Morgan Stanley Sees Bright Future for Macau Stocks, Mixed on Beijing Regulations

Shares of Macau concessionaires continue sagging. But Morgan Stanley is bullish on the long-term outlook for the world’s largest casino center. That’s even as some investors fret about regulatory risk from Beijing.

Recent gross gaming revenue (GGR) data suggests that despite an increase in COVID-19 cases in the neighboring Guangdong province and the persistent lack of a travel bubble with Hong Kong, things are starting to trend the right way for Macau. But those are considerable overhangs to overcome, and likely explain the 2021 lethargy in related operator equities.

We think initial underperformance can be explained by new Covid cases in Guangdong in June and no travel relaxation between Hong Kong and Macau,” said Morgan Stanley analysts.

Like their US counterparts, Macau operators proved adept at cutting costs and boosting margins as a result of the coronavirus pandemic. Led by a 46 percent slashing at Melco Resorts & Entertainment (NASDAQ:MLCO), Macau operators, on average, trimmed operating costs by 35 percent since the health crisis started.

As such, Morgan Stanley forecasts the companies need GGR to return to just 80 percent of pre-pandemic levels to get earnings before interest, taxes, depreciation and amortization (EBITDA) back to 2019 highs.

“We remain constructive in the hope of the border opening and eventual extension of licenses, both of which we expect in second-half 2021,” said the bank.

Regulatory Clouds Need to Part

In an effort to improve consumer outcomes and reduce monopoly potential, Beijing is cracking down on Chinese internet companies, particularly those with heavy consumer-facing businesses.

“We believe the recent launch of China’s ‘common prosperity’ plan is not supportive of gaming in Macau, but a hardened stance on gambling (especially overseas) is not new either,” said analysts at the bank.

Prevailing wisdom is that Beijing isn’t looking to end land-based gaming in Macau, but rather to eradicate online gaming, which is forbidden in the world’s second-largest economy.

Renewal Outlook

All six concessionaires are supposed to be up for license renewal in 2022. But that process is being delayed because of the pandemic. Morgan Stanley says it’s likely Macau will extend all gaming licenses for another three years before a more conventional retendering process commences in 2025.

Some experts estimate that without renewal of the individual visit scheme (IVS) visa and with the current travel protocols, up to 47 percent of prior Macau visitation is out of the picture for the time being.

In the meantime, the special administrative region (SAR) appears to loathe to consider another casino shutdown to deal with the pandemic. But that also implies travel restrictions are likely to remain in place.