A little over 12 months ago, the COVID-19 virus dramatically impacted Macau, prompting an almost complete cessation of cross-border travel and the effective close down of the externally driven components of the territory’s economy — gaming and entertainment — for much of calendar 2020.
Looking back on the Macau government’s swift reaction to the COVID outbreak — which at the time may have appeared severe and harmful to the economy, alongside events unfolding in China — it is clear that Macau’s performance during the pandemic has been commendable relative to the actions taken in other small territories and indeed some major countries. For a jurisdiction sharing three borders with mainland China, Macau has handled the pandemic deftly, with low case numbers and a COVID-19 death rate of zero, demonstrating the effectiveness of strong, decisive leadership backed by substantial financial reserves. Equally impressive are measures taken by Macau’s government to secure vaccine doses in quantities sufficient to ensure that all of the territory’s population can be protected from the virus — a move critical to the recovery of any small jurisdiction that is so densely populated and in which GDP is so heavily reliant on inbound tourism.
In the fourth quarter of calendar 2020, there were encouraging signs of recovery in Macau, against a backdrop of the return of economic growth in China and significant increases in visitor numbers to the territory, albeit from devastatingly low levels. There has been a corresponding improvement in Macau’s gaming sector and indications that people are spending more time in the territory when they visit. There are also signs that mainland Chinese are focusing their leisure travel closer to home, which should benefit Macau’s recovery, alongside initiatives by its government and China’s renewed focus on the development of the Greater Bay Area. However, any route to recovery will include some unexpected bumps in the road, as we have seen elsewhere in the world — including neighbouring Hong Kong — with virus-related developments quickly able to derail prospects of recovery in the near term. Various uncertainties remain, including potential winter surges of COVID-19 in Macau and mainland China, recent calls by the Chinese central government for residents to curb travel during the Lunar New Year holiday season, the persistence of Beijing’s capital controls, and how new US President Joe Biden will handle the US-China relationship going forward.
Despite those cautionary observations, and without understating the negative impact of the economic downturn on the Company, there have been a number of positive developments. Sales of the individual units at One Central Residences and further sales of smaller individual units at The Fountainside are a credit to the Manager’s persistence through adverse and unexpected circumstances. With proceeds from the divested assets applied to the reduction of the Company’s debt, no distribution of capital has yet been achieved, but both the Board and the Manager have remained steadfast in their focused delivery of a divestment strategy.
Coordinating property enhancements to coincide with required maintenance during a hiatus in luxury real estate market activity has maximised potential sales opportunities amid the emerging recovery, a commercial posture that lies at the heart of our divestment plans.
Improvements to our ultra-luxury villa Penha Heights (Estrada da Penha) have yielded impressive results, making the property significantly more appealing to prospective purchasers. Similarly, cost-effective repairs and upgrades to vacant apartments at The Waterside have been aimed at restoring rental levels and maintaining the tower as a standout asset that is attractive to potential buyers. With most of The Fountainside already sold, creative solutions and strategies are being implemented to complete sales of the development’s remaining units.
The Company’s financial performance during the first half of the current financial year reflects stable property valuations following earlier dramatic declines, with sales prices modestly exceeding current market valuations. Against this, the Company’s operating costs, including financing charges, saw a reduction in its Adjusted Net Asset Value.
The Company’s share price discount to Adjusted Net Asset Value remains a closely monitored metric, and its current level is disappointing, although it serves as an additional incentive to deliver returns for shareholders. The Board remains very mindful of the working capital operating needs of the Company when considering buying back its shares in the market.
The Manager continued to achieve favourable debt restructuring through proactive engagement with lenders, which has supported cashflows and reduced expenditure. A loan facility of HK$540 million (US$69.7 million) was executed in September 2020 for the Company’s properties in One Central Residences, followed by another facility of HK$250 million (US$32.2 million), which was executed after the period end, significantly improving the Company’s cash position. Active monitoring and a focus on loan covenants continued through the changing circumstances of the past year. The Company retained strong working capital and liquidity to see it through these extremely challenging developments and to enable the exit outcomes that we are working hard to deliver.
Operationally, we appointed Deloitte LLP as the Company’s new auditor, following a tender process. We also continued to maintain the governance and operational focus on the ESG practices previously explained in the context of the Company’s specific circumstances.
The effects of the COVID-related downturn and the stagnation of sales activity in the luxury property sector have already been explained in our 2020 Annual Report and Accounts, and the subsequent update that accompanied the Notice of Annual General Meeting set out changes to the fees paid to the Manager. The key elements are that no further fees will be paid to the Manager from the beginning of 2022, with a Management Fee of US$100,000 per month payable for calendar 2021, which may be offset against Realisation Fees previously agreed such that the overall fees payable will not exceed the maximum levels negotiated in 2019.
We greatly appreciate the confidence of shareholders in approving the Company’s strategy and supporting the extension of its life for a further year. We will permit no complacency nor let-up in the task of divestment, and detailed, well thought-out plans are in the process of being implemented in response to prevailing market circumstances. It is fair to say that results may be seen later this year, subject to developments related to COVID-19. With Macau’s recovery at an early stage, it remains premature to offer anything beyond cautious optimism, tempered by a realistic recognition that events beyond our control may yet hamper our progress towards the ultimate achievement of our objectives. Patience will be at a premium.