Looking beyond COVID-19

 We turn more constructive on Macau on: 1) rising visibility of a normalisation; 2) new supply growth fuelling mass growth; 3) likely policy shift towards driving mass market in the long term. We cut 2021E EBITDA by 36% to reflect a slower-than-expected recovery YTD. The recent vaccine rollout and lower COVID-19 cases in mainland China, Hong Kong and Macau increase visibility of border normalisation. Longer term, we expect the regulatory tightening on VIP to be positive for mass, as government policies (such as concession terms) become more aligned to growing mass. We raise price targets by an average of 19%, as we move sector multiples to about 0.6SD above the long-term mean. We upgrade Wynn Macau from Neutral to Buy on its premium mass shift and relative value. Our sector top picks are Sands China, MLCO, MID, and Wynn Macau.

Expect the mass market to fully recover and return to growth

Looking beyond the border issue, which we think centres around timing, we believe the mass market (about 90% of the industry's EBITDA) can fully recover, as it did from the 2014-15 downturn. We believe the drivers of the mass market have been structural, including positive wealth effects, still low penetration versus the region, improved infrastructure connection to Macau, and growth in supply of tourism assets in Macau (18% higher hotel rooms in 2022E than 2019). We expect these structural forces should continue to drive the mass market post COVID-19.

Expect full EBITDA recovery in 2022E 

We cut 2021E/2022E Macau GGR forecasts by 23%/4% to reflect weaker-thanexpected run rates YTD, disrupted by China's spike in COVID-19 cases in January. For 2021E, we expect mass to get back to 67% of the 2019 level (previously 85%) and VIP at 44% (previously 60%), assuming further border policy relaxation from mid-year. The GGR cut leads to a 36% drop in 2021E EBITDA (49% of 2019 EBITDA). We leave 2022E estimate largely unchanged and expect EBITDA to fully recover to pre-COVID-19 levels.

Valuation: top picks Sands, MLCO, MID, Wynn Macau 

The sector is trading at 30.6x 2021E and 12.8x 2022E EV/EBITDA versus the historical 12-month forward average multiple of 12.8x. The market appears to have largely priced in a normalisation as the sector is trading at long-term mean multiples on a 2022E basis.

However, the re-rating potential, driven by supply growth outlook, mass mix shift and likely policy support for mass, are yet to be priced in, in our view.