Coronavirus to have significant but short-term impact in gaming sector – Analysts

Analysts from Morningstar and Fitch Ratings indicated to Macau News Agency (MNA) that the coronavirus outbreak and respective travel restrictions imposed to contain it will likely have a significant but short-term impact on the local gaming sector results.

Chelsey Tam and Ivan Su, Equity Analysts from Morningstar, expressed that the companies more likely to be affected the most by the outbreak were likely airlines -China Southern, China Eastern, Air China, Cathay Pacific – airports such as the Beijing Capital International Airport, plus tourism websites and all local six gaming concessionaires.

‘If any staff or customers are infected with the coronavirus; the offices, airports, and casinos could be quarantined or closed. Macau’s chief executive did not rule out the possibility of closing casinos, should the spread of coronavirus worsen,’ a Morningstar note indicated.

The number of visitors reported in Macau in the first six days of the Chinese New Year holiday period has dropped by 76.5 per cent year-on-year to about 243,204 people, with the number of Chinese tourists falling by 89.1.

So far, seven confirmed cases of the novel virus were reported in Macau, all Wuhan residents.

The World Health Organization declared a global emergency over the new coronavirus, as China reported today the death toll had climbed to 213 with nearly 10,000 infections, more than the number of people infected during the SARS crisis.

Measures to prevent the spread of the novel coronavirus outbreak and fears by visitors themselves to travel between Greater China, have been described as some of the reasons for the large decrease in visitation numbers.

Ferry services between Macau and Hong Kong have also been reduced or suspended, almost 1,000 flights passing through the Macau International Airport have been canceled, while the frequency of shuttle buses in the Hong Kong-Zhuhai-Macau Bridge has been reduced.

Local authorities have already barred travel groups from Wuhan and Hubei province, with any resident from that region, or anyone who passed through them in the last 14 days having to show a health certificate certifying they have not been infected.

Currently, anyone entering Macau also has to fill a health questionnaire and undergo body temperature checks, with opening scheduled for some borders also reduced.

On Tuesday it was revealed that authorities in mainland China have stopped issuing individual travel visas (ITV) for visits to Macau and Hong Kong by mainland residents, effectively barring solo travel to the SARs, and with most VIP players usually recurring to this scheme to come to the city.

The scheme had been introduced to boost tourism to both Hong Kong and Macau following the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, and after several updates, it covered about 49 cities in the Mainland, with almost half of Chinese visitation to Macau recurring to ITVs.

At the time only one suspected case of SARS was reported in Macau, but the then blooming gaming market suffered a considerable blow.

“During SARS, SJM Holdings was the only major casino operator in Macau. While it was not listed at the time, SJM indicated the number of gamblers dropped by 30 per cent in April 2003, and betting volumes also decreased. According to the Gaming Inspection and Co-ordination Bureau, SJM’s gaming revenue was up 68 per cent year over year in 2003,” analyst Chelsey Tam told MNA.

‘Quarterly gaming revenue is not available publicly, but the annual gaming revenue increase shows the short-term nature of the SARS outbreak. What is different now is that the gaming industry is a lot more mature, thus we expect a recovery after the coronavirus will likely be much smaller in percentage terms.

Ms. Tam also described that 38 per cent of Melco Resorts adjusted EBITDA came from its operation in the Philippines in the third quarter of 2019, with the group likely more insulated from the outbreak than its other Macau peers.

However, the Morningstar analysts noted that since SARS did not have a long-term effect on the companies’ financials covered by the brokerage in the past, it maintained that the coronavirus outbreak is likely to be a ‘one-off short-term risk’.

Large risk but strong foundations

Meanwhile, analysts at Fitch Ratings expressed today that the cash flow effect on Macau’s gaming operators will be significant as the virus spreads and regional governments’ precautionary measures continue, however, the solid credit profiles of casino operators covered should enable them to withstand this pressure.

The brokerage also looked back to past pandemics, such as the H1N1 swine flu outbreak in 2009, to predict the possible local impact of 2019-nCov.

‘During the H1N1 (swine flu) pandemic in Asia, Macau’s gaming revenue and visitation declined 17 per cent and 16 per cent, respectively, in June 2009, the first month Macau reported its first case of swine flu. Revenue stabilized sequentially thereafter and started to recover in September 2009,’ Fitch noted.

However, Fitch considered that the more restrictive travel measures implemented to control the coronavirus pandemic could lead to a more severe impact than H1N1 to gaming revenues.

Nevertheless, the brokerage noted that even assuming that first-quarter and second-quarter 2020 revenue from Macau declines by 50 per cent and 25 per cent, respectively, with a combined hit to the four operators’ listed in the US in cash flow of US$2.0 billion relative to about US$11.0 billion of EBITDA, they would still be able to take it.

The aforementioned operators have ample debt capacity and/or cash to fund the cash impact of the virus within the context of their rating or credit opinion sensitivity thresholds. The four operators have a combined US$7.0 billion of excess cash and US$7.8 billion revolver availability.

Las Vegas Sands, Wynn Resorts, MGM Resorts International and Melco Resorts & Entertainment inclusive of its Studio City joint venture, were said to have a combined US$7.0 billion of excess cash and US$7.8 billion revolver availability that would allow them to weather the storm.

‘Long-lasting effects on Macau’s tourism beyond the period of the outbreak are not anticipated. Assuming the outbreak does not last more than two quarters, 2019-nCoV will mainly have a temporary cash flow impact on casino operators,’ Fitch noted.

However, the rating agency warned that should the 2019-nCoV outbreak extend beyond two quarters or cause significantly greater revenue declines, the credit effects could be more profound.

‘Beyond a near-term credit impact, some possible residual effects may include an impact on the regional economy and players trying new venues and illegal channels such as online gaming,’ it was stated.