{"id":75194,"date":"2023-10-21T07:33:00","date_gmt":"2023-10-21T11:33:00","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/studio-city-international-a-pure-play-on-macaos-reopening-and-recovery-nysemsc\/"},"modified":"2023-10-21T07:33:08","modified_gmt":"2023-10-21T11:33:08","slug":"studio-city-international-a-pure-play-on-macaos-reopening-and-recovery-nysemsc","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=75194","title":{"rendered":"Studio City International: A Pure Play On Macao\u2019s Reopening And Recovery (NYSE:MSC)"},"content":{"rendered":"
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After almost 3 years of full lockdown, Macao\u2019s casinos finally opened in full in 2023. Their economy is mostly founded on tourism and in particular gambling tourism. Macao is known for its casinos and can be considered the Las Vegas of Asia. Studio City International Holdings (<\/span>NYSE:MSC<\/span>) owns and operates one of the largest casinos in Macao, with more than 250 tables, and a resort, with more than 1,600 luxury hotel rooms. Of course, they will be a main and direct beneficiary of this reopening and the (strong) comeback of tourism in 2023 and beyond. We believe there is an opportunity under certain conditions and assumptions, but we also need to be conservative considering the high debt load that weighs on the company.<\/span><\/p>\n

The business and the lockdown years<\/h2>\n

As everyone knows, Covid did no good to the leisure industry. Macao in particular adopted a very strong lockdown policy for much longer than many other countries, in a policy alignment with China. Studio City International suffered a lot as it lost nearly all its revenues, while costs were still there to be paid. We need to look at how this affected the company and its balance sheet to understand the implications for future growth and valuation.<\/span><\/p>\n

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Revenue (Seeking Alpha)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

These are revenues during the last 8 years. After a small pickup in 2021, the lockdowns came back in 2022 with a harsher-than-expected China policy on Covid. This forced MSC to continue to use debt to finance the increasing cash burn. Since 2019, net debt increased by around $1 billion, and this of course translates into much higher interest expense.<\/p>\n

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Debt (Seeking Alpha)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The relatively good news is that the debt structure is very clean and simple. Plus the company was wise enough to issue much debt at fixed interest in 2021, while interest rates were very low.<\/p>\n

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Debt Structure (Latest earnings filing)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

And indeed we see that 2021 5% notes of more than $1 billion make up around 40% of the total debt outstanding. The company relies very little on expensive revolvers or other forms of short-term debt. This takes away a lot of uncertainty over interest payments, and makes everyone\u2019s job much easier. The average cost of debt is then in the 5-6.5% range, which makes it also relatively cheap to finance close to $3 billion of high-risk assets like casinos and resorts.<\/p>\n

The way forward: forecasting the future of MSC<\/h2>\n

We believe that in the current valuation of MSC there are several assumptions embedded. First of all, the market expects higher revenues compared to the pre-Covid period. Since tourist numbers are not expected to explode compared to 2019, this means that the gains must come from pricing power. Studio City must show its ability to align the prices to the inflationary wave that we experienced in the last 2 years, and it must thus pass on the increased costs.<\/p>\n

On the other hand, the very rapid comeback in touristic activity is a big help in restoring confidence in the stock.<\/p>\n

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Macao Tourist Statistics (Tradingeconomics.com)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

This shows the tourist arrivals over the last 25 years. After a huge decline and depression in the 2020-2022 period, 2023 started as the best year since 2019. This will definitely be reflected in the year-end\u2019s results.<\/p>\n

However, we remain focused on margins. To justify the new $3 billion valuation (EV), MSC will need at least $300 million of EBITDA to remain in line with the industry\u2019s average multiples. For the last 6 months ended June 30, 2023, the company only reported around $30 million of EBITDA, well far away from that target.<\/p>\n

On the cash flow side, there is also much work to do. Changes in WC contributed to some pressure on cash from operations, which are still negative by some $30 million. This is on top of almost $70 million of Capex for the six months ended in June.<\/p>\n

But we believe the market is right in expecting much higher margins and revenues, and we will try to forecast these into the next years. Our assumptions for the model are the following:<\/p>\n