Revitalization of gaming sector depends on testing capacity

in Guangdong and Macao, analysts warn

Key comments in Ponto Final article (in Portuguese) on reopening the borders between Macao and Guangdong province.

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There is no question that the easing of GD restrictions is positive news, however, the extent by which it helps Macao depends on the answer to more questions. Among them are:

1. How fast and how much will Macao ramp up its testing capabilities?

2. Will transportation into Macao be able to meet the demand?

3. How many COVID-19 transmissions is Macao willing to put up with, given that it’s been more than 100 days since the last case a case INSIDE Macao?

4. How soon will other Chinese provinces and Hong Kong follow suit?

English (Google Translated) article below:

Revitalization of gaming sector depends on testing capacity in Guangdong and Macao, analysts warn

By Eduardo Santiago

Ponto Final

15 July 2020

The reopening of the borders between Macau and the province of Guangdong could benefit the gaming industry with the return of thousands of visitors from mainland China, who represent more than 40% of tourism in the territory. Despite the relief of travel restrictions between the two regions, analysts contacted by FINAL POINT considered that the capacity to carry out nucleic acid tests in Macau and Guangdong will be crucial for the casinos.

The relief of travel restrictions between Macau and Guangdong announced by China on Monday had an almost immediate impact on the share value of listed concessionaires, with Wynn Macau rising 7% and MGM China rising 5% in the first hours Tuesday morning. The announcement of the reopening of the borders between the two regions as of today at 6:00 am was seen by many analysts as a first step towards the sector's recovery.

“We hope that demand in Guangdong can quickly recover to 70% of normal levels, assuming individual visas will resume soon,” said DS Kim, an analyst at JP Morgan in Hong Kong.

With the increase in the value of shares of casino dealerships due to the easing of some restrictions on travel between China and Macau, JP Morgan Chase & Co. anticipated an improvement in gross gaming revenue of 20% to 25% compared to at 2019 levels, or from 150 million to 200 million patacas a day, next month, which "will be a litmus test for the size of pent-up demand, and which will help set a foundation for the 2021 recovery" may read the document signed by analysts DS Kim, Derek Choi and Jeremy Na.

“In my opinion, this decision is a light at the end of the tunnel for Macau's tourism and gaming industry. I believe that sector agents are optimistic about this positive sign, as it seems to be a kind of moving forward. I like this idea of ​​a special corridor with a reduction in people, but which will allow the return to hotels and casinos. It is a time to see how this interaction goes and it will be an opportunity to test the systems”, said Glenn McCartney, specialist in Tourism Marketing.

“We hope that some pent-up demand will quickly materialize in Macau as travel restrictions ease,” said Vitaly Umansky, an analyst at Sanford C. Bernstein, adding that despite the difficulties of visiting Macau from people outside Guangdong, “the general trend is moving in the right direction”.

For Glenn McCartney, it is still not possible to forecast the profile of tourists who will return to Macau with the reopening of the borders with Guangdong. “We are going to see what will happen in the coming months, analyze the number of people who will come to Macau from Guangdong Province and the type of expenses they will make. In China there is a phenomenon in the retail trade called revenge spending where people have money to spend because they could not go anywhere due to the pandemic context. Will this factor have an impact on Macau in terms of casinos and retail purchases? At the moment, Macau doesn't have much to offer other than the gaming industry because we've lost many of the entertainment events, namely 'The House of Dancing Water'. The basic spending of visitors should be on meals,

Guangdong Province accounted for more than 40% of Macau's tourism in 2019

In 2019, visitors from Guangdong accounted for about 46% of all Chinese visitors from mainland China to Macau, accounting for between 30% and 35% of last year's gross gaming revenue. The relaxation of restrictions between the two regions will also represent an opportunity for the revitalization of the gaming sector. However, there are factors and risks to consider, according to some analysts.

“I want to believe that the casinos are prepared to attract the greatest number of players, probably with some discounts, which were also available in hotel rooms and packages that they must have already prepared for more people to come to Macau. I see this more as a test of what the future may be, rather than a total openness. We are talking about a first step for things to return, more or less, to normality”, said Pedro Cortés, lawyer and specialist in the gaming sector.

According to the analyst, the pandemic situation has once again demonstrated that Macau urgently needs to diversify its economy, as it is heavily dependent on the gaming industry. The drop in casino revenues of around 90% in the last three months is more than a warning, indicated Pedro Cortés. “We have to look at this as a warning because we have come to the conclusion that we cannot depend on just one industry, we probably have to change the page a little and also focus on that diversification of the economy that can include shows, another type of attractions that we had for some time.”

However, the possible return of tourists from mainland China will have a significant impact on a virtually stagnant sector. "It's better to have something, to let something grow, than to have nothing, because otherwise, if this continued the way it is now, we would probably have some kind of social manifestations because, even if we have very deep pockets, there is a a time when we can no longer reach the bottom of our pockets, and when that is how it starts to run out of money, and we all know that companies are to make profit for shareholders", stressed the expert, also adding that there are risks in this reopening, namely the possible emergence of new cases of infection.

“This measure was more than necessary and very welcome. We are going to see how it will be implemented because we have to see if it does not jeopardize everything that was done by the Government of Macau to keep the region practically without cases”, said Pedro Cortés, admitting that it is possible the resurgence of cases in Macau with the reopening the borders, and that this would be very detrimental to the casino business. “If there are public health problems, which I think will happen in the near future, as we are capable of having one or two cases, we have to see if we don't close the borders again. Because if they close again, then it seems to me that dealerships will have to start thinking about packing their bags and traveling to other places because in the near future they won't be able to have major attraction factors here to continue in Macau”,

One of the factors pointed out by JP Morgan analysts for a more significant recovery of the gaming sector was the possible return of individual visas, as if the IVS visa system is restored to around 70% of normal levels, it would mean that VIP revenue it could grow between 80% and 90%, and the revenue of the mass game between 50% and 60%.

“It is not possible to understand when individual visas will be authorized again in many of the cities that are included in this program. Therefore, it is necessary to take into account when the individual visa program will come back into force, because that seems to me to be the decisive issue in this whole matter as well”, commented Pedro Cortés, adding that, given the current context, the Dealers' strategy should go through a bet on the VIP market. “Perhaps, the strategy involves a bet on the VIP market or on the market of a higher range than the mass market in order to try to bring more customers and quality players instead of quantity. Casinos know perfectly well how to work with the VIP market,

Macau and Guangdong need to strengthen Covid-19 testing capacity

With the capacity to carry out 16,000 nucleic acid tests per day and a system for marking 5,000 orders a day, the health authorities in Macau could face many difficulties if the test quota is not increased, since in addition to the mandatory presentation of the negative nucleic acid test to enter the territory, the casinos will also demand, from today, the same document. A situation that could affect casinos.

“The casinos depend on test results, and even in Macau there are people who find it difficult to do nucleic acid tests. We are now required to take the test in order to enter the casinos. The crucial point is to try to understand how Macau and Guangdong are going to improve their testing capacity”, began by explaining Alidad Tash, strategist and general manager of 2nt8, a consultancy specializing in the gaming industry.

For the expert, there is no doubt that the reopening of circulation between Macau and Guangdong will have a “significant impact” on the gaming industry. However, Tash pointed out the importance of access to tests. “Of course when something is practically dead and suddenly resurrects, that's good news. The issue that is important to emphasize here is not about the reopening of borders, but about the facilities for accessing the Covid-19 tests. What will be the capacity to carry out tests in Guangdong and Macao? In this regard, the quantity and speed with which Macau will carry out tests will be crucial, as will the increase in its own capacity. Even today [yesterday] there was a situation in which the Macao Health Services were unable to deal with requests for nucleic acid tests to be carried out”, he pointed out.

For the director general of 2nt8, there is no doubt that the relief of entry restrictions in Guangdong province is positive news; however, the expert considered that the measure will only help Macau if the questions are answered: “How quickly and when will the test capacities in Macau increase? Will transport to Macau meet demand? How many Covid-19 transmissions will Macau be willing to support, given that more than 100 days have passed since the last case of local infection? And finally, how soon will other Chinese provinces and Hong Kong follow suit?”

According to JP Morgan analysts, China will pay close attention to the success of the special corridor between Macau and Guangdong. “If the Macau-Guangdong Special Corridor is a success, with no Covid-19 outbreak recorded for a few weeks, we believe the Central Government can further open the border to other regions in a phased manner, together with the return of individual visas. ”, indicated the analysts.

Regarding the normalization of the gaming sector, analysts pointed to the second quarter of 2021. “We wanted the normalization of demand to take place within two to three quarters of the reopening, and we expect the sector's gross gaming revenue to fully recover by the second quarter of next year, unless there is a new wave of Covid-19 infection cases in China.”