JP Morgan analysts have labelled the liquidity of Macau casino concessionaire SJM Holdings as “worrying” amid concerns over its ability to refinance while the COVID-19 pandemic drags on.
In a Friday note outlining potential stock opportunities for investors, the investment bank suggests that liquidity is not of any immediate concern to five of Macau’s six casino licensees, with the exception being SJM.
While most operators have ample liquidity to withstand another 18 months to four years “even at current levels of demand run-rates under near-shutdown of border,” analysts DS Kim, Amanda Cheng and Livy Lyu write that this does not apply to Galaxy Entertainment Group – which has cash reserves to last for “30+ years” – and SJM with “only about half a year.”
“SJM’s liquidity is somewhat worrying as its loan re-financing effort has stalled pending government approval, hence it’d have to seek external funding in our view,” the state. “Plus, note SJM’s [operating expenses] are likely to rise from 2H22 amid the likely closure of some satellite casinos, as we believe SJM will have to bring their gaming staffs on its own payroll.
“This would shorten its liquidity runway even further.”
The analysts’ comments come two months after ratings agency Fitch downgraded SJM’s Long-Term Foreign-Currency Issuer Default Rating and senior unsecured rating from “BB+” to “BB” due to the company’s slow pace in securing a new loan facility and uncertainty over license renewal.
However, in her Chairman’s Statement published in SJM’s Annual Report last week, Chairman Daisy Ho expressed confidence in the company’s “continued future presence in Macau”.
JP Morgan also noted there was now “reduced (if not largely removed) risks of license renewal” since the start of the year given recent clarity provided by the Macau SAR Government.
While the analysts have maintained SJM as their least preferred stock, they see Sands China as a unique long-term opportunity.
“While it’s tempting to throw in the towel given near-zero visibility on China’s re-opening policy, we feel it may actually be difficult for these stocks to further disappoint investors here given the (worst) level of investor apathy, sentiment and positioning, as well as current valuation,” they write.
“In short, we see the risk/reward tilted positively for those who can play a ‘waiting game’ for China to allow easier travel/mobility into 2023, and we suggest using volatility to gradually build positions on quality names.”
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