REG - Macau Prop Opp Fund - Investor Update H2 2022

Macau Property Opportunities FundAnnouncement

13/01/2023 07:00

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RNS Number : 5757M  Macau Property Opportunities Fund  13 January 2023

13 January 2023

 

Macau Property Opportunities Fund Limited

 ("MPO" or the "Company")

 

Investor Update

Second Half 2022

 

KEY DATA

 

 Inception date            5 June 2006
 Exchange                  London Stock Exchange
 Domicile                  Guernsey
 Market capitalisation     £32.3 million
 Portfolio valuation       US$227.4 million(1)    -0.1%

                                                  (vs 30 June 2022)
 Adjusted NAV              US$101.9 million(1)
 Adjusted NAV per share    US$1.65(1)/136p(2)     -1.5%

                                                  (vs 30 June 2022)
 Share price               52.25p                 36.8%
                                                  (vs 30 June 2022)
 Discount to Adjusted NAV  61.6%                  74.7% (as at 30 June 2022)
 Cash balance              US$3.5 million(1)
 Total debt                US$118.8 million(1)
 Loan-to-value ratio       51.5%(1)

 

(( 1 )) As at 30 September 2022.

(2) Based on a US$/£ exchange rate of 1.210295 as at 31 December 2022.

 

All other data are as at 31 December 2022.

 

Opening Paragraph

In the second half of 2022, China's maintenance of its zero-COVID policy
continued to have a severe impact on Macau's economy, with GDP expected to
have contracted by 25%. The rapid reversal of that policy in December -
although ultimately positive for Macau - is likely to continue to hinder the
near-term progress of the Company's divestment programme due to the ensuing
"exit-wave" of COVID infections sweeping across the region.

 

Portfolio

The economic downturn and zero-COVID restrictions over the past six months
prompted the Company to carefully adjust its divestment strategy. This led to
negotiations for all three portfolio properties, although successful sales
were concluded only at The Waterside. The complete reversal of China and
Macau's zero-COVID policy in December, is far reaching and comes as a
long-awaited, positive development. Most significantly, it reinstates free
access across the region, including Hong Kong. However, a positive impact on
Macau's property market is unlikely to be immediate, and the Company is
adopting a cautious position as the rapid spread of COVID following the
lifting of restrictions may complicate the near-term divestment programme.

 

The Waterside

The Company's strata sales programme at The Waterside made slow progress in
the second half, with the sale of only one additional unit, bringing the total
sold in 2022 to five out of the 59 apartments in the building. The total
combined sales value of the units was approximately US$17 million, equating to
a discount of 6% to their average valuations as of 30 June 2022.

 

From the US$17 million sales proceeds, the Company utilised US$14 million for
loan repayments and earmarked the balance for working capital. The Waterside's
lender extended new financing of US$6.4 million partly to refinance an US$18.3
million repayment that was due for settlement in September, resulting in an
improvement of the overall portfolio loan-to-value (LTV) ratio from 53.3% in
June to its current 51.5%.

 

Securing further sales remains the Company's overriding priority at The
Waterside, but this is being balanced with its ongoing leasing programme.
Tenant demand showed signs of improvement in December, with the occupancy rate
increasing marginally to 32% at an average rent of HK$17.06 per square foot,
largely unchanged from H1 2022. The Company has received interest in unit
purchases in the building from some long-term tenants.

 

The Fountainside

At The Fountainside, four villas and two duplexes that have been reconfigured
into three smaller units and two additional car-parking spaces, remain
available for sale. The reconfiguration work was completed in Q3, but the
occupancy permits have been delayed by several months due to Macau's
protracted approvals process and the local COVID situation. The permits are
now expected to be issued by Q2 2023, following which the marketing of the
three units will commence.

 

Although several buyers from Macau and Hong Kong have been identified,
negotiations stalled as investor sentiment waned following a COVID lockdown in
Macau in July and amid restrictions on access to the territory from China,
which have now been lifted.

 

Penha Heights

Marketing Penha Heights to potential purchasers has been challenging, as
viewings are an important step in the acquisition of this type of luxury
property. Demand for the asset remains strongest from China where travel
restrictions have discouraged interested parties from actively viewing the
property. The more recent resumption of the free movement of people in the
region and a likely rebound in sentiment once the current COVID surge abates
should positively impact progress on a sale moving forward.

 

Property

Residential property sector hits new lows

Impacted by weak investor sentiment, Macau's residential property sector
continued to struggle in H2 2022. Following Macau's citywide lockdown in July,
the city's property market did not recover as expected, resulting in Q3
transaction volumes declining by 32% quarter on quarter (QoQ), or 65% year on
year (YoY) to 541 transactions - a new low for the residential market. Average
prices declined 3.1% QoQ to HKD8,267 (US$1,061) per square foot, indicating
continued downward pressure on the property market.

 

In the luxury market segment, in which the Company is invested, average prices
in Q3 2022 declined by 9.1% YoY to HKD8,373 (US$1,078) per square foot.
Investors persisted with a cautious stance after the July lockdown, with fewer
viewings conducted than during the first half of the year. Rental values of
high-end and mass-market to mid-market residential properties also remained
under pressure, with average rental yields declining to 1.5%, according to
real estate agency JLL.

 

Although pent-up demand from cash-rich buyers in China and Hong Kong remains
strong, Macau's residential property market is expected to remain quiet until
after the Chinese New Year holiday in late January. According to property
agent Centaline, despite positive recovery prospects in the tourism industry,
the property sector will continue to face pressure from other factors such as
interest rate increases, stock market volatility, high unemployment, the
Ukraine war, and regional tensions between China and the United States.

 

 

Macau

COVID-19: Abrupt dismantling of zero-COVID

In December, China's central government rapidly reversed its zero-COVID
policy, replacing it with a renewed focus on the country's economy. Investors
welcomed the move, but fresh concerns emerged that an anticipated "exit wave"
of infections would be severe due to low vaccination and booster rates among
the country's elderly population.

 

Macau, mirroring mainland China's shift away from zero-COVID, eliminated
zero-COVID measures including mass-testing for at-risk groups in December. As
a result, an exit wave of infections has affected at least 60% of the
territory's population, and the fact that vast numbers of infected workers
have been caught up in the outbreak has disrupted gaming and tourism
operations.

 

Despite rising infections, Macau's government quickly announced a series of
measures to restore pre-pandemic ease of travel. To date, all quarantine
requirements for visitors have been abolished. Regular bus and ferry services
between Macau and Hong Kong have resumed. Direct international air
connectivity is also resuming, with Air Macau flights from major hubs set to
restart through 2023. These developments are significant milestones in the
recovery of Macau's tourism industry and the territory's economy. The
resulting rebound in sentiment in the property sector will likely benefit the
Company's divestment programme once the current and future COVID exit waves
subside.

 

Economy: A difficult second half

Macau's economy continued to suffer in H2 2022, with gross domestic product
expected to have fallen 25% YoY. The COVID outbreak in summer led to a dismal
third quarter, during which visitor arrivals more than halved YoY and exports
of gaming and other tourism services tumbled 73% and 46% YoY, respectively.

 

The unemployment rate among Macau residents in Q3 2022 rose to 5.2%, one of
the territory's highest unemployment figures since the global financial crisis
in 2008. Pre-COVID, Macau's unemployment rate had hovered at a level of around
2.6%.

 

Tourism: Ebbs and flows from dynamic zero-COVID

Macau's visitor arrivals in H2 2022 reflect the impact of dynamic zero-COVID
measures taken in the territory and in mainland China, its main source of
visitors. H2 visitor arrivals expected to have fallen 41% YoY. Hotel occupancy
in Macau is estimated to have fallen 12% YoY to 38% during 2022 and average
room rates stood at MOP741 (US$93). However, industry sources indicate that
hotel bookings have rebounded for the upcoming Chinese New Year holiday period
with room rates increasing in tandem.

 

Prior to December, Macau had announced several key measures to boost visitor
numbers. For mainland Chinese tourists, such as the resumption of e-visa
issuance under the Individual Visit Scheme. The expectation of a steady influx
of tourists into Macau as a result of these changes has led to a rebound in
sentiment among investors, who expect a recovery in the tourism and gaming
industries - albeit with some lag -  ultimately to spill over into the
residential property sector. Gaming stocks, a leading indicator of economic
recovery and investor sentiment, have rallied strongly.

 

Gaming: Stability heralds better times ahead

Gross gaming revenue (GGR) for H2 2022 reflects the economic impact of Macau
and China's dynamic zero-COVID measures. For full-year 2022, GGR was down
51.4% YoY, at US$5.26 billion, just 14% of 2019's total.

 

Following the passage of new gaming laws last June, seven companies - the six
incumbents and surprise bidder Genting Malaysia - submitted bids for the six
available licences. At the end of November, Macau's government announced that
the six incumbents would be given new 10-year licences taking effect from
January 2023. The long-awaited announcement was a nod to stability and
continuity for the concessionaires, whose investments in the territory over
the past 20 years total more than US$50 billion.

 

 

Outlook for Macau

China's pivot from zero-COVID

Macau's outlook for 2023 and beyond will depend very much on the impact of
mainland China's pivot away from zero-COVID. Although Beijing's focus on
economic growth is welcome, the exit wave of COVID infections is likely to
delay economic recovery for several months as Macau's tourism and gaming
sectors grapple with labour shortages and demand constraints.

 

Divestments remain the key priority for the Company

We remain cautiously optimistic that the Company's sales programme can be
actively advanced in 2023, but the immediate future will likely bring
headwinds due to aforementioned reasons. These challenges are expected to
continue until investor confidence is restored, potentially in H2 2023. That
said, it seems clearer that Macau is now better positioned for recovery and
that the pace of change could see an accelerated return to more positive
sentiment. The Company will continue to position its portfolio properties to
take advantage of opportunities that arise as Macau's borders and economy
reopen, and prioritise debt repayments and a return of capital to Shareholders
in the shortest possible timeframe.

 

The Company would like to thank shareholders for their continued support in
extending the Company's life for a year at its recent AGM. Its Interim Results
are due to be published towards the end of February.

 

 

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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