The Macau gaming industry could see its earnings before interest, taxation, depreciation and amortisation (EBITDA) reach break-even in the third quarter this year, due to “cost rationalisation” measures adopted by the city’s gaming firms, suggests banking group Morgan Stanley.
“Industry EBITDA should break even in the third quarter of 2020, even though GGR [gross gaming revenue] is lower and revenue mix is weaker,” favouring VIP compared to the mass segment, suggested analysts Praveen Choudhary, Gareth Leung and Thomas Allen in a Monday note.
EBITDA break-even would be “due to cost rationalisation, as overall operating expenses dropped by 18 percent quarter-on-quarter in the first quarter, and we expect it to have declined by another 5 percent quarter-on-quarter in the second quarter,” the Morgan Stanley team added.
Macau gaming industry property EBITDA for the third quarter could reach US$160 million, said the banking group. It would represent a 93-percent year-on-year decline, but an improvement from an estimated second-quarter circa US$1.07-billion loss before interest, taxation, depreciation and amortisation (LBITDA), the Morgan Stanley team estimated. They also expected that the industry’s property EBITDA for the fourth quarter could reach US$1.38 billion.
“We do not know when Macau EBITDA will reach 2019 levels, but in our model we have assumed it to be 2022,” stated the institution.
The team said its estimate for 2020 property EBITDA of the six Macau operators was US$641 million, a year-on-year decline of 93 percent. The banking group expects that from that low base, it will expand to just under US$8.12 billion in 2021, and just under US$9.90 billion in 2022.
Referring to the pending reporting period, Morgan Stanley said: “Third-quarter EBITDA could be lower than first quarter despite cost reduction, mainly due to less favourable revenue mix as mass recovers more slowly than VIP.”
For the third quarter, Sands China Ltd, “helped by Four Seasons serviced apartments opening,” and Galaxy Entertainment Group Ltd, “helped by the construction materials segment,” were the only Macau operators “that we expect to generate EBITDA greater,” than seen in the first quarter, said the analysts.
Market-wide, the banking group expects “daily operating expenses could continue to decrease by [between] 8 percent to 14 percent year-on-year in third quarter to fourth quarter,” which should allow the companies to “get back to pre-Covid EBITDA levels even when GGR is not there yet”.
In the Monday update, the Morgan Stanley analysts lowered their estimate for Macau 2020 GGR, while adjusting upward the GGR estimates for 2021 and 2022.
“We change our full-year 2020/2021/2022 GGR estimates from -55 percent year-on-year/+90 percent/+15 percent; to -60 percent/+110 percent/+20 percent, respectively,” the analysts wrote.
Its new 2020 GGR figure was “10-percent lower, to reflect weaker second quarter and no IVS reinstatement yet.” The latter was a reference to an exit visa programme operated by mainland China, allowing its residents independently travel to Macau and several other places.
Morgan Stanley said the shape of a Macau gaming recovery would depend on the removal of quarantine restrictions by other mainland Chinese cities – a factor relating to return travel by mainland residents after visits to Macau – as well as the reinstatement of the IVS programme.
The institution thinks Macau’s 2021 GGR will reach US$31.1 billion, and that for 2022, US$37.3 billion.
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"The most worrying [thing] is whether [mainland] China will again tighten the issuance of travel visas [for visits to Macau]"
Luiz Lam Kai Kuong
Macau junket investor