S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Good morning. Hello, and welcome to S&P Global's live webinar on a webcast -- excuse me, on an update for Macao Gaming. I'm Andy Liu, Senior Director and Analytical Manager of Corporate Ratings. Before we begin, I'd just like to give you a quick update on the web console that you are looking at. The webinar does come with accompanying audio and slide presentation. On the left-hand side is the Q&A box, so we can submit questions at any time. You don't have to wait until the end of the speakers' remarks. Also on the left-hand side is a resource bar, where you can download a copy of today's presentation that will be shared during this webinar. At the end of the webinar is a short survey. Please complete the survey. We'd love to hear your feedback. Also, please note, this presentation is not intended for and must not be distributed to retail clients in Australia. Joining me today are my colleagues, Aras Poon and Melissa Long. And with that, I'll pass it to Aras, who will kick off today's presentation. Aras?

Yes. Thank you, Andy, and thank you all for joining us today on this Macao gaming webinar. So basically following the license renewal in Macao and also the recent change in corporate policies in Macao and Mainland China, we have affirmed several ratings on casino operators that have meaningful EBITDA and cash flow exposures in Macao last week. And they are Las Vegas Sands, MGM Resorts, Melco Resorts, Studio City and Wynn Resorts. We also removed all the ratings from credit watch where we first placed them with negative implications back in July last year. The ease of COVID-19 control measures actually came earlier than our previous expectation and we believe that should support Macao gross gaming revenue recovery in 2023. This is lower operators' cash burn and support credit measures improvement over the next 12 months. So in the next few slides, we'll walk you through, firstly, the Macao recovery scenario that we assume, and secondly, the key factors that we are monitoring for the negative rating outlooks. We'll also cover the topics of concession renewal and showed the awards of 10-year new concessions with the 6 incumbent licensee was in line with our expectation in our base case scenario. Investment commitments are high but manageable as long as Macao GGR begins to recover this year. So let's move on to the first slide. Here, it's the GGR forecast. So overall speaking, China rapid shift away from its 0 COVID-19 policy stands in December last year as a credit positive. It should support Macao GGR recovery that allow operators to get out of cash burn finally and gradually restore credit metrics, but the road to recovery will likely be pumpy, at least in the first 1 to 2 quarters. Reduced testing and removals of current e-measures together with the earlier reinstatements of electronic visas, we believe, with lower entry hurdles for individuals entering Macao and support a recovery in visitation. We believe Macao GGR recovery could improve more sustainably, assuming the current virus rate begins to subsidize over the coming weeks. And as a result, we updated our base case forecast for Macao mass GGR. That is for mass GGR to recover to around 60% to 70% of 2019 levels in 2023. And that is the upper end of our previously published range of 50% to 70%. And we believe our near full recovery for mass may happen in early 2023 -- 2024, as you can see in the left-hand side chart on this slide. On the other hand, we believe the VIP market will likely remain weak due to the tightened regulations and junkets. And in our base case, as you can see on the same chart, we assume VIP to stay at about only 20% of prepandemic level and not recovering. We don't expect material impacts from VIP weakness though because the segments historically only contribute less than 10% of EBITDA to Macao operators given its low margin versus mass. And back to more details for mass, the more important mass market. As you can see on the right-hand side chart, we expect recovery could gradually -- could be gradual in the first few months, and that is because of the high case flow in China, that could make people -- will tend to venture out or potentially impact consumer behavior, at least initially. However, we do expect the recovery in mass GGR to pick up and accelerate more significantly in the second half of the year. And the current base case assume that to reach above 80% of the 2019 level. And that is based on the recovery that we observed in other gaming markets such as Las Vegas and Singapore. And now I will pass it to Melissa to provide more details on Las Vegas and Singapore as a case study.

Thanks, Aras. So we believe the recovery that was experienced in other markets supports our view that Macao's gaming recovery will pick up steam following the relaxation of COVID measures and travel restrictions between Macao, Mainland China and Hong Kong. So as Aras mentioned, we're going to talk about 2 case studies that are informative as we think about Macao's recovery. The first is Singapore, a market which does have a significant reliance on inbound international visitation and which had fairly strict travel restrictions until earlier in 2022. As travel protocols in Singapore and key feeder markets were relaxed, you can see that recovery in airport passenger volumes accelerated, reaching nearly 70% of prepandemic levels in November 2022. Keep in mind, this recovery in passenger volume is with almost no visitation from Mainland China and limited visitation from Hong Kong. Prepandemic, those 2 source markets comprised about 15% of passenger arrivals in Singapore. Despite passenger volumes still below prepandemic levels and key source markets limited in their visitation, Marina Bay Sands gross gaming revenue in the third quarter of 2022 was about 95% of third quarter 2019 levels. And mass gaming revenue in that quarter exceeded prepandemic levels. Resorts World Sentosa, operated by Genting Singapore, the other integrated resort in the market, saw a similar recovery in the third quarter with its gaming revenue above prepandemic levels. We can move to the next slide, please. Las Vegas' recovery began to accelerate in the spring of 2021, so a year earlier than Singapore, as U.S. consumers began traveling again following the rollout of vaccination, listing of many COVID restrictions across markets and with stimulus money and accumulated savings in their wallet. That being said, the market was missing a key component of visitation in 2021 and into early 2022 convention and group business. So in 2021, visitations to the market began recovering, but for the year, it was only about 75% of prepandemic levels. In 2022, that number has improved to 90% through November as convention and group recovery has accelerated. Like Singapore, despite lower visitation, Las Vegas' gaming revenue rebounded quickly to near prepandemic levels, reaching 93% in 2021 and exceeding prepandemic levels last year. On the graph, you can also see the surge in hotel room rates that the market experienced, pushing revenue per available room above prepandemic levels even though occupancy hasn't fully recovered. Despite the strong recovery in 2022, recession risks in the U.S. are rising and could hurt Wynn and MGM's cash flow, but convention and group recovery might offset leisure softness. This is especially true in the first quarter of 2023, which faces an easy compare to last year's first quarter because of the impact of the Omicron variant. Additionally, events programming like Formula One's Grand Prix race later this year will be a draw to the market and illustrates how nongaming events can support visitation and spend in a market. We can move to the next slide, please. Following the update to our mass gaming revenue forecast, as Aras mentioned, we affirmed our ratings on Sands, Melco, Studio City, Wynn and MGM, but a negative outlook bias persists. The negative outlook at this point reflects continued stress on Macao revenue and cash flow, our view that Macao free operating cash flow will remain negative in the first half of the year and that leverage will be above downgrade thresholds in the coming quarters. The negative outlook also incorporates some uncertainty as to how Macao's recovery will unfold in the coming days, weeks and months amid an evolving public health environment following the relaxation of COVID-19 policies. MGM is less exposed to Macao than the other operators, and its strong U.S. cash flow recovery was a key element of the rating affirmation, while our negative outlook on MGM's rating is partly Macao-driven, the company's high lease adjusted leverage relative to our downgrade threshold is also the result of acquisitions and real estate sales the company completed in the U.S. last year. We can move to the next slide. As you can see from the graph on the bottom left, while we expect to leverage for operators at the end of 2023 on a reported basis to be around or above downgrade thresholds, we believe they'll improve below downgrade threshold by late 2023 or early 2024 on a forward-looking or EBITDA run rate basis. This is because we expect Macao's recovery to accelerate in the second half of 2023. Solid liquidity positions across all operators also support our forward-looking view. And the Macao-based subsidiaries of U.S. operators also benefit from healthy parent liquidity positions and a demonstrated willingness to support their Macao operations. On the right-hand side, you'll see that the majority of maturities in Macao are due in 2025 and beyond. The largest near-term maturity is Sands China's revolver which matures in July. And we believe that conversations with lenders will likely accelerate now that concession uncertainty is resolved and the market is likely to begin recovering. Now I'll turn it back over to Aras to talk about the new concessions.

Yes, sure. Thank you, Melissa. So that's the highlight of key concessions, is actually eliminate the license uncertainty that also recorded lots of operators' investment commitment over the next 10 years of this license -- new license concession period. So these 6 operators committed to invest a total of around USD 50 billion over the 10-year period of the license. These investments will likely include a mix shift in capital expenditures and also operating expense to support nongaming amenities and events. The split is not particularly clear, but as I referenced, 1 market participant, MGM, has indicated the split will be fairly even. As you can see in the charts below, promised investments are roughly between 1 to 3x of our estimated 2024 property EBITDA for these guys in the Macao operations. We believe the level of commitment has taken to account some of things. That's including the scale of these operators, the prior investments that they have made in Macao and also the number of gaming tables that they got awards in the new license, which is also an indication of their potential gaming capacities in the 10-year license period. We believe this level of investment will likely be manageable or their demand is high as long as Macao GGR begins to recover this year, because these investments will likely be spread over the 10 years new concession period. And in addition, we expect if there's any large scale CapEx projects, that will likely go through several stage that require designs and planning, government approvals before beginning. And therefore, for now, we do not expect material impacts from these investments to the credit metrics recovery in May 2023. For now, I will pass it back to Andy for Q&A.

Thank you, Aras. Thank you, Melissa. Just a quick reminder before we go to the Q&A. For those of you who missed the introduction earlier, please know you can submit your question any time via the Q&A box on the left-hand side of your screen. And with that, we'll go to our first question. Can Aras or Melissa share with us what is the nongaming investment requirements marginal impact to revenues and credit measures?

Yes, sure. We expect the impacts to be not material at this stage. Firstly, in terms of CapEx, let me just guess, if you look at what the operators highlight previously during the press conference and the license renewal, you see a lot of these projects as a mixture of capital expenditures and OpEx, including, for example, bringing shows to Macao, bringing concerts or events, those kind of events to Macao and also building some of the facilities, for example, max facilities and other smaller facilities. So some of these projects are more like smaller projects that were likely to spread across gradually in the license period and not all come at once. Even in a case where these operators change their minds or gotten approval or decides to have some of the bigger projects, large-scale CapEx projects in Macao usually go through different stage. You first have to get government approval. You have to go with finite planning. And for the construction, that will be -- usually be done in phases. And also the payments or in terms of the cash outflow, we believe we'll be more [ lease ] over the license fee, and therefore, we are not expecting a big incremental cash outflow in -- at least in '23 or maybe the early part of '24 that will potentially have a material impact to the credit metrics. And in terms of the revenue generated from these nongaming assets, we think Macao is -- while operators are increasing their assets in nongaming, we believe the key EBITDA and cash flow driver will still be gaming in the Macao market. So nongaming as a percentage of mass -- of gaming revenue historically is only about like 50% to 20% and a very select proportion of that is also coming from hotel rooms and also F&B retailers, this kind of nongaming offerings. So by just having more shows and concerts, at least in the short to medium term, it's probably not going to have material incremental contributions to the revenue given that it's small compared to the gaming revenue.

To some extent, you kind of touched on the next -- part of the next question already. So what is Macao's nongaming direction? And how is the central government influencing the nongaming direction of Macao?

Yes. I think in terms of direction, the Macao government kind of highlighted during the license review process day 1, Macao census of tourism and leisures and that nongaming to support the gaming industries to be healthy in longer term. So in that manner, we can see Macao -- firstly, Macao for -- in terms of EBITDA and cash flow is driven by gaming. But at the same time, the business model will be changed a little bit, less reliance to gaming and shifting a little bit more to nongaming, like potentially closer to the Las Vegas model, which is people don't come here just for gambling, but at the same time, they came here for all the other reasons, for example, for shows or concerts or other nongaming, and then at the same time, doing some sort of gambling. But overall, when we look at these talents, when we look at these operators, we think nongaming, the idea, it's for these operators to attract more visitors to Macao hopefully to come more often, they will stay longer, and with that, if they stay longer, they potentially gamble a little bit more and drive the EBITDA and cash flow.

Maybe for the next question, we'll switch to Melissa. Melissa, is the worst thing in Macao gaming over after China opened up the borders or its population to go in and out?

Sure, Andy. So the reopening of the borders of Mainland China is certainly a positive for the Macao gaming market and should accelerate its recovery as we walk through 2023. But I would say we still think there's some uncertainty just how the recovery will unfold and how consumers will behave, especially as the public health environment is changing and in an environment of high cases. I think the biggest downside risk to our forecast in 2023 is that if there are large numbers of people who contract COVID and have the virus, that consumers will stay home and voluntarily social distance and not go out and spend as much. And I think it's very difficult to predict the path of the virus, and we can't also fully roll out the possibility that restrictions could be reimplemented, which could slow the ramp-up in Macao's gaming revenue recovery.

Okay. Thank you, Melissa. Maybe switching gears a little bit, talking about CapEx and the concession. Can you share with us, either Aras or Melissa, the CapEx plan on the new concession period, the assumptions, the front run background and potential the funding mix that you guys are envisioning?

I'm happy to jump in on that, to start with, Aras. I think we know the amount in total that operators have agreed to commit over a 10-year period. And we have some indication that there might be a fairly even split between CapEx and OpEx or at least that's what MGM has indicated. I think ideally, operators will probably want to try to front-load the CapEx investments. For example, if you're going to add meeting space or build an entertainment center, you want to get that open as quickly as possible and spend the CapEx sooner in the 10-year concession period than later. And then the OpEx to program that space to bring in entertainment or sporting events or meetings and group, that OpEx would come later in the concession period. But I think there's a little bit of uncertainty at this point over when the CapEx will be spent, operators haven't sort of publicly committed to what the plans are and over what time frame. We think given the need to design some of these projects and get government approvals, that the CapEx is probably not likely going to be significant in 2023 and that it will probably ramp up a bit more in '24 and '25.

Okay. Thank you. Going now to the next question. This has to do with the flexibility of the CapEx spending. Is the capital deployment for nongaming facility market-driven? In other words, if GGR lags, do the casino have the flexibility to defer or kind of push out those CapEx deployments?

Yes, I will take that. So yes, I think in short, operators, right, do have the abilities to -- in terms of the time to incur this cash flow because, I mean, they committed over and then they sort of highlighted what they want to bring to Macao. But in terms of timing, it's not a very, very fixed time line. So they do have some flexibility. But at the same time, we don't expect that to be fully market recovery-driven, i.e., operators were only, for example, do bring a show to Macao when GGR recovered a certain percentage, that's not a linear relationship because as you can see, these are actually on an individual project basis. It's probably not that material. And at the same time, nongaming amenities is also something that could help to potentially drive mass customer to Macao. So that is not directly conflict to the recovery of gaming operations in that sense. So I think operators do have that flexibility. But meanwhile, we do expect to start spending in 2023, but we don't expect very big spending in '23.

Thank you, Aras. Moving on to the next question. Can you kind of share with us the implication arising from the increasing competition in APAC?

So Andy, maybe I'll -- go ahead, Aras.

Yes. So we don't expect the competition to be having a very material impact to Macao operators, although, I mean, we agree that there will be increasing some competition. I guess we can look at it into 2 group of assets that create competition in Macao. Firstly, some of the more existing established markets, for example, like Singapore, Malaysia. I guess these groups of assets, they have been -- historically, they have been there. There are also some Chinese going to these gaming market. But at the same time during normal travel period, you can see the occupancy rate at the hotel, occupancy rate for these assets is actually very, very high in the '90s. So unless they have -- so it's going to increase capacities actually for them to draw incremental competition. It's actually not that easy because they are running at full capacity as well. The other group of assets is, longer term, we understand there are also some market buildings or potentially planning to be casino assets, for example, in Japan. I mean for this group of markets, they're also targeting either Mainland Chinese visitors or international visitors, which in that sense, will have some competition with Macao. But for them to be fully operational at full capacities and competing with Macao, that would likely be a very, very long-term story, potentially more towards the end of the current license previous. So in that sense, we do not expect material impacts to Macao.

Okay. Is there anything else you want to add, Melissa?

No, I think Aras covered everything. Thanks, Andy.

Moving on. So Genting failed to win a bid in the Macao concession. Would they try to enter another -- excuse me, will they still try to enter into the sector, say, for instance, partnering with one of the existing operators, for example?

Yes. Andy, I think this question, I have some very interesting assumption. We do think we have a very good odds on that. I mean what I mean is, firstly, we're not sure if Genting would still want to pursue Macao after not getting the license. Because Genting now to them -- license already set for them to invest in Macao, they will likely need to partner with one of their concessionaire. And in that sense, they will more just be passive for financial investors instead of operators that's driving all things in Macao. So what Genting is interested at and that part is unclear. And I guess for the privatization of GUCs, I think that actually happens -- I mean the exploration on the potential privatization which I believe what you need is to guard the stakes from the minority shareholders actually starts long time ago at exploration, but there is not much update so far. And whether this will happen any time soon is actually unclear. We believe one of the difficulties, one of the challenge for this to happen is not about financing, it's more about reaching an agreement with the minority shareholders, institutional investors potentially on the returns, the validations of their stakes. And in that sense, the incremental benefits that campaigns can bring to Melco so this transaction may not be that significant. Because we believe one of the motivations of Melco is really designed to go ahead and reach agreements with institutional investors to buy the stakes from Studio City. It's really to get full control of Studio City such that they can more efficiently allocate towards between -- our resources between the 2 major projects in Macao, [indiscernible] and also Studio City. And in that sense, we -- I mean that's a question, that's what Melco wants to have and other minority shareholders, which, I guess, we assumed Genting from this question.

Okay. Thank you, Aras. Next question has to do with some of the dividend policy or potential changes to dividend policies. Do you expect there will be dividend payout for the Macao operators this year? And could there be any changes in your dividend policy given the upcoming CapEx in future years?

Sure, Andy, why don't I take that to start with? So our base case forecast for the 3 Macao operators that are owned by U.S. parent, so MGM China, Sands China and Wynn Macao, is that the earliest they would begin to pay dividends is 2024. Typically, those operators pay dividends on a backward-looking basis. So 2024's dividend would consider how 2023's cash flow has recovered. And we believe that will be a key element, that the dividends will reflect the cash flow recovery that's occurred and the potential investment spending needs that each operator has. So dividends, at least in 2024 and 2025 in our forecasts are likely to be lower than they were before the pandemic and will depend heavily on the pace of cash flow recovery.

Okay. Thank you, Melissa. Same thing about cash flow. If cash flow recover as expected, what would the company prioritize, balance sheet repairs, CapEx, shareholder return? For example, would Sands be keen to get back its IG rating?

So let me jump in on that. I mean so for Sands in particular, we do think that Sands is going to focus on reducing leverage and repairing its balance sheet and rebuilding cash balances, especially in Macao that have been depleted over the past 3-year period before they begin sort of paying dividends. They've publicly commented that they need to see sort of a sustainable recovery in cash flows and a reduction in leverage before they begin paying dividends both out of Sands China and out of the parent at Las Vegas Sands.

Thank you, Melissa. Okay. Next question, would there be any significant difference in the recovery path among the operators? Is there a possibility that one could recover faster than others? And what is the reason?

So I guess maybe I'll -- yes, let me just jump in on 1 point. I would say I think one of the potential positive developments is for MGM China. MGM China got an additional 200 tables under the new concession. And so because of that incremental gaming capacity and our expectation that MGM China might be able to take some share because of those new tables, we do expect that MGM China's cash flow could recover closer to prepandemic levels faster than perhaps some of the operators just on the back of that incremental capacity.

Okay. Is there anything you want to add, Aras, or...

Just 1 point to add. Also, I mean for the overall direction, we do expect them to be quite in line, but you're very aware that some operators, they have new capacities, for example, like Melco, where they're opening Studio City Phase 2 potentially in mid this year. That will add a bit more hotel room. That is also the case for some of the other operators. So for operators that have more hotel rooms, potentially from an EBITDA perspective compared to prepandemic level, they will have faster recovery because of the additional capacity.

And Andy, sorry, just 1 more point I want to make. We've also actually assumed that Wynn Macau's revenue recovers at a lower pace than the overall market given that Wynn had kind of a higher percentage of VIP revenue in its mix before the pandemic. So we've assumed a slower pace of recovery there than for some of the other operators.

Okay. Thank you, Melissa. Maybe staying on the theme of VIP, how do you see the growth of VIP gambling sector in this industry and the impact on the credit of these players given some of the changes that's going through?

We are not expecting much growth and we actually -- I mean, in fact, we are not expecting much recovery in VIP. We expect VIP to stay at around like 20% of the prepandemic level, which is roughly just slightly higher than the current level. That is because of the timing and regulations on junkets. So future -- when operators for the VIP potentially -- if there's any more likely to be driven by direct VIP from operators. But at this stage, we are not aware of any significant development plans and direct VIP as operators more likely to want to focus on mass given the much higher margins of the business. And also, it's more aligned to the developments of nongaming amenities. So in that sense, we do expect a very low level in VIP. But that's to say because the margins of VIP is very low. Historically, they have to pay commissions to the junkets, which ate up a lot of EBITDA. EBITDA, as a whole country view, we estimate, like only 10% of EBITDA to Macao. So with that, we were not expecting material impact moving forward to recovery.

Okay. And staying on that topic, which operator is affected by the most in terms of the issue that we see with respect to the VIP or the junket market? And which one is affected the least as well?