Gaming & Luxury Goods | Expecting full mass recovery in 3Q23

Our new pecking order: MGM (2282.HK) = Wynn (1128.HK) > Sands (1928.HK) > Melco (MLCO.US, 200.HK) =Galaxy(27.HK)>SJM (880.HK).

We largely maintain our 2Q23 mass gross gaming revenue (GGR) projection of 89% of the 2Q19 level, given:

During the pandemic, all six gaming operators in Macao reduced their employee headcounts, resulting in a labor shortage in the non-gaming service industry. This led to an insufficient supply of hotel rooms, higher costs for available options, and limited recovery from the supply side. A comparison of the headcount cutting trends in 2019 and 2022 showed that Melco (Macao operation) and Galaxy had the most significant layoffs. The delay in the opening of Galaxy Phase 3 and Melco's underperformance in the pace of mass recovery were attributed to this. Staff recruitment since January 2023 has normalized labor constraints, alleviating the bottleneck in hotel rooms, and driving further recovery in business volume in 3Q23. Operators with higher layoffs (Melco and Galaxy) are expected to perform better in terms of QoQ acceleration in mass GGR due to more upside in hotel inventory for patrons.

As of May 2023, Macao has 42,928 hotel rooms available, which is a 10% increase from the end of 1Q23. Another 1,150 hotel rooms are expected to come online in 2H23, offering a 3% upside compared to 1H23. The growth in hotel room capacity can boost mass demand since Macao's hotel room occupancy rate has always been above 90%. In 2016-2018, around 6,402 rooms were opened in Cotai, which stimulated Macao's total mass GGR to increase significantly YoY in 2017 and 2018. New properties need time to ramp up, which is why we use mass GGR YoY in those years, while 2016 only registered a 5% increase.

In May 2023, total visitations to Macao recovered to 65% of the May 2019 level at 2.2 million. Land visitations led at 69%, while sea and air visitations lagged at 57% and 49%. Limited frequency of air and sea transportation caused the lagging performance. However, as of June 2023, the weekly frequency of flights increased to 595, recovering to nearly 61% of the 2019 level, up by 24% compared to March 2023. There has been a continuous uplift in the frequency of transportation, both by sea and by air, in 3Q23, and flight capacity from the Chinese mainland to Macao SAR may return to above 90% of the pre-pandemic level by end-2023 based on CAPA data.

Slower-than-expected recovery in Macao SAR gaming sector, increased competition in Asia gaming market.