Lower operating costs and a better business mix are likely to have helped the bottom line of Macau’s operators in the fourth quarter, despite continued low revenues, Morgan Stanley says.
The firm predicts positive corporate EBITDA of $420 million for the quarter from all companies combined, much better than in Q1 of last year when they made $100 million. Morgan Stanley said all the operators except SJM Holdings are likely to be positive on the EBITDA level.
Morgan Stanley notes the operators made significant cuts to operating expenditure after the pandemic hit, with daily operating expenses coming down by 38 percent in Q3 year-on-year. It expects a similar decline in the fourth quarter.
The companies have also seen a higher contribution from the mass market, which has led to better operating mix. VIP is expected to make up just 21 percent of gross gambling revenue in the most recent quarter, compared with 42 percent in the first quarter of last year.
“We estimate that VIP revenue declined by 83 percent in 4Q, while mass revenue declined by only 62 percent,” it said.
Among the individual operators, Morgan Stanley expects Galaxy Entertainment and Sands China to benefit from non-gaming EBITDA, in particular from their retail offerings. The firm notes that retail sales for many luxury stores were already positive year-on-year in October at the two resorts.
The analysts also observe that slot contribution to GGR in Macau has been rising and now stands at 7 percent. However, slots’ contribution to EBITDA is higher at 10 percent.
For the whole of this year, Morgan Stanley has already revealed that it is below the consensus estimate for the market, but expects outperformance in 2022. It sees 2021 corporate EBITDA of $6.4 billion, or 65 percent of 2019’s levels. The market view is for EBITDA to reach 70 percent.
It also says it continues to see potential for downside in both numbers.
In terms of the implications for gaming stocks, Morgan Stanley says stocks are likely to remain “sluggish” until there is a bottoming out of 2021 earnings revisions.