Full recovery in Macau mass market not likely before 2024 [video]

Macau operators are likely to face another choppy year in 2022, with visitation expected to stay at low levels as the pandemic drags on, says Fitch Ratings analyst Colin Mansfield.

As a result, full recovery in Macau’s mass market is not expected until 2024. In this week’s Face-to-Face interview Mansfield reviews prospects for the industry and explains more about why the companies have all been placed on the Ratings Watch Negative list. 

Interview transcript

Hello, and welcome to Asia Gaming Brief’s Face to Face series. Today I’m talking with Colin Mansfield, who’s an analyst at Fitch Ratings. We’re going to be talking about the Macau operators and why Fitch recently put them on ratings watch negative.

Thank you very much for joining us today. We last spoke around a year ago now and I would like to ask you, first of all, whether the year has panned out like you thought it would?

So I think it’s a little bit worse than we were anticipating, mainly on the visitation front. It’s been a lot more depressed for a lot longer than we thought this year. Also, like a lot of the investment community, I think we were optimistic that once the vaccinations really started rolling out that you’d start to get more of a snapback in demand and visitation and things would go back to normal. While that’s true here in the U.S. and some other gaming markets, that really hasn’t been the case over in a lot of APEC jurisdictions. So I think that’s where, you know, we had to look to revise our forecasts for both 2021 and 2022, as the lingering travel restrictions, and really tight health code policies weighed on visitation a lot more and a lot longer than I think we had originally anticipated.

So when are you now seeing full recovery?

For recovery, on the mass side, we’re modelling for 2024. The market as a whole probably will take a little bit longer than that, because of some of the challenges in the VIP sector right now. 2022, we think it’s going to be another volatile year. You know, regardless of what vaccination rates are, I think it’s inevitable that we are going to get COVID cases every now and then. And the tight policies that both Hong Kong, Macau and the mainland government have, inevitably are going to cause some volatility for shutdowns and travel restrictions, unfortunately. So we don’t see a lot of change for 2022. We really think it’s going to be another couple of years before you start to see more meaningful improvement in visitation.

How concerned are you about the Omicron virus variant?

It’s definitely a concern. I think it adds a degree of uncertainty around how we feel about our 2022 forecasts. Much like other folks in the investment community, it’s hard to have a high degree of confidence until we know if Omnicrom is going to be a variant that has less severity or it’s less transmissible. I think if we get more information on that, we’ll get a little bit more comfortable with how we’re seeing 2020 to play out. But inevitably, variants are a risk that we have to incorporate into our forecasts and definitely we have skewed a little bit more conservative, as we think about recovering gaming revenues or visitation.

Given the potential for another year of extremely low revenue base, and at a time when the operators have pretty much cut everything back down to the bone. Are you seeing any cracks?

Not yet. The good thing about the Macau operators, and some of the global gaming operators in general that are related to these companies, is that they have a lot of excess liquidity. So it has allowed us the patience and the time to look through some of the more challenging years, like 2020 and 2021 and now 2022, because they have enough liquidity to ride out the storm. It has allowed us to be a little bit more patient as we think about the credit profiles that should begin to normalize more in earnest and 2023, should our assumptions for visitation and gaming revenue come to fruition.

In a worst case scenario, how many years of this kind of low visitation do you think that they could bear before the strain is there?

Well, 2022 is going to be a pivotal year because we’re starting to enter the third year of the pandemic. And that’s part of the reason why we placed the entire sector and the operators on Rating Watch Negative last week. It was a two-prong one, the regulatory uncertainty, but also the recovery uncertainty. Because as we’re getting into the third year. If we’re not really seeing a recovery and visitation start to materialize or crystallize, it really begs the question of what does the long-term visitation trajectory look like for Macau? While it’s still positive, I think credit risk will increase if visitation next year really doesn’t start to improve materially, because then you start to get to a point where you have to question what is the normal amount of cash flows that these companies can generate, relative to the amount of debt that they have. There’s a possibility that if that recovery doesn’t start to materialize, credit risk will increase if there’s not a commensurate amount of debt paid down given a structurally different cash flow profile.

You just mentioned regulatory risk there as being one of the reasons for putting them on their Credit Watch Negative. How big a factor is that for you? Imminent and rising were the terms you used…

So we’re entering the six-month mark before the concessions expire. And while the government and the regulators are working towards the re-bidding process and what that structure is going to look like, there’s definitely increased uncertainty around what that’s going to actually look like. How does that impact cash flows and balance sheets, and who ultimately gets the licenses. While we’re still believers that all of the operators will remain in Macau operating long term, and we think the loss of concession is a relatively low risk, it’s one that can’t be ignored, and something that we wanted to communicate to the marketplace that there is potential for downside credit risk here. We’re not exactly sure how this is going to be structured. Now, there has been some communication around possibly when those details will be coming out, which is a positive. But at this point we think there’s more credit downside risk than upside risk – until we get more clarity on what the next concessions structure is going to look like, and how that’s ultimately going to impact the cash flows and the balance sheets of the operators.

Are you concerned that they may be required to invest in more non-gaming on considerations that are not purely economic and financial and are rather to fulfil a vision?

At this point, any sort of capital commitment is something that we’re building into our base case. All the operators have done a very good job supporting those goals through the current concession term so I don’t think it would be too surprising to us if there were capital commitments related to other developments that help support those broader goals. But we would think there would be a commensurate return profile that the operators would demand to be able to commit to spending those types of dollars.

So in the best case scenario, we are going to have regulatory clarity next year, COVID isn’t going to be as big of a problem as we thought: who do you think is best placed for a recovery?

Probably Las Vegas Sands. They’re more geared toward the mass market already and have the most hotel rooms. That’s probably the operator we would think would be best positioned to take part in the recovery, as evidenced by some of the shorter periods when, in 2021, when there haven’t been a lot of travel restrictions. It’s evident in the numbers. One company, I think I’d call out that would be a little bit more concerned with, is Wynn Macau just because of their historically higher mix of VIP. In any case, as long as the mass market is recovering in Macau, all operators are going to be seeing a commensurate recovery. We think Las Vegas Sands is geared towards the mass market the most and would benefit probably the most.

And what about the Grand Lisboa Palace? Obviously, it launched in the worst possible times. Given the operating environment, how have you seen that ramp up?

It is a little bit of an unfair time to be judging the ramp-up of the property? I think it goes back to the fact that the whole market is not performing well right now. What we still hold is that that property is going to ramp up over a period of years and not necessarily months so there’s a long runway to go. In our forecast, we have it basically maturing by about 2024 and generating cash flows of about US$450 million with margins in about the mid 20 percent range. The property will work, the problem is it’s going to take a little bit more time to ramp up. So it is a little bit of an unfair environment right now to judge how it’s been performing. I look forward to seeing it in person someday and some of the other properties on Cotai. At the end of the day, more hotel rooms is a good thing for Macau. It’s a positive for the market, it’s a positive for Cotai.

Looking at some of the loss of the VIP there’s going to be quite a few VIP tables that are going to be freed up now that can be dedicated to the higher margin mass market. How will that help?

Strictly speaking, if you’re moving tables from VIP to mass market you’re going to immediately get a margin benefit because the margins are better, and that’s good for cash flows for the operators. It’s also good just from a stability perspective, because the mass market business historically has been less volatile than the VIP business, since the VIP business is driven by some other factors as opposed to rising middle class and further penetration of visitation into Mainland China. First and foremost, you might see a little bit more of a revenue impact. The good thing is that you’ll make up for that on the cash flow side because the margins are better on the mass market side.

What about outside of Macau, do you have any thoughts on how the recovery might proceed and the rest of Asia?

I think it’s going to remain challenging relative to the United States and even European markets where it’s a little bit more digital focused. We do see a lot of the APAC jurisdictions lagging behind their Western peers, mainly because of the strict health codes and the travel friction that continues to persist as we get into 2022. I think that’s been a benefit for markets like the United States and Las Vegas specifically, where when you remove the travel friction, and there’s a little bit more of a living with COVID mentality, the leisure demand has been really strong, and you get a snapback in performance. And unfortunately, I think what’s going on in a lot of the APAC markets is that the very strict health codes and disruptions from when there’s localized cases and you shut things down and limit the moveability of people that’s really going to make those markets lag in recovery relative to some of the Western ones in 2022.