GGRAsia – Inflated estimates pressure Macau casino stocks: Nomura

Inflated estimates pressure Macau casino stocks: Nomura

Jul 03, 2018 Newsdesk Latest News, Macau, Top of the deck

Macau casino stocks took a tumble in Tuesday morning trading after official data showed slower-than-expected gross gaming revenue (GGR) growth in Macau last month. The Hong Kong Stock Exchange was closed on Monday to mark the anniversary on Sunday, July 1, of the establishment of the Hong Kong Special Administrative Region.

Macau’s June GGR rose by 12.5 percent year-on-year, to approximately MOP22.49 billion (US$2.81 billion), according to data from the city’s regulator, the Gaming Inspection and Coordination Bureau. Up until last week, the investment community had been expecting year-on-year expansion of circa 20 percent.

On Monday U.S.-listed stocks of casino operators involved in the Macau casino market also fell - a movement that was linked by some analysts to the official data released on Sunday.

“We believe that today’s weakness in the Macau stocks is largely related to high investor and analyst expectations caused by inflated consultant estimates, which have now been proved wrong for more than several months,” said Japanese brokerage Nomura in a note on Monday.

Shares of Hong Kong-listed Macau casino operators closed lower on Tuesday, falling between 6.2 percent and 7.9 percent. On Monday in New York, shares of U.S.-based Wynn Resorts Ltd were at the close down nearly 7.9 percent, while Las Vegas Sands Corp and MGM Resorts International dropped 6.7 percent and 3 percent, respectively. Nasdaq-listed American depository shares of Melco Resorts and Entertainment Ltd closed down 10.6 percent, the most in nearly 19 months.

The role of so-called “channel checks” in forecasting the monthly performance of the Macau casino industry’s GGR has been called into question by several brokerages following a miss on June GGR year-on-year growth compared to some estimates. In May, the downward surprise had been similarly pronounced.

“Recent conversations with several Macau operators suggest that the weaker-than-expected growth is due to several issues, some of which are non-recurring: both junkets and operators have commented about a streak of bad hold; several operators have cited a loss of high-end gamblers to the World Cup; and a plateauing in VIP volume,” said Nomura analysts Harry Curtis, Daniel Adam and Brian Dobson.

The brokerage also noted that slower growth in the VIP segment “affects growth” in the premium mass segment.

“Another recent headwind for operators with a stronger VIP market share (such as Wynn) has been the reenergised effort of Las Vegas Sands to increase its VIP share [in Macau] at a time when the VIP growth rate is slowing,” stated the Nomura team.

In comments at an investment conference in New York City in May, Robert Goldstein, president and chief operating officer of Las Vegas Sands, said that notwithstanding the group’s recent profitability it was looking to get a “bigger slice” of the Macau VIP gambling market.

Commenting on Las Vegas Sands strategy, the Nomura analysts said: “Our sources suggest that Las Vegas Sands has been aggressive with junket operators, offering better-than-market terms to stimulate demand. This strategy is unlikely to work in the long run, given the razor-thin margins on VIP. In the near term, it could shift VIP market share, although the positive impact on EBITDA [earnings before interest, taxation, depreciation and amortisation] could be either small or temporary.”

The Japanese brokerage expects Macau casino GGR to grow between 9 percent and 12 percent in the second half of 2018.

“GGR growth above 15 percent increases the risk of increased government scrutiny. Looking ahead to next year, we think sustained growth of 12 percent should ease investor concerns about increased government restrictions,” said the Nomura team.