REG - Macau Prop Opp Fund - Investor Update H1 2023

Macau Property Opportunities FundAnnouncement

14/07/2023 07:15

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RNS Number : 9957F  Macau Property Opportunities Fund  14 July 2023

14 July 2023

Macau Property Opportunities Fund Limited

 ("MPO" or the "Company")

 

Investor Update H1 2023

 

KEY DATA

 

 Inception date            5 June 2006
 Exchange                  London Stock Exchange
 Domicile                  Guernsey
 Market capitalisation     £36.2 million
 Portfolio valuation       US$213.8million(1)     -1.5%

                                                  (vs 31 December 2022)
 Adjusted NAV              US$94.1 million(1)
 Adjusted NAV per share    US$1.52(1)/121p(2)     -5.4%

                                                  (vs 31 December 2022)
 Share price               58.5p                  +12.0%
                                                  (vs 31 December 2022)
 Discount to Adjusted NAV  51.5%                  61.6% (as at 31 December 2022)
 Cash balance              US$1.9 million(1)
 Total debt                US$110.4 million(1)
 Loan-to-value ratio       51.2%(1)

 

((1)) As at 31 March 2023.

(2) Based on a US$/£ exchange rate of 1.261441 as at 30 June 2023.

 

All other data are as at 30 June 2023.

 

Opening Paragraph

 

Macau's economic engines roared back into life in H1 2023. The property
sector, however, has so far lagged the overall economy at this relatively
early stage of the recovery and challenges including high interest rates and a
slow return of confidence have persisted. Against this backdrop, the Company
continued to advance its divestment programme during the period, selling an
additional nine units at The Waterside.

 

Portfolio

 

The lifting of travel restrictions to and from Macau just six months ago has
been extremely positive for the territory's tourism industry, but the
immediate impact on the ultra-luxury segment of its residential property
market and the Company's portfolio has so far been muted.

 

The Waterside

The Company's strata sales programme at The Waterside has made further
progress, with the disposal of three additional units since the last update to
Shareholders in the Company's Interim Report, issued in February. The
disposals bring total year-to-date sales at the property to nine standard
units. Overall, 14 of the development's 59 apartments have so far been sold
through the strata sales programme.

 

The combined value of year-to-date sales at The Waterside is approximately
US$22.3 million, with 80% of the apartments sold being standard units located
on low to middle floors. Units located on more valuable higher floors,
including the special simplex and duplex units, have been reserved for future
sales as Macau's property market improves.

 

In line with the recovery in Macau's tourism industry, leasing demand at The
Waterside is showing continued signs of improvement. Occupancy currently
stands at 47%, up from 32% at the end of 2022, driven by a 22% increase in new
leases since last December and an 11% reduction in the number of units
available for lease during the same period. Rental income has also increased
since December, up 22%, while the average rent remains unchanged at US$2.17
per square foot, despite average rentals in the immediate area around The
Waterside dropping 8.3% year on year (YoY) in Q1.

 

Securing further sales at The Waterside remains a priority. The Company is
therefore balancing increased rental income from current leasing demand with
further strata sales of vacant units. Sales of units with sitting tenants are
a component of our strategy, bringing our leasing and sales approaches into
alignment. The Company intends to progress the strata sales programme but pace
this to take advantage of the expected property market recovery.

 

 

The Fountainside

At The Fountainside, four villas, three reconfigured units and two car-parking
spaces remain available for sale. A few potential purchasers have viewed the
villas and negotiations remain ongoing, a reflection of the current state of
the luxury segment of Macau's property market, which has faced ongoing
challenges despite the territory's economic recovery. Nevertheless, in
anticipation of increased market activity in the coming months, a renewed
marketing campaign is currently in progress for the villas.

 

The issuance of occupancy permits for the three smaller reconfigured units has
been delayed. The authorities completed inspections in January and comments
detailing minor changes have been received. The permits are now expected to be
issued in Q3, following which the marketing of the three units will commence.

 

Penha Heights

Interest in Penha Heights has been muted, consistent with the lack of activity
in Macau's ultra-luxury property segment. Although several viewings have taken
place in the past six months, a sustained economic recovery in both Macau and
mainland China is a prerequisite for investor interest in an asset such as
Penha Heights - a fact that is likely to become more apparent entering 2024.
In the meantime, maintenance work has been ongoing to keep the property in
pristine condition and a very targeted marketing campaign is planned for the
second half of the year.

 

 

Property

 

Property sector expected to lag economic recovery

Macau's property market has so far lagged the impressive tourism industry
recovery. The market faces a number of challenges, including a high interest
rate environment that has seen the territory's base lending rate rise to 5.25%
while yields on properties have remained historically low at below 2% per
annum.

 

Following FY2022's 40-year low in transaction volumes, Macau's residential
property market improved in terms of both transaction volume and value during
the period. In Q1 2023, 848 units changed hands, representing 31%
quarter-on-quarter (QoQ) growth, while total transaction value rose by 34% QoQ
to MOP5.6 billion.

 

The luxury segment of the market has remained quiet, with only 48 luxury units
transacted in Q1 2023, a 9% YoY decline, although the average transaction
price per square foot increased 3.1% YoY in the same period. The market
environment remains challenging, with high interest rates driving potential
investors to seek increased yields when considering investment opportunities,
or to seek price reductions to compensate for lower expected returns. Sellers
are exhibiting strong holding power, with many reluctant to accept lower
prices at a time when the tourism sector is seeing such a strong rebound. In
addition, potential investors are also distracted as they grapple with
immediate concerns amid the recovery - reviving their businesses and coping
with a spike in demand while simultaneously managing labour shortages.

 

Average rents declined across Macau's residential property market in Q1 2023,
with the average rent per square feet of usable area at MOP12 (US$1.5), 7%
lower YoY and 2% lower QoQ.

 

Macau

 

Economy: Rapid recovery from an extremely low base

With the lifting of Macau's travel restrictions, the territory's economy
rallied in the first half of 2023, driven by its twin economic engines, gaming
and tourism. In Q1 2023, gross domestic product grew 39% YoY to reach
approximately 66% of Q1 2019 levels. Macau's economy has clearly turned the
corner following its 27% contraction in 2022, but its recovery will require
significant time and effort to restore balance sheets, rebuild capacity,
address labour shortages and re-establish flight connectivity.

 

The outlook for the second half of 2023 is encouraging, with Fitch Ratings and
the International Monetary Fund predicting full-year GDP growth of 48% and
59%, respectively.

 

Tourism: Year-to-date  arrivals have already topped 2022 numbers

Macau's tourist arrivals have surged since the lifting of border control
measures, and for the first half of the year, year-to-date tourist arrivals
had already exceeded 2022's visitor arrivals by 104%. Tourist arrivals grew
month on month during the first half of the year, and the territory had
admitted 11.6 million visitors by May, approximately 57% of 2019's
record-breaking total.

 

More than two-thirds of visitors are mainland Chinese, but travellers from
Hong Kong SAR now make up 30%, an increase of 21 percentage points since
travel restrictions were lifted. By May, the number of visitor arrivals from
Hong Kong had recovered to c.92% of 2019 levels.

 

Macau's tourism agencies have been actively promoting the territory,
particularly to North Asian and Southeast Asian tourists, with special offers
and packages to boost visitation. In Q1 2023, Macau International Airport
recorded YoY passenger traffic growth of 170%, while flight movements
increased 57% YoY. As airlines tackle the task of restoring routes paused
during the pandemic, international tourist numbers will take time to reach
pre-pandemic levels.

 

Gaming: Year-to-date Revenue has beaten full-year 2022 GGR

GGR has rallied in line with Macau's surging visitor numbers. By June,
year-to-date GGR had exceeded 2022's total by c.90%, with June's GGR reaching
c.64% of pre-Covid levels, surpassing analysts' initial forecasts.

 

The rally in GGR is being led by the premium mass-market and mass-market
gaming segments, which have rebounded to c.90% of pre-pandemic levels in June,
while VIP GGR is at c.24% of its level pre-Covid, heavily impacted by an
official clampdown on the junket business. The current mix of GGR is positive
for gaming operators' financial performance as the mass-market segments are
generally more profitable than VIP gaming. JP Morgan has estimated that Q2
EBITDA for Macau's six gaming operators rang in at US$1.7 billion, or 73% of
2019 levels, which puts the gaming industry significantly ahead of previous
projections.

 

Outlook

 

Continued economic recovery

The economic outlook for the second half of 2023 is positive, with a continued
recovery expected through the period and beyond. In addition to predicting
full-year 2023 GDP growth of 59%, the IMF forecasts that in 2024, Macau's
economy is likely to grow by 21%, taking it to 86% of its pre-pandemic size.

 

Nevertheless, challenges remain as Macau rebounds from a low base and faces
shortages of labour and other inputs. Investor sentiment is increasingly
buoyant, but it will take time for that optimism to spill over into the
property sector, which faces additional headwinds, particularly with regard to
high interest rates.

 

Divestments remain the Company's key priority

We remain cautiously optimistic that the Company's sales programme can be
actively advanced in the second half of 2023, given the overall positive
sentiment in Macau, but we are balancing transaction velocity with achievable
disposal prices, while also managing our debt amid higher interest rates.

 

The Company will continue to position its portfolio properties to take
advantage of opportunities that arise as Macau's economy recovers to its
pre-pandemic condition, prioritising debt repayments and the return of capital
to Shareholders in the shortest possible timeframe.

 

 

Investor Relations

Sniper Capital Limited

Tel: +853 2870 5151

info@snipercapital.com

www.snipercapital.com (http://www.snipercapital.com)

 

Corporate Broker

Liberum Capital

Darren Vickers / Owen Matthews

Tel: +44 20 3100 2234

 

Company Secretary and Administrator

Ocorian Administration (Guernsey) Limited

Kevin Smith

Tel: +44 14 8174 2742

Stock Code

London Stock Exchange: MPO

 

LEI:

213800NOAO11OWIMLR72

 

About The Company

Premium listed on the London Stock Exchange, Macau Property Opportunities Fund
Limited is a closed-end investment company registered in Guernsey and is the
only quoted property fund dedicated to investing in Macau, the world's leading
gaming market and the only city in China

where gaming is legalised.

 

Launched in 2006, the Company targets strategic property investment and
development opportunities in Macau. Its current portfolio comprises prime
residential property assets.

 

About Sniper Capital Limited

 

The Company is managed by Sniper Capital Limited, an Asia-based property
investment manager with an established track record in fund management and
investment advisory.

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