Is Macao coming back?

Early signs are encouraging but Covid concerns linger.

acao could use some good news these days. Gambling revenue in 2022 was a pale shadow of the glory days of 2019. Junket operators, once the lifeblood of casinos, have dwindled by 85 percent. The high-roller business, frowned upon by the Beijing government, has largely gone missing or taken its play overseas. And the now-discontinued ‘zero-Covid’ governmental policy has gotten bread-and-butter players out of the habit of patronizing the casino enclave.

But the beginning of 2023 brought some positive auguries. During the first three days of relaxed access to Macao, over 100,000 tourists swarmed across the border. Ferry service to Hong Kong has been resumed, albeit initially limited to 10 round-trip voyages per day.

As for gambling, J.P. Morgan analyst Joseph Greff, previously a severe—at times scathing— Macanese skeptic wrote on January 17 that business fundamentals “thus far in January are encouraging,

By David McKee

with improving traffic and spending overall, and benefitting from the recent resumption of visitation from Hong Kong.” During the first half of the month, Macao’s casinos were grossing an average of $39 million per day.

To put this in context, it would put Macao on pace to achieve 40 percent of its pre-Covid revenues in January, a healthy step forward from the emaciated dollar figures of the past two years. Greff assumed that high-roller play represented no more than 15 percent of the total, “obviously direct VIP since the junket biz is dead.” That would mean that massmarket play and slots are a vigorous 60 percent-plus of their pre-pandemic altitudes.

“These are levels where property level EBITDA should be firmly in the positive,” observed Greff, in comparison to the negative return on investment that has characterized recent quarters. “Even more remarkable to us is that this is normally a ‘lull’ period before a seasonally stronger Chinese New Year’s holiday (and because of this usual, seasonal trend, next week’s market wide GGR per day may show some level of deceleration). As well, advanced bookings for the [holiday] are also promising with many hotels reporting full or close to full occupancies and rates that are meaningfully higher than 2019 levels.”

Taking the long view, Greff forecast a 40 percent level of pre-Covid revenue for most of the year, improving to 60 percent in the autumn. “So, if these very-early-but-encouraging trends continue, there could be potential positive upside to these forecasts.”

Citing higher travel and spending trends among Chinese consumers, Greff opined that Macao now represented an attractive, long-term stock play, particularly for investors in Las Vegas Sands, Wynn Resorts and Melco Resorts & Entertainment. “While these stocks have meaningfully outperformed the SPX over the last 3 months, we still see attractive upside given estimates that are reasonably based and have more upside than downside,” he wrote. Greff added, “recent trends reflect pent up demand that is not dissimilar to what U.S gaming and leisure travel markets experienced earlier in their respective recovery.”

This comes as welcome news to Macanese casino operators, who find themselves faced with a new set of mandates from the local government, a precondition for concession renewal. For one, they have to reach preset levels of table game revenue or pay an additional levy (on top of a 40 percent tax rate) to cover the shortfall. They also have to invest a collective $12 billion in non-gaming amenities, which they will have to amortize over a scant 10 years rather than the former 20.

Lastly, casino operators are expected to transform Macao into a hub of family fun and medical tourism, among other things. To do this, they are being pressured to improve international travel into Macao from along the Pacific Rim (particularly Taiwan), even though Macao’s airport is not generally regarded as being of first-tier status, which puts even more pressure on keeping the lifeline to Hong Kong open.

For these and other reasons, former University of Macau law professor I. Nelson Rose characterized the six concessionaires as “trapped” in the enclave, the dog that caught the proverbial car. “What do you do if you have spent hundreds of millions of dollars and two decades building your business in Macau, which, before Covid, had been one of the most successful casinos in the world? Do you walk away from your billion-dollar integrated resort,” Rose queried.

His conclusion? “You stick with it, even when the government orders you to close the casino and have literally no income for months because a total of six people died of Covid in the entire city.” Harsh medicine indeed.