Industry analysts have warned against accumulating Macau casino stocks after once again revising down their estimates for the months ahead due to the ongoing outbreak of COVID-19.
In a Monday note, Credit Suisse analysts Kenneth Fong, Lok Kan Chan and Sardonna Fong suggest “accumulating the sector only when there are more solid signs of a sustainable GGR recovery.” This follows the government’s decision over the weekend to order the closure of all commercial and industrial businesses, including casinos, for seven days from midnight at the start of 11 July to midnight at the start of 18 July.
It is just the second time that Macau’s casinos have been ordered shut – the previous occasion coming in February 2022 when casinos closed for 15 days, also because of COVID.
With no clear pathway towards reopening and China sticking with its zero-COVID policy, the Credit Suisse analysts said the current situation implies that Macau GGR will likely stay depressed for the rest of this year.
“We expect any meaningful improvement (if it materializes) is likely to come only in 1Q23 next year,” they said.
On the call to avoid accumulating stocks, the analysts note that this could see investors miss the first 10-20% of a rally but, with a gaming cycle rally normally lasting for 1.5 years on average, “could still [allow investors to] ride on the upcycle with higher certainty.”
They also outline their reasons for taking a more negative short-term view on Macau, stating, “Given the highly contagious nature of Omicron and with the number of cases remaining at an elevated level despite mass testing, the timing of a complete clearance is yet to be sure.
“Given that the border may only reopen after 14 days of zero domestic cases (that could potentially drag into mid-August), the pace of GGR ramping up may also be slow as players’ confidence may have been impaired and could take time to rebuild. The players may choose not to return in the near term, fearing that they may not be able to return to their hometown if additional new cases are discovered.”
In a separate note, JP Morgan’s DS Kim and Livy Lyu said both July and August were almost certain to be write-offs and also warn that they would need to revisit their liquidity models for Macau’s operators based on a zero-revenue environment.
“Our analysis suggests SJM and Sands have the shortest liquidity runway of nine months until March 2023, while other operators such as Wynn/MGM/Melco have 1.5 to 2 years of liquidity with Galaxy being an outlier with 5 years of liquidity,” they write.
However, with license rebidding imminent and operators now required to set aside MOP$5 billion (US$625 million) in share capital throughout their concession period, the liquidity runway will be shortened even further, “to just one month for SJM and six months for Sands in this worst-case scenario (zero revenue, zero funding and a lock-up on MOP$5 billion), although other operators should still be okay.
“In practice, we expect controlling shareholders to provide funding via shareholder loans, similar to the case of Wynn last month.
“All-in, we are not too worried about the liquidity situation overall, perhaps except for SJM (which wouldn’t have much headroom even after a shareholder loan).”
