Macau Outlook Worsens, UBS Sees Five Years to Rebound

Posted on: April 12, 2022, 11:01h. 

Last updated on: April 13, 2022, 09:42h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

As coronavirus cases surge in mainland China, the Chinese Communist Party (CCP) is again employing harsh, ineffective lockdowns, sapping Macau’s recovery prospects in the process.

Macau rebound
Casinos on Macau’s Cotai Strip, seen above. Analysts are negative on recovery there. (Image: Anthony Kwan/Bloomberg)

Research firms are taking note that none of the most recent batch of commentary on the world’s largest casino anywhere close to positive. UBS goes so far as to say the special administrative region’s (SAR) gaming industry won’t fully recover from the effects of the pandemic for another five years.

The six Macau concessionaires generated a combined $36 billion in revenue in 2019 — the last year prior to COVID-19. UBS estimates that figure this year will be just $12 billion. The Swiss bank also pared its 2023 Macau gross gaming revenue (GGR) outlook by 15%.

Those bleak estimates are far cries from what analysts expected at the start of the pandemic. Despite a 15-day shutdown of casinos in February, conventional wisdom at that time was that Macau’s gaming industry would bounce back more rapidly from the health crisis than other casino markets, including Las Vegas.

However, the opposite is proving true. Las Vegas, though not all the way back, is thriving, and so are US regional casinos, while Macau is flailing.

Concerning Cash Outlook

Recently, some analysts voiced concern about the cash positions of Macau concessionaires, noting some may only have enough to capital to survive through the end of this year.

UBS echoes that refrain, pointing out that based on 2021 cash burn rates, the six operators have capital to survive anywhere from 1.1 years to 7.2 years. Based on current burn rates, the bank says Grand Lisboa is the worst off, with cash to survive no more than 1.5 years.

Making matters worse is that looming first-quarter earnings reports are unlikely to provide any relief, as Morgan Stanley expects MGM China, SJM, and Wynn Macau will each report negative earnings before interest, taxes, depreciation and amortization (EBITDA) for the January through March period.

Our cash flow analysis shows that companies’ cash can last for eight to 44 months, but that is based on fourth-quarter financials. March/April 2022 are much weaker, and cash drain is much higher,” according to the bank.

Some research firms estimate the first quarter of 2022 was the worst three-month stretch for Macau operators since the July through September period of 2020.

Maybe Some Signs of Hope

Amid ballooning debt burdens and a shutdown of Shanghai, among other Chinese cities, optimism is hard to come by. Investors and operators alike will take it where they can get it.

Bernstein sees Macau GGR returning to 80% of pre-pandemic levels next year. That’s with some border restrictions loosening in the second half of this year  and notes the shares of the concessionaires are inexpensive.

“We expect outperformance as the recovery kicks in over the next 12 months,” according to the research firm.