Macau Casino Revenue Likely to Surpass Pre-Covid Levels for First Time
The take at Macau's casino tables should outdo the pre-Covid year of 2019 for the first time, suggesting this is a good entry point for casino stocks.
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These have been extremely difficult years for Macau, and its gambling industry. Covid-19 shuttered casinos and kept punters away. Forced to maintain headcount, the casino operators bled a stream of red ink.
Those tough times are over. This year, gambling revenue should surpass pre-Covid levels for the first time since the onset of the pandemic. The boom in outbound Chinese travel is the primary driver behind trends that bode very well for casino stocks.
Gross gaming revenue should run 5% to 15% stronger than in 2019, according to a new report from S&P Global Ratings. We're entering the Lunar New Year break, which this year runs February 10-17, when the Macau tourism office has forecast a daily average of 120,000 visitors, or close to one million for the whole holiday.
Earnings haven't quite recovered to match the take at the tables, yet. Profits for 2024 should run around 95% of the levels of 2019. It was at the end of that year that we here in Hong Kong first heard rumblings about a new SARS-like strain of pneumonia striking down citizens in Wuhan.
I expected a similar impact to SARS, which hit in the fall, led to a dramatic scaling back of, well, life in Hong Kong and Macau, but was gone by the spring. Little did we know what tough years lay ahead.
The main overseas operators in Macau are Sands China (HK:1928) SCHYY , Wynn Macau (HK:1128) WYNMY , and MGM China (HK:2282) MCHVY .
The domestic competitors are Melco Resorts & Entertainment MLCO , Galaxy Entertainment (HK:0027) GXYYY , and SJM Holdings (HK:0880) SJMHY .
MGM China is the exception that has already seen profits recover. It's already back above pre-Covid levels, and outperforming thanks to the granting of the license for new tables under a fresh concession.
Earnings for Melco have been lagging the group, but that's because it was completing a second phase of its movie-themed Studio City resort as well as its City of Dreams complex, where it added a Mediterranean theme. The peak capex should now be past, and while the company has had increased expenses to promote the expanded properties, those pressures should ease in the second half of the year.
There has been a notable shift in the way the Macau casinos operate. After a crackdown on "junkets" and the downfall of the largest junket operator, Suncity Group, there's been a shift away from the VIP gamblers that the junkets targeted.
Junket operators would bring Chinese high rollers to Macau, often taking money in China and giving them chips at the tables in Macau. They would also take on and chase down casino debts.
It was always a gray area, at best, since recruiting gamblers is illegal in mainland China. What's more, the cross-border movement of money from Chinese yuan into the Hong Kong dollars typically used at the Macau tables skirts money-laundering rules. But it was tolerated for years in Macau, the only Chinese territory to allow casinos to operate legally.
That was until the November 2021 arrest of Alvin Chau, the founder of Suncity. Chau has now been handed an 18-year prison sentence for money laundering, fraud, and operating an illegal gambling business. Industry insiders estimate Suncity, which would share the proceeds to run its own VIP gambling rooms within casinos, accounted for as much as 25% of Macau's gambling revenues. Since Chau's arrest, almost all junket operators have ceased.
The result has been a shift in the balance of casino operations toward "mass market" regular gamblers. The VIP high-roller rooms, technically operating as subcontractors within the casinos, are no more.
Market leader Sands China has the most hotel rooms in Macau under its portfolio, bolstered by the enormous Venetian and neighboring Parisian and Londoner resorts, with their mini-versions of the Eiffel Tower and Big Ben. S&P anticipates that it will recover a slight dip in its market share to regain, in 2024, the 29% command of the market that it had when Covid hit.
Galaxy, the next-largest operator, has stayed steady at an 18% market share. There's growth both at Melco (15% market share) and MGM (up to 13%), largely at the expense of legacy operator SJM, the original monopoly holder before Macau forever reshaped the industry in 2002 by announcing it would expand the number of licenses, resulting in the Las Vegas operators entering Macau.
Wynn, which concentrates on high-end hotels, has a 12% market share and may suffer some attrition since, unlike Sands, Melco and MGM, it is adding no new room capacity. However, the ratings agency Fitch cited the improvement in the Macau market as a prime justification in giving a BB- rating to the Wynn group and its "high-quality portfolio" of gambling assets.
The new holy grail of gambling is the "premium mass" market. Fitch says mass-market baccarat, the game of choice for most Chinese high rollers in Macau, has nearly returned to 2019 levels, particularly in that "premium mass" sliver. The shift away from VIP gambling at first hurt profitability so it's a key substitution.
As a side note, the Macau Jockey Club has announced it will terminate horse races and shut down as of April 1, after years of running up losses. The club signed a 24-year renewal of its concession in 2018, supposedly guaranteeing racing until 2042 alongside plans for surrounding development, but the pandemic dealt it a crippling blow. That leaves Hong Kong as the only place in greater China where horse racing is legal.
The closure of the track raises the prospect of a prime block of land coming up for grabs near the Cotai Strip, home to Macau's biggest casino resorts.
Macau removed any lingering uncertainty about the immediate future of the casino companies by awarding 10-year licenses to the six incumbent operators in November 2022. The Malaysian casino operator Genting (KL:3182) GEBHY had entered a surprise bid to challenge for a license but was overlooked.
The new licenses were followed in swift order by the removal of essentially all China's super-strict anti-Covid policies overnight in December 2022. But it has taken time for travelers to arrange trips to Macau, and for gamblers to return. Due to China's quest to eliminate Covid as well as strict border-closure rules in Macau and the mainland, gambling revenue had fallen as much as 98%.
That situation could only improve, and over the course of 2023, it has. This year essentially represents a "return to normal," despite the stop-start economic recovery in China.
S&P upgraded the credit rating on Sands and Wynn last year, and says Melco has a positive outlook now it seems it can bring its added promotion and expansion expenses under control.
It is worth noting that Las Vegas Sands LVS , Wynn Resorts WYNN and MGM Resorts MGM are all bidding for the three casino licenses now up for grabs in New York. Winning any of those projects could pressure the leverage of the U.S. entities. But it shouldn't affect the Macau stocks.
Of the six Macau-focused stocks, I would avoid SJM, which is struggling to corral its extensive portfolio of smaller, older gambling halls. The others generally stabilized in 2023, a sideways year. But the five stocks have yet to reclaim the peaks they set in spring 2021, the first rally after the initial Covid downturn, which proved a phantom runup undone by the anti-Covid campaign. And they're all well off their levels of the start of 2020, when the pandemic first hit.
Now should mark a good entry point for an industry finally finding its feet after the greatest challenge they've ever had to face.
