The majority of Macau’s casinos began reopening in phases late last week, after the government lifted a 15-day closure order. But the damage inflicted on business by the novel coronavirus is far from over.
Ten of the territory’s 39 operating properties chose to remain shuttered last week, under a 30-day grace period granted by the government. Those that reopened did so with only a fraction of their table games—around 1,800 of the market’s current inventory of 6,754.
They were under orders to space tables a safe distance apart, with no more than half of them in a given area permitted to operate at one time. No more than three to four players were allowed per table, to ensure they would not seated be next to one another. Gaming machines also were required to be spaced to ensure customers were not seated too closely.
Other safety measures include mandatory body temperature scans at all entries and exits for customers and staff alike, frequent cleaning and disinfection of gaming areas, and a requirement that all customers and staff wear face masks.
Spaced seating also is being implemented in employee cafeterias and break areas, so workers are dispersed rather than crowded in confined spaces.
The government also is restricting the flow of non-resident workers from mainland China, requiring 14 days of quarantine and a health certificate from authorities in the neighboring city of Zhuhai, while those returning from other destinations will need to undergo 14 days of observation in Macau at their own cost.
The government also is asking employers to help minimize cross-border travel by providing accommodations in the city. Ten casinos were still closed at the end of last week. The list included Galaxy Entertainment’s Rio, Waldo and President, Sands China’s Sands Cotai Central, Melco Resorts’ Altira and Grand Dragon, and SJM’s Jai Alai-Oceanus and Casino Taipa and Casino Macau Jockey Club. They may reopen at any time at their discretion.
At press time, they hadn’t indicated when that would be, although junket leader Suncity Group said it was reopening its VIP rooms at Altira and Rio this week, in addition to the 13 rooms it planned to reopen last week, according to local news reports. The other major junkets—Tak Chun Group, Meg-Star, David Group and Guangdong Group, among them—said they were resuming VIP operations as well.
As for the devastation that’s been visited on the market—the largest in the world in terms of annual gambling revenue—its eventual recovery is subject to a host of factors completely beyond the industry’s control. It depends almost entirely on what happens on the mainland, and how the government and its citizens respond.
Ninety percent of Macau’s visitation comes from China, where the SARS-like respiratory disease, now known as Covid-19, originated and where it continues to claim by far the most victims more than 74,500, 2,118 of them fatal, according to the latest from the South China Morning Post, citing statistics from the country’s National Health Commission.
As it stood last week, visitation from the mainland was “a mere trickle,” as brokerage Sanford Bernstein put it.
“Even with the casinos reopening, there will still be a dearth of customers,” the firm’s team of analysts wrote in a client note. “We currently estimate that hotel occupancy in Macau is around 10 percent-15 percent, with some customers staying over since Chinese New Year. However, the suspension of group travel and IVS visa issuance eliminates the largest source of customers. Until the suspensions are lifted, most mainland Chinese customers will not be able to enter Macau.”
In this regard, reopening the casinos is an “empty gesture” in the view of Nomura Instinet analyst Harry Curtis.
“The consensus among local operators is that there will be little material improvement in visitation, GGR and EBITDA until the IVS and tour group customers are permitted to cross the border, which may not normalize for another six weeks,” he said.
It’s the “biggest known unknown,” in the words of J.P. Morgan Securities (Asia Pacific), whose analysts are forecasting February gaming revenue to decline by more than 80 percent year-on-year, and March revenue by “well over 50 percent” as “meaningful disruptions” to travel are likely to continue.
The analysts said the fallout could push back the planned openings of several big-ticket resort projects, notably SJM’s Grand Lisboa Palace, Galaxy’s Galaxy Macau Phase III and Sands China’s Londoner.
A fair assessment of the financial risks was provided recently by debt experts Fitch Ratings, in an analysis of the U.S.-traded parent companies of four of the territory’s six licensees𑁋Las Vegas Sands, Wynn Resorts, MGM Resorts International and Melco Resorts & Entertainment𑁋whose revenues depend on Macau in varying but “significant” degrees.
“(Their) solid credit profiles should enable them to withstand this pressure,” the agency said. “Absent an unprecedented duration, we do not expect (the virus) to lead to widespread downgrades.”
But it’s not going to be pretty.
“Assuming first-quarter and second-quarter 2020 revenue from Macau declines by 50 percent and 25 percent, respectively, the combined hit to the four operators’ cash flow would be $2 billion, relative to about $11 billion of EBITDA and $1.3 billion of (forecasted free cash flow).”
Morgan Stanley analyst Thomas Allen has slashed first-quarter Macau EBITDA forecasts by 60 percent to $127 million for Wynn, $307 million for LVS and $87 million for MGM.
Fitch expects these impacts to be “temporary,” assuming the outbreak doesn’t last more than two quarters. If it does, and if “significantly greater revenue declines” occur, “the credit effects could be more profound.” There could also be severe effects on the economy of the region. And it could scare players away from the city, driving them to new venues or into black market channels such as online gambling.
The virus is impacting Macau casino workers as well. A division of the Macau Federation of Trade Unions, the city’s largest labor organization, conducted an online survey last week that revealed much trepidation among casino workers. After almost 1,700 workers responded to the poll, 53 percent said they feared losing their jobs. The vast majority of the respondents, however, said they were “very satisfied” or “satisfied” with the government’s response to the situation. Prior to shuttering the casinos, the Macau government elicited a pledge from the casino companies that wages would continued to be paid, but the fear remains.
Nonetheless, Melco Resorts & Entertainment has established a new MOP$5 million Special Aid Fund to assist workers in need during the outbreak of Covid-19, or coronavirus. Target beneficiaries of the fund include casino workers and self-employed people such as taxi drivers, coach drivers and tour guides, their families and more, Melco said, adding that it will work closely with the Macao Federation of Trade Unions (FAOM), t to identify eligible beneficiaries and distribute the funds.
If there was any good news last week it was that the spread of Covid-19 in China appeared to be slowing. Officials on Thursday reported the lowest number of new cases𑁋394, with 114 deaths𑁋since the city of Wuhan, the epicenter of the outbreak with a population larger than New York City’s, went into lockdown on January 23.
In Hubei, the province surrounding the city, the number of new infections had dropped for seven straight days as of Thursday. Infections outside the province had declined for 16 days. The number of recoveries nationwide had exceeded 16,000.
Outside China, more than 1,100 cases have been confirmed, according to the Post, including 15 in the U.S. There have been 11 fatalities: three in Japan, two in Hong Kong, two in Iran, and one each in Taiwan, South Korea, the Philippines and France.
Two weeks ago, Macau had reported 10 cases. The number hasn’t increased since.
Then there’s the bad news, which is that, despite the drop in the rate of new cases, the world should be prepared for the possibility that Covid-19 is here to stay. This is according to Wang Chen, president of the China Academy of Medical Science, who told state broadcaster CCTV last week that unlike its close relative, SARS, which also was highly contagious and potentially fatal, “This new coronavirus may become a long-term disease that coexists with humans, just like flu.”
With Macau hoping to dig out from under its effects sooner rather than later, analysts see a number of ways it can go. Allen, for one, expects gaming revenues to decline by 20 percent this year before rebounding by 20 percent next year, with VIP leading mass-market.
Sanford Bernstein’s team of analysts outlines three possible scenarios: The first is for gaming revenue to fall by more than 11 percent this year, and EBITDA to fall 12 percent to 26 percent. This assumes the virus “running out of steam reasonably quickly” and a strong rebound in gaming revenues in the second half. The second scenario, based on infections peaking by early summer, pushes a recovery into the third quarter, and estimates gaming revenue to drop around 21 percent and EBITDA by 33 percent to 42 percent. A “bear” case, assuming “severe disruption” lasting into autumn, with only a “slow and gradual” recovery in visitation, sees revenues plummeting by more than 40 percent year on year and EBITDA by more than 50 percent, possibly by more than 80 percent.
As they summarize it, “A fat-tail risk exists, which is twofold”: that a return to normalcy takes place over a longer period than currently expected, and/or China slides into an economic downturn that could get ugly if the government “does not stimulate or stimulus fails to temper the negative economic impact from the Covid-19 and confidence remains suppressed.”
At this point, it’s all still in the limbo of J.P. Morgan’s “known unknowns.”
Or as the Bernstein group put it, “As sell-side analysts, one of our key value-adds is to forecast what may very well be unforecastable.”
