GGRAsia – Macau ops likely to front-load capex over opex: S&P

Macau ops likely to front-load capex over opex: S&P

Jan 13, 2023 Newsdesk Latest News, Macau, Top of the deck

Macau casino operators are likely to allocate their pledged capital expenditure “sooner” in the new, 10-year concession period, said analysts at S&P Global Ratings Inc, during a webinar on Thursday focused on Macau’s gaming sector recovery. Operating expenditure would then “come later in the concession period,” they added.

The city’s six gaming concessionaires have pledged to the city’s government they will invest MOP118.8 billion (US$14.8 billion) between them over the course of the next 10 years. About 91.5 percent of that amount, i.e., MOP108.7 billion, will be allocated to “exploring overseas customer markets and developing non-gaming projects”.

The ratings agency said the investment commitments were “high but manageable”, as long as Macau’s gross gaming revenue (GGR) “begins recovering this year”.

S&P expects Macau’s mass-market GGR this year to be in the range of 60 percent to 70 percent of 2019 levels, i.e., before the onset of the Covid-19 pandemic. Its latest estimate followed China’s “rapid shift away from its zero-Covid-19 policy stance” in December 2022.

“I think ideally operators will probably want to try to front-load the capex investment. For example, if you are going to add meeting space or build an entertainment centre, you want to get that open as quickly as possible, and spend the capex sooner in the 10-year concession period,” said S&P analyst Melissa Long.

She added: “The opex to programme that space, bring in entertainment or sporting events, or meetings and groups, will come later in the concession period.”

Ms Long said however there was still “a little bit of uncertainty at this point” over when the committed capex will be spent. “Operators haven’t publicly committed to what the plans are and what is the timeframe,” she noted.

Nonetheless, given the “need to design some of these projects and get government approval, the capex is not likely going to be significant in 2023, and probably ramp up in 2024 and 2025,” said Ms Long.

According to S&P, there has been “some indication” from operators that there might be “a fairly even split” between capex and opex regarding the pledged investment across the 10-year period.

MGM China ramp-up

Also speaking at the webinar, S&P analyst Aras Poon said the ratings agency does not expect the impact of the pledged non-gaming investment to be material to the credit metrics of Macau casino firms.

Regarding capex, he added, some of the projects highlighted by the operators are “smaller projects, and likely to be spread across” the licence term.

“So, in terms of cash outflow, we believe it will be spread more evenly over the licence period. We are not expecting a big incremental cash outflow, at least in 2023 or the early part of 2024, which could potentially have an impact on credit metrics,” stated Mr Poon.

In terms of revenue generated by non-gaming assets, Mr Poon said the institution believed that the gaming sector would remain the “key driver” in terms of earnings before interest, taxation, depreciation, and amortisation (EBITDA) and cash flow for the Macau operators.

“Having more shows and concerts in the short to medium term would not have material incremental contribution to overall revenue,” he added.

In terms of ramping up business, S&P expects MGM China Holdings Ltd’s cash flow to “benefit from a 36-percent increase” in the number of gaming tables allocated to the firm, i.e., additional 200 tables, under its new concession. MGM China has received authorisation to operate a total of 750 gaming tables and 1,700 gaming machines under its new licence, according to a December filing to the Hong Kong bourse.

“Because of that incremental gaming capacity and our expectation that MGM China might be able to take some [market] share, we do expect MGM China’s cash flow could recover close to pre-pandemic levels faster than some of the other operators” in Macau, said Ms Long.

The ratings agency also assumed that revenue at Wynn Macau Ltd will recover at a “slower pace” than the overall market, “given that Wynn had a higher percentage of VIP revenue in its mix before the pandemic,” added the analyst.

The easing of Covid-control measures however should “lower cash burn and support credit metric improvements” in the next 12 months, with Macau operators likely to return to positive EBITDA in the second half of this year, said S&P.

But the institution warned there was still “some uncertainty on how the recovery will unfold, and how consumers will behave, especially as the public health environment is changing”.

“We cannot fully rule out the possibility that restrictions could be reimplemented which could slow down the ramp-up in Macau’s revenue recovery,” noted Ms Long.