Friday, August 12, 2022

Nerves of steel and a long-term view needed for stock investors


Asia’s gaming stocks have been pummelled by the outbreak of the coronavirus, but with signs China may be bringing the disease under control, is it nearing the time to re-enter the market?

The Association of Gaming Equipment Manufacturers Index showed a greater than 13 percent decline in February from the prior month, with every single member in the red as investors sought to assess the fallout from the outbreak.

Stocks in the operators have also taken a beating, with Wynn Resorts down more than 22 percent since its January highs, Melco Resorts & Entertainment is down about 38 percent, while Genting Singapore is off 26 percent and South Korea’s Paradise Co. down 34 percent to name but a few.

Gross gambling revenue in Macau dropped 87 percent in February, after a 15-day closure of the casinos, and is forecast to decline a further 80 percent this month. In a worst-case scenario, under which the situation does not return to normal until the latter half of this year, Bernstein estimates GGR for the year could decline more than 40 percent.

The IRs are now open, but are operating at under half of their strength and visitation is minimal.

Companies with U.S. properties got some relief on Tuesday, with shares rising on news the Trump Administration is considering financial aid for some of the areas of the economy worst-affected, such as tourism and aviation, though it was a short-lived bounce.

With the virus taking hold in Europe and escalating in the U.S., it’s hard to see any short-term respite. However, some analysts are looking for glimmers at the end of the tunnel in Asia.

“The time to buy would probably be the earlier of China lifting its outbound travel ban, or the number of Covid-19 deaths peaking,” said Samuel Yin Shao Yang, associate director at Maybank Investment Bank. He added that President Xi Jinping’s visit to Wuhan this week was an encouraging sign in this direction. 

Outside of the epicenter, in Wuhan, China is gradually easing restrictions, though a rise in the number of imported cases from Chinese returning to the country may give Beijing further pause about ending overseas travel restrictions too quickly. Macau has had no new cases for more than a month and has reportedly discharged its last remaining patient.

Analysts at Bernstein Research said there is still very little clarity on the timing of a potential recovery at present among operators it has spoken to in Macau, however, investors with strong stomachs are starting to take a look at the stocks. 

“With stocks significantly underperforming since the COVID-19 news broke (weekend of Jan 18th), many investors we have spoken with are looking at buying at current valuation levels if there is positive news on the COVID-19 contagion and a clearer sense of when business can get back to normal,” it wrote in a note. “Current investor sentiment on Macau skews bearish, but Asian investors seem more bearish than US/Global investors.”

Bernstein warns there will be significant volatility in the short-term, with a bias towards further declines. However, for investors taking a long-term view it may be time to start accumulating, as Bernstein argues the long-term fundamentals for the Macau market remain strong. 

Morgan Stanley argues that stocks tend to bottom out about two months earlier than visitation and revenue. However, its analysts say they believe the market has priced in a very weak Q1, but not a weak Q2 as yet.

The firm expects GGR to be down 45 percent in Q1 and 26 percent in Q2, before rebounding in the second half to end the year off by about 16 percent. 

“While we expect recovery to be slow, we anticipate VIP to turn around faster and thus we

raise our rating for Wynn Macau to OW (from EW) and downgrade Sands China to EW (from OW),” it says, adding that stock picking is key. It is overweight on SJM Holdings due to the planned opening of the Grand Lisboa Palace in the first quarter of next year and MGM China because of its current cheap valuations. 

Nomura Research analyst Harry Curtis notes, Wynn Resorts tends to have the distinction of being the go-to stock for investors when a recovery is near.

“For value investors,however, we recommend MLCO because of its 400bps EBITDA-multiple discount and strong local management,” he notes.

Outside of the Macau operators, it’s hard to make the case to jump back into the market at present, with many jurisdictions still not getting a grip on the situation. Philippines President Rodrigo Duterte declared a state of emergency this week, as new cases began to ramp up, while South Korea remains one of the worst-affected countries outside of China, even though there are signs infection rates are slowing.

In Singapore, after an early ramp up, the situation appears to have been contained, though in neighboring Malaysia new infections are rising sharply. 

Genting Malaysia said that their year to date visitor arrivals to Resorts World Genting are down by mid teens in percentage terms due to a strong start. Visitor arrivals for Feb 20 on Feb 19 are down 30-40 percent YoY.

There was no official comment from Marina Bay Sands and Resorts World Sentosa but Maybank says interviews it conducted suggest that visitation is down 50-70 percent year on year.

 

Asia Gaming Brief is a news and intelligence service providing up to date market information for worldwide executives on relevant gaming issues in Asia.

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