I present my report for the first six months of our current financial year and the second half of the calendar year 2022.
The period ended with an unexpected and broadly welcome development: the removal of all travel restrictions to Macau and within the region following a decision by Chinese authorities to end their dynamic-zero approach to COVID control.
This rapid change of circumstances had not been foreseen. Indeed, Macau was still slowly recovering from the effects of a major COVID outbreak in July that prompted citywide lockdowns and multiple rounds of mass-testing. Although the lifting of COVID control measures resulted in an “exit wave” of COVID infections across the territory, which affected the Company’s operations, it has ultimately led to several very positive developments.
The border with mainland China – Macau’s primary source of tourists – has fully reopened, daily ferry services to Hong Kong have recommenced, travel on the Hong Kong-Zhuhai-Macau Bridge has resumed and quarantine-free entry to the territory has been restored for visitors from foreign countries. Macau’s gaming revenues have reflected this surge in visitors, notably Hong Kong residents who had been prevented from travelling freely to the territory.
In contrast to the difficult situation that persisted for much of the period, this dramatic and much-hoped-for change will enable us to make renewed progress on our divestment strategy. However, these changes occurred so recently that a solid timeframe for divestment is difficult to anticipate.
Conditions in Macau were challenging in the lead-up to these changes, with low visitor numbers and a poor economic performance in gaming and other tourism-related revenues that saw the economy depressed further by travel restrictions and a lockdown in the third quarter. This had a huge impact on confidence, and the ongoing difficulties involved in visiting the territory hampered efforts to achieve divestment of our property portfolio.
In the high-end property segment, to which we are exposed, transaction volumes remained low. Just one unit at The Waterside was sold during the period, in addition to four previously reported sales. These disposals came amid the continuing negative effect of COVID restrictions and property market anti-speculation measures that affected both sentiment and pricing. It will be interesting to see whether recent events spark a rekindling of investor interest and an end to the “wait and see” approach that has become established in the market.
The recent marked rebound in visitor numbers, gross gaming revenue and the hospitality trade, which has included a significant increase in hotel occupancy, are all encouraging. However, any sense of optimism must be tempered by an awareness that the route out of any prolonged lockdown has been shown in other jurisdictions to be painful both socially and economically.
Throughout the period, our divestment process continued against this difficult backdrop, with a consistent focus on marketing more units at The Waterside. We have maintained a pragmatic, measured approach to market conditions, balancing our need for debt reduction and working capital with the market’s emerging upside potential.
It is pleasing to report that since the calendar year-end, the improved market sentiment has allowed the Manager to accelerate the strata sales programme at The Waterside, with the divestment of a further six apartments. Of these, two transactions have completed in full and security deposits have been received for the remaining four properties, with completions due over the next three months. This will bring the total number of units sold to 11, which represents 19% of The Waterside’s gross floor area.
Careful management of sales has ensured ongoing upside potential for the remaining units in terms of both valuations and investor interest, driven in part by the units’ size, layouts and floor height. Most sales have been on the mid- and lower levels of the tower, leaving the more valuable higher floor apartments available and the Company well placed to benefit from any market upswing and price strengthening. It is important to note, however, that a recovery in economic conditions may take time to percolate through to our segment of the property market.
Occupancy at The Waterside had improved to a level of 32% at the end of the period, and some long-term tenants may also have an interest in purchasing units.
There have been delays to approvals for the reconfigured units at The Fountainside, partly due to the impact of Macau’s COVID exit wave. A long-awaited inspection has now been completed, but pre-sale initiatives will commence only once the final permits are successfully confirmed. The Fountainside’s larger villas remain an ongoing sales focus, but the likely improvement in the economy will need to prove robust to deliver satisfactory divestments.
For Penha Heights, the restored ability of overseas buyers to visit Macau improves the prospects of divestment, but further lead time will be required.
As at 31 December 2022, the Company’s unaudited adjusted net Asset Value (NAV) was US$99.5 million. This is equivalent to US$1.61 (133 pence*) per share and represents a decline of 3.8% over the period.
* Based on the following US Dollar/Sterling exchange rates 1.210 on 31 December 2022 and 1.212 on 30 June 2022.
MPO’s share price recovered by 37% since 30 June 2022 to 52.25 pence at the end of 2022, which represents a 61% discount to its adjusted NAV per share.
Cash management and debt reduction remain a key priority of the Company, with rising interest rates increasing what was already our largest expense. As more fully explained in Note 6 of the financial statements, the Company repaid US$14 million of bank loans during the period. This reduced gross borrowings to US$117.2 million and lowered the overall loan-to-value ratio from 53.3% to 51.6% as at 31 December 2022. This is estimated to fall further to 50.2% following the completion of the Company’s latest six divestments.
The Company’s consolidated cash balance, including deposits pledged for banking facilities, was US$2.3 million, of which US$1.9 million represented a 6 month interest reserve, pledged and classified as a non-current asset. The majority of the balance of US$0.4 million represents deposits on contracted sales and usage of which remains subject to the prior consent of the lender.
MPO’s free cash situation has improved since the period end as a result of further sales which will generate incremental cash proceeds of US$14.6m.
Outcome of Annual General Meeting
At our Annual General Meeting (AGM) in December, shareholders approved an extension to the life of the Company for a further year until 31 December 2023. The Board and the Manager greatly appreciate the overwhelming support shown for allowing the Company to continue with the orderly liquidation of its remaining assets.
As a consequence of the approval, and as prefaced in the update that accompanied the notice of the AGM, the management agreement between the Company and Sniper Capital has been extended for a further year on terms similar to those that applied in 2022. In all respects the fees remain consistent with the arrangements of the previous year, and aim to contribute towards the Manager’s operating costs. This is an essential step in terms of accelerating the pace of our divestment programme after an exceedingly challenging 2022.
The Board continued to function well during the period, with increased interaction required between scheduled board meetings to ensure oversight and control of the sales process and ongoing management of our loan facilities. We remained vigilant in respect of our environmental, social and governance through this difficult period, and it remains an important component of the many challenges we must work through in the current circumstances.
In presenting this report, it is difficult to avoid communicating anything but a more optimistic view for the second half of our financial year.
While inflationary pressures, including labour and other shortages, are already mounting – albeit from a muted level when compared to other jurisdictions – the dramatic effects of the easing of COVID-related restrictions can only benefit the outlook for Macau, leading to a more supportive environment for the Company. Maintaining caution seems sensible in the circumstances, but amid further sales and an improved operating environment, writing this report has been a much more encouraging experience than in recent years.
As stated, we will continue to do all that is practically possible to achieve further sales and to reduce debt levels related to our assets. This will lower our operating costs as we work towards delivering the upside potential we see in our remaining properties.