What will cause Macao Casinos to go bust

What will cause Macao Casinos to go bust 1

Latest covid zero restrictions result in a burn rate of $700m per month

Some countries are doing it tougher than others when navigating through the pandemic, in particular the territory of Macau, which is considered the gambling mecca of the world. This once thriving city, is now facing unprecedented challenges, with casinos on the verge of going bust.

Pre-pandemic, Macau was churning billions of dollars of turnover a year. As the only legal Chinese gambling territory, Macau held a valuable monopoly, thus being able to attract millions of tourists, both from mainland China and overseas.

But now the bottom line of all casinos in Macau are deep in the red.

During the early days of the pandemic, the government predominantly excluded casinos from its Covid containment strategy. It knew it had to keep the lifeblood of the economy flowing by not shutting down casinos. However the advent of the more infectious Omicron has removed this exception, and now all businesses must close shop – big or small, casino or not. Much to the chagrin of casino owners, they too now must face the same devastating economic losses as small businesses.

The latest restrictions that were implemented two weeks ago, were unlike any other.

Covid infections in Macau have slowly been rising with June 2022 reporting a high of 2,000. To stop transmission, all residents, including staff on the payroll of casinos, must abide by stay-at-home orders. As a result, casinos have effectively reached zero revenue while still incurring and maintaining operating expenses. Even though no staff are allowed to step foot within any casino, their wages must still be paid, as stipulated by the government to support workers. With no revenue but all expenses on the books, there is no way for casinos to turn a profit.

Furthermore, what makes these restrictions even harder to bear, is the uncertainty. Government officials previously stated that it would not last more than two weeks, a date that has now passed. With an indefinite restriction on tourism and local resident movement (effectively shutting down all business), how long can Macau’s residents and its casinos last?

“Macau is by and large dependent on gambling revenue which contributes up to 80% its taxes. With a population of only 600,000 it simply can’t afford to sustain lengthy restrictions,” Industry expert Phillip Wong comments.

“If you observe the gambling floors, they are a vacuum of dead silence. They used to be buzzing like a bee hive, but now – nothing. Its like being in space.”

Unfortunately, Macau has not been able to diversify and detach its tourism from being gambling dependent. Pre-pandemic, 40 million Chinese mainlanders came to Macau each year to try their luck, experience fine dining and be entertained. But with borders closed, there is a huge void of tourists.

The Macau government and residents are not the only ones suffering. The Hong Kong listed Wynn Macau (WYNMF), Sands China (SCHYF) and MGM China (MCHVF) have seen their share price drop by more than 70% from all time highs. Investors that have held on to their big name Macau casinos shares are now experiencing huge unrealized losses. With many investors being cash poor, some are considering selling out of their positions.

“At the start of the pandemic Wynn Macau stated they were losing $2.6 million per day. Based on this, and projecting out by using other statistics, (I) estimate the industry is currently racking up losses of $700 million per month. With no end in sight, casinos will soon run out of cash, and will need to either raise more capital or borrow. And we all know, this is not easy with the cost of capital rising around the world.”

Is now the time that we will see a Macau casino go bust?

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