Analyst: Despite Concession Shutout, Genting to Pursue Macau Venture

While Genting didn’t win a Macau gaming concession, this may not be the firm’s final go at the market. Analysts at JP Morgan say the Malaysian company, which operates a casino in Malaysia’s Highlands, that includes many non-gaming attractions, may try to slip in via an equity or joint venture deal.

Analyst: Despite Concession Shutout, Genting to Pursue Macau Venture

Genting’s attempt to unseat one of Macau’s Big 6 gaming concessionaires went down to defeat last month, but the Malaysian company will persist in its goal to find a footing in what was, pre-Covid, the world’s most profitable casino market.

On November 26, the local government announced that the current six license holders—Wynn Macau, Galaxy Gaming, MGM China, Sands China, SJM and Melco—would retain their place in the jurisdiction, and continue to operate for another 10 years.

But that’s not the end of GMM Ltd., the Genting subsidiary that made waves with its last-minute license bid, submitted September 14. At the time, the parent company stated that its bid “represents an opportunity for Genting Malaysia to expand its business in the leisure and hospitality sector, diversify its geographical footprint and participate in the recovery prospects of the Macau SAR gaming segment.”

Instead, GMM ranked last among the seven bidders, reported Asia Casino News, though Macau’s tender committee has said it will not reveal the final scores until something this month.

According to JP Morgan analyst DS Kim, GMM “might still want to participate via equity or joint venture investment if [the] prices are right and the government is okay.”

According to gaming consultant Ben Lee, the government avoided “a major disruption” in the employment sector by going with the tried-and-true operators that have been in the market for 20 years. Macau Business quoted local gaming attorney Carlos Lobo, who agreed, “There wasn’t enough time left to switch operators. A different solution could jeopardize employment of thousands and consequently risk social stability.”

Brokerage Sanford C. Bernstein has floated a scenario in which the Malaysian company partners with one of the six incumbents, “positioning itself as a prospective partner or buyer of an existing operator in the event that a concession-holder experiences financial difficulties and may require a partner or could be open to being acquired, with government consent.”

Asia Gaming Brief cited Nomura analysts who said Genting investors “likely feel relieved” that the company was passed over in Macau.

“There were two concerns if Genting Malaysia had won the bid,” wrote Tushar Mohata and Alpa Aggarwal, “the risk of a low ROIC investment in Macau given lack of clarity on the residual size of the Macau gaming industry once China emerges from zero-Covid strategy, after years of crackdown on the sector by Beijing; and funding risk for a large capex commitment and resulting balance sheet pressure on Genting Malaysia … to develop a new Macau resort.”

The news that the incumbents will stay on kicked Macau gaming stocks into high gear, and going forward, “could serve as a strong stock catalyst because many investors—especially long-only—were largely staying away from the sector given this ‘tail risk’,” Kim said.

“This is still a ‘provisional’ license, as the operators will now need to review and sign the contract to have it to be effective for the next 10 years, but recall most of the contentious issues on the next license are already addressed (e.g. gaming tax of 35 percent to 40 percent vs. current 39 percent, no explicit restriction on dividend, very reasonable table caps, etc.).

“The only known unknowns are minimum investment requirements for the next 10 years (we estimate US$2 billion to US$3 billion-plus per operator, with bigger operators such as Galaxy/Sands spending on the higher ends; see our note), which we expect to be fairly reasonable; and annual concession premium (vs. currently ranging from US$15 million to US$45 million, subject to the number of tables/slots), which we also expect to change incrementally and reasonably. “

Last week, Kim issued a “buy” rating on Macau gaming stocks. The team expects EBITDA in the sector to turn positive in the first quarter of 2023.

JP Morgan notes that, while Macau GGR sits at “just 10 percent to 15 percent” of pre-pandemic levels, that’s an improvement from the 5 percent to 10 percent of pre-pandemic performance “a couple of months ago” and suggests “very gradual” improvement.

“We think there is more room for recovery, particularly within mass GGR in 2023, when we think GGR can approximate 60 percent of 2019 levels, and improving further in 2024, to 90 percent of 2019 levels,” the JP Morgan team stated. “We’d like to think these numbers are rooted in conservatism.”

Meanwhile, the Big 6 are expressing satisfaction in the re-tender outcome. Rob Goldstein, chairman and CEO of Sands China, said, “In the coming decade and beyond, we will remain steadfast in our strategy of continuous investment in Macau—in its economy, its people and its community.”

Lawrence Ho, chairman and CEO of Melco, said, “We are honored to have been selected and granted a provisional award for the concession to operate gaming in Macau and would like to thank the Macau government for running a smooth and transparent process. We are committed to Macau and its development as Asia’s premier tourist destination.”

SJM, which ranked lowest in evaluations among the six concessionaires, said it’s confident in the “long-term growth prospects of Macau, and looks forward to contributing to the sustainable development of the local economy in the coming decade.”

And MGM, which ranked highest, said, “With confidence in the future of the Macau SAR, we firmly believe in Macau’s full recovery and growth, becoming even stronger as a holistic tourism destination.”