March 5, 2020 / 3:21 AM / a month ago

Breakingviews - To set Macau’s virus odds, consider 2015 over 2003

A man walks past a logo of Melco Resorts & Entertainment at its booth at the Japan IR EXPO in Yokohama, Japan January 29, 2020. REUTERS/Kim Kyung-Hoon

HONG KONG (Reuters Breakingviews) - A swift return to normal in Macau is looking like a long shot. One casino operator, Melco Resorts and Entertainment, says recovery from the coronavirus could take four to six months. The slump is starting to make a comparison to China’s corruption crackdown more apt than the oft-cited SARS. 

A previous epidemic is a natural, and encouraging, point of reference. Back in 2003, consumers kept enough cash to spend later, which helped spark a rebound. This time, Macau may not be so lucky. Covid-19 closed casinos for two weeks, while limited visas brought the territory’s visitors down to just 2,000 a day in mid-February – almost 98% fewer than a year earlier, according to local media. The former Portuguese colony is also more exposed than it was after the turn of the millennium, when the Cotai Strip was barely off the drawing board.

That’s why a more recent crisis might be instructive. Soon after Chinese President Xi Jinping rose to power, he kickstarted an anti-graft campaign against the country’s elite. Macau’s gross gaming revenue tumbled by a third, or some $15 billion, in 2015 as high rollers shied away from conspicuous consumption. After the crusade relaxed, the recovery was steady, supported largely by a strategic shift toward less-moneyed visitors. It took a few years, however, for Melco’s revenue to surpass the $4.8 billion it generated in 2014.

It might be an even harder slog this time. Continued travel restrictions mean that even though some gamblers are back at the baccarat, any genuine revival is nowhere in sight. In the meantime, operators have few ways to hedge their bets. Resorts beyond Macau will be feeling the pinch, too. The virus doesn’t distinguish between wealthy or mass-market customers, and neither will a broader economic slowdown. Even Xi now says it is an inevitable after-effect.

A robust bounce back is being anticipated. Melco shares are trading at more than 80 times forecast profit for 2020. In mid-2015, the forward multiple was just 25 times, Datastream shows. The six-month slowdown now is destined to create more than half as much damage as the full-year corruption crackdown. Earnings per share, however, are expected by analysts to sextuple in 2021, according to estimates gathered by Refinitiv. That sounds optimistic. Take the under.

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