Bullish Prospects for Macau’s Gaming Sector Driven by Strong Fundamentals

Macau’s gaming sector is catching the eye of investors with its strong fundamentals and promising outlook, as analyzed by HSBC Global Research. Despite potential challenges, the casino operators are setting up a robust foundation to overcome market volatility and regulatory developments.

HSBC’s analysis highlights significant debt reduction within the sector. As of June 2024, there was a noteworthy decrease in net debt, down by $1 billion to $22 billion from December 2023. This financial strategy is bolstered by proactive steps such as increased bond buybacks and tender activities, signaling a solid fiscal approach by operators.

Notably, over 470 investment managers held approximately $6.8 billion in Macau gaming bonds as of September 20, 2024, excluding Las Vegas Sands. This accounts for nearly 30% of the market, reflecting a diversified investment environment. Interestingly, total fund holdings witnessed a decline of over 7% since the previous year, hinting at shifting investment strategies.

The liquidity and cash flow of Macau’s gaming sector add resilience against short-term market fluctuations. The available liquidity rose to $13 billion by June 2024, an upswing from $12.4 billion in December 2023, underscoring the sector’s strong cash flow generation. This financial stability ensures that most operators have ample liquidity to meet their bond maturities for 2024 and 2025 without requiring external refinancing.

However, Studio City represents an exception, facing a liquidity gap for its STCITY’25 bonds due in July 2025. Despite this, their situation appears to be improving with a positive free cash flow of $66 million in the second quarter of 2024, compared to a $9 million loss in the first quarter, showing progress in cash generation.

There are ongoing regulatory considerations that investors need to be aware of. Proposed legislation aims to criminalize unlicensed money exchanges in casinos, with potential penalties of up to five years’ imprisonment. Nonetheless, industry experts believe this will have a minimal impact on long-term gaming demand, as authorized money exchanges will continue.

Further regulatory complexities may arise around the upcoming Macau Chief Executive election in October 2024, with sole candidate Sam Hou Fai hinting at a shift in policy focus. Sam Hou Fai has advocated for reducing Macau’s dependence on gambling, pointing towards a longer-term vision of economic diversification. As per the government’s Development Plan for Economic Diversification, there’s an ambitious goal to derive 60% of GDP from non-gaming activities by 2028. Licensed casinos will contribute significantly to this transformation, with a mandate to invest MOP131 billion ($16 billion) in non-gaming ventures from 2023 to 2032.

HSBC remains optimistic about the credit potential for investors, owing to the robust fundamentals and proactive strategies exhibited by Macau’s casino operators. This outlook provides a foundation for sustained growth amidst the evolving economic landscape.