The post-COVID earnings of Macau’s gaming operators will be stronger than they were in 2019, buoyed by strong luxury spending by mainland visitors, pent-up demand, lower staffing costs and an improved gaming mix, according to Morgan Stanley analysts.
The positive outlook forms part of the investment bank’s latest earnings preview for 2023, with analysts Praveen Choudhary and Gareth Leung adamant that gross gaming revenues will inflect next year on improved regional travel opportunities.
Following eVisa resumption last month, Morgan Stanley believes China will now gradually move away from its COVID-zero policy and reopen all borders with Macau and Hong Kong paving the way for mass market GGR to reach 91% of 2019 levels by Q4.
More importantly, however, this will also help operators become more profitable by 2024 than they were in 2019. Among the key reasons for this, state Choudhary and Leung, is the fact that various types of luxury retail sales in mainland China have stayed more than 20% above 2019 levels, with Macau yet to enjoy the same benefits.
“Historically, Macau mass revenue is strongly correlated with China nominal GDP, which is already 20% higher in 2022 than it was in 2019, and could be 35% higher than 2019 by 2024,” they write.
“China discretionary retail sales and other more luxurious retail sales have stayed at more than 20% above the 2019 level since 2021.”
The analysts also note that fixed opex, mainly staff costs, are currently 40% below 2019 levels with operators expecting 15% to 25% of this reduction to remain once fully operational again – translating to around US$500 million in annual savings.
In terms of gaming mix, Morgan Stanley estimates the higher margin mass segment will comprise 90% of post-COVID GGR versus 60% in 2019, while pent-up demand looms as a key factor in Macau’s recovery trajectory.
“Investors are concerned that strict COVID controls have impaired China’s economy,” they state. “Though we see some softening in various discretionary consumption by Chinese consumers in recent quarters, figures stayed well above 2019 levels.
“Furthermore, we see robust gaming recovery in Las Vegas Strip and ASEAN post travel reopening.”
Morgan Stanley’s 2023 estimates show mass GGR recovering to 37% of 2019 levels in 1Q23, rising to 53% in Q2, 72% in Q3 and 91% in Q4 – leading to full recovery by 2024.
However, factors which could prove such a positive outlook wrong include a further crackdown on premium mass similar to junket VIPs, higher-than-expected non-gaming investment requirements, potential fees on gaming areas and higher interest rates drive FCFE lower, the analysts observe.
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