Macau gaming sector stocks had “until very recently” been “abandoned by investors” and had “massively underperformed” gaming and lodging peers covered by JP Morgan Securities LLC, noted a Monday report from the institution. But, “as we head into 2023, we think Macau has the most upside within our coverage universe,” suggested the investment bank.
The lack of investor interest in Macau names had been due to “extremely limited” opportunities to travel to Macau from the Chinese mainland,” under “China’s zero-Covid policy”, stated JP Morgan.
Other factors had been “investors’ concerns over licensing renewal risk and related terms,” including the possibility of “mandated uneconomic capital expenditure” being required by bidders in the public tender for new, 10-year concessions, added the paper from analysts Joseph Greff, Omer Sander, Daniel Adam, and Ryan Lambert.
Prior to Saturday’s announcement by the Macau authorities that the six incumbent operators had each been provisionally awarded a fresh concession, there had been “extreme bearish sentiment” among investors regarding Macau gaming stocks, observed JP Morgan.
The stock prices of Hong Kong-listed firms directly linked to Macau casino operations rose in Monday trading, following the Saturday tender result announcement by the Macau government. Nonetheless, the amount of spending that each successful bidder will need to pledge over the lifetime of the new permits is yet to be disclosed.
The brokerage said that while the report’s authors were “far from being experts on China policy,” they took the view that what mattered was moves China makes in practical terms.
“We subscribe to the idea of following what China does, i.e., recent steps to loosen restrictions, versus what China says (adherence to zero-Covid policy in various public commentary),” wrote the authors.
“We know that in various and small sample sizes, that when Macau is accessible, demand is strong,” observed the analysts, though they added that recently the chances for the market to enjoy an extended run of consumer demand had been “few and far between”.
JP Morgan said that while Macau’s market-wide gross gaming revenues (GGR) were “just 10 percent to 15 percent” of pre-pandemic levels, they were nonetheless up from the equivalent of 5 percent to 10 percent of pre-pandemic performance as seen “a couple of months ago”. This indicated “very gradual” improvement.
“We think there is more room for recovery, particularly within mass GGR in 2023, when we think GGR can approximate 60 percent of 2019 levels, and improving further in 2024, to 90 percent of 2019 levels. We’d like to think these numbers are rooted in conservatism,” said the JP Morgan team.
