Macau Casino Companies to Prioritize Capital Spending Over Near Term

Posted on: January 16, 2023, 01:29h. 

Last updated on: January 16, 2023, 02:35h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The six Macau casino operators are likely to focus on required capital spending over the near term before turning attention to operating expenditures.

Macau Casino
An exterior view of Macau casinos. S&P believes operators there will prioritize capex over opex. (Image: Bloomberg)

That’s the take from S&P Global Ratings. They recently noted the six concessionaires in the special administrative region (SAR) will tackle the $14.8 billion in mandated capital expenditures early in the current 10-year concession term. That’s while the bulk of operating spending will be shifted to a later date.

Under the terms of Macau’s recently enacted gaming laws, operators must spend that $14.8 billion combined over 10 years on efforts such as nongaming amenities and luring visitors to the casino hub from Asia-Pacific nations beyond China.

I think ideally operators will probably want to try to front-load the capex investment. For example, if you are going to add meeting space or build an entertainment center, you want to get that open as quickly as possible, and spend the capex sooner in the 10-year concession period,” said S&P analyst Melissa Long.

The bulk of the spending is expected to come from Galaxy Entertainment and Sands China — the two largest Macau operators. The six concessionaires are Galaxy Entertainment, Melco Resorts & Entertainment, MGM China, Sands China, SJM Holdings, and Wynn Macau.

Macau Casino Firms Can Handle the Spending

The nongaming spending mandate could be good news for some operators, and a call to boost related expenditures for others. For example, analysts believe Sands China — a unit of Las Vegas Sands — has a lengthy record of directing capital to non-gaming projects.

A time frame for exactly when Macau casino operators will begin unleashing capital expenditures isn’t immediately clear. That’s understandable, because the companies are coming off a treacherous three-year span in which gross gaming revenue (GGR) and cash flow was severely depressed, owing to the coronavirus pandemic.

S&P analysts believe 2023 could be used for getting approval for projects, because there’s “need to design some of these projects and get government approval, the capex is not likely going to be significant in 2023, and probably ramp up in 2024 and 2025,” added Long.

Eye on MGM China

MGM China, in which MGM Resorts International holds a nearly 56% stake, runs two Macau integrated resorts, and S&P forecasts the operator will soon generate the free cash flow necessary to meet required capital expenditures.

“Because of that incremental gaming capacity and our expectation that MGM China might be able to take some [market] share, we do expect MGM China’s cash flow could recover close to pre-pandemic levels faster than some of the other operators” in Macau,” noted S&P’s Long.

Macau GGR could return to 60% of pre-COVID levels this year. But the recovery will be slow-going in the first several months of 2023, with an eventual free cash flow pop later on, according to the ratings agency.