The Macau gaming sector continues to project a bullish outlook, supported by the solid fundamentals of its casino operators, a report by HSBC Global Research analysts suggests.
According to the bank’s dispatch, recent reports indicate notable progress in debt reduction, with net debt decreasing by $1 billion to $22 billion as of June 2024, compared to December 2023.
Additionally, increased bond buybacks and tender activities throughout the year reflect a proactive approach from operators.
As of September 20, 2024, approximately $6.8 billion in Macau gaming bonds (excluding Las Vegas Sands) were held by over 470 investment managers, accounting for roughly 30 percent of the total market.
Notably, total fund holdings have declined by more than 7 percent since September 2023, indicating a shift in investment dynamics rather than an overcrowding of the sector.
Liquidity and Cash Flow Resilience
Despite potential fluctuations in gross gaming revenue (GGR) and quarterly growth of adjusted property EBITDA due to seasonal variations, these temporary dips are not expected to detract from the long-term positive trajectory of casino operators.
The sector’s available liquidity has risen to $13 billion as of June 2024, up from $12.4 billion in December 2023, showcasing enhanced cash flow generation capabilities.
With stable cash generation from operations, most casino operators are believed to have sufficient liquidity to cover their bond maturities for 2024 and 2025 without needing external refinancing.
However, Studio City is facing a liquidity challenge, with cash and undrawn bank loans totaling $182 million, leaving a gap of $77 million for its STCITY’25 bonds due in July 2025.
While refinancing through the $bond market is anticipated, Studio City’s improving cash generation—with free cash flow of $66 million in 2Q24 compared to a loss of $9 million in 1Q24—may help the company manage its liquidity needs.
Regulatory Considerations
Investors should also remain aware of potential regulatory impacts in the coming months, namelly two key issues, a proposed law to criminalize unlicensed money exchange activities in casinos and the upcoming Macau Chief Executive election in October 2024.
A recent report noted that the new law could impose penalties of up to five years’ imprisonment for unauthorized money exchange.
However, industry analysts believe that the long-term demand for gaming should remain insulated from this legislation, as legal money exchange activities will continue to be authorized. Estimates suggest a low single-digit impact on GGR following the law’s rollout.
As lawmakers prepare to vote on the bill by the end of 2024, the potential for regulatory shifts adds another layer of complexity for the sector.
Looking ahead, HSBC consiered that the upcoming Chief Executive election, featuring sole candidate Sam Hou Fai, may influence future policy directions.
Hou has previously expressed a need for Macau to diversify away from its reliance on gambling, emphasizing the importance of long-term development for the city.
The government’s Development Plan for Economic Diversification aims to have 60 percent of GDP derived from non-gaming activities by 2028.
All licensed casino operators are required to invest MOP131 billion ($16 billion) in non-gaming projects between 2023 and 2032, highlighting their crucial role in the city’s economic transformation.
In summary, despite some concerns regarding market positioning and volatility, HSB considered that ‘the strong fundamentals and proactive strategies of Macau’s casino operators continue to support a favorable outlook for credit investors’.
