SJM’s Weak Q3 Expected; Restarting E-Visa Travel Should Drive a Meaningful Recovery in 2023

Narrow-moat SJM’s weak third-quarter results, with a widened adjusted EBITDA loss of HKD 968 million from HKD 702 million in the prior quarter, were within our expectations and continued to reflect coronavirus headwinds and related travel restrictions. Although near-term challenges persist, the Chinese authorities were restarting e-visa travel to Macao from Nov. 1, according to a notice from China’s National Immigration Administration on Oct. 31, which we think is a significant step toward durable recovery of Macao gaming demand. We retain our long-term constructive outlook for Macao's gaming sector, but slightly revise down our assumptions of industry gross gaming revenue to 50% of 2019 levels in 2023 from 60% in our earlier forecast. The tweak is to reflect the challenges resulting from: 1) an extended zero-COVID-19 period, which may continue to disrupt tourism; and 2) slow economic growth that will likely weigh on customer spending and patron betting sizes. As such, we lower our fair value estimate for SJM slightly to HKD 5.60 per share from HKD 5.80.