GGRAsia – Macau catalysts distinct from other China sectors: MS

Macau catalysts distinct from other China sectors: MS

May 24, 2023 Newsdesk Latest News, Macau, Top of the deck

While Macau gaming stocks have underperformed Hong Kong’s Hang Seng Index by 7 percent so far in May, there are reasons why investors should categorise them differently from other equities with exposure to China consumer markets, suggests a report issued on Tuesday by the Morgan Stanley banking group.

The institution made reference to a sustained sell-off by investors earlier this month, despite the improving trading situation in the Macau casino market since easing of Covid-19 countermeasures in early January.

“The market is concerned about China consumption and consumer health industries and gaming stocks have been sold off with other consumer discretionary names,” observed Morgan Stanley, adding that there are “key differences” between Macau and broader consumer discretionary names.

The paper is based on work by Morgan Stanley Research, and draws on data from Refinitiv, the financial and risk assessment business of Thomson Reuters.

Morgan Stanley highlights as positives for the Macau casino sector, first: upward revisions for industry earnings, provided by a number of institutions. Morgan Stanley’s own estimates on operator earnings before interest, taxation, depreciation, and amortisation (EBITDA) are “10 percent to 20 percent higher than Refinitiv consensus for 2023 and 2024, suggesting more upside,” said the banking group.

Macau’s casino GGR stood at MOP49.36 billion (US$6.12 billion) in the first four months of 2023, up 141.4 percent from a year earlier. The tally for the four months to April 30 already beat the aggregate GGR for last year.

The institution also raised Macau gaming industry estimates for 2023, “to reflect faster recovery” so far this year.

The bank now expects aggregate 2023 corporate EBITDA of just below US$6.90 billion, up 3 percent on its previous forecast, and 20-percent higher than market consensus.

The second Macau-market upside in the view of Morgan Stanley, is that the city’s recovery is “behind other markets” for gaming such as Las Vegas, Nevada in the United States, and Singapore – both of which eased Covid-19-related restrictions before Macau.

“We expect Macau to catch up over the next few quarters, which is not in consensus numbers, we believe,” added Morgan Stanley.

A third positive, said the institution, was that higher financial leverage in an ‘up’ cycle was actually a positive factor for Macau gaming stocks.

The authors stated: “Macau gaming stocks have added US$22 billion of net debt, but with more than 10 percent free cash flow yield, the deleveraging could help the equity values rise much more than cash-rich domestic consumer stocks.”

“While Macau gaming stocks stopped paying dividends during Covid, we expect they will start paying after deleveraging,” they added. “Macau gaming could provide one of the highest dividend yields (6.8 percent) if the industry resumes dividends, which could come earlier if recovery momentum continues to hold up strongly.”

The dividends topic was discussed in a Tuesday webinar by credit assessor S&P Global Ratings Inc. It mentioned 2024 as a more likely scenario for the dividend issue to be addressed again.