Macau’s gross gaming revenue (GGR) from its casinos is likely to shrink this year, but shares in the casino operators are worth buying – and holding – says JP Morgan in its preview of the year ahead in the world’s largest single-jurisdiction casino market by GGR.
The stockbroking arm of the investment bank issued a note on Sunday that acknowledged the “cyclical slow-down” in the mainland Chinese economy would in likelihood curb business in Macau casinos this year. But the brokerage said that had already been recognised by investors in terms of Macau casino operator share prices.
“Most of the negatives are well known and already (if not overly) priced-in,” wrote the brokerage’s Hong Kong-based analysts DS Kim and Sean Zhuang.
JP Morgan said it was maintaining its conviction in its earlier forecast that annual Macau GGR would shrink by 1 percent this year. The brokerage foresaw revenue in the VIP market contracting 6 percent, and mass-market revenue expanding by 3 percent.
JP Morgan thinks investors in Macau casino stocks should keep long positions. Its favourite stocks are Sands China Ltd and Wynn Macau Ltd. “The trends in Macau have been surprisingly resilient if not strong – despite [a] (very) challenging macro backdrop and ever-growing concerns over [a] downturn.”
Of the city’s casino companies, the analysts wrote: “Granted, these stocks are (still) tethered to macro factors and overall market volatility, but we see good values and believe the risk-reward is compelling for patient investors.” In particular, the stockbroker likes the look of shares in Wynn Macau.
“Even the sceptics would agree that the quality of Wynn’s assets is among – if not the – best in the global gaming industry (e.g. product offering, service quality, brand name etcetera), which is supported by the best-in-class management team,” the note stated.
“Its historical-trough earnings before interest, tax, depreciation and amortisation [EBITDA] multiple of 10 times is too attractive to ignore, in our view. We see an opportunity to purchase the best-quality asset at a great bargain.”
JP Morgan said, regarding Sands China: “Sands remains a low-risk, solid return investment opportunity in Macau.” “We look at Sands as an attractive way to play the structural mass story given its outsized exposure to this segment (mass and non-gaming driving 90 percent plus of EBITDA)…”
This was “not to mention its unparalleled dominance in mass with ample room inventory and powerful cluster. Moreover, this stock is essentially VIP-risk-free (junkets comprising about 5 percent of its EBITDA),” added the institution.
The brokerage said attention should be paid to the earnings reports by Macau casino operators for the fourth quarter of last year, which would begin to appear toward the end of this month.
“Eyes will be on qualitative comments on [the] demand environment and [the] 2019 outlook, especially considering recent GGR beats that bucked the trend of deteriorating consumption in China. We would expect management’s tone to be ‘better-than-feared’ and ‘cautiously optimistic’, in that mass and non-gaming demand has been robust with no clear sign of [a] downturn, and that this should be the pillar of likely resilient profit and cash flow momentum in 2019, cushioning the negatives from [an] anticipated VIP slowdown,” the note said.
At the beginning of the month, the brokerage had stated a period of double-digit annual growth in GGR had probably ended for the time being. But the house remains constructive on Macau gaming companies, arguing that it expected in 2020 a return to an annual GGR growth rate in excess of 10 percent.
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“We see that basically the ‘golden’ periods [for Macau's casino industry] are all concentrated in the second half of this year”
Lei Wai Nong
Macau’s Secretary for Economy and Finance