Macau back in party mood as casinos surge
Crisis? What crisis?
The painful credit crunch, widespread lay-offs and payouts, stalled billion-dollar projects, and near bankruptcies that plagued Macau casino operators in 2008-09 all seem like distant memories.
Today, investors are partying like it was 2007 all over again. Shares in four of the five Hong Kong-listed Macau casino operators hit lifetime highs in the past two weeks.
The five stocks advanced 158 per cent on average over the past year, compared with a 14.4 per cent gain in the Hang Seng Index. That saw them add HK$215 billion in combined market value in the past 12 months, which was more than the record 188.3 billion patacas Macau did in total casino revenue last year.
And Macau's winning streak continues: the shares are up 22 per cent on average in the first three weeks of this year against a 3.6 per cent rise in the blue-chip index. Shares in Sands China, Wynn Macau, SJM Holdings, and Galaxy Entertainment now trade at rich multiples of 20-30 times this year's forecast earnings. Melco International Development is trading at 165 times forecast earnings - implying it will finally swing back to profitability after three years of booking losses.
By comparison, the benchmark market index trades at a humble 11.2 times forecast earnings.
Did somebody say 'bubble'? Nope. 'Despite the recent share price run-up ... we argue that Macau gaming names are still attractive,' JP Morgan analysts led by Kenneth Fong wrote last week in a research note.
Fong expects casino revenue in Macau to surge 29 per cent this year to about US$30 billion. He points out that while Macau shares are trading at 20 times this year's forecast earnings on average, that is still cheaper than the 25 times earnings' multiple at which shares in Chinese consumer stocks are currently changing hands.
Investors have been here before, in the autumn of 2007, when shares in Macau gaming companies were at their peak. That massive run-up saw Las Vegas Sands controlling shareholder Sheldon Adelson rank briefly as the third-richest man in America behind Bill Gates and Warren Buffett. But it all came crashing down in the wake of the financial crisis.
This time around is different, analysts say. Despite the recent run-up, when comparing share prices to underlying earnings, Macau stocks have yet to approach the sky-high valuations they enjoyed in 2007.
Chastened by several near-defaults on mountains of debt, the companies today maintain stronger and more conservative balance sheets. Macau's relentless growth of casino revenue in recent years means ongoing corporate sales and profit levels are several times what they were a few years back.
And the fundamentals of the market have shifted, too. Unlike the building boom of previous years, this year will see only one major casino resort opening - Galaxy Entertainment's HK$14.9 billion, 2,200-room Cotai complex.
Bolstered by abundant liquidity on the mainland, Macau's high-stakes gamblers meanwhile continue to enjoy cheap and free-flowing credit, skewing the entire market more heavily towards the VIP segment. VIP revenue accounts for 73.4 per cent of all casino revenue in the fourth quarter and 72 per cent for the full year last year, compared with 64-67 per cent of the market between 2006 and 2009.
At the same time, the gradual appreciation of the yuan against the US dollar (and thus against the Hong Kong dollar and the pataca) means gambling in Macau has become increasingly 'affordable' in relative terms.
'Any appreciation in yuan against the [Hong Kong dollar] creates buying power for Chinese visiting Macau ... Players essentially will have more capital and will be able to absorb losses more easily,' says Bill Lerner, a Las Vegas-based analyst at boutique consultancy Union Gaming Group.
He calculates that currency appreciation has resulted in around US$3 billion in additional gaming revenue in Macau in the past five years.
Still, there are a number of potential risks that could threaten to bring an end to Macau's winning streak in the coming months. The credit-driven nature of the VIP segment and the city's heavy reliance on mainland gamblers make Macau particularly sensitive to shifts in Beijing's economic policy.
The mainland in recent months has taken steps to rein in liquidity, including twice raising interest rates, raising the amount of cash banks must keep on reserve, and setting conservative informal lending quotas. In addition, the local government in Macau continues to roll out new measures designed to curb the pace of expansion in the casino sector and allow for broader economic diversification. These include strict limits on imported construction workers, tight caps on introducing new gaming tables, and blocking developer's plans for new resorts on Cotai.
But judging by recent trading in casino stocks, investors are not too worried about these risks.
'We think the concerns are overdone,' wrote JP Morgan's Fong.
He cited the sector-specific nature of Beijing's tightening measures so far, and said as long as liquidity on the mainland remains ample it will usually find its way into Macau's VIP segment.
'The potential impact from credit tightening in China is unlikely to have a significant effect on the Macau growth outlook,' he wrote.