MACAU

Macau recovery lags, with 3Q worst so far

Macau gross gambling revenue is beginning to show signs of recovery following the latest round of lockdowns, though it’s now clear the city won’t reach anywhere near the levels that had been expected at the beginning of the year.

The government’s insistence on a zero tolerance policy, coupled with a continuing low rate of vaccination also means any rebound is vulnerable to new outbreaks.

While the situation has normalized in Macau, China is continuing to battle Covid clusters in some of its cities, although so far none have affected Guangdong, Macau’s largest feeder market.

Morgan Stanley is expecting the six operators to have posted an industry-wide EBITDA loss of $23 million in 3Q21, while Bloomberg predicts it will have been the worst quarter of the year so far due to the disruptions in August and September.

The loss figure would be a 108 percent decline from the prior quarter.

A bigger decline in the higher margin mass market business may have tipped the operators into the red, the firm said. It estimates that industrywide, mass revenue may have dropped by 28 percent from 2Q21 to $1.7 billion, which would be 31 percent of 2019 levels. It says mass revenue needs to be at 35 percent of where it was prior to the pandemic for the operators to remain profitable.

VIP revenue was likely down 23 percent to $0.6 billion.

Visitation was crushed in August after Macau recorded its first Covid cases in more than 500 days. It was beginning to improve into September when a second outbreak triggered a new round of travel restrictions heading into the Golden Week holidays. Chinese visitation in 3Q21 was down 18 percent quarter-on-quarter, with the occupancy rate for five-star hotels at 47 percent in July and August.

Morgan Stanley says its view is below the consensus estimates of eight analysts for a quarterly decline in EBITDA of just 50 percent, which it says is “overly optimistic.”

“We expect a further 40-50 percent drop in 2021 EBITDA estimates due to recent Covid outbreaks,” it said. “Over 2022 GGR and mass revenue expectation is 61 percent and 77 percent of 2019 levels respectively.”

On a company specific basis, Morgan Stanley says it expects Galaxy Entertainment to be the only operator with positive free cash flow in the period. However, it also said Sands China is likely to decline less than the peer average.

Both of these two operators are helped by a sizable retail rental segment.

Sands China posted total net revenues of $611 million for the quarter, compared to $167 million in the third quarter of 2020. The net loss was $423 million, compared to $562 million in the third quarter of 2020 and $166 million in 2Q21.

“Local Covid-19 flare ups driven by the Delta variant and the government’s proposal to tighten its grip over gaming companies have combined to make the third quarter one of the most volatile since the virus first battered Macau’s tourism-reliant industry,” Bloomberg analysts wrote in a report.

The struggles in the gaming sector are feeding through into the economy and the Macau government’s budget. Revenue from gaming taxes has reached only 54.5 percent of the government’s budget forecast in the nine months through to the end of September.

Gaming revenue came to MOP27.2 billion, compared with a projection of MOP50.0 billion and only marginally higher than the MOP23.4 billion recorded in the same period last year.

Revenue from the six gaming operators is by far the largest contributor to Macau’s tax base, accounting for 70 percent of the total in the latest period.

The International Monetary Fund (IMF) has significantly downgraded its forecast for Macau’s gross domestic product growth in 2021 to 20.4 percent.

In its latest World Economic Outlook, the fund said it is also expecting consumer price deflation of -0.3 percent this year. In its prior forecast in April, the IMF had expected the economy to rebound by 61 percent this year.

Sands CEO says no chance of license not being renewed

Las Vegas Sands CEO Rob Goldstein says he sees “no chance whatsoever” of the company not being given another gaming license in the concession renewals and said the company is ready and willing to invest more in Macau.

China’s clampdown this year on sectors ranging from technology to private education, coupled with proposed amendments to Macau’s gaming law have spooked investors and raised questions over just what Beijing might be prepared to do.

“I do not. I see no chance of that whatsoever,” he said when asked if there is a chance of the company losing its license.

“We’ve been doing this for a couple of decades, we have an unparalleled track record.” Goldstein pointed to Sheldon Adelson’s vision for the Cotai Strip and the $15 billion the company has invested in developing its Macau assets.

“So I remain beyond confident that we’ll be operating in Macau. I don’t think there’s any chance whatsoever that we wouldn’t be.”

Budget hotel law to come into effect in 2022

A new law aimed at creating more affordable hotel accommodation in Macau is set to come into effect on January 1st, 2022, according to a press release from the MGTO, which held a number of online introduction seminars about the new law.

The Law No. 8/2021 on the Operation of Hotel Establishments was first proposed in the Legislative Assembly some two years ago. It’s main feature is the introduction of budget and low-cost accommodation in Macau – as part of the city’s goals of diversifying its tourism base.

Under the law, there will be a new category of economic accommodation establishments, which allows for shared rooms and the offering of bed rentals.

“These new measures will support development of more diverse lodgings for travellers,” said the MGTO.

New Macau traveller less likely to gamble

Macau observers are noting an increasing disconnect between the number of incoming tourists and gross gambling revenue, pointing to a changing demographic in those visiting Macau.

The big question is what’s driving this change and is it here to stay? “There is a changing demographic amongst the Mainland Chinese visitor,” said gaming consultant Ben Lee, managing partner of IGamiX Management & Consulting. “They are younger and there are more females.”

“About 30 to 40 percent of them are young women and they do not gamble,” he said.

Lee’s comments on the demographics stem from observations on the ground, which have been backed up by talks with casino operators.

Analysts who follow the sector closely have also said that gains in visitation this year have not always translated into what they would have expected to see in terms of GGR.

Bernstein Research noted in September last year that there was a divergence between arrivals and GGR, with a follow up report in April suggesting that the reason was a “lower value customer pick up” as VIPs stayed away.

“Is this market dynamics because of big discounts being offered on rooms to a demographic that doesn’t mind the tests and questions about whether they are coming to gamble?” said Lee. “Or is that that China is deciding which people can come?”

He adds there is anecdotal evidence of China refusing to renew the passports of some premium mass and VIP gamblers in a deliberate manipulation of the visitor profile.

The Macau Government Tourism Office (MGTO) has certainly been stepping up its efforts on the Mainland to market Macau’s nongaming attractions, along with the six operators.

There is a changing demographic amongst the Mainland Chinese visitor.

At a recent event in Chengdu, the MGTO was advertising some $17 million in discounts and incentives to encourage people to visit over the Golden Week holiday.

In 2Q21, Macau welcomed 2,189,401 visitors, up 4,302.6 percent year-on-year, although the average length of stay shortened by 2.3 days year-on-year to 1.5 days.

The increased visitation this year has fuelled retail spending which soared 200 percent in 2Q21 to MOP20.7 billion, above its pre-pandemic levels of MOP17.86 billion.

Jewellery and watches led the gains, up 958 percent, while other high-end items, such as leather goods and consumer electronics were also sharply higher. Supermarket sales declined.

In comparison, gross gambling revenue in the second quarter surged from 2020’s Covid-affected base to MOP25.75 billion, but it was still far short of the MOP73.55 billion reported in 2Q19.

As for Golden Week, Lee said it’s now likely to be a write-off. On a recent visit to a major casino floor, he said it was possible to count the number of players on one hand, although a “fair” number of tables were open.

Macau has now completed its second round of mass testing of residents in two months, finding no further local cases.

However, Zhuhai authorities have extended the deadline to lift its quarantine requirements for anyone coming from Macau until at least Thursday night, the eve of the start of Golden Week.

Macau had been hoping to attract at least 35,000 visitors a day over the period, which is the last major holiday this year for the Mainland Chinese. They had foreseen hotel occupancy at about 80 percent.

Golden Week loses lustre as Chinese stay at home

Domestic travel during Golden Week fell short of expectations this year, partly as a result of an outbreak of Covid-19’s delta strain starting in July, and partly as a result of government policies that have stunted economic growth.

According to China’s Ministry of Transport, domestic trips fell around 34.1 percent from pre-pandemic levels, with 515 million domestic tourists travelling nationwide between the October 1-7 period. In 2020, this number was substantially higher at 637 million.

Industry observers say that this was a result of travel curbs on certain regions within China, as well as an overall discouragement of unnecessary travel and gatherings during the Golden Week holiday.

Thus, Chinese holiday makers instead opted for leisure activities closer to home. Cinema ticket sales grew by around CNY300 million compared to 2020. According to COTRI, there was another increase in the hiring of rental cars during the period, and staycations surged in popularity. Rail passengers fell nearly 20 percent, as did air travel.

Unfortunately, the results were even worse for international travel. China’s only international travel destination (which normally did not require quarantine), Macau, saw its Golden Week visitation falling around 99 percent below pre-pandemic levels.

Instead, Beijing became China’s number one destination during the holidays, thanks to the opening of Universal Studios Beijing on September 20, 2021. Tickets to the theme park sold out around 30 minutes after coming online ahead of the mid-Autumn Festival.