“There is plenty of room for top-line growth” for Macau’s casino industry in 2024, suggests a note from Citigroup. It observed that the city’s six casino operators “have had a decent 2023,” with industry earnings before interest, taxation, depreciation, and amortisation (EBITDA) “recovering to circa 80 percent of pre-pandemic levels in the third-quarter 2023 earnings season”.
Despite the improved performance, the stocks of Macau casino operators “have been suffering from a series of armchair theories over the past few months, e.g., weak economy in China impacting luxury spending, casino operators engaging in a price war on player incentives, etc.,” noted Citigroup analysts George Choi and Ryan Cheung in a recent memo.
The Citigroup team stated that the Macau casino sector’s current valuations implied an “over-pessimistic” view on “operational expenditure, more specifically, player reinvestment”.
“We firmly believe that companies’ fundamentals drive long-term value, and eventually the market will give credit where it is due,” the analysts added.
According to Citigroup, concerns about overspending on player incentives in the Macau market are “grossly overdone”.
“If a company does not spend on marketing, it runs the risk of losing market share. In our view, the six Macau casino operators should not be penalised for upping expenditure on player incentives, so long as their EBITDA margins are not materially diluted,” wrote Mr Choi and Mr Cheung.
The issue of the current level of competition among Macau’s six casino operators regarding player reinvestment levels for premium-mass players – including complimentary services to clients – has been discussed recently by a number of investment analysts, and acknowledged by senior management in the Macau market.
Research from brokerage CLSA Ltd suggested that, in the first nine months of this year, the Macau gaming sector offered the equivalent of about US$2.7 billion in premium-player rebates and player reinvestment, or about “17 percent to 18 percent” of Macau’s total gross gaming revenue (GGR) for the same period. That compared to an average of 22 percent of Macau annual GGR in the pre-Covid-19 trading period covering the years 2017 to 2019, it added.
According to Citigroup’s memo, there is a “weak correlation” between China’s gross domestic product and Macau’s mass GGR growth potential. “Visitation, gaming spend and time spent at casinos together have a more significant correlation with Macau’s mass GGR,” stated the analysts.
They added: “For Macau to achieve our forecast of 19 percent year-on-year GGR growth in 2024 (MOP216 billion or circa US$27.1 billion), all that is needed is: visitation recovery (versus pre-pandemic) to flat-line from third-quarter 2023 level; gaming spend per player to stay flattish versus 2023; and time spent in Macau [to be] up marginally due to the 3 percent year-on-year increase in total available hotel room night[s].”
The Macau government estimates the city’s casino GGR next year will be MOP216.0 billion, according to its fiscal year budget proposal for 2024.
“Given its [the government’s] record of underestimating GGR in its fiscal budget, we believe there is plenty of upside risk to our GGR forecast,” said the Citigroup analysts.
