Asia-Pacific casino operators beyond Macau have cash-flow risk – and in some cases debt service risk – in relation to China’s coronavirus emergency, because of their exposure to the mainland China consumer segment.
So says a note issued last week by credit ratings agency S&P Global.
Credit assessment agency Fitch Ratings Inc had said in a Thursday note that the effect of the ongoing coronavirus crisis on Macau casino operators’ cash flow would “be significant as the virus spreads and regional governments’ precautionary measures continue”.
S&P’s own assessment on the topic – by analysts Emile Courtney and Melissa Long – dealt with that issue and looked also at the impact of the crisis on the casino sector regionally.
The World Health Organization – a United Nations agency – had said following a Thursday meeting that it declared the outbreak a “public health emergency of international concern”; as of that date there were coronavirus infection cases in 17 countries aside from China, with most of the patients affected having had a history of travel in China. Locations in Asia Pacific with one or more confirmed cases include Australia, Cambodia, Japan, Malaysia, the Philippines, Singapore, South Korea, Sri Lanka, Thailand and Vietnam.
Seven of those 10 locations have active, legally-licensed casino sectors. Some – like Singapore, the Philippines and Vietnam – have issued travel restrictions covering all new visitors who have been recently in mainland China.
Referring to the Malaysian conglomerate that is parent to the Genting brand of casino businesses, the S&P Global analysts wrote: “Due to its high 2020 capital expenditure requirements Genting Bhd has limited flexibility to absorb a significant and prolonged decline in the cash flow from its Singaporean or Malaysian casinos. We believe Singapore is much more reliant on Chinese visitation than Malaysia.”
Genting unit Genting Singapore Ltd runs the Resorts World Sentosa gaming resort in Singapore, and Genting Malaysia Ltd operates the latter nation’s only licensed casino complex, Resorts World Genting near Malaysia’s capital Kuala Lumpur.
Turning to the Philippine casino market, S&P Global noted, referring to a Japanese entertainment conglomerate: “Universal Entertainment Corp also faces potential cash flow declines at its Okada Manila resort in the Philippines, which contributes over 50 percent of its total revenue.”
The analysts added: “We believe visitors from mainland China account for a portion of this resort’s clientele; however, we believe the profit contribution from its Chinese visitors is modest compared with its potential revenue exposure.”
The authors further stated: “We already have a negative outlook on the company signalling downside risk. If a prolonged reduction in visitation to its resort leads to a weaker operating performance and causes its leverage to stay above 3x in fiscal year 2020, we may consider lowering our ratings.”
NagaCorp, Crown Resorts
The ratings agency said the tourism industry in Cambodia – where Hong Kong-listed NagaCorp Ltd has a monopoly in the capital Phnom Penh to operate the NagaWorld resort – was “increasingly reliant” on Chinese visitors, a segment that represented “approximately 39 percent” of the total visitors to the country in the first half of 2019.
It stated that VIP gambling business – “more volatile by nature” than that provided by other player segments – “accounted for 73 percent of the company’s revenue” in the six months to June 30.
“This, combined with our forecast for negative discretionary cash flow over the next 12 to 24 months, could rapidly reduce the company’s cushion relative to our downside leverage threshold for 2020, potentially pressuring the rating.”
S&P Global added: “If the effects of the [China virus] outbreak are prolonged it could heighten NagaCorp’s refinancing risk because the company has US$300 million of upcoming debt maturing in May 2021.”
The ratings house also discussed Australia’s Crown Resorts Ltd, which operates properties Crown Melbourne in Victoria, and Crown Perth in Western Australia – and is developing a third resort called Crown Sydney, in New South Wales. Crown Resorts has traditionally had significant exposure to the Chinese VIP market.
“We believe the coronavirus will likely reduce both VIP and mass-market visitation to Crown Resorts Ltd’s properties in Australia,” S&P Global said.
It added it was “still too early” to quantify the outbreak’s eventual effect on the company’s earnings given Australia’s “still-strong domestic economy,” and what the agency believed was a “smaller cash flow exposure to the outbreak than the firms operating in Macau and Singapore”.
S&P also said Crown Resorts had “ample headroom relative to our 2.5x leverage downgrade threshold given its sizable cash balances and low net debt”.
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Analyst at Roth Capital Partners