“Reopening” of China relative to its current “Covid-zero” policy could start “in spring 2023” based on “three signposts” that could emerge after the 20th National Congress of the Communist Party of China in October, says banking group Morgan Stanley.
The waypoints were: “Reacceleration of vaccinations, especially for the elderly; a nudge on public opinion on Omicron,” a reference to a variant of Covid-19; and “wider availability of domestic treatment pills and ramp-up of Covid-specific medical equipment,” said the report.
The National Congress is an event held every five years with the latest gathering due to start on October 16 at the Great Hall of the People (pictured), in Beijing. It is expected to affirm the ongoing leadership of President Xi Jinping, as well as to flag direction on a variety of public-policy matters, with the country’s approach to Covid-19 being of particular interest to investors in Macau’s casino sector.
The latter has seen start-stop recovery amid periodic lockdowns in its core tourism feeder market, the Chinese mainland, as well as within Macau itself.
Morgan Stanley noted in its report on the topic, that policy status quo, and current Macau tourism volume, meant Macau operators were running at “negative” in terms of earnings before interest, taxation, depreciation and amortisation (EBITDA) and free cash flow, which was “not sustainable”.
Despite a recent dropping of hotel quarantine for inbound travellers to Hong Kong, China’s Covid-19 policy remained “restrictive,” noted the institution.
“Without a turnaround in China’s Covid-zero strategy, domestic travel will face sustained headwinds from pandemic resurgence, in our view, and the removal of international travel restrictions will be less likely,” said the 33-page report.
Morgan Stanley identified three potential scenarios for China’s Covid-19 policy: “status quo”; “reopening plus soft demand”; and “reopening plus strong demand”.
Shift to local travel
A potential upside for Macau if China were to move away from the status quo, was what Morgan Stanley described as “two tendencies among China’s tourists” relating to staying closer to home than in pre-pandemic times. Macau is the only place in China where casino gambling is legal.
There had been a “shift to ‘local travel’ and same-day trips amid the pandemic, which weighs on short-/medium-term air traffic and hotel demand,” said the report.
This was the result of “uncertainties” regarding “travel restrictions” arising from “pandemic control”. Recent experience in relation even to domestic travel has been that such curbs can be introduced at short notice, requiring such consumers to extend stays beyond the dates they had planned.
The other trend identified by Morgan Stanley, via its AlphaWise survey among Chinese consumers, was “prioritising domestic travel over overseas travel, given stringent international travel restrictions, high expenses of overseas travel, and health concerns”.
Under the status quo, “scenario one”, China might maintain “Covid-zero in the next six to 12 months,” said Morgan Stanley. In that case, “domestic travel demand recovery will be fragile and fluctuate below 70 percent of pre-Covid level,” suggested the institution.
Under “scenario two”, i.e., “reopening plus soft demand,” China potentially “reopens in the next three to six months, but demand faces headwinds from softened domestic consumption and a weak global economy,” suggested the investment bank. Nonetheless, domestic demand might recover to “70 percent to 80 percent of pre-Covid level”.
In “scenario three” – “reopening plus strong demand,” – domestic demand could reach “130 percent of pre-Covid level”.
Under scenario three, Macau could have “110 percent upside if we apply a 6.9 percent free cash flow to equity yield – the long-term average – to our 2024 free cash flow to equity estimate,” said Morgan Stanley. “We estimate recovery to 2019′s level by then,” the banking group added.
“Our key assumption is that China’s reopening will not happen until the pandemic is officially announced to be ‘over’,” stated the Morgan Stanley report.
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