Macau Gaming Sandy Lim, Director

Home , Macanese pataca, Mainland Chinese

Aras Poon, Associate Director Melissa Long, Director Macau Gaming Sandy Lim, Director

Why we’ve lowered our gross gaming revenue forecast for 2021 Corporate Ratings

Feb. 9, 2021 Key Takeaways

– We have revised our forecast for gross gaming revenue (GGR) in Macau for 2021 to 30%-40% below 2019 levels (vs. 10%-20% previously). We expect full recovery in 2022. – We maintain our view that the premium mass segment will recover faster than that of VIP and base mass. This should support EBITDA since it is the most profitable segment. – Macau remains a strong gaming market. Improving infrastructure and planned hotel capacity expansion should fuel long-term growth. – Although operating conditions are improving from a trough, downside risk to ratings persists. – Operators have solid liquidity profiles that should help to mitigate risks if the recovery is slower than expected.

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly. Our Revised GGR Forecast

– We now anticipate Macau’s GGR will be 30%-40% below 2019 levels (vs. our previous estimate of 10%-20%). We still see pent-up demand for casinos and continue to expect a full recovery in 2022 when travel activities are more normalized. – The market's recovery will stay bumpy, partly because of visa limitations, testing requirements, and travel fears. Additional constraints are continued quarantine restrictions for Hong Kong visitors, economic challenges, and reduced gaming capacity. – Macau’s GGR declined 79% year-on-year in 2020. The average daily run-rate GGR recovered to Macau pataca (MOP) 250 million in December 2020 and January 2021, representing about 30% of the pre-pandemic level and below our previous expectation of around 40%.

Macau 2021 GGR Likely To Be 30-40% Below 2019 Levels Macau GGR Recovered To About 30% Of Pre-Pandemic Level

First quarter Second quarter Third quarter Fourth quarter Monthly GGR (left scale) YoY growth (right scale) 2021e 30 20 25 0 2020 YoY growth (%) 20 (20) 2019 15 (40) Bil. MOP Bil. 2018 10 (60)

2017 5 (80) 0 (100) 2016 Jul-19 Jul-20 Oct-19 Oct-20 Apr-19 Apr-20 Jan-19 Jan-20 Jan-21 Jun-19 Jun-20 Feb-19 Feb-20 Dec-19 Dec-20 Aug-19 Aug-20 Sep-19 Sep-20 Nov-19 Nov-20 Mar-19 Mar-20 0 50 100 150 200 250 300 350 May-19 May-20 Bil. MOP GGR--Gross gaming revenue. MOP--Macanese pataca. e--Estimate. Bil.--Billion. Source: Gaming GGR--Gross gaming revenue. MOP--Macanese pataca. Bil.--Billion. YoY--Year on year. Source: Gaming Inspection and Coordination Bureau (Macau), S&P Global Ratings. Inspection and Coordination Bureau (Macau), S&P Global Ratings.

3 Recovery Path And Outlook

– The premium mass segment will likely remain the key driver for cash flow for the next 12-18 months. Base mass is more affected by travel restrictions and economic challenges. Authorities appear to not want visitation to increase too quickly as COVID-19 remains a risk. – Credit availability for VIP customers is constrained by capital controls, stricter regulations on overseas gambling, junkets’ liquidity, and tighter trade conditions. The number of licensed junkets declined for the eighth consecutive year to 85 in Jan. 2021, from 235 in 2013. – On a positive note, VIP contributes only 10%-15% to Macau EBITDA for our rated issuers. Yet, weakness in VIP could lead to lower demand in the high-end mass segment as some players are overlapping. This is a risk that we cannot completely rule out.

Our Base Case Assumes Macau 2021 Mass GGR At 65-75% Of 2019 Levels And VIP GGR At 55%-65% Of 2019 Levels

Premium mass to recover faster than VIP and base mass VIP Mass 250

200

150

Bil. MOP Bil. 100

0 2014 2015 2016 2017 2018 2019 2020 2021f f--Forecast. Bil.--Billion. MOP--Macanese pataca. GGR--Gross gaming revenue. Source: Gaming Inspection and Coordination Bureau (Macau), S&P Global Ratings.

4 Visitation Trends At A Glance

– Mainland Chinese visitation to Macau has steadily increased since the resumption of the Individual Visit Scheme nationwide. Chinese visitor volume slowly recovered to around 30% of pre-pandemic level, in line with the city’s GGR recovery. – The recovery is more gradual than we expected. This could be due to visa limitations, testing requirements and travel fears, in our view. – Resurgence of COVID-19 cases in Hong Kong and the region could also slow the recovery as travel options are limited – for example, the use of Macau transit visa or doing a Hong Kong-Macau trip.

Mainland Chinese Visitation To Macau Steadily Increasing Since Hotel Occupancy Partly Supported By Local Demand And The Resumption Of IVS Nationwide Increased Length Of Stay For Chinese Visitors 2019 2020 3,000 40 94 94 94 100 93 91 92 91 90 93 93 86 89 2,500 20 90 82

0 YoY growth (%) 80 2,000 70 (20) 60 53 1,500 (40) 50 43

Bil. MOP Bil. 39 1,000 40 (60) 30 500 19 Occupancy rate (%) rate Occupancy 16 (80) 20 12 9 8 9 10 12 - (100) 10 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jul-19 Jul-20 Oct-19 Oct-20 Apr-19 Apr-20 Jan-19 Jan-20 Jun-19 Jun-20 Feb-19 Feb-20 Dec-19 Dec-20 Aug-19 Aug-20 Sep-19 Sep-20 Nov-19 Nov-20 Mar-19 Mar-20 May-19 May-20

IVS--Individual Visit Scheme. GGR--Gross gaming revenue. Bil.--Billion. MOP--Macanese pataca . YoY-- Source: Government of Macau Special Administrative Region; S&P Global Ratings. Year on year. Source: Government of Macau Special Administrative Region , S&P Global Ratings.

5 Macau Remains A Strong Market In The Long Term

– Support for the long-term growth of Macau's gaming industry comes from economic growth in mainland China, a growing middle class, improving infrastructure connecting the mainland and Macau, as well as expanding hotel capacity. – Gaming penetration rate is low in China and concentrated in Guangdong. Improving infrastructure could enhance players’ experiences visiting Macau. Shortened travel time could translate into longer length of play, and hence higher revenue for operators. – Planned hotel capacity expansion by operators should increase visitors and length of stay over the long term and will help to grow the market. We expect Macau’s 4- and 5-star hotel room counts to grow only 2%-3% in 2021, compared with 2019, given the decline in 2020.

Macau Overnight Visitor Length Of Stay And Hotel Room Supply Expanding Hotel Capacity To Fuel Mass Growth Are Increasing

Hotel room count (left scale) Occupancy rate (right scale) 45,000 100 2.3 2.2 40,000 2.2 2.1 95 Occupancy rate(%) 2.1 35,000 1.9 30,000 90 25,000

85 Days 20,000 15,000 80 Numberhotel of room 10,000 75 5,000 - 70 2014 2015 2016 2017 2018 2019 2020f 2021f 2022f 2014 2015 2016 2017 2018 2019

Source: S&P Global Ratings. Source: Government of Macau Special Administrative Region; S&P Global Ratings.

6 Rating Actions In Second Half Of 2020 Negative outlook bias remains

Rated Entities With Exposure To Macau – We removed the ratings on Las Vegas Sands, Melco and Studio City from CreditWatch From To Date Negative as the sector recovers from trough Positive conditions; however, downside risk remains. Las Vegas Sands Corp. BBB-/Watch Neg BBB-/Negative/-- Nov 12, 2020 – MGM Resorts and Wynn Resorts remain on Melco Resorts (Macau) Ltd. BB/Watch Neg BB/Negative/-- Sep 28, 2020 CreditWatch Negative given their higher exposure to Las Vegas, which relies heavily Studio City Co. Ltd. BB-/Watch Neg BB-/Negative/-- Sep 28, 2020 on air travel, conventions, and group No Rating Actions meetings. We believe these categories will be MGM Resorts International n/a BB-/Watch Neg/-- n/a slow to return and may experience more Wynn Resorts Ltd. n/a BB-/Watch Neg/-- n/a permanent disruption.

n/a--Not applicable. Source: S&P Global Ratings.

7 Soft Credit Metrics In 2021

– For rated issuers that are not on CreditWatch with negative implications, our base cases generally assume their leverage ratios will recover below our downgrade thresholds by late 2021 or early 2022 on a run-rate basis. – Sustained high debt-to-EBITDA ratios above our downgrade thresholds continue to pose a key downside risk. Financial policies remain a key variable that could further shape the recovery timeline during a low-rate environment. – We have not included potential license renewal costs in our base case given the uncertainty of form and size. Any material investments will likely be spread across the long term, considering the amount of investments that the rated issuers have committed in recent years.

Rated Issuers - Average Debt/EBITDA Rated Issuer - Aggregate Capex, Debt, FFO Profile

Heightened leverage for an extended period pose a key downside risk Capital expenditure in 2021 and 2022 could be mostly funded by internal cash flows 45,000 Pre-COVID-19 Base case 40,000 9.0x 35,000 8.0x 30,000 7.0x 25,000 6.0x 20,000 15,000

5.0x US$ million 10,000 4.0x 5,000 3.0x - 2.0x (5,000) 1.0x 2019 2020f 2021f 2022f Capital expenditure Adjusted debt FFO 0.0x 2019 2020f 2021f 2022f A-- Actual. F--Forecast. Source: S&P Global Ratings

F--Forecast. Source: S&P Global Ratings. Mil.--Million. F--Forecast. FFO--Funds from operations. Source: S&P Global Ratings.

8 Liquidity

– Operators maintain solid liquidity profiles that help to mitigate the risks if (1) the Macau market recovers slower than expected or (2) even back to a zero-revenue environment if a significant resurgence of COVID-19 cases in the region leads to closures. – Most rated issuers raised and/or refinanced debt over the past six to eight months to shore up liquidity against the negative impact of COVID-19. Other initiatives include cutting dividends, reducing operating expenses, deferring capital spending, and raising equity.

Liquidity Profile (Zero Revenue Case) 12-Month Forward Liquidity Profile (Base Case) 12-Month Forward

As of Sept. 30, 2020 As of Sept. 30, 2020 Liquidity sources Liquidity uses Liquidity sources Liquidity uses 4,500 4,500 4,000 4,000 3,500 3,500 3,000 3,000 2,500 2,500 Mil. US$ Mil. US$ 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 Sands China* Wynn Macau MGM China Melco Resorts Studio City§ Sands China* Wynn Macau MGM China Melco Resorts Studio City§

Note: Liquidity sources defined as cash on the balance sheet and revolver availability at Sept 30, 2020. Note: Liquidity sources defined as cash on the balance sheet and revolver availability at Sept 30, 2020, Liquidity uses include operating expenses, debt service requirement, maintenance and development and estimated cash FFO for the next 12 months. Liquidity uses include, debt service requirement and capital spending . *As of Dec. 31, 2020. §Adjusted for the debt issuance for refinancing in Jan 2021. Mil.-- maintenance and development capital spending .*As of Dec. 31, 2020. §Adjusted for the debt issuance for Million. Source: S&P Global Ratings. refinancing in Jan 2021. Mil.--Million. Source: S&P Global Ratings.

9 Related Research

– Wynn Resorts Ltd. Ratings Remain On CreditWatch Negative Due To Slower Recovery; Wynn Macau Sr. Notes Remain ‘BB-’, Dec 15, 2020 – Industry Top Trends 2021 Hotels, Gaming, and Leisure, Dec. 10, 2020 – Las Vegas Sands Corp. 'BBB-' Ratings Affirmed; Removed From CreditWatch; Outlook Negative, Nov 05, 2020 – APAC Gaming Sector Update: Don’t Bet On A Quick Recovery, Oct. 28, 2020 – Melco Resorts And Studio City Ratings Affirmed, Removed From CreditWatch; Outlook Negative, Sept. 28, 2020

This commentary is not a rating action.

10 Macau Gaming Analytical Contacts

Aras Poon Melissa Long Sandy Lim, CFA

Associate Director Director Director [email protected] [email protected] [email protected] Hong Kong New York Hong Kong

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