However, SJM has trimmed its expectations quite significantly since its most recent attempt to go public in January when it was testing the market for a deal of up to $1 billion.
The price range has been set at between HK$3.08 and HK$4.08 a share. The 1.25 billion shares on offer are all primary and represent 25% of the company. The 15% greenshoe, if exercised, could bring a further 187.5 million shares into the deal and boost the total deal size to $752 million. The international offering accounts for 85% of the shares being offered, while an initial 15% has been earmarked for Hong Kong retail investors û up from the normal 10%, suggesting that the company is expecting the deal to be popular with the Hong Kong public. And it may well be right. In the past, Hong Hong investors have been known to come out in force specifically for companies that they are familiar with.
SJM runs 19 of MacauÆs 29 casinos, and is top in terms of market share and gaming revenue. Across its venues it has 305 VIP gaming tables, 1,100 mass market gaming tables and 3,700 slot machines. Its origins can be traced back to Sociedade de Turismo e Diversoes de Macau (STDM), the former monopoly that is controlled by Macau gaming tycoon Stanley Ho and which dominated gaming in the former Portuguese colony before the liberalisation of the industry in 2002.
The introduction of competition û including American market entrants, such as Wynn Resorts and Las Vegas Sands û has proven a mixed blessing: the opening of large American casinos has helped to vastly increase the gaming revenue in the area, but at the expense of SJMÆs market share. In 2005, SJM took 85% of MacauÆs VIP gaming revenue and 58% of the mass market revenue, in 2007 this had dropped to 38% and 48% respectively. Despite the decreasing market share, SJMÆs revenues have remained fairly stable at HK$30 billion to HK$34 billion per year. And the top line is expected to hit HK$42 billion in 2010, when a number of projects will be completed.
One research report notes that during the time it ran a monopoly, as STDM, ôit neither felt strong competitive pressure nor the need to inject massive capital to upgrade its casinos when existing properties were generating strong recurring cashflow. But with the fierce competition from some of the worldÆs top casino operators, SJM has embarked upon a number of initiatives to bring its products into line with the competition.ö
As part of this plan to expand, it has been building new properties. In February 2007, its new flagship casino, the Grand Lisboa, opened; and this February the casino at Ponte 16 opened its doors for business.
More properties are on the way. In the Lisboa district, it is building LÆHermitage, a club-style casino focusing on richer clients, which is due to be completed in the third quarter of 2008. In the same area, it is purchasing a 2,885 square metre plot of land for a future development. It also has plans for two developments on the Cotai strip, one to be completed in 2010, the other to be finished in 2012.
Of the proceeds raised during the IPO, 40% will be used for project funding, 50% will be used to purchase land for new developments and the remaining 10% go towards working capital.
More buildings and land increases the companyÆs exposure to MacauÆs booming real estate sector and the intention is for the new projects to stop the gradual decrease in SJMÆs Ebitda margin, which has narrowed from 12% in 2005 to 6% in 2007. The research report holds that margins will stabilise in 2008, and eventually rise to 7% as the company puts into place cost-saving measures and new mass-market service agreements.
SJMÆs price range values the company at 10.1 to 13.4 times its predicted 2008 earnings, which is much cheaper than its major competitors. US-listed Las Vegas Sands is currently trading at 82 times 2008 estimates, and MGM and Wynn are trading at 22 times and 29 times respectively.
A recent report by Globalysis is bullish on Macau's prospects in 2008: despite the concerns created by the downturn in the global economy, the research firm believes that Macau will experience a 28.8% increase in gross gaming revenues. The reasons cited include the growth in the number of developments, an ever wealthier Chinese clientele, and some more punters coming across from the Beijing Olympics.
An SJM IPO has been in the pipeline for a number of years, but has been consistently delayed due to legal disputes between Stanley Ho and his sister Winnie. Stanley Ho directly owns 10% of SJM and is also the controlling shareholder of STDM, which owns 80% of SJMÆs equity.
One source described the disagreements between the two as the ômost vitriolic fight over a major asset in recent Hong Kong historyö. Concerns brought up by the regulator in connection with these legal issues caused the deal to be pulled at the last minute in January, but a separate source said the fact that the IPO has now got to the stage of a formal roadshow proves that the legal issues have been resolved.
That may be, but investors might wonder why the company has decided to come to market during a period when Hong Kong IPOs are routinely trading down û the worst example being Chongqing Machinery and Electric Co, which has lost nearly 30% since its debut earlier this month.
Deutsche Bank is the soul global coordinator and bookrunner for the offering, while BNP Paribas and CLSA are advising on the deal. Pricing is scheduled for July 3 and the trading debut is planned for July 10.
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