The Macau government-ordered 15-day suspension of the city’s 41 casinos from midnight on Tuesday, in the wake of three locals – including two casino industry-linked workers – getting infected with coronavirus, clouds the 2020 earnings outlook for the local industry said an industry executive and several brokerages.
On the day of the closure announcement, several brokerages outlined that risk applied not only to February casino gross gaming revenue (GGR) – one estimated on Tuesday that February earnings might fall by as much as 75 percent year-on-year - but also first-quarter earnings and beyond.
But some senior industry executives polled by a Chinese-language media outlet in Hong Kong said that the variables involved in Macau’s coronavirus alert – including how quickly the city might be able to control infection and how long the casinos might stay shuttered – makes it hard to make clear predictions.
Were there to be a quick resolution locally of the public health crisis Macau casinos could see a quick recovery, said Ambrose So Shu Fai, vice-chairman and chief executive of Macau operator SJM Holdings Ltd, as reported by the Hong Kong Economic Journal. The authorities in mainland China where the outbreak was first reported, had already – prior to the casinos closing - stopped issuing exit visas to Macau for the mainland’s independent travellers.
The news outlet cited Mr So as saying the suspension of casino operations coincided with what would in any case be a “quiet” period following any Chinese New Year holiday celebrated in normal times.
The SJM Holdings CEO conceded however that reduced operating expenses as a result of the minimum 15-day shuttering “cannot completely offset” the revenue that will be lost.
JP Morgan Securities (Asia Pacific) Ltd said in a Tuesday note that fixed operating costs consumed about “19 percent” of revenue generated by Macau gaming operators. The majority of such expense was staff costs, the institution noted. On Tuesday the local authorities urged the city’s six casino operators – who all face expiry of their current Macau gaming rights in 2022 – not to cut salaries or force staff to take unpaid leave.
Fixed costs rain or shine
But JP Morgan analysts DS Kim, Derek Choi and Jeremy An said that from a purely business perspective, “unless the [Macau] government allows operators to implement non-paid or partially-paid leave, there isn’t much room for operators to reduce fixed operating expense,” although the brokerage conceded that lay-offs “would not be an option in Macau given political sensitivity”.
JP Morgan added: “Casino is ‘revenue business’, and there isn’t much that operators can do to mitigate such extreme declines in revenue. Our analysis suggests a 75-percent cut in February gross gaming revenue (or approximately 6-percent annual gross gaming revenue impact) would reduce our annual EBITDA [earnings before interests, taxation, depreciation and amortisation] by approximately 10 percent given negative operating leverage.”
Roth Capital Partners LLC said in a Tuesday note that it currently forecast Macau GGR for calendar-year 2020 to fall by “14 percent” year-on-year, compared to its previous estimate of flat performance.
“While there are many unknowns with the coronavirus, we anticipate an approximately 31-percent GGR decline in the first half of 2020,” Roth Capital Partners’ David Bain wrote.
Hong Kong Economic Journal also approached Alvin Chau Cheok Wa, boss of Macau-based junket brand Suncity Group for comment on the outlook for Macau. He said he couldn’t yet predict how things might go in the wake of the health alert.
“Potential extension of [mainland tourist] visa suspension or [casino] shutdown beyond February would shave off GGR/EBITDA by… 5 percent to 10 percent” of such annual figures, per month of industry curtailment, although that would in likelihood be “followed by strong recovery from pent-up demand,” JP Morgan stated in the Tuesday note.
Brokerage Sanford C. Bernstein Ltd said that – assuming the coronavirus situation improved – the institution expected a “sharp recovery in visitation and GGR” in Macau.
“The key question surrounding Macau will be the timing of the reinstitution of visa issuances and a reversion of visitation back to normal levels… the second half in Macau should still be a strong recovery (unless the medical situation becomes much worse),” wrote analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu.
U.S.-based analysts Carlo Santarelli and Steve Pizzella of Deutsche Bank AG said on Tuesday – alluding to some Macau government commentary on Tuesday about economic stimulus for the whole Macau economy – that it could “accelerate plans for construction applications… in an effort to revive the economy of Macau as quickly as possible. Accordingly, we think the derivative implication could lead investors to believe the concession renewal process could in fact move along quicker and smoother than perhaps anticipated.”
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”Many investors cite Golden Week as a catalyst to significant, sustainable visitation increases and a showcase for profitability for many casinos [in Macau]... However… we are concerned recovery estimates may again be pushed back”
Analyst at Roth Capital Partners