Macau expected to reach pre-Covid levels in Q2, with EBITDA jumping to $1.6B

Macau's gaming industry is expected to reach pre-Covid levels in the second quarter of 2023. According to investment bank Morgan Stanley, industry EBITDA would increase by 46% quarter-on-quarter, reaching $1.6 billion, equivalent to 70% of pre-pandemic levels. Meanwhile, free cash flow to equity is expected to approach 60% of 2019 levels.

According to analysts Praveen Choudhary, Gareth Leung, and Stephen Grambling, the industry's second-quarter EBITDA result will be driven by a 29% quarter-on-quarter increase in industry-wide mass and slot GGR to $4.79 billion, with further positive momentum tipped for the second half of the year.

Morgan Stanley further noted that the recent recovery of the gaming industry had been helped by a series of high-profile concerts in recent months, which the firm expected to continue in the third quarter of the year. According to the research, Q2 visitation was only at 60% of 2019 levels and more than 5% of hotel rooms have been offline, "suggesting upside to 3Q and 4Q estimates."

The investment bank’s latest report highlighted that spending per visitor in Macau is currently tracking 50% higher than pre-pandemic levels in 2019. Morgan Stanley analysts believe that the recovery of visitation to the city will provide even more upside potential for gaming revenue.

According to them, the potential recovery is anticipated to be propelled by a resurgence in package tours and an uptick in visitors from provinces that are further away from Macau. Furthermore, the anticipated enhancement in ferry and air travel capabilities is projected to contribute to the revival of the gaming industry.

In the research, the investment bank forecasts mass revenue to reach 115% and 125% of 2019 levels in 2024 and 2025. In addition to the increase in revenue, industry valuation could receive a boost from deleveraging efforts. The firm estimates that the market value of the industry could increase by 50% with the help of deleveraging.

As mass gross gaming revenue EBITDA approach levels similar to those seen in 2019, market share is predicted to stabilize. Analysts anticipate notable improvements in the second quarter from Wynn Macau and Melco Resorts. They explained that Wynn is likely to benefit from the refurbishment of its Wynn Macau property on the peninsula, while Melco will be supported by the opening of Studio City Phase 2's indoor waterpark and EPIC tower, as well as its residency concert series.

On the other hand, Sands and Galaxy are expected to experience a decline in market share due to the negative impact of not having all hotel rooms fully operational. However, this issue is anticipated to be fully resolved by the third quarter.

Morgan Stanley continues to favor MGM China as its top choice, given the fact that the business has been granted an extra 200 gaming tables as part of its new 10-year concession agreement. 

"We expect MGM’s 2024 mass-market share at 13% and 2Q could be tracking at 14% to 15% (16% in 1Q)," said Choudhary, Leung, and Grambling. "This means estimated 2024 mass revenue to be at least 30% above 2019 even if we assume no growth in industry mass revenue vs 2019."

"Consensus forecasts MGM 2024 EBITDA to be only 10% above 2019, which probably does not give enough credit to its market share or the benefits of operating leverage. Our estimated 2024 EBITDA for MGM is 30% higher than 2019."

Despite the optimistic outlook, the analysts also caution that there are risks to the industry’s recovery. For instance, visitation recovery may continue to be sluggish, and non-gaming investments could prove to be dilutive or even negative to earnings.

A recent study conducted earlier this month by scholars from the Shanghai Cooperation Organisation Research Institute, Shandong University, and the University of Macau highlighted that Macau is set to undergo a challenging and critical test in the future. The city, known for its reliance on mainland Chinese high-rollers to sustain its gaming industry, is now facing the need and pressure to transition away from this model.

As reported by local media, the economic recession that accompanied the Covid-19 pandemic, as well as Beijing's push for an overhaul of the gaming sector, have made it "impossible" for Macau authorities to maintain the "status quo" or implement reforms at a slow pace, the research concluded.