JP Morgan Securities (Asia Pacific Ltd) says it is “not worried” by a Friday correction in Macau casino stock prices, which fell between 2.5 percent and 12.7 percent at the close of trading on that day.
The brokerage said more than 40 investors had contacted the institution, coinciding with an average 6 percent correction in Macau names versus the 2 percent decline seen for Hong Kong’s Hang Seng Index on Friday.
The Macau correction was “a head-scratcher because Macau operators as a group have actually delivered bang in-line results in third quarter versus consensus,” wrote analyst DS Kim, Mufan Shi, and Selina Li.
“We have not found anything too worrying from the third-quarter earnings so far (including Wynn [Macau Ltd]) and view the correction as (very) overdone,” they stated in a Friday memo.
The Friday stock correction coincided with Wynn Macau Ltd and Galaxy Entertainment Group Ltd respectively reporting on Thursday, third-quarter earnings before interest, taxation, depreciation and amortisation (EBITDA) that were below market consensus judged sequentially. The quarterly EBITDA of Melco Resorts & Entertainment Ltd, reported in its results issued on Tuesday, had also been below market expectation quarter-on-quarter, indicated JP Morgan’s research note.
Business trends “were still very encouraging with mass gross gaming revenue [GGR] rising 12 percent quarter-on-quarter to drive 15-percent quarter-on-quarter growth in industryEBITDA in the third quarter, which, again, is in-line with pre-print expectations,” stated the brokerage’s team.
The institution added that fourth-quarter performance in mass-market casino GGR was on course for 12 percent growth sequentially, “well above historical seasonality of +5 percent,” which the brokerage said was the average quarter-on-quarter uptick during the period 2014 to 2019.
“This suggests the reopening recovery is still ongoing, which we think should cushion cyclical headwinds from China macro/consumption to some extent,” it added.
JP Morgan stated: “This makes Macau’s earnings visibility actually higher than some other consumer verticals, in our view.”
Its analysts stated: “If we were to nitpick, third-quarter EBITDA margins overall came in a tad lower than expected.”
JP Morgan also observed that the “majority” of the operating expense increase seen in the market in the third quarter could be “attributed to… openings”. These were: Galaxy Macau’s Phase 3, i.e., the Raffles at Galaxy Macau hotel in July – initially for certain invited customers – and Andaz in September – though the full room inventory will only be in the market by Chinese New Year, which is February ; and W Macau hotel at Melco Entertainment’s Studio City, with public bookings from September.
The brokerage also gave some commentary on player reinvestment rates mentioned in a number of quarterly earnings calls.
“Reinvestment is industry jargon referring to ‘freebies provided to premium mass players’, i.e., casino comps (complimentary goods and services, such as rooms, food and beverage, etc.) and promotions for premium mass,” wrote the JP Morgan team.
“The so-called reinvestment rate should be calculated via reinvestments as percentage of theoretical (theoretical win = bets-per-hour x length-of-play x theoretical-win-rate), for each individual patron and their tiering based on historical spends,” said the institution.
“The problem is, outsiders do not have access to the player database, and there is no way that we (or investors) can accurately analyse the reinvestment rate.”
(Updated November 13, 10.23am)
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