No juice in casino stocks for Citic, UOB as Macau’s economic makeover, valuations blunt upside

The year-end rally in Sands China, Galaxy Entertaintment and Macau casino peers has left no upside for investors in 2023, Citic and UOB Kay Hian say

Macau’s economic makeover means casino firms will need to realign their businesses and pay the price in terms of lower returns to shareholders

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Macau casino operators’ investments in non-gaming infrastructure are expected to cut the industry’s operating cash flow by nearly a fifth on average, according to UOB Kay Hian. Photo: Reuters

Published: 7:30am, 26 Jan 2023Updated: 6:47pm, 26 Jan 2023

The rally in 2022 that turned Macau casino stocks among the best performers in Hong Kong has left no juice for investors in the new year while capital spending to reshape the city’s economy will impinge on dividends, some analysts said.

China’s biggest listed brokerage Citic Securities is bearish on the sector, citing challenges amid Macau’s determination to seek new growth avenues and wean itself from the gambling industry. At current prices, major players like Sands China and Galaxy Entertainment are already trading at levels that reflected its recovery upside up to next year, according to UOB Kay Hian Securities.

Macau granted new 10-year concessions last year to the city’s six incumbent casino operators, who have pledged to spend US$13.5 billion outside their core business to help diversify the local economy. Gross domestic product shrank at an annual rate of 27.8 per cent in the first nine months last year as the pandemic slammed businesses.

“While sentiment will get a big boost from new licences and the expected return of tourists, we are bearish on the sector,” said He Pianpian, an analyst in Beijing at Citic Securities. “The top priority for casino operators is to ensure their businesses are aligned with Macau’s transformation.”

A mainland Chinese tourist takes photos outside the Lisboa Casino in Macau, on January 22. Macau borders reopened earlier this month. Photo: EPA-EFE

Casino stocks tumbled in Hong Kong on Thursday, surrendering earlier gains when trading resumed after the Lunar New Year break. Sands China slumped 2.2 per cent to HK$29.35 and peer Galaxy Entertainment lost 1 per cent to HK$54.35. Both retreated after briefly surging to their highest levels in more than a year.