy and regulatory changes, as well as execution risk on the ramp up of GLP amid a competitive environment in Macau due to new openings and expanded facilities,” the institution said.

Reviewing GLP’s performance, Fitch noted that the integrated resort continues to build up, even though the progress has been slower than expected. In 3Q23, GLP recorded GGR of HKD783 million, translating to a market share of 1.6%.

This has allowed it to narrow the property EBITDA loss to HKD27 million, close to break-even.

Meanwhile, there is a strong recovery at self-promoted casinos.

Mass GGR of Grand Lisboa and other self-promoted casinos reached 91% to 92% of 2019 levels in 3Q23, in line with the overall market.

SJM has shifted focus away from the VIP segment at these casinos, resulting in VIP revenue at Grand Lisboa recovering to only 9% of 2019 levels and no VIP revenue generated at other self-promoted casinos.

This has led to a lower GGR contribution, but the EBITDA impact is much more limited, as VIP has low margins.
“We project Grand Lisboa and other self-promoted casinos adjusted property EBITDA to recover to 95% of 2019 levels in 2024,” said Fitch.

Meanwhile, Fitch observed that satellite casinos are dragged by excess costs as SJM has had to “take on the excess costs of redundant staff from the closure of five satellite casinos at end-2022, amounting to HKD488 million through [first nine months of 2023].”

It expects the excess costs to be fully absorbed through attrition and redeployment by 2025. However, steady progress has been made so far, with headcount dropping below 2,000 in 3Q23, from 2,700 at end-2022, and the daily run rate of excess costs dropping to HKD1.6 million in 3Q23 from over HKD2 million in 2022.