Macao's gambling scene is having a moment. October gaming revenue hit a post-pandemic record, tourists are flooding in, hotels are packed, and casino floors are buzzing with activity. There's just one problem: SJM Holdings isn't invited to the party.

While the gambling capital celebrates its comeback, SJM Holdings Ltd. (0880.HK), one of Macao's veteran casino operators, is stumbling through a painful restructuring that's making its earnings look downright grim compared to everyone else's champagne-popping results.

When Everyone's Winning Except You

The numbers tell a stark story. In October, Macao's overall gaming revenue surged nearly 16% year-over-year to 24.09 billion patacas ($3.01 billion). Robust tourist flows, high hotel occupancy rates, and bustling casino action painted a picture of an industry that had roared back to life.

SJM's third quarter results? Not so rosy. Gaming revenue fell 4.7% to HK$7.14 billion ($919 million) compared to the same period last year, and dropped 1.8% from the previous quarter. Adjusted EBITDA declined 15% year-over-year to HK$881 million, though it did manage a 28% bump from Q2. Here's the kicker: SJM was the only one of Macao's six licensed casino operators to report falling gaming revenues.

The bottom line was even more alarming. Net profit collapsed 91% to a mere HK$9 million from HK$101 million a year earlier. For the first nine months of the year, the company posted a loss of HK$173 million. Meanwhile, all five of its competitors enjoyed rising profits in the third quarter.

The Satellite Casino Problem

So what happened? The root cause is Macao's revised gaming regulations, which are forcing a complete overhaul of how casino operators do business. A law taking full effect at the end of this year requires operators to either bring satellite casinos under direct management or sever existing profit-sharing arrangements with third parties.

This hits SJM particularly hard because the company operated a network of satellite casinos dotting the Macao peninsula. Four satellite venues have already closed this year, with three more set to be shuttered by December. That's stripping SJM of vital market access points and customer touchpoints. Only two will be acquired and brought under SJM's direct control.

The company's satellite casino revenue dropped 14.6% in the third quarter, though EBITDA did jump more than 50% to HK$53 million from HK$35 million in the same period last year as SJM reduced subsidies and intermediary costs. But the loss of floor space and foot traffic is taking its toll. SJM's market share for gaming revenue fell to 11.8% in the quarter from 13.9% a year earlier and 12.9% in the previous quarter.

Chairman Daisy Ho Chiu Fung acknowledged the transition was disruptive, but emphasized that the company is actively reallocating personnel and gaming resources to strengthen its core business. Translation: short-term pain for what they hope will be long-term gain.

Even the Flagship Is Struggling

You might think SJM could lean on its crown jewel properties while weathering this transition, but here's where things get really concerning. Grand Lisboa, the Macao landmark that has long been SJM's most reliable profit engine, is faltering too.

The flagship venue's gaming revenue dipped to HK$1.91 billion from HK$1.94 billion in the third quarter of last year, while adjusted property EBITDA slid 13.6% to HK$471 million. That's not supposed to happen to your core asset during an industry boom.

The company's newer luxury resort, Grand Lisboa Palace, posted an 11% rise in gaming revenue, which sounds promising until you see that its adjusted property EBITDA plunged 32.7% to HK$111 million. Hotel occupancy dropped to 94.9% from 98.9% in the third quarter of last year, another troubling sign.

The Debt Dilemma

Adding to SJM's challenges is its balance sheet. The company held only HK$3.4 billion in cash against HK$27.3 billion in debt at the end of September, making it the most financially leveraged of Macao's six casino operators. That debt load leaves SJM with limited firepower compared to its rivals when it comes to rebuilding through marketing campaigns and upgrading entertainment offerings.

There's also a space problem. Only Grand Lisboa Palace has the scale required for a modern integrated resort. The other peninsula-based properties lack room for expansion, putting SJM at a structural disadvantage as the industry evolves.

The Market's Verdict

Investors aren't impressed. SJM shares tumbled 8.05% to HK$2.74 on the first trading day after the results were announced. The stock's year-to-date gain of just 1.86% lags far behind the sector average of 31.3%. Morgan Stanley slapped an "underweight" rating on the stock with a target price of HK$2.80, warning that SJM's debt could rise further after the company acquires the two satellite properties it's keeping.

The Road Ahead

SJM has outlined a strategy to turn things around, focusing on revitalizing its core properties on the Macao peninsula. The company plans to redeploy gaming tables and machines from its closing satellite casinos to Hotel Lisboa, another flagship venue, using extra space acquired from its parent company Sociedade de Turismo e Diversões de Macau.

But here's the problem: while SJM is scrambling to consolidate, competitors are racing ahead with diversification beyond traditional gaming. Melco Resorts & Entertainment (MLCO) made headlines by opening the first private hospital within a resort. Wynn Macau (WYNN) is planning a large-scale event center. These operators are reimagining what a Macao casino resort can be.

SJM, meanwhile, is playing defense, forced to give up its satellite casino network while trying to make the most of what it has left. The company is already several steps behind in the race to evolve beyond gambling.

The bigger question is whether investors will stick around while SJM works through this messy transition. With lackluster earnings, excessive leverage, and competitors pulling ahead, patience may be wearing thin. Sometimes being dealt a tough hand isn't just bad luck—it's the result of structural disadvantages that are hard to overcome, even when the overall industry is thriving.