Recovery in consumer demand for Macau casino services in the wake of the coronavirus alert might happen only in the fourth quarter this year – compared to market consensus that the pickup would be in the third quarter, said a Tuesday note from JP Morgan Securities (Asia Pacific) Ltd.
“This leads us to model 2020 GGR [gross gaming revenue] to drop 24 percent, a sharp 25-percent to 30-percent cut from pre-virus consensus,” wrote analysts DS Kim, Derek Choi and Jeremy An.
Macau’s casino GGR contracted 3.4 percent year-on-year in calendar year 2019, to approximately MOP292.46 billion (US$36.45 billion), even before the public health alert, according to official data.
Lawrence Ho Yau Lung, chairman and chief executive of Macau casino operator Melco Resorts and Entertainment Ltd, had noted on his firm’s fourth-quarter and full-year earnings call on February 20 that in 2020 Macau’s gaming industry was likely to take “quite a long time” to recover from the coronavirus alert.
The JP Morgan analysts said on Tuesday their assessment of the market’s outlook for 2020 was deliberately “conservative” given the number of “known unknowns” in the Macau market at the moment.
These included: when the authorities in mainland China would “feel safe” to lift general travel restrictions imposed to try to halt the spread of the Covid-19 infection. Other important variables were when specifically China’s issuance of Individual Visit Scheme (IVS) visas – for mainland residents wishing to travel independently to Macau – might “normalise”; when the full timetable of train and flight connections to Macau from mainland China – and beyond – might be restored; and “how significant the knock-on impact on China macro –and gamblers’ confidence” would be.
Another brokerage, Sanford C. Bernstein Ltd, had said on February 20 – the day that Macau casinos reopened at reduced gaming capacity after a precautionary 15-day shuttering – that a “bear” case for the Macau casino sector might see gaming business disrupted “into the autumn”.
JP Morgan noted on Tuesday: “We assume GGR to drop about 55 percent in the first quarter,” driven by seeing February and March GGR “sink” 90 percent and 70 percent year-on-year respectively, and then 35 percent decline in the second quarter. That would in likelihood be “followed by some stabilisation from the third quarter,” though nonetheless with a -8 percent quarterly GGR result year-on-year, with the final quarter delivering 5 percent growth.
The institution described the 2020 profit outlook for the six Macau operators as “dire”. The institution alluded to the difficulty for the firms to make major cuts to operating costs – particularly labour overheads, a major component of such spending – given the perceived pressure on the casino firms not to lay off workers. The companies all face the likelihood of a public retender for Macau gaming rights coinciding with the expiry in 2022 of their current licences.
“Profits will inevitably decline faster than the top line, given the rigid cost structure – a maximum 15 percent to 20 percent of operating expenditure is subject to cost containment,” wrote the JP Morgan team.
The year was set up for “an extremely bumpy ride,” with the institution projecting that Macau industry-wide earnings before interest, taxation, depreciation and amortisation (EBITDA) would “plunge about 80 percent and 45 percent” in the first and second quarters respectively, “to the lowest levels on record”. That might be followed by an “okay” third quarter at -4 percent EBITDA performance; and a “solid” fourth quarter, at +10 percent, added the brokerage.
“The next two earnings seasons will be of little importance given the virtual lack of earnings,” said JP Morgan, adding that the Macau gaming stocks might in effect “trade as a group on headline news and GGR trajectory, not much on bottom-up analysis or individual estimate revisions”.
