Dampened expectations

Macau Business | February 2021

Gaming operators’ earnings have witnessed a clear improvement in the fourth quarter of 2020, over the dismal picture in the previous two quarters. However, a rough path remains for the recovery of the gaming industry over the COVID-19 pandemic and the impact of the crackdown on junket-related activities in the mainland. In the future, the industry may further tap into Southeast Asia to attract high rollers, according to experts.

The recent announcement by all six gaming operators that most of their employees could continue to enjoy this year bonuses or discretionary allowances, equivalent to at least one month’s salary was met with applause within the local community amid the ongoing COVID-19 pandemic. However the move per se is yet to ramp up confidence among some observers.

With so much unknown still concerning the development of the coronavirus outbreak, alongside the heightened oversight upon the sector, it is expected there will be no significant recovery, at least until the second half of 2021, and the further growth of the market relies on gamblers from across the border and beyond, say analysts.

The Government had earlier forecasted the gaming segment would continue to recover this year, after the gross gaming revenue shrank 79.3 percent year-on-year to MOP60.44 billion (US$7.56 billion) last year — the worst annual result last seen in 2004 in the beginning of the liberalisation of the industry — over the disruption to travel. Local casinos could rake in about MOP130 billion this year, translating to some MOP45.5 billion in gaming taxes, the authorities have indicated. The official forecast means a 115-percent growth from the dismal performance last year, but it would only be about 44.5 percent of the pre-pandemic level in 2019, when the tally amounted to MOP292.46 billion.

“There will be ups and downs in the first half of 2021,” says Professor Ricardo Chi Sen Siu, director of Centre for Tourism and Integrated Resort Studies at the University of Macau. “I originally expected there would be a stable recovery but I have more reservations now given the recent series of news, including the no travel call from the central government.”

The scholar refers to the calls from the Chinese National Health Commission and other mainland government departments that Mainland Chinese should avoid travelling during the Chinese New Year holiday — which begins on 12th February this year — as a precaution against the spread of COVID-19, in light of a new wave of cases around the world, as well as in some Mainland Chinese provinces. The city also reported the first COVID-19 case in almost seven months on 22nd January, at the time when the local government had also urged residents and non-resident workers to avoid crowd gatherings and travelling.

Longing for Hong Kong visitors

“Hopefully there will be meaningful recovery in the second half of this year, to be driven by the signs of stabilisation in other places and the implementation of the vaccine scheme,” Professor Siu remarks. “But it really depends on the latest development of the COVID-19: should the pandemic continue to linger, the annual gaming revenue of 2021 could probably still reach the government’s target at the range of MOP130-150 billion; should the situation improve, local casinos could bring in MOP160-170 billion this year.”

One of the keys for local casinos to achieve the top end of the revenue forecast lies on the return of Hong Kong gamblers and travellers. “When Hong Kongers could visit Macau again without a mandatory quarantine is crucial to the local gaming performance, as they represent a considerable contribution to the revenue of the mass market,” the academic adds.

Before the pandemic, Hong Kong visitors — making up 18.7 percent of the tourists’ arrivals to Macau in 2019 — were the second biggest tourism source market for the city, just trailing behind the mainland. Due to the pandemic, only tourists coming from the mainland can visit the city now with a quarantine-free travel bubble under the Individual Visit Scheme (IVS). According to the latest figures from the Statistics and Census Service, the city received over 843,160 Hong Kong travellers last year, contracting 88.5 percent year-on-year and representing only 14.3 percent of the overall tourism market.

Sanford C. Bernstein Ltd also commented in a recent research note about the 2021 Macau gaming outlook that it did not expect any significant improvement in the local gross gaming revenue until the second half of 2021, in the anticipation of the gradual lifting of travel restrictions the city has imposed upon non-Mainland Chinese travellers. Highlighting the importance of Hong Kongers, who in general contribute to about 10-15 percent of the gaming revenue here, the analysts added: “We would not expect any opening in a Hong Kong travel bubble [with Macau] until late in the first quarter, or the second quarter.”

VIP baccarat revenue/total gaming revenue in 4Q

VIP woes

More upbeat, the brokerage foresees the local gaming industry could generate about MOP196 billion in 2021, or roughly about two-thirds of the 2019 tally, including the recovery of the mass segment to about 75 percent of the pre-pandemic level and 50 percent for the VIP segment.

The latest data from the Gaming Inspection and Coordination Bureau shows the VIP segment, which made up about 46.2 percent of the overall gaming market in 2019, saw a plunge of 80.6 percent in revenue to just MOP26.28 billion last year, and its share further shrank to 43.5 percent. In the fourth quarter of 2020 alone, VIP baccarats only accounted for 34.9 percent of the overall gaming revenue, the first time for the share of the segment to drop below 40 percent since the liberalization of the gaming industry.

The brokerage believes it might take five years for the VIP segment to get back to the 2019 results while the mass segment could do so next year. “VIP is likely to continue to be negatively impacted by scrutiny around money transfers, and customer and agent concerns about dealing with junkets,” the analysts added.

“When Hong Kongers could visit Macau again without a mandatory quarantine is crucial to the local gaming performance, as they represent a considerable contribution to the revenue of the mass market,” says Ricardo Siu, a professor from the University of Macau

Heightened oversight

One of the biggest concerns for the VIP segment, in addition to the pandemic, is the heightened supervision, namely a new law that will come into force in the mainland in March. The Chinese National People’s Congress approved the amendment to the country’s criminal law in December, and one of the new provisions mandate anyone who organises “overseas” gambling trips and soliciting mainland Chinese to gamble abroad will be subject to sentencing of up to 10 years. Though there has not been an official explanation as to whether this new law will cover gambling trips in Macau, analysts and observers believe so.

In the perspective of veteran junket investor Luiz Lam Kai Kuong, this new law only further intensifies the efforts by Beijing in recent years to clamp down the illicit outflows of capital from China and the underground banking activities, which have dealt a huge blow to local junket operators — the middlemen who bring high rollers, mostly from the mainland, to Macau’s casinos and lend them credits to play that will be settled later.

“It remains to be seen how this new law will be implemented before determining its impact upon the city, but it’s definitely negative for the segment: some high rollers would have less initiative to come, [or even if they have come,] they might have limited funds to play,” Mr. Lam notes, who is also a director of a junket group, the Macau Association of Gaming and Entertainment Promoters.

In light of the tightened grip and uncertainties when the pandemic could be contained or whether the central government would limit the visas of the mainlanders to Macau again, most mainlanders could now come to the city without a mandatory quarantine under the IVS scheme or with business and family visas, but the package tours to the territory have remained suspended since the onset of the outbreak — the junket veteran says the sector has looked beyond this year. “Our expectation for 2021 is that we will be relieved if we lose less money [than 2020],” he adds. “Should there be another large-scale outbreak in the mainland, prompting Beijing to suspend visas to Macau again, the impact [upon the gaming segment] would be much worse this time as the industry has hardly recovered [from last year].”

“Should there be another large-scale outbreak in the mainland, prompting Beijing to suspend visas to Macau again, the impact [upon the gaming segment] would be much worse this time as the industry has hardly recovered [from last year],” says junket investor, Luiz Lam.

‘Breakeven level’

Brokerage Macquarie Securities pinpointed in a recent research note that it expects the gross gaming revenue of 2021 could resume back to about 60 percent of the 2019 tally, rather than the previous forecast of 80 percent, over the continuous travel constraints in the short run. But the analysts expect the earnings before interest, taxation, depreciation and amortization (EBITDA) of the six gaming operators could remain “slightly above the breakeven level”, following the improvement in recent months.

Another investment bank Morgan Stanley also highlighted the EBITDA of the industry could reach US$240 million (MOP1.92 billion) in fourth quarter 2020 — gaming operators are set to report the financial results of the aforementioned quarter starting from this month — improving from US$100 million in the first quarter of the same year over a mix of cost-cutting measures and sector improvement, but it is still below the average tally of US$2.3 billion a quarter in 2019.

“There is still a long road for the recovery of the local gaming market in the aftermath of the pandemic with stronger supervision from the central government,” says Zeng Zhonglu, a gaming professor from the Macau Polytechnic Institute.

New projects

Albeit there are uncertainties, analysts see some silver linings ahead: the robust fundamentals of the mainland whose economy expanded 2.3 percent last year after shrinking 6.8 percent in the first quarter, and new gaming projects slated for opening in 2021. The increase of the city’s hotel room supply, namely, about 1,900 rooms in Grand Lisboa Palace, 800 rooms in Galaxy Macau Phase 3a, and The Londoner Macao “should see a corresponding increase in premium mass revenue,” Morgan Stanley said.

Gaming operator Sands China Ltd has recently announced The Londoner Macao, a nearly US$2-billion revamp and rebrand from the Sands Cotai Central property, would have the first phase opened on 8th February prior to the Chinese New Year holiday, while the rest would “open progressively throughout 2021.”  For the HK$39-billion Grand Lisboa Palace by SJM Holdings Ltd and the HK$5-billion Lisboeta Macau by the SJM executives-linked company, after several delays there is still no timetable as to when they will become operational, except the latter has been used as one of the quarantine hotels for travellers. Meanwhile, the first half of 2021 is the latest opening timeline set by Galaxy Entertainment Group for Phase 3 of Galaxy Macau, which will cater to 3,500 new hotel rooms, an additional 400,000 square feet of events and convention space, and other gaming and entertainment facilities, together with Phase 4 that is poised to open next year.  

More than Mainland Chinese 

Zeng Zhonglu, a professor at the Centre for Gaming and Tourism Studies of Macau Polytechnic Institute, also forecasts there will only be better fundamentals for the sector in the second half of 2021. “The recovery of Macau casinos has so far been slower than some markets, for instance, the gaming revenue in Las Vegas has been back to about 70 percent of the pre-pandemic level in the last few months [of 2020],” the scholar says. 

“There is still a long road for the recovery of the local gaming market in the aftermath of the pandemic with stronger supervision from the central government,” the academic details. “So it makes sense for the local gaming industry to expand its clientele, tapping into, for instance, Southeast Asian countries more for high rollers.”