Shares of Macau gaming operators could endure lethargic starts to 2021 before a catalyst-rich rebound materializes in the second half of the year, according to Morgan Stanley.
New capacity, increased domestic travel and momentum for license renewal are among the factors that could lift Macau equities in the back half of the year. With some countries in the Asia-Pacific still struggling to contain the coronavirus, Beijing is urging Chinese citizens to eschew international travel and consider domestic destinations, which could benefit Macau. As for the retender process, permits for all six concessionaires expire in mid-2022, indicating regulators will want to start the conversation this year.
Morgan Stanley forecasts full year gross gaming revenue (GGR) of $21 billion on earnings before interest, taxes, depreciation and amortization (EBITDA) of $6.4 billion for Macau operators this year. Those estimates are 65 percent and 70 percent of 2019 levels, respectively, and the bank’s projections are below the consensus calls of 70 percent and 75 percent.
With Beijing clamping down on international tourism and cross-border money transfers, Macau could reap rewards.
One third of Asian gaming revenue comes from outside of Macau, part of which is contributed by Chinese consumers and could come back to Macau, with recently unveiled criminal law also making it more difficult for overseas countries to solicit Chinese consumers,” said Morgan Stanley analysts.
Domestic tourism is vital to Macau’s recovery hopes because the special administrative region (SAR) recently imposed new travel restrictions on international visitors following the emergence of a new strain of coronavirus. Currently, only travelers from mainland China, Hong Kong and Taiwan can enter the gaming hub provided they haven’t been to another country in the three weeks prior to their visit.
VIPs, Junkets Still Sluggish
Echoing sentiments of other research firms, Morgan Stanley notes Macau’s high rollers business remains slack and that mass and premium mass market players will have to do the heavy GGR lifting over the near-term.
That scenario could be to the benefit of Galaxy Entertainment and Las Vegas Sands (NYSE:LVS), which are more tethered to mass market trends than rival operators. However, some analysts also argue that Wynn Resorts (NASDAQ:WYNN) derives a significant portion of its Macau business from the premium mass segment, potentially buffering it against weakness in the VIP market.
Morgan Stanley forecasts VIP and mass market revenue this year will reach 40 percent and 80 percent of 2019 levels, respectively.
“VIP will continue to drag overall GGR down,” according to the bank.
Waiting on Renewal Rerating
The research firm says concession retender concerns should abate this year with Macau authorities likely opting for a three-year reupping from the 2022 expiration, which would remove some of the headwinds facing Macau gaming stocks, particularly the US-based companies.
“We expect US-backed concessionaires to be re-rated higher if all licenses are extended,” said the Morgan Stanley analysts.
The US-based Macau operators are LVS, Wynn and MGM Resorts International (NYSE:MGM) via its MGM China unit. That trio trailed the three local gaming companies in terms of 2020 share price performance.
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