Macau’s industry EBITDA will return to 95% of pre-COVID levels by 2024, aided by the expansion of the high-margin mass market and up to 50% more mass gaming tables under the city’s new table cap, according to investment bank JP Morgan.
In a weekend note which estimates true market recovery will begin in early 2023, JP Morgan analyst DS Kim outlines a series of reasons why investors should feel more confident about Macau’s short-term future following confirmation last week that all six current concessionaires would be awarded new 10-year concessions starting 1 January 2023.
These include the removal of concession risk and the potential for a lower tax rate should concessionaires successfully attract more non-Chinese visitation, however he also suggests that a previously announced cap of 6,000 gaming tables market-wide in 2023 – lower than the 6,739 that were in the market as of 4Q19 – was misleading given the collapse of the junket industry.
“The table cap is (far) less meaningful than it looks,” Kim said.
“The number of tables will remain capped at current capacity of 6,000 for the next term, as the government won’t grant additional gaming land or capacity. However, this doesn’t mean growth will also be capped, as there is more than enough excess capacity in the market.
“We estimate there were only about 4,000 mass tables directly operated by casinos (excluding junkets and satellites) in 2019 (peak for mass GGR), so the table cap of 6,000 presents significant headroom … theoretically, up to 50% additional capacity for mass.”
Despite the current pandemic situation in mainland China, which continues to impact travel to and from Macau, JP Morgan notes that “pent-up demand is real for most markets, and should be the case for Macau’s mass and non-gaming.
“So,” writes Kim, “it boils down to Macau’s accessibility, and a series of recent events makes us feel confident in the direction of mobility easing within China, which we view as the only missing piece for Macau’s recovery, given e-visa resumption last month.”
JP Morgan’s key milestone estimates include a return to EBITDA profitability in 1Q23 thanks to mass/non-gaming demand recovering to around 35% of pre-COVID-19 levels, Free Cash Flow turning around in Q2 or Q3 with demand reaching 50% and then a “return to normalcy with mass demand reaching 100% in 2024.
“We maintain our model for mass and non-gaming demand to recover fully during 2024, but we place VIP numbers at near-zero levels, as this segment has probably been structurally impaired,” Kim writes.
“Yet thanks to the high-margin nature of mass and solid cost-saving efforts, we still expect industry EBITDA to recover to 95%+ of pre-COVID-19 levels by 2024.”