Hong Kong-traded Macau gaming stocks could see aggregate market capitalisation “double” from current levels by “end-2022”, to US$200 billion, suggests the research arm of investment bank Morgan Stanley.
Analysts came to that upbeat view while also factoring in potential for major market disruptions. Those included what might happen regarding Macau’s gaming rights refreshment process, and possible competition to the Chinese casino hub from other jurisdictions in the Asia-Pacific region.
Five of Macau’s six casino licensees are quoted on the Hong Kong Stock Exchange. A sixth, Melco Resorts and Entertainment Ltd, is listed only via New York in the United States.
Morgan Stanley said its market-cap estimate for the relevant Macau gaming operators was achievable if they were able to “rerate” like Sands China Ltd, the Macau unit of Las Vegas Sands Corp, or like high-growth Asian real estate investment trusts “as they start returning all FCF [free cash flow] to shareholders”.
“Plenty of Cash Flow”, the 2019 edition of Morgan Stanley Research’s annual primer on the Macau gaming industry, also estimated that the city’s casino gross gaming revenue (GGR) could reach US$50 billion by 2022, supported by infrastructure developments, an increase in the supply of hotel rooms, improved gaming amenities, a greater number of visitors from China’s “lower-tier cities” and an increase in the spending power of Chinese consumers.
Macau GGR could reach “US$50 billion by 2022,” implying an “8 percent” compound annual growth rate, said the report.
This would be in likelihood driven by annual “visitation and spending-per-capita growth of 7 percent and 6 percent respectively,” wrote Morgan Stanley Asia Ltd’s equity analyst Praveen Choudhary and research associate Jeremy An, and Morgan Stanley and Co LLC’s equity analyst Thomas Allen in Wednesday’s report.
The analysts noted a current growth cycle in Macau gaming stocks had “just started”. They added that a previous peak in the value of Macau gaming names – that had also marked the end of a five-year growth cycle – was seen in April 2014. At that time market capitalisation of Hong Kong-listed Macau names had reached a record US$196 billion. At that time the then Melco Crown Entertainment Ltd still had a listing in Hong Kong, although its main listing was in the U.S.
As of 2019, Macau’s gaming business is still significantly supported by VIP play, despite efforts by the city’s government to encourage local operators to diversify their tourism offerings. The risk attached to the high-roller market was illustrated by the slump in Macau GGR that began in June 2014 and extended for two years, a situation that gaming industry analysts said coincided with an anti-corruption drive in mainland China.
Bull and bear factors
“In this [current] cycle, we think the quality of growth will be better, as more than 80 percent of the forecast profit should from the mass-market segment,” stated the Morgan Stanley team in their latest Macau primer report.
“Along with the opening of the Hong Kong-Zhuhai-Macau Bridge in October 2018 and the high-speed rail extension to Hong Kong, we expect increased visitation potential from China’s lower-tier cities,” the analysts further noted, addressing the issue of new tourism markets available to Macau even as customer penetration rates have risen in mainland places – such as Guangdong province – neighbouring the casino centre .
“We also quantified the bear case for Macau with two of the biggest disruptions (license renewal and regional competition),” said Morgan Stanley.
There could be a “potential downside” of as much as “37 percent” on market capitalisation, stated the institution, noting it took as the starting point for its numbers a “base-case value of US$126 billion”. Morgan Stanley also noted there could be as much as a “29 percent downside” from the sector’s current Hong Kong market capitalisation of US$114 billion.
The Macau government announced in March it was extending the current gaming concessions of SJM Holdings Ltd and MGM China Holdings Ltd to June 26, 2022, from the original finish date of 2020.
“This confirms to us that the licence risk is overblown, and while there will be a rebidding process before the June 2022 expiry,” stated Morgan Stanley. The bank added it considered “unlikely” a scenario where any of the current six operators would “lose” their gaming rights “or have to pay significant renewal fees”.
Regarding market competition, “the biggest threat should come from Japan, which currently enjoys wagering of more than US$200 billion per annum in pachinko buy-ins,” stated Morgan Stanley.
But the institution added that despite the basic legalisation process having been passed by Japan’s parliament in 2017 and a follow-up implementation bill nodded last year, “we expect the first casino may not be ready before 2024”.
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Francis Lui Yiu Tung
Vice chairman of Macau-based casino operator Galaxy Entertainment Group