Morgan Stanley Drops 2021 Macau GGR Projection to $23.7bn as VIP Sector Shrinks

  • In a Friday note, the investment bank dropped Macau's 2021 GGR and EBITDA estimates by 10%
  • Analysts expect VIP revenue to be just 40% of 2019 levels this year as the mass market grows
  • A couple of junket operators are diversifying in reaction to the region's VIP market decline
  • Morgan Stanley has increased estimates for 2022 GGR and EBITDA, predicting stock growth
Macau China city skyline in the evening
Morgan Stanley analysts have lowered estimations for Macau’s 2021 gaming revenue by approximately 10% because of dwindling VIP revenue figures. [Image:]

Down 10% on previous estimates

Analysts for international investment bank Morgan Stanley have downsized expectations for Macau’s 2021 gross gaming revenue (GGR). The company decreased previous GGR estimations by approximately 10%, to around $23.7bn. EBITDA expectations also fell 10% to $6.43bn.

the region’s high-roller revenue could be just 40% of what it was in 2019

In a Friday note, Praveen Choudhary, Gareth Leung, and Thomas Allen pointed to Macau’s struggling VIP sector to explain the adjustment. For the full-year 2021, the region’s high-roller revenue could be just 40% of what it was in 2019, according to the analysts. Meanwhile, the group expects Macau’s mass market to generate 80% of 2019 revenue levels this year.

The total of $23.7bn represents 65% of Macau’s 2019 GGR. This is lower than others have predicted, with investor consensus currently standing at around 70%. However, Morgan Stanley has forecasted a considerable uptick for 2022. Because of cost-cutting measures among other factors, the analysts estimate an 8% increase over 2019 GGR levels next year.

A troubling outlook for Macau’s VIP sector

Last week, Macau posted its lowest annual gaming revenue in ten years, totaling $7.57bn for the full year 2020. The decline of Macau’s VIP segment is partly to blame for the 79% year-on-year decrease. For the fourth quarter in 2020, JP Morgan analysts said mass-market share reached the “highest level on record”. VIP gaming fell 80% year-on-year for the period.

Macau posted its lowest annual gaming revenue in ten years

This has pushed Macau’s two most prominent junket brands towards diversification. According to Morgan Stanley, Suncity and Tak Chun have both purchased stakes in casinos in reaction to the VIP market’s decline, in this way “diversifying away from pure junket business.”

China’s recently approved criminal penalties could soon hinder Macau’s junket operators even further. Set to come into effect on March 1, the new law criminalizes the organization of overseas gambling for mainland Chinese residents. The legislation recommends that offenders receive a jail term of more than five years, up to ten years.

A significant aspect of Macau’s decline last year was the impact of the coronavirus pandemic. Casinos closed for two weeks in February in an effort to limit its spread. Since then, travel limitations have restricted casino profits. Visitor numbers have remained low, despite the resumption of Macau-Hong Kong tourist visas in August.

It’s not all doom and gloom

Despite the dour outlook for VIP gaming, Morgan Stanley has predicted a strong recovery for Macau’s casinos in 2022. The company expects total gaming revenue to increase by 8% from 2019 levels next year, to $47bn. Analysts cited the recent reduction of operator expenses as a driver for this future growth.

In Q3 2020, operating expenses were down 39% year-on-year for Macau’s casinos. “While some of the cost should come back with volume, we expect the new fixed-cost run rate to be lower than 2019,” explained Morgan Stanley. As a result of these lowered costs, the investment bank also raised its corporate EBITDA expectations to $9.97bn for next year. This is up 4% from the previous estimate.

Additionally, Choudhary, Leung, and Allen believe stock prices will also increase as the market continues to recover. The note argued that current stock prices do not yet reflect estimations for Macau’s growth, predicting that prices will rise in late 2021 and into 2022. This would be due to a number of factors, including the planned opening of three new Macau hotels this year and the extension of operator licenses in 2022.

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