China only recently relaxed its draconian zero-COVID policy, but it appears to be paying immediate dividends for Macau casino operators, which are already believed to be profitable.
While the six concessionaires are forecast to report fourth-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) losses, those losses are expected to be well below those notched in the prior quarter, and it’s likely the operators are making money to start 2023. Through the first 15 days of this month, gross gaming revenue (GGR) in Macau is averaging $35 million to $36 million per day, according to JP Morgan. The bank added that there’s been upside momentum to those figures in recent days.
What does this print tell us? Stripping out largely lifeless VIP segments, the print implies mass/slot GGR run-rate has recovered to over 50% of pre-Covid levels, hitting well over EBITDA break-even levels (mid-30%s recovery in mass) and reaching an important milestone of FCF (free cash flow) breakdown (mid- 50%s of recovery in mass) for the industry,” wrote analyst DS Kim.
Importantly for operators such as Galaxy Entertainment and Sands China, recovery in the mass-market segment is robust and is already exceeding 40% of pre-pandemic levels. JP Morgan’s Kim noted the percentage could exceed 60% with the arrival of the Chinese Lunar New Year.
Macau Profitability Integral for Potential Upgrades
Prior to China’s recent departure from the zero-COVID protocols, the 2020 to 2022 timeframe was rough on Macau operators. The six companies contended with temporary shutdowns and travel restrictions, which sapped visitation to the casino mecca.
As such, profits rapidly turned to losses while operating expenses surged and debt levels swelled. The result is it’s now impossible to find investment-grade credit among Macau concessionaires, but things could improve on that front if the current recovery expands.
“We recently affirmed ratings on Las Vegas Sands Corp., MGM Resorts International, Melco Resorts & Entertainment Ltd., Studio City Co. Ltd., and Wynn Resorts Ltd. Macao’s mass GGR recovery should allow rated issuers to reduce leverage to below our downgrade threshold, though not until late 2023 to early 2024,” according to S&P Global Ratings.
Citing “stretched financials” and the possibility of the return of COVID-19 restrictions, the ratings agency has “negative” outlooks on those gaming companies.
Macau Profitability Has Some Support
In addition to renewed profitability, Macau gaming firms are likely to see robust top-line increases this year, and there will be room for more improvement in 2024.
We have revised our forecasts upwards for mass gross gaming revenue (GGR). In our base case, GGR will improve to 60%-70% of 2019 levels. This is at the higher end of our previous forecast 50%-70% range,” added S&P.
The research firm also noted that revenue growth could stem high cash burn rates while potentially supporting stronger credit metrics over the next year.
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