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Macau Casinos’ Investment Payback Period Balloons From a Year to Decades

Macau Casinos’ Investment Payback Period Balloons From a Year to Decades

Sands Macau stands out on the city’s skyline with its gold facade and reflective glass panels -- a reminder of the gilded age of the world’s largest gaming hub. 

Opened in 2004, the enclave’s first Las Vegas-style casino raked in so much cash from Chinese gamblers that its owner, late mogul Sheldon Adelson, was able to recoup a $256 million construction cost in just under a year.  

Those days are gone. Even before the pandemic, new casino resorts were likely to see a payback period of more than five years as they faced challenges from bulging construction costs to China’s crackdown on capital outflow. Covid-19’s hit to visitation has added at least four years to that timeline, based on analyst estimates on when operators can expect to make a full recovery after gaming revenue plunged 80% last year. 

The next shoe to drop is likely the shortening of concessions -- Macau’s term for gaming licenses -- under revisions currently being debated to the territory’s casino law. With authorities having signaled that the current 20-year concession period will be slashed after expiry in June, operators are growingly concerned that building a new casino in Macau will no longer be a good bet. 

Macau Casinos’ Investment Payback Period Balloons From a Year to Decades

“If the new concession term is shorter than 10 years, then it’s really difficult, if not impossible, for new projects starting after the concession to get payback within the period,” said JP Morgan analyst DS Kim. “The casino operator may end up losing half the concession period without getting anything.”

No Macau casino that had opened since 2015 made back its initial investment before the pandemic all but halted tourism to the city. Before Covid, projects like Wynn Macau Ltd.’s Wynn Palace and Sands China Ltd.’s Parisian were on track to recoup their billions in constructions costs within a decade, based on their earnings in the first full year of operations. That’s now less likely. 

Worse still is the outlook for newer projects like MGM China Holdings Ltd.’s MGM Cotai and SJM Holdings Ltd.’s Grand Lisboa Palace, which opened in 2018 and July 2021 respectively. Neither of the casinos were running at full revenue-generating capacity before Covid-19 brought the world to a halt. 

Macau Casinos’ Investment Payback Period Balloons From a Year to Decades

At the same time, debts have steadily piled up over the past five years as operators committed to building new resorts and upgrading existing ones. Macau casinos have issued $28.6 billion in bonds since 2017, accounting for more than 80% of the debt the industry has ever raised. Most borrowing remains outstanding, with the bulk of it maturing between 2024 and 2029. 

While most of the operators don’t have maturities in the next year or two, the slow pandemic recovery leaves operators with less room to manage other risks like government policy changes, said S&P Global Ratings analyst Aras Poon. 

S&P last month downgraded Wynn Resorts Ltd. and Melco Resorts & Entertainment Ltd.’s two local units, citing the sluggish gaming recovery due to travel restrictions and high company leverage. Earlier this month, Moody’s cut Melco Resorts’s ratings for similar reasons. 

Fear of further ratings downgrades could be reflected in higher borrowing costs going forward. 

Macau Casinos’ Investment Payback Period Balloons From a Year to Decades

The uncertainty comes amid broader pressure from Beijing for Macau to diversify its economy away from gambling, which now accounts for 80% of government’s income. Authorities have already proposed revisions to the gaming law like sending government representatives to directly supervise casinos, approve the companies’ dividends and increase local ownership in the firms. 

Analysts say even greater intervention in the future can’t be ruled out. 

“Macau casino operators have had a glorious period making quick money,” said Bloomberg Intelligence analyst Angela Hanlee. “With these obstacles, the gambling business in Macau is now seeing more ‘normal’ returns.” 

©2021 Bloomberg L.P.

With assistance from Bloomberg