There is a possibility of a summer rally in Macau gaming stocks, driven by a number of potential catalysts, says a note from Karen Tang of Deutsche Bank AG in Hong Kong.
“Since peaking in late March, Macau stock prices have fallen 17 percent as the sector entered a slow season in the second quarter of 2016 with gross gaming revenue (GGR) down 8 percent quarter-on-quarter,” wrote Ms Tang in her analysis carrying Sunday’s date. “In both of the last two years, Macau stocks had short-term summer rallies in July-August as GGR picked up over the summer holiday,” she added.
“Note that we are not touting the summer pickup [in demand] as a sign of cyclical recovery. But as seasonality is more prominent this year, we think a strong summer can already give a boost to investor sentiments,” wrote Ms Tang.
She suggested three catalysts that could drive an improvement in Macau investor sentiment. They were: that the six-year low seen in June’s casino gross gaming revenue (GGR) would in likelihood be followed by an improvement in July; the opening respectively of Wynn Palace from Wynn Macau Ltd (scheduled for August 22) and the Parisian Macao from Sands China Ltd (scheduled for mid-September); and that the second quarter 2016 results of the operators, due to be filed soon, would in likelihood affirm the growing importance of higher margin mass-market gambling versus the high stakes VIP variety.
Ms Tang wrote, regarding probable second-quarter performance market wide in Macau: “EBITDA [earnings before interest, taxation, depreciation and amortisation] margin will climb 60 basis points to 20.7 percent as stronger mass [gambling] improves mix.”
She said this was likely despite the bank estimating that second quarter industry EBITDA would fall 4 percent quarter-on-quarter on the back of 8 percent quarter-on-quarter lower GGR.
A note on Tuesday from brokerage Sanford C. Bernstein Ltd indicated that the Macau market had seen an uptick in the proportion of VIP players directly managed by the house rather than via a junket. It added that this might also have increased Macau casino operators’ exposure to credit risk, given that credit for VIP play and collection on player losses has traditionally been administered via the city’s government-registered gaming promoters – also known as junkets – and their collaborators.
“We believe the recent expansion of casino receivables relative to gaming revenues has more to do with the growing proportion of the direct VIP business as a result of a shaper decline in junket VIP,” wrote analysts Vitaly Umansky, Clifford Kurz and Simon Zhang.
“Even so, Macau casino operators appear to be managing the risks prudently and the direct VIP business remains a more profitable business relative to junket VIP despite higher provisions for bad debt,” they stated, adding that “the impact of rising provisions from direct VIP is relatively small on overall earnings for most casino operators given that total VIP EBITDA represents only about 20 percent of EBITDA for the industry”.
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"The [Macau] government has a lead in this subject in regards to what should be done after the [gaming] concessions expire. We will be first listening to what the government will say”
Ambrose So Shu Fai
Vice-chairman and chief executive at Macau casino operator SJM Holdings