Slow recovery to new normal - Plataforma Media

Slow recovery to new normal

After 12 days of “partial confinement”, the new epidemic outbreak appears to be under control. Macau entered a “period of consolidation” on 23 July, with around 30 casinos resuming activity on a limited basis. Reopening is the first step in the recovery process.

Prior to the June 18 outbreak, the epidemic development in China and the Central Government’s restrictions on gambling, the first half of the year revenue was weak. According to the Gaming Inspection and Coordination Directorate (DICJ), between January and June of this year, the accumulated gross revenue of the industry fell 46.4 percent year-on-year, to 26,269 million patacas – just 17.6 percent of the total. pre-pandemic; the worst result for the first half since 2006.

In an interview with PLATAFORMA, Zeng Zhonglu, coordinating professor at the Pedagogical and Scientific Center in the Areas of Gaming and Tourism at UPM, says that the pace of recovery depends only on the development of the pandemic. “If the epidemic situation in both locations continues to improve, the game’s revenue will grow after August. In several regions, like Shanghai, demand will pick up.”

Chinese GDP during the first half rose 2.5 percent year-on-year, when the target was 5.5 percent. The 0.4 percent growth was the lowest since the first quarter of 2020. The economic performance on the mainland adds pressure to the gaming industry. However, the pandemic mainly affects the social classes.
medium and low, therefore it is expected that the results will reverse with the improvement of the epidemic situation – the target is the middle and upper classes.

Slow and uncertain

International credit rating agency S&P Global announces a slow recovery and an uncertain future.

Revenue this year will only reach 20 to 30 percent of pre-pandemic values.

Despite the pandemic shadow, the three concessionaires in Macau with American capital are confident. Rob Goldstein, president and chief executive of the parent company of Sands China – Las Vegas Sands Corp – admitted at a summit in the United States that gambling in Macau is going through a difficult phase, but believes that the second half and next year will be one of recovery, surpassing even peak heights in the past. Bill Hornbuckle, CEO of MGM China’s parent company – MGM Resorts International – guarantees that Macau will continue to be the world’s largest gaming market.

Customs control

In contrast to this optimistic view, the president of the Macau Responsible Gaming Association, Song Wai Kit, believes that revenue will not reach the values ​​achieved before the partial confinement in the near future. “I predict that the epidemic will continue to go back and forth; being difficult to achieve zero rate of infection in places where the Ómicron variant BA.5.1 dominates. In places without confinement these outbreaks will continue to arise.”

If Macau maintains the “dynamic goal of zero infection”, it will be difficult to change border restrictions between Macau and Mainland China. Although the Macao SAR maintains coordination with Zhuhai, for Song there are serious obstacles.

“One small mistake and all government officials on the Continent (provinces and municipalities) would have to resign. The impact on Macau is gigantic: “With the suspension of mandatory medical isolation, if nucleic acid tests with deadlines of 12, 24 or 48 hours are needed to cross the border, visiting Macau will be unattractive for tourists from the Mainland. We need at least a deadline of 72 hours or even 7 days.” Therefore, he believes that the revenue will not reach the 3 billion patacas obtained in May this year. This will only be possible during National Day week in October, at the end of the year, or next year.

The Chinese brokerage, Zhongtai International, does not expect any changes to the protocols between regions, at least until the 20th National Congress of the Communist Party (October/November) ends, when the General Secretary of the Party, Xi Jinping, begins his third term. It is estimated that this year’s revenue will be around 60 billion, reaching 120 to 130 billion patacas for the year.

Goal 10 billion

Since the beginning of the pandemic, gaming revenue in Macau has only surpassed the 10 billion mark in May last year, with an average monthly revenue during this first half of 4.38 billion patacas.

Values ​​well below the goals set by the Macao SAR Government: annual revenue of 130 billion and monthly average of 10 billion for the last two years. In addition to the pandemic, Song believes that the fight against cross-border gambling on the mainland, as well as the opening of gambling in Japan and Thailand, will limit Macau’s revenue. “Before the pandemic, revenue was half/half between the mass market and VIP lounges. However, profit from VIP customers is practically non-existent now.” Between the end of last year and the beginning of this year, the promoters of the game in the VIP lounges, Chau Cheok Wa and Levo Chan, were arrested for illegal betting and money laundering, following tight regulations with the new “Gaming Law” – and the closure of a number of game rooms. Revenue from VIP lounges in the first half of the year (6,827 million patacas) represents around a quarter of the industry’s total revenue, a decline of more than 61 percent year-on-year.

Song describes this phase of the industry as a period of “major restructuring”. As the new “Gaming Law” suggests, the industry will have to explore markets other than Mainland China. “If local casinos undergo a transformation to attract more foreign customers, they will not be able to implement measures whose main objective is the mainland market.”

For Zeng Zhonglu, the industry will assume the new target of 10 billion patacas as a monthly average. “It will be the new norm. If the impact of the pandemic is completely eliminated, the [revenue] level will be restored, especially with the reopening of borders in Macau and Hong Kong.” According to official data, before the pandemic, Hong Kong customers accounted for around 15 percent of Macau’s gaming revenue.

However, since the beginning of the pandemic, only those who come from the Continent are exempt from mandatory isolation.

Liquidity worries

With weak gaming revenue, the market is now focusing on these companies’ liquidity problems as they continue to make losses.

Investment bank J.P. Morgan recently reported that assuming a period of zero revenue, among the big six companies in the industry, Sands China and SJM Holdings recorded the lowest volume of liquidity, capable of only nine additional months of activity.

After deducting the 5 billion share capital requirement needed for the new gaming license bidding round, the capital volume of both guarantees just seven months of activity. Wynn Macau, MGM China and Melco Resorts have funds to stay in business for between a year and a half and two years, while Galaxy Entertainment Group has the highest liquidity, capable of guaranteeing five years of service. However, the bank considers that these liquidity problems are not even very significant, as its shareholders can finance additional activity through loans.

Zeng Zhonglu says that some companies do have a shortage of liquidity, but with the new bidding round about to begin – a “crucial phase” – it is expected that the six operators will be able to solve their problems and renew their licenses.

SJM Holdings announced in mid-June that it had entered into a syndicated loan agreement worth HK$19 billion with a syndicate led by the Industrial and Commercial Bank of China (Macao). Over the past two months, Wynn Macau and Sands China have also received loans from their shareholders totaling US$500 million and US$1 billion, respectively (approximately 4.03 billion and 8.06 billion patacas).

Should these companies renew their gaming licenses, they will have the ability to make major budget cuts, reducing staff and preparing for the gaming industry’s recession. “Companies need to increase their revenue and reduce expenses. If they cannot find new sources of capital, they will have to reduce costs. The total number of local workers in these companies may remain unchanged, but new ways of ‘restricting automatic contracts’ to high-paying positions could be explored with subsequent hiring of new employees at a lower salary.”

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