MACAU

The outbreak of Covid-19 forced the closure of all properties for two weeks in early February, just after the key Chinese New Year festival. Gross gambling revenue plunged by almost 88 percent in the month and even though the casinos have now opened, there is still expected to be a decline of about 75 percent in March, according to analysts’ forecasts.

There is also very little clarity as to when the situation may improve. Key to this will be the lifting of travel restrictions in China, in particular the individual visit scheme.

Out of 39.5 million travellers in 2019, 70 percent came from Mainland China, that rises to 90 percent if you include visitors from neighbouring Hong Kong.

Management at Melco Resorts & Entertainment said in February that it expected the next four to six months to remain highly challenging for Macau, while MGM Resorts and Wynn have noted the virus has posed a significant risk to their business.

In MGM Resorts’ annual report, the company said it is unable to predict the full extent of the impact of the coronavirus, but said it expects a material effect on MGM China’s results in the first quarter of 2020, and potentially thereafter.

“The extent to which the coronavirus impacts the company’s results will depend on future developments, which are highly uncertain and cannot be predicted,” said MGM.

During Macau’s casino shutdown, MGM lost around $1.5 million per day across both of its properties in Macau – most of this being payroll related.

While MGM resumed operations on February 20, MGM said there are limits on the number of gaming tables allowed to operate to avoid customers being seated in too close proximity.

Wynn Macau was also unable to reasonably estimate the impact of the viral outbreak on its results.

“The Coronavirus outbreak has had and will have an adverse effect on our results of operations.

Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.”

Staffing costs have long been an issue in Macau due to the shortage of labour and the restrictions placed on hiring foreign workers, who are banned from working as dealers. With the potential difficulty of rehiring and with one eye on upcoming concession renewals from next year, reducing expenses by shedding staff is likely to be a last resort.

As a result, the operators have very few options when it comes to cutting overheads to counter the plunge in revenue.

A number of casino expansion projects in Macau have also been halted or slowed due to the outbreak of the coronavirus, according to Morningstar analyst Chelsea Tam.

Among the delayed projects include Galaxy Macau phases 3 and 4, Sands China’s the Londoner, the Grand Lisboa Palace, and Studio City’s second phase.

Macau casino stocks have taken a beating since the outbreak of the virus, but while analysts remain cautious in the short term, they remain optimistic of a sharp bounce back once the outbreak is under control.

Likewise, analysts also see strong pent up demand, which will help drive GGR once travel restrictions have been lifted. However, that forecast comes with a caveat.

Bernstein Research says that there is a risk that the “return to normal” will take place over a longer period of time, perhaps towards the end of the year, as the contagion is not brought under control and visa issuance and transport links are not resumed.

A further issue may be China entering recession if government stimulus fails to overcome the negative impact of Covid-19 and confidence is suppressed.

The Statistics and Census Service (DSEC) has reported that total non-gaming spending by visitors in the fourth quarter of 2019 dropped by 11.8 percent year-on-year to MOP16.24 billion (US$2 billion).

Per capita spending of visitors went down by 4.3 percent year-on-year to MOP1,765 in the same period, marking a drop for five consecutive quarters since the fourth quarter of 2018.

While visitors from Singapore and the Republic of Korea spent an average of MOP2,144 and MOP2,073, an upsurge of 25.4 percent and 31.8 percent year-on-year respectively; spending by visitors from mainland China, Hong Kong, and Taiwan witnessed a decline.

For the full year 2019, per capita spending of visitors fell by 16.5 percent year-on-year to MOP1,626.

The Macau Monetary Authority said its financial reserves rose 13.9 percent in 2019, helped by a significant recovery in world equity markets.

The fund said it had MOP579.4 billion ($72.5 billion) at the end of the year, representing basic reserves of MOP148.9 billion and an extraordinary reserve of MOP430.5 billion.

Investment income was MOP30.2 billion, up 5.6 percent, and the highest level since the reserve was created in 2012.

The authority sees significant challenges for 2020 given the impact of the coronavirus on equity markets and the low, or negative interest rate environment prevailing in the money markets.

MGM China (2282:HK) is operating two casinos, with its MGM Cotai IR opening in February last year. The HK$27 billion IR features 1,400 hotel rooms and suites, meeting space, high end spa, retail offerings and food and beverage outlets and its ramp up has helped the company gain market share in the latter half of 2019.

For 2019, the company saw revenue up 19 percent year-on-year, driven by non-VIP gaming.

Said revenue reached HK$22.8 billion. Adjusted EBITDA grew by 28 percent yearon-year, reaching HK$6.2 billion. MGM said that 86 percent of its profit was driven by non-VIP businesses in the year.

Much of this growth was seen at its MGM Cotai property, with growth recorded across all business segments, while MGM Macau saw solid profit in the year – completing a seven-month renovation on the casino floor in October.

Long-time Chairman and CEO Jim Murren announced he was stepping down from his position in February, though will continue to serve until a successor is found.

Melco Resorts & Entertainment (6883. HK) has three casinos and the Mocha Clubs. The company operates the City of Dreams and Studio City in Macau and the City of Dreams Manila. It is also developing a resort in Cyprus and maintains a strong focus on Japan. CEO Lawrence Ho recently said that construction on its Hollywood-themed Studio City resort is progressing. It will offer 900 additional luxury hotel rooms and suites, one of the world’s largest indoor water parks, a Cineplex, fine-dining restaurants, and state-of-the-art MICE spaces.

For Q4, total operating revenues were US$1.45 billion, representing an increase of approximately 3 percent year-on-year – in line with analyst estimates.

Net income attributable to Melco, however, fell to US$68.1 million, compared with US$126.6 million a year earlier.

Galaxy Entertainment Group (27.HK) has three main properties and runs three City Club casinos inside hotels. Galaxy Entertainment reported full year net revenues at US$51.9 billion, down 6 percent year-on-year, while Adjusted EBITDA was US$16.5 billion, down 2 percent year-on-year. The final quarter of 2019 contributed to these soft results.

The flagship Galaxy Macau and StarWorld Macau both saw declines in revenues and profitability in 2019, with only Broadway Macau making progress over the 2018 figures.

Bernstein Research said that some of the decline was anticipated by analysts “due to ramp up of newer Cotai properties such as Melco’s Morpheus Tower and MGM Cotai,” which added enhanced competitive pressures.

Galaxy has the largest land bank of all the operators in Macau for any future developments and is also focused on bidding for a license in Japan, for which it has teamed up with Monaco’s Societe des Bains de Mer. The company has said that it’s still aiming to launch elements of its Galaxy Phase 3 expansion in the first half of next year, despite construction delays caused by the outbreak of the coronavirus.

Wynn Macau (1128:HK) operates two resorts, with its $4 billion Wynn Palace opening in 2016. The company’s original property is on the Macau Peninsula. The Wynn Palace has 1,700 hotel rooms and 90 percent of the resort is non-gaming. In November, the company opened elements of its new Lakeside Casino at Wynn Macau.

For Q4, Wynn’s results came in below expectations. Operating revenue at Wynn Palace dropped 20.3 percent, with adjusted property EBITDA down 21.6 percent, while at Wynn Macau operating revenues dropped 5.1 percent, with EBITDA off 1.5 percent.

Overall gross gambling revenue at Wynn Macau was down 20 percent year-on-year to $1.24 billion in the quarter, giving it a share of 13.9 percent of the Macau market, down from 14.2 percent in the prior quarter, according to analysis from Bernstein. The firm says Wynn lost 35 basis points in mass market share and 25 points of VIP. Management has noted that prior to the casino closures business had been strong through to mid-January with EBITDA of about $4 million a day.

Sands China (1928:HK) has five properties in Macau. The company has 12,000 hotel rooms and suites, making up for 48 percent of hotel rooms run by casino operators in Macau. For 2019, the company reported profit of US$2 billion, which was an 8.4 percent advance over the previous year’s figure. Net revenues of over US$8.8 billion represented a 1.7 percent increase.

The company has invested $14 billion in its properties in Macau and that will rise to $15 billion over the next two years as the company upgrades its resorts. In the fourth quarter, Sands beat estimates by 2 percent, with adjusted property EBITDA up 3 percent at $811 million. It gained market share in the quarter to 24.3 percent from 23.2 percent in the same quarter a year earlier. The results were driven mainly by a strong performance in base mass, though premium mass was weaker.

SJM Holdings (880:HK) has 22 casinos in Macau, though the former monopoly has been losing market share to new IRs on Cotai. The company was scheduled to open its $4.6 billion Lisboa Palace resort in early 2021, although analysts estimate that will be pushed back further due to disruptions from the coronavirus.

The Lisboa Palace will be the last to open on Cotai and has faced numerous delays. The property features hotels designed by the late Karl Lagerfeld and by Versace and has a strong VIP focus.