Thursday, August 18, 2022

Macau stock rally seen losing steam

Macau’s gaming stocks have rebounded to trade at two-year highs, tracking the recovery in gross gaming revenue, however analysts warn against over optimism, saying growth may be nearing its peak, at least in the short term.

Gross gambling revenue jumped 13 percent in Q1 this year, led by a surprising gain of almost 17 percent in VIP revenue, which returned to positive territory for the first time in 26 months in December.

These gains have added further steam to the rally in Macau’s listed gaming stocks. Wynn Macau is up more than 43 percent over the past 52 weeks; Sands China up 25 percent; Galaxy Entertainment up 52 percent; MGM China up about 50 percent; SJM Holdings up 32 percent and Melco Resorts up 43 percent. During the same period, Hong Kong’s Hang Seng Index has gained about 12 percent.

Although still far short of their late 2013 peaks, the share price gains have been impressive. Analysts have also been revising upwards their forecasts for annual GGR, which could provide further momentum.

Morgan Stanley has raised its full-year GGR forecast to 12 percent from 9 percent, while Fitch Ratings has also set its estimate at 12 percent. Aegis Capital Corp. has upped its forecast to 11 percent from 9 percent.

However, analysts say the stocks may now be fairly valued and may lack further catalysts for growth. The boost from the surprise recovery in VIP revenue is likely to wane in the near future, in particular due to the close correlation between the VIP sector and China’s Producer Price Index, which they say is now near its peak.

The PPI peaked in February at 7.8 percent and Morgan Stanley economists expect it to slow down to zero by end-2017.

“Macau gaming stocks have underperformed the Hang Seng Index in Q2 every year since 2012,” Morgan Stanley said in a note. “We expect high valuation, a seasonally weak quarter and a peak in China’s PPI to be medium-term risks.”

JP Morgan analysts agree, saying the cyclical boost from China’s macro backdrop (e.g., liquidity easing, property rally, commodity price hikes) is waning or even rolling over.”

“As the sector runs out of positive catalysts, we think investors will focus more on the individual operator’s execution and resulting earnings revision potential, making stock calls increasingly more important,” it said.

When it comes to the individual operators, analysts cite Melco Resorts as their top pick, saying its valuation at 10X EV/EBITDA for 2018 is attractive.

Union Gaming recently raised its rating to Buy, upping its price target to $26 from $18.

“We think MLCO has been a share taker in Macau and is outperforming in the ongoing VIP recovery,” analyst Grant Govertsen wrote. “At the same time with market-wide mass GGR growing 11 percent or better for the third consecutive quarter we look for this trajectory to continue and for MLCO to be a market rate (or better) grower for the balance of 2017.”

Wynn Resorts is also highly favored, especially in the near term given its strong VIP focus, with the concern about the cannibalization of its peninsula property due to last year’s opening of the Wynn Palace fading.

“For Wynn, we project 38 percent EBITDA growth in 2017, with Palace continuing to ramp up through 2017,” Morgan Stanley, which has an overweight rating on the stock said.

The firm also rates Galaxy Entertainment as overweight, with Sands China and MGM China at equalweight and SJM Holdings at underweight.

It says Sands is fairly priced given a slower projected rate of EBITDA growth of just 8 percent for 2017, while any bounce for MGM from its upcoming opening of MGM Cotai later this year is largely priced in, given a 66 percent surge in the stock in 2016.

SJM, which will be the last to open its property on Cotai in 2018, is likely to continue to suffer from a loss of market share up until that time, analysts say.

“New resort openings on the Cotai Strip should help to extend revenue and EBITDA gains through 2018 as it features more hotel and table capacity as well as non-gaming attractions,” Bloomberg Intelligence analyst Margaret Huang said.

Despite the recent focus on VIP, Huang points out that it will continue to be the mass sector that underpins Macau and will likely return to be a stock price driver.

“It will be critical to track the mass-market segment's growth as it supports long-term, steady revenue and generates higher profits. VIP may also expand, yet it will be more volatile and it also faces more competition as junkets consolidate and select operators add more facilities to compete for these high rollers.”

“All operators are shifting to Cotai in hopes of capturing a higher share of the mass-market business. Late entrants may face more hurdles as other peers have already ramped up and pricing may be more difficult given higher capacity.”

Although analysts are lukewarm on the prospect for Sands this year, they say in the future it is likely to benefit from its strong mass market focus and dominance of the center of the Cotai strip.

“We believe LVS is looking into FY18 and beyond in Macau, as it prepares for the opening of the ferry terminal in May and more importantly, the open of the Hong Kong-Zhuhai-Macau bridge, in FY18,” The Buckingham Research Group said. “While the infrastructure upgrades should benefit the entire market, they should benefit LVS the most, as the leading mass market operator, with the most hotel rooms and meeting/convention space.”



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