Some Macau concessionaires could run out of cash in as little as three months at current run rates, with the industry losing US$800 million and leaking US$250 million in cash flow each quarter, according to investment bank Morgan Stanley.
The dire predicament, outlined in a research report published this week, suggests that SJM Holdings could use up all if its cash in three months at the 4Q21 FCFE (free cash flow to equity) run rate, although it has another US$170 million undrawn revolver it can access to extend its lifeline.
Also racing the clock, the report says, are Sands China and MGM China with around nine months (three quarters) worth of cash each, while Wynn Macau has around 15 months and Melco Resorts 18 months of cash available.
Galaxy Entertainment Group is the only one of Macau’s six concessionaires facing no such issues since it is FCF (free cash flow) positive and has a US$5 billion war chest at its disposal.
“Survival is key in this stage,” according to Morgan Stanley analysts Praveen Choudhary, Gareth Leung and Thomas Allen. “Of course, companies can raise new debt, but current bond yield suggests it will be expensive.”
With losses growing, the analysts also note that industry net debt has risen from around US$5 billion pre-COVID to US$20 billion at end-2021, while shareholders’ equity has fallen from US$23 billion to US$12 billion.
Nevertheless, they suggest concessionaires are well-placed to stage a strong recovery in the long-term provided they can survive in the short-term as China’s zero-COVID strategy continues to place pressure on travel to and from the mainland.
“The total market cap of Macau stocks at US$58 billion is still close to the all-time low (and similar to January 2016),” they said.
“We expect similar outperformance but not in the near term. We recovered from the COVID shock in 1Q20 with quarantine-free travel between China and Macau but we are stuck at ~30% of pre-COVID level visitations for the last six quarters.
“We remain constructive on the long-term potential of Macau, and market cap upside on 2024e is 82%. But it feels like a long dry highway with no exit in sight. Gas tanks are running low unless we find the exit soon.”
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