The rally in stock prices of Macau-related gaming operators since their January bottom was “justified” as “fundamentals are stabilising”, says a new report from Morgan Stanley. But after an average share price rebound of over 40 percent, “valuation is not compelling any more,” the investment bank adds.
“Macau’s daily gross gaming revenue (GGR) has been tracking around MOP600 million (US$75 million) for the last six months; minimum bets are not declining; VIP revenue showed its first quarterly growth since 2013 in the fourth quarter of 2015 sequentially; and EBITDA [earnings before interest, taxation, depreciation and amortisation] margin has improved thanks to better mix and cost-cutting,” analysts Praveen K. Choudhary, Alex Poon and Thomas Allen wrote on Monday.
“But without growth or dividends in the near term, the industry may not re-rate further: for growth, the industry needs growth in either visitation or spending per capita,” they added.
The annual tally of visitors to Macau fell 2.6 percent year-on-year in 2015, according to official data. For full-year 2015, visitor arrivals totalled 30.71 million, down by around 811,000 year-on-year.
February’s casino GGR was 0.1 percent down from the same month a year earlier. It was the best monthly performance, in terms of year-on-year decline rate, in the last 21 months.
Morgan Stanley stated that the while the recent rebound in stock prices of Macau-related gaming operators was justified, “valuation is not compelling after a 40 percent rebound from January’s trough.”
The investment bank team added: “We think stock prices are reflecting too much optimism from the Chinese government’s supportive policy, which may or may not help fundamentals meaningfully.”
China’s central government has pledged to introduce measures to help Macau’s economy to rebound, after gross domestic product contracted by 20 percent in 2015, mainly due to the ongoing slump in the city’s gaming industry. Beijing has yet to unveil concrete measures, although it recently mentioned a potential “optimisation” of the individual visa scheme to Macau.
Morgan Stanley’s note added that some potential risks facing the industry “include rise in competition from overcapacity and thus margin decline, limited cost-cutting potential in 2016, and potential smoking ban in VIP rooms.”
Macau legislators approved in July last year the first reading of a government bill that proposes the abolition of casino smoking lounges and a full smoking ban in VIP areas. The bill is now at committee stage in the Legislative Assembly.
There has been ongoing discussion among observers of the Macau gaming industry on the topic of market stabilisation. In a March 9 note, Wells Fargo Securities LLC stated it was probably “too early to call stabilisation” in the market. But several senior executives of Macau casino firms have recently highlighted signs of what they regard as stabilisation in the market.
In its Monday note, Morgan Stanley maintained its estimate of a 6 percent year-on-year decline in overall Macau GGR in full year 2016. That decrease will be a result of a decline of 16 percent in VIP revenue, partially compensated by an increase of 4 percent in the mass-market segment, it stated.
Macquarie raises sector
On Thursday, Macquarie Capital Ltd – regarded by some industry observers as conservatively cautious in its analysis of Macau gaming – raised its outlook on the city’s casino industry.
It upgraded its full year 2016 GGR forecast for Macau to a decline of 6 percent in year-on-year terms. Its prior estimate pointed to a full year decline of 13 percent.
“We expect Macau GGR will enter a third year of decline (-6 percent) in calendar year 2016 (estimate) and flat growth in calendar year 2017 (estimate) before a low-single-digit L-shaped recovery in calendar year 2018 (estimate),” analysts Kai Tan, Maggie Jiang and Jensen Hui wrote.
They added: “We raise our Macau gaming sector view from underweight to neutral and suggest investors selectively accumulate shares in April 2016 post the March 2016 GGR release.”
According to media reports, Mcquarie’s Thursday note was one of the reasons leading to a surge in share price of Macau-related gaming operators on Friday in Hong Kong trading. MGM China Holdings Ltd led the gains, with its stocks increasing almost 14 percent, while other operators recorded share gains of between 5 percent and 10 percent.
In its Thursday note, Macquarie had also increased price targets for the six Macau gaming operators.
“We believe Sands China Ltd and Galaxy Entertainment Group Ltd, with well established properties in Cotai, will be the biggest beneficiaries of the [Cotai] project delays announced so far by Wynn Macau Ltd and MGM China,” the brokerage added.
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"If the [Macau casino] concessions are put up for bid, there will also be a lot of giant Chinese companies, some having nothing to do with gaming, which would like to take over these enormously successful casinos”
Professor emeritus at Whittier Law School in California, in the United States, and a visiting professor at University of Macau