A change in China’s investment regulations, rather than market sentiment, could be a key value driver for Macau gaming stocks, suggests a Monday note from Japanese brokerage Nomura.
Nomura said Macau had recently seen a “strong boost to sentiment; but little change in fundamentals”. It said a price rally in Macau gaming stocks had been supported by three events: casino gross gaming revenue (GGR) growth turning positive in August; the Macau government announcing its five-year development plan; and the China Insurance Regulatory Commission allowing Chinese insurers to invest in Hong Kong-listed equities.
Nomura stated: “The most significant change, in our opinion, is the regulatory change allowing Chinese insurers to invest [in] Hong Kong-listed equities as our China strategist believes companies with strong cash flows and dividends, like Macau stocks, are likely to be key beneficiaries.”
A note last week from Deutsche Bank AG had suggested the Macau casino market was – following 26 months of year-on-year declines in casino GGR – at the beginning of a recovery driven by play in the mass segment.
Deutsche Bank had said that in the second quarter, Macau’s mass-market GGR was up 4 percent year-on-year. The local regulator, the Gaming Inspection and Coordination Bureau, had reported mass-market baccarat GGR as only having grown by 0.2 percent in the second quarter.
A number of investment analysts have said that disparities between official numbers for the mass segment and those from the investment community relate to an under-reporting of mass play in the gaming bureau figures, due to “table reclassification” by operators so that patrons can smoke at the table.
Analyst Christopher Jones of the Buckingham Research Group Inc said in a Monday note – after meeting senior management from Macau operators Galaxy Entertainment Group Ltd and MGM China Holdings Ltd: “While both managements are optimistic about the longer-term, they were hesitant to call the bottom on Macau at this point, wanting to see how the market handled all the incremental supply.”
The Parisian Macao, the latest Macau gaming and entertainment resort from Sands China Ltd, was due to open to the public on Tuesday (September 13). The launch comes only weeks after the opening of the US$4.2-billion Wynn Palace, promoted by Wynn Macau Ltd, prompting some analysts to fret about the risk of oversupply in the current market.
A Monday note from brokerage Sanford C. Bernstein Ltd said that – based on unofficial industry data so far for this month – the institution expected September to post year-on-year GGR growth market wide.
“Our channel checks indicate that Macau’s GGR month-to-date is [about] MOP7.3 billion [US$913.6 million], implying an ADR (average daily rate) of [about] MOP663 million,” wrote analysts Vitaly Umansky and Yang Xie.
“We currently estimate that September GGR will… [be] +8 percent to +11 percent,” they said, based on the assumption of an average daily rate of MOP590 million to MOP620 million for the remainder of the month.
“For second half 2016, we estimate that GGR will show +3 percent year-on-year growth (VIP -9 percent and mass +15 percent),” they added.
David Katz and Brian Davis of brokerage Telsey Advisory Group LLC, said in a Monday note: “September GGR is up against a comparison of a 33.0 percent decline [for the prior-year period], which is slightly harder than August’s 35.5 percent decline. Comparisons will become marginally more challenging in October and December when the prior-year declines were 28.4 percent and 21.2 percent, respectively. We note that August was the first month of fundamental GGR growth in Macau since May 2014.”
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"VIP growth [in Macau] is roaring back on the heels of last year’s economic stimulus – but we think this could stall once the effect of the stimulus and the Chinese housing bubble wears off – as it did in 2013-14"
Cameron McKnight and Robert Shore
Analysts at Wells Fargo Securities