Analyst to Macau: Show me the money

January 23, 2023 11:01 AM

Analyst to Macau: Show me the money

Photo: Shutterstock
  • David McKee, CDC Gaming Reports
January 23, 2023 11:01 AM
  • David McKee, CDC Gaming Reports

Don’t buy into the Chinese New Year (CNY) hype.

That was one of the key takeaways from Deutsche Bank analyst Carlo Santarelli’s skeptical look into current Macau casino revenues. As Santarelli put it, “Don’t fall for the CNY weekly GGR data ‘head fake,’ as the weekly performance in the week that includes CNY (January 16-22) is always subdued, relative to the days/week post the CNY holiday.”

Noting acceleration in the Macanese market, Santarelli led off by saying, “Investors are likely to continue to dream the dream and expand target multiples on the potential for higher highs ahead.”

He characterized himself as bullish on Macau, particularly liking Las Vegas Sands and Wynn Resorts. But, he continued, “We see crowding and unreasonable expectations as the two primary trading related risks at present.”

As for MGM Resorts International, “which has lagged,” Santarelli believes it would also “benefit and respond well” to positive auguries from Macau. He maintained “Buy” ratings on all three stocks.

Santarelli sounded a note of asperity, saying he had “consistently fielded questions” about the trajectory of Macau’s recovery and had been asked why it would not be similar to those sharp rebounds seen in Singapore and the United States. “While anything can happen,” he allowed, an absence of consumer stimulus and the drastic revamping of the VIP market make for an “unlikely” rebound to pre-pandemic levels, at least in the near term. He also deemed it not “a significant issue.”

Getting back to Chinese New Year, Santarelli observed that hotel rooms in Macau were sold out for the holiday itself, but that most of the gaming revenue would be seen after Jan. 22, when “large inflows” of visitors traditionally descend on the enclave.

“As it’s been a while since there was any investor excitement around CNY, we thought it would be helpful to remind investors that GGR data for the week that includes the CNY period is subdued, with the week following the CNY holiday up notably.”

During the golden years of 2013 through 2019, the post-new-year week outperformed the holiday itself by at least 65 percent.

The VIP segment will be kneecapped by new restrictions on junket operators, who are synonymous with high-roller play. They can no longer extend credit to gamblers, a severe blow, as casinos themselves are not allowed to issue markers. Junketeers can’t participate in revenue sharing with casinos or work with more than one of the six casino concessionaires.

Last week, it was reported by Global Gaming Business that the Macau junket industry had shrunk by 85 percent from its pre-COVID size. There are now only 36 licensed junketers compared to a high of 235 in 2012.

Junketeers also had a warning shot fired across their bows in the form of the conviction and sentencing last week of former Sanctity junket boss Alvin Chau for illegal gambling.

Said Santarelli, “We do believe junkets will continue to play a role in the Macau VIP ecosystem, albeit in a far more limited way than they have previously. … We think 15-20% of 2019 VIP volume can be confidently underwritten as being largely intact.” This is still not without its downsides, such as bad-credit budgeting, “as operators are unlikely to take on more credit risk.”

This shifts more of the revenue burden onto the mass-market player, which may not be a bad thing from Santarelli’s standpoint; he explained that these are higher-margin customers. Including slots (not the Macanese game of choice), mass-market play accounted for 54 percent of 2019 gross gaming revenue, or $3.6 billion. The lower tier the player, the higher the margin, with base-mass players bringing a 40 percent EBITDA margin, compared to as little as nine percent for VIPs.

Looking into his crystal ball, Santarelli predicted that mass-market play will swell to 85 percent of its 2019 volume this year, while VIP play would be more pallid, only 48 percent of what is was before the ongoing pandemic. As such, the mix of casino revenue is projected to be 67 percent mass-driven and 33 percent propelled by high rollers. In two years time, Santarelli forecast, casino cash flow would be $7.5 billion, as opposed to 2019’s $8.8 billion.