MACAU

Operators back in the black and seeing market improvement

All but one of Macau’s six concessionaires posted a return to positive EBITDA in Q4 and are seeing more meaningful signs of market recovery.

A combination of concerted cost cutting since the beginning of the pandemic, coupled with steadily improving visitation, helped results in the final quarter of the year, with only SJM Holdings remaining in the red at the EBITDA level.

The New Year brought a setback with new Covid clusters across China sparking more restrictions, highlighting how vulnerable the market remains to the pandemic. However, as vaccines rollout operators are beginning to see stronger signs of life and analysts remain convinced in a significant H2 comeback.

Most now see the market getting back to about two thirds of its 2019 levels by the end of the year, led by the premium mass segment. There remain major question marks over the recovery of VIP, which is only forecast to be at half of its pre-pandemic levels by the end of 2021.

There is no more quarantine with China, vaccines are being rolled out, all the pieces are getting incrementally better.

Perhaps one of the most upbeat assessments of the market’s prospects came from Melco Resorts & Entertainment Chairman and CEO Lawrenco Ho. Presenting the group’s Q4 earnings, Ho said for the first time in 12 months he sees more positives than negatives.

“Our optimism comes from seeing what happened with the tail end of the Chinese New Year and how strongly the pent up demand came back,” he said. “There is no more quarantine with China, vaccines are being rolled out, all the pieces are getting incrementally better.”

Ho also said he believed China would allow a return to e-visas in the short term, contrary to most analysts who still see this step as being some way off. The visas are seen as key to removing bottlenecks to visitation and the Macau Government Tourism Office has been in talks with Mainland authorities to urge their resumption.

Group visas are also still off limits, which will be a driver for the grind mass part of the business.

In terms of travel bubbles, Bernstein says that it’s possible that restrictions could be lifted with Hong Kong in Q2.

“A travel bubble encompassing China/HK/ Macau should be a key driver of recovery,” it said.

In terms of Q4 results, Galaxy posted adjusted EBITDA of HK$1 billion, down 75 percent year on year, but up from a HK$233 million loss in the prior quarter.

Total GGR at $4.6 billion was up 435 percent from Q3. Both mass and VIP showed strong sequential growth, though mass was particularly positive rising to become 64 percent of the total. Overall Galaxy’s market share in Macau rose to 22 percent.

Melco posted adjusted EBITDA of $53 million, down 87 percent year on year and up 170 percent from the prior quarter. Macau GGR was up 234 percent sequentially.

Wynn Resorts saw a 58.5 percent yearon-year decrease in operating revenues to a total of US$686 million for the quarter. Net losses attributable to the company were US$269.5 million.

“In Macau, the gradual and thoughtful easing of visitation restrictions allowed us to return to Adjusted Property EBITDA profitability in the fourth quarter, with particular strength in our premium mass business,” CEO Matt Maddox commented.

MGM China saw its net revenues decrease 58 percent compared to the prior year quarter to US$305 million. Adjusted Property EBITDA decreased 78 percent to US$41 million.

Sands China posted adjusted property EBITDA of $73 million, down from $378 million, helped by the Venetian and The Plaza Macau and Four Seasons.

SJM posted an adjusted EBITDA loss of $323 million, below forecasts from Bernstein Research for $337 million.

Galaxy to bring Raffles brand to Macau

Galaxy Entertainment Group has signed an accord with Accor to bring storied hotel brand, Raffles, to Macau with the opening of an exclusive all-suite tower, Raffles at Galaxy Macau in the second half of 2021.

The hotel will feature about 450 suites, with some featuring their own private pools and gardens. The raffles brand dates back to 1887 and Galaxy said its introduction to Macau will bring a “new level of sophistication and refinement.”

Macau to get high-speed connection with Beijing

Macau’s connectivity with Mainland China will continue to be expanded and will include a link to Beijing via a maglev high-speed train, according to the 2020-2035 National Territorial Spatial Plan for Guangdong Province.

The link – named the Beijing- Hong Kong-Macao Maglev – is one of six proposed rail lines included in the plan, with the Department of Natural Resources of Guangdong Province outlining a multi-center gridded spatial layout with Macao-Zhuhai, Hong Kong-Shenzhen, and Guangzhou- Foshan clusters.

Morningstar takes the Macau market pulse

Jennifer Song, equity analyst with Morningstar, spoke with Asia Gaming Brief managing editor Sharon Singleton about visitation to Macau during the recent Chinese New Year period and the outlook for recovery. The longer-than-usual May holiday may be a key catalyst for growth.

What is your view of the data from Chinese New Year? Was it disappointing?

I think the Chinese New Year data was not too surprising. I am actually stationed in Shenzhen and the policy of the local authorities was to encourage residents to stay local, so you had lower numbers for the China New Year period.

China recently lifted its remaining restrictions on travel to Macau, triggering a share price bounce. How significant is this?

There is a change in the overall market conditions. One is that restrictions have been lifted and there is an improvement in market sentiment.

How do you see the stocks moving from here?

From our perspective we have seen the stocks move up quite a little bit recently and they’re trading at 0.9 percent of our fair value estimate, so the upside is definitely lower in the near term.

We’re going to see the focus for investors being on the GGR data and the visitation data.

When will we start to see a meaningful increase in GGR data?

I don’t think GGR will suddenly go up. It will be gradual. The May holiday is usually just three days, but this year it will be five days. The government has tried to boost travel. I think this is a good opportunity for short-haul travel of two to three hours. We expect good GGR data during the May holiday.

What are you expecting for Q1?

For Q1, we’re expecting about 32 to 35 percent of 2019’s GGR which is not very bad and pretty much the same as Q1 last year.

The operators have been cutting costs. What impact will this have on profitability as revenue picks up?

Some of the cost cutting is temporary as they are closing down part of their properties. This part will definitely come up when revenue returns, but some of the other costs will be quite sustainable. They chose to optimise the operations of the business, so up to 5 to 10 percent of the cost cuts will be sustainable going forward.

We expect permanent cost cuts of 5-10 percent for the next one or two years. For the next few years we will still see the benefit on margins from cost cutting.

Are you hearing any news about the resumption of e-visas?

e-visas will probably come back later, probably in the second half of this year. The government’s focus right now is to make sure the virus is under control for the overall sustainability and benefit of the economy.

What about the VIP sector. Will that return in the same way?

VIP I don’t think any time soon. There is quite a big policy concerning money flows out of China and that will definitely affect the VIP business. From our chats with management we have seen recently that VIP data is very volatile from one month to the next. VIP will definitely be affected by China’s overall money controls.

That said, the operators still have VIP rooms, so I don’t either expect it to disappear in the next three to five years. Over the past ten years VIPs have been quite important to Macau’s economy and have made up half of the overall tax. So we don’t expect they will disappear but we do see tighter regulation, especially for the junkets.

Will operators extend direct credit to VIPs?

There’s a trend of direct VIP services, however, that’s not very good for the company’s balance sheet as they give their own credit. We’re more likely to see rising bad debts. The company itself will take risks so it depends on the overall credibility of the client.

Do you expect Macau to allow any other travel bubbles?

China accounts for 70 percent and Hong Kong accounts for 20 percent, so the impact would be very low. The big impact would be to connect with Hong Kong. They tried with Singapore but haven’t managed. I still think it’s very likely that this year HK will connect with Macau, which will be very good for Macau and will also create synergies with visitors from other parts of China.

What’s your current outlook for stocks by year-end?

The market is currently only at about a 10 percent discount to our fair value estimates, but different players have different discount to fair value. Some players have a lower valuation. For example SJM or Melco have a lower discount to our fair value, so they have a higher potential upside, especially SJM.

SJM will open its first Cotai property in the first half of this year and that will change the company’s market positioning, so it’s very hot for this company. It’s currently our best idea.

When will Macau get back to 2019 GGR levels?

For this year we target 65 percent and expect a full recovery in 2022 which is pretty much in line with market expectations. We’re looking at the first half of 2022.