Morningstar takes the Macau market pulse

Jennifer Song, morningstar
Jennifer Song, equity analyst with Morningstar, spoke with Asia Gaming Brief managing editor Sharon Singleton about visitation to Macau during the recent Chinese New Year period and the outlook for recovery. The longer-than-usual May holiday may be a key catalyst for growth.

Q: What is your view of the data from Chinese New Year? Was it disappointing?

A: I think the Chinese New Year data was not too surprising. I am actually stationed in Shenzhen and the policy of the local authorities was to encourage residents to stay local, so you had lower numbers for the China New Year period.

Q: China recently lifted its remaining restrictions on travel to Macau, triggering a share price bounce. How significant is this?

A: There is a change in the overall market conditions. One is that restrictions have been lifted and there is an improvement in market sentiment.

Q: How do you see the stocks moving from here?

A: From our perspective we have seen the stocks move up quite a little bit recently and they’re trading at 0.9 percent of our fair value estimate, so the upside is definitely lower in the near term.

We’re going to see the focus for investors being on the GGR data and the visitation data. 

Q: When will we start to see a meaningful increase in GGR data?

A: I don’t think GGR will suddenly go up. It will be gradual. The May holiday is usually just three days, but this year it will be five days. The government has tried to boost travel. I think this is a good opportunity for short-haul travel of two to three hours. We expect good GGR data during the May holiday.

Q: What are you expecting for Q1?

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A: For Q1, we’re expecting about 32 to 35 percent of 2019’s GGR which is not very bad and pretty much the same as Q1 last year. 

Q: The operators have been cutting costs. What impact will this have on profitability as revenue picks up?

A: Some of the cost cutting is temporary as they are closing down part of their properties. This part will definitely come up when revenue returns, but some of the other costs will be quite sustainable. They chose to optimise the operations of the business, so up to 5 to 10 percent of the cost cuts will be sustainable going forward.

We expect permanent cost cuts of 5-10 percent for the next one or two years. For the next few years we will still see the benefit on margins from cost cutting.

Q: Are you hearing any news about the resumption of e-visas?

A: e-visas will probably come back later, probably in the second half of this year. The government’s focus right now is to make sure the virus is under control for the overall sustainability and benefit of the economy. 

Q: What about the VIP sector. Will that return in the same way?

A: VIP I don’t think any time soon. There is quite a big policy concerning money flows out of China and that will definitely affect the VIP business. From our chats with management we have seen recently that VIP data is very volatile from one month to the next. VIP will definitely be affected by China’s overall money controls. 

That said, the operators still have VIP rooms, so I don’t either expect it to disappear in the next three to five years. Over the past ten years VIPs have been quite important to Macau’s economy and have made up half of the overall tax. So we don’t expect they will disappear but we do see tighter regulation, especially for the junkets.

Q: Will operators extend direct credit to VIPs?

A: There’s a trend of direct VIP services, however, that’s not very good for the company’s balance sheet as they give their own credit. We’re more likely to see rising bad debts. The company itself will take risks so it depends on the overall credibility of the client.

Q: Do you expect Macau to allow any other travel bubbles?

A: China accounts for 70 percent and Hong Kong accounts for 20 percent, so the impact would be very low. The big impact would be to connect with Hong Kong. They tried with Singapore but haven’t managed. I still think it’s very likely that this year HK will connect with Macau, which will be very good for Macau and will also create synergies with visitors from other parts of China. 

Q: What’s your current outlook for stocks by year-end?

A: The market is currently only at about a 10 percent discount to our fair value estimates, but different players have different discount to fair value. Some players have a lower valuation. For example SJM or Melco have a lower discount to our fair value, so they have a higher potential upside, especially SJM. 

SJM will open its first Cotai property in the first half of this year and that will change the company’s market positioning, so it’s very hot for this company. It’s currently our best idea.

Q: When will Macau get back to 2019 GGR levels

A: For this year we target 65 percent and expect a full recovery in 2022 which is pretty much in line with market expectations. We’re looking at the first half of 2022.