Net debt of Macau operators now four times higher than in 2019: Morgan Stanley

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The combined debt of Macau’s six dealers has quadrupled from $5 billion to more than $20 billion since the start of the COVID-19 pandemic, one of multiple factors currently dragging down stock prices according to investment bank Morgan Stanley.

In a research note published this week, analysts Praveen Choudhary and Gareth Leung said the sector’s debt had climbed to $19 billion at the end of 2021 and could reach $23 billion at the end of 2022, driving down valuations.

The COVID-19 outbreaks in mainland China and Hong Kong are also contributing factors, as is uncertainty over Macau’s amended gaming law and license renewals – although the latter concerns have largely been resolved in recent times. weeks.

However, they observe that many operators have sometimes posted positive EBITDA over the past six quarters while remaining negative in FCFE (free cash flow to equity).

“In the last six quarters since the opening of the IVS between Macau and the mainland, the industry has tracked Chinese visits at 20-30% of 2019 level, mass revenue at 30-40% of the level of 2019 and EBITDA at breakeven or 5% of 2019 level,” they wrote.

“The problem with positive EBITDA but negative FCFE is that the sector has added debt.”

Galaxy Entertainment Group is the only operator currently FCFE-positive, but analysts said Sands China and Melco Resorts could turn FCFE-positive if mass revenues rise from the current 40% to 2019’s 50%.

They also see a 20% to 30% rise in share prices “if the license extension is just a formality”, although normalization of EBITDA is not expected until late 2023 or in 2024.

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