Dim outlook clouds Macao casino listing
By Dominic Whiting and Kennix Chim Reuters
Published: July 16, 2008
iht.com
MACAO: Warring octogenarian siblings are not the only headache for investors as a casino company with roots in Macao's lurid past makes its stock market debut this week.
The potential risks outlined in the share prospectus of SJM Holdings - intense business rivalry, building delays, labor shortages, money laundering, mainland Chinese travel restrictions - make a lengthy health warning for the company and the industry.
Once hot, stocks related to in the $15 billion Macao gambling market are no longer a one-way bet.
Even share prices have more than halved since November for Las Vegas Sands and Wynn Resorts, which entered the Chinese gambling enclave with high-profile casinos after the monopoly held by SJM's founder, Stanley Ho, expired in 2002.
The odds are particularly stacked against SJM, or Sociedade de Jogos de Macau, which will trade on Wednesday on the Hong Kong Stock Exchange, having overcome a last-minute legal challenge by Ho's estranged sister, Winnie Ho, who owns a stake in SJM's parent company.
Lewis Wan, chief investment officer at Pride Investment Group, said, "We haven't invested in Macao-related stocks this year, as the casino industry faces oversupply."
SJM's operating margin halved to 6 percent in the last three years as high-rollers migrated to the casinos built by the U.S. operators, which achieved 20 percent margins.
Earnings are projected to grow by just 2 percent in each of the next two years, compared with 13 percent to 22 percent for rivals.
A "moving elephant," is how a BNP Paribas analyst, Chris Zee, described SJM in a note to clients.
At least SJM stock looks inexpensive.
At 3.08 Hong Kong dollars, or 39 U.S. cents, the company priced its initial public offering at the bottom of its indicated range and a third less than its fair value, according to CLSA and BNP Paribas, which were both involved in arranging the deal. Deutsche Bank is the lead underwriter.
SJM pressed ahead with the listing despite a torrid time for stocks and raised $494 million, half of what it wanted, to help give its famous casino, the Lisboa, a long-awaited overhaul.
The Lisboa, where clusters of women in miniskirts whisper to attract passing men, is a relic from an era when gangster gun battles often echoed across the sleepy town, compared with Ho's Grand Lisboa across the road and other new venues.
During a four-decade monopoly, casinos like the Lisboa helped Ho build a fortune worth about $8 billion.
But Ho, who is 86 and claims to have fought off pirates during a voyage to Macao early in his career, has struggled to defend his empire as SJM's share of gambling revenue in Macao dropped to 40 percent from 75 percent three years ago.
Macao, whose gambling revenue overtook those of Las Vegas in late 2006, has 29 casinos, with more on the way. About a dozen hotel and casino operators are building what they hope will be a family-friendly entertainment hub on the Cotai strip, four square kilometers, or 1.5 square miles, of reclaimed land fusing two islands, with most opening by 2010.
The increased building has raised the cost of construction and delayed some projects. And the battle to keep croupiers means that SJM's wage bill doubled in two years to $390 million in 2007, when the work force grew by just one-fifth.
Reports that Guangdong Province has stopped issuing double-entry visas for Macao are a reminder that the mainland Chinese authorities could turn the tap off at any time. Half of Macao's 27 million visitors in 2007 crossed from the mainland.
"It has increased the policy risk facing Macao gaming stocks," said Gabriel Chan, an analyst at Credit Suisse.
A corruption crackdown could provide the motive to close the border. Analysts suspect that corrupt Chinese officials shift ill-gotten gains by paying tour operators at home for chips they pick up in Macao.
SJM has set up an anti-money laundering department that tries to spot suspicious gamblers and do background checks on them. But the company says in its prospectus that the Macao government could impose a fine or even revoke its license if it discovers illegal activity.
With Winnie Ho around, some form of litigation seems guaranteed. Winnie Ho, 85, has started more than 30 court cases against her brother, including complaints against the transfer of assets to SJM from its parent, STDM, or Sociedade de Turismo e Diversões de Macau.
Lawyers for Winnie Ho, who owns 7.3 percent of STDM, argued in the Hong Kong High Court last week that stock market regulators should have rejected the SJM listing because of the legal uncertainty. She lost but continues her court campaign. |
