Credit fundamentals in Macau’s gaming industry “will further strengthen with the market’s continued recovery through 2024,” observed CBRE Capital Advisors Inc in a Wednesday memo.
The institution published a comprehensive analysis of the casino sector – including a number of companies with investments in Asia – as it initiated credit research coverage of global gaming, lodging and leisure companies, for leveraged loans and for bonds.
“Spreads across the sectors remain relatively tight, having compressed over the trailing 12-month period as consumer discretionary spending for leisure activities held up in the face of inflation,” stated the CBRE analysts.
“Gaming credits with Macau exposure are the most attractive, given its on-going recovery and incremental yield relative to U.S. peers,” they added.
According to the report, visitor numbers and gaming revenue this year “should grow by nearly 30 percent and level off closer to China GDP-type growth thereafter”.
“We’re forecasting the market to reach gross gaming revenue of circa US$28 billion and US$29 billion in 2024 and 2025, respectively, which is in line with the local government’s expected growth rate,” said CBRE.
The investment bank added: “The growth should be primarily driven by further improvements in mass market visitation, which can also support property-level margins.”
As premium mass and base mass gaming volumes “have led the recovery” in Macau, operators’ earnings before interest, taxation, depreciation, and amortisation (EBITDA) recovery “has outpaced gaming revenues,” the report noted.
It added: “While direct VIP has seemingly held up well, the VIP segment should remain a shadow of its former self without the legacy junket business of the 2010s.”
According to CBRE, Macau operators “have done a good job of repositioning old junket rooms into gaming parlours and selectively growing direct VIP business”.
“Overall, we view the submission of the VIP segment as a long-term positive. Success of other non-junket markets like Singapore give us confidence that Macau is better positioned in the long run, even if it means a slower recovery from the pandemic than its neighbouring jurisdictions (on a relative basis),” stated the analysts.
Growth, deleveraging
With mass-market gross gaming revenue (GGR) accounting for “circa 90 percent of total GGR”, CBRE sees “further upside” in the segment, “since visitation still is about 10 percent below 2019 levels”.
“The additional visitation should help operators optimise hotel yield and take advantage of newer supply directed at premium mass customers that has opened since the pandemic,” suggested the report.
CBRE stated the Macau industry-wide “de-leveraging will be a by-product” of growth in terms of EBITDA, “though more impactful” for the Studio City group of companies, as well as for casino operator SJM Holdings Ltd.
The Studio City companies promote the Studio City casino resort in Macau, and are majority-controlled by gaming firm Melco Resorts & Entertainment Ltd.
“The greatest leverage improvement should be at Studio City, which we forecast at 7.6x and 5.3x in 2024 and 2025, respectively,” noted CBRE. “Larger operators should remain lower-levered as they experienced a faster recovery in EBITDA and/or paid down debt more aggressively during Macau’s reopening.”
Lawrence Ho Yau Lung, chairman and chief executive of Melco Resorts, said during the firm’s fourth-quarter call, that his company’s “number one goal continues to be debt reduction”.
CBRE said that a “return of normalised leverage should eventually boost equity cushions when considering the sector’s historic enterprise value to EBITDA trading levels of 12x to 14x”.
The analysts stated: “A massive credit overhang was lifted with the new 10-year concessions awarded on January 1, 2023. The new terms were not overly onerous, in our opinion, but capex will increase and eat into free cash flow (albeit still healthy).”
They added: “This should affect the sector’s ability to distribute meaningful cash flow to parent entities in the medium-term, but some levels of distributions are reasonable by 2025 (in our opinion).”
The CBRE team noted that bond spreads for Macau casino firms were “reasonable,” meaning that the “aggregate US$10 billion in unsecured maturities through 2026 are manageable”.
“Liquidity is also healthy between revolver availability, excess cash and discretionary free cash flow,” it added.
