I present my report for the first six months of our financial year and the second half of the calendar year ended 31 December 2021.
During this period, the challenges of COVID-19-driven restrictions following outbreaks in mainland Chinese cities and in Macau, including lockdowns, continued to seriously affect Macau’s recovery. Adding to uncertainty around travel, questions over renewals of casino licences and a subsequent clampdown on VIP and junket gaming also weighed heavily on sentiment. Recent announcements have calmed those concerns, although the mainland Chinese government’s targeting of junket operations and VIP gaming will impact gross gaming revenue and the Macau government’s tax receipts. The Company has no direct links to gaming, but the critical role that gaming plays in Macau’s economy affects our operating environment and investor sentiment.
Against this backdrop, the improvement in Macau’s economy during 2021 is mildly encouraging, although it remains a long way from its pre-pandemic performance. Macau continues to follow a “dynamic zero” strategy to control COVID, like mainland China and Hong Kong. Unlike those jurisdictions, however, whose economies are more diversified, Macau’s economy is heavily reliant on two key industries – gaming and tourism – so the dynamic zero policy has not only reduced government revenues, but has also affected most aspects of the wider marketplace, including the luxury property sector, to which we are exposed.
Although the territory’s public health achievements are noteworthy, the delays have hampered the pace of economic recovery. China remains Macau’s only travel bubble, accompanied by vigorous controls. Broader travel bubbles would provide a welcome boost to sentiment and investor confidence. These two markets are critical to Macau’s continued recovery, and particularly important when it comes to restoring some momentum at the upper end of the property market. Macau’s real estate market remains subdued compared to markets in mainland Chinese cities and Hong Kong, as well as markets further afield, which have delivered growth and higher levels of activity. This is largely due to the limited diversity of Macau’s economy.
A loosening of travel restrictions has appeared to be imminent on several occasions, but the recent surge in COVID cases in Hong Kong, and the imposition of strict public health measures in that city, will result in a further delay. In contrast to Macau, once strict “COVID-zero” countries such as Singapore, Australia and New Zealand are now moving to policies of “living with COVID”. In the absence of a clear exit strategy from the mainland China-led dynamic zero model, we expect that the completion of our divestment programme will require more time than we had anticipated at the beginning of 2021.
Any relaxation of travel restrictions would be an welcome development. Although the property market in Macau continues to function, most transactions are still within the first-time-buyer segment of the market. Sales activity in the luxury segment has remained muted, however, which has fed into our property valuations.
Amid these circumstances, there are some signs of improvement, with higher inbound visitor numbers over the Christmas and New Year period. Many of the gaming concession proposals that had unsettled sentiment in the industry appear to have been abandoned, and the 10-year concession duration of each licence will provide a measure of confidence for casino operators. Moreover, a shift to mass-market gaming and a broadening of the tourism base will support Macau’s longer-term future and help to cement its key position in the Greater Bay Area initiative, which is of major importance to the mainland Chinese government. This transition could nevertheless be challenging in the near term.
Our financial performance reflects the challenges we faced during the first half of our financial year.
The Company’s unaudited adjusted net asset value (NAV) was US$121.5 million as at 31 December 2021. This is equivalent to US$1.96 (145 pence) per share, and represents a decline of 5.7 % (3.2% in Sterling term) from the year end.
As at 31 December 2021, MPO’s share price was 47.3 pence, representing a 67% discount to its adjusted NAV per share.
Our results reflect the profitable sale of a unit at The Fountainside and a reduction in debt of more than US$3.2 million. Debt service is our most significant operating cost, and reducing debt through sales is a key element of our near-term strategy.
The Company’s aggregated cash and deposit balances were US$6.9 million as at 31 December 2021, of which US$2.9 million, representing a six-month interest reserve, was pledged as collateral for credit facilities. Cash resources of approximately US$4 million were available for the payment of operating costs, although this includes a US$3.5 million deposit from which any withdrawal for such purposes is subject to consent from the lender.
At our AGM in December, the Board and the Manager expressed their great appreciation for the overwhelming support of Shareholders for continuing the life of the Company to allow the completion of the ongoing divestment process on more favourable terms.
Amid a very challenging environment, the Manager has steadfastly pursued a variety of exit tactics, and has carefully coordinated marketing and sales processes within the constraints outlined in detail in its report. This management activity has included property visits and support for extensive due diligence requests among prospective buyers of our assets.
These efforts have yet to translate into tangible outcomes, but a clear strategy is being followed through that will include the sale of further individual units at The Fountainside. More significantly, any move to strata sales of units at The Waterside could have a positive effect on our results.
In the meantime, however, a modest recovery in leasing at The Waterside towards the end of 2021 was a positive development and an achievement for the leasing team. The Waterside retains its status as a premier property thanks to the quality of construction by the original Hong Kong-based developer, a high standard of management, and ongoing upgrades and improvements led by the Manager and its leasing team. In this context, there is a continued focus on the environmental impact and efficiency of new air conditioning units and kitchen appliances. These are solid examples of such attention to detail that we believe will translate into stronger leasing activity and more attractive sales options.
The redevelopment of units at The Fountainside is nearing completion, with reconfigured smaller apartments targeted at a more active segment of the property market. The creation of two additional car-parking spaces should also create readily saleable assets. The four larger units at The Fountainside will continue to be marketed, although current mortgage limits remain a challenge for prospective buyers.
Penha Heights is an attractive asset that has drawn several viewings, but prevailing “wait and see” sentiment among prospective investors has deterred any from making a purchase. Ongoing travel restrictions mean that more time may be required to achieve a sale. When sentiment improves, this asset may become very much in demand, especially if planning conditions are improved or simplified to broaden its appeal to developers.
Corporate governance has remained high on our agenda, with physical meetings resuming in Guernsey. I am also pleased to report that our extensive search for a new Director has been concluded, with the appointment of Carmen Ling to the Board. The recruitment process required an extended duration due to the travel challenges involved.
Ms Ling is a Hong Kong resident, and brings a diverse set of financial skills and experience to the Board, including a background in banking and real estate, and a deep understanding of the Chinese market. This knowledge is important, as travel by other members of the Board remains subject to restrictions. Ms Ling will be joining our Board for a shorter duration than other, equivalent appointments, and we appreciate her commitment in these extraordinary circumstances.
We look forward to working with our new colleague, who has already spent time with the Manager’s team in Hong Kong.
I should also like to take this opportunity to express my personal thanks to Wilfred Woo for his many years of service and considerable contribution to our Board functions. His diligent approach and perspective have been most valuable, especially during the past two years, as travel has been so restricted.
As prefaced in our earlier reports, we continue to drive down costs where possible. We have also previously outlined our intention to agree a revised fee payable to the Manager in 2022, contributing to its operating costs and to continue to provide incentives for an early disposal of our assets. Full details are set out in the Interim Report.
A properly resourced Manager is essential to see the Company through the current challenges and conclude an optimal divestment of our remaining assets. The Manager has worked with the Board and taken all appropriate steps to slim down its operations while retaining the necessary capacity to deliver a wide range of functions for as long as we retain our current assets.
Similarly, managing our debt and debt-servicing costs is critical, as this is our single largest expense. The Manager’s success in restructuring our debt is commendable, and a key component of our ability to navigate through the near-term challenges. More details on our current loan facilities can be found in the Interim Report.
In conclusion, with continued prudent capital management and the hard work of our team, we believe the Company can weather the conditions that have temporarily disrupted our divestment plans. We remain dedicated to achieving our asset disposal objectives, albeit over a longer time frame than we had originally anticipated.