The combined debt of Macau’s six concessionaires has quadrupled from US$5 billion to more than US$20 billion since the start of the COVID-19 pandemic, one of multiple factors currently driving down stock prices according investment bank Morgan Stanley.
In a research note published this week, analysts Praveen Choudhary and Gareth Leung said industry debt had climbed to US$19 billion by the end of 2021 and could reach US$23 billion end-2022, driving down valuations.
COVID-19 outbreaks in mainland China and Hong Kong are also contributing factors, as is uncertainty over the amended Macau gaming law and license renewal – although the latter concerns have largely been addressed in recent weeks.
However, they observe that many operators have turned EBITDA positive at times over the past six quarters while remaining FCFE (free cash flow to equity) negative.
“In the last six quarters since the IVS opening between Macau and the mainland, the industry has tracked Chinese visitation at 20-30% of 2019 level, mass revenue at 30-40% of 2019 level and EBITDA at breakeven or 5% of 2019 level,” they wrote.
“The issue of EBITDA positive but FCFE negative is that the sector added debt.”
Galaxy Entertainment Group is the only operator currently FCFE positive but the analysts said the likes of Sands China and Melco Resorts could turn FCFE positive if mass revenue goes up from the current 40% to 50% of 2019.
They also see 20% to 30% upside to stock prices “if license extension is just a formality”, although EBITDA normalization is only expected in late 2023 or into 2024.
RelatedPosts
