Across The Border

Are Macau casino stocks starting to look better bets?

After weakest June revenue in six years, the end of two major international football tournaments and the start of the peak summer season could drive more back to the tables

PUBLISHED : Tuesday, 05 July, 2016, 2:55pm
UPDATED : Tuesday, 05 July, 2016, 10:05pm

Macau has recorded its weakest June gambling revenue in six years, with a division of opinion on how the industry will fare in the months ahead.

Some analysts expect a strong summer ahead for the city’s casinos as the ending of European and American football tournaments should send more punters to the tables, rather than placing bets on matches.

While others still warn the sector’s volatility is likely to persist, with China’s slowdown likely to further affect visits by big-spending tourists.

Macau’s gross gambling revenue (GGR) fell 8.5 per cent year-on-year in June to 15.9 billion patacas, the lowest level since September 2010, according to the latest government data.

It also marked the 25th straight monthly drop in revenue.

“June might have been adversely impacted by lowered frequency ahead of the peak summer season, the European Championships, and substantial changes in the macro environment such as the Brexit and yuan depreciation,” wrote Angela Han Lee and Ryan Yu, analysts at China Merchants Securities, in a research report.

They said the international football tournament and the Copa America across the Atlantic from June 3 to June 26 had driven many potential casino customers to spend money on football betting instead.

Karen Tang, an analyst at Deutsche Bank, added the opening of Shanghai Disney Resort in mid-June had also diverted tourists, particular from the mainland, away from Macau’s casinos.

However, with the European event ending in a week and the traditional summer holidays starting, Tang forecasts Macau’s gambling revenue could grow during August and September.

“We expect the busier summer season to lead Macau stocks into a short-term rally,” Tang said.

“This has happened before — the sector has seen at least six such rallies since 2014, when casino stocks bounced 18-20 per cent on average in a 4-6 week period.”

She warned, however, any positive reaction due to seasonality can be brief, usually lasting one to two months based on historical patterns.

From an investor point of view, she added that on top of the likely tourist boost, the valuation of the sector looks attractive.

Macau stock prices have fallen 17 per cent since their peak in late March, as the sector entered a “slow season” in the second quarter, when the GGR fell 8 per cent on a quarterly basis, according to Tang.

The sector currently trades at 11 times its estimated 2017 EV/EBITA (a measurement that divides enterprise value by earnings before interest, taxes, depreciation and amortisation), compared with a historical range of 10 to 14 times, she said.

Deutsche Bank, meanwhile, has been advising investors to hold Macau casino stocks, such as Sands China, Galaxy Entertainment, SJM Holdings, Wynn Macau, MGM China, and Melco Crown Entertainment.

Of those, Sands China is its top pick, as the company could benefit the most from the busy summer months, given its higher exposure to the mass market, it said.

However, HSBC analysts are more cautious.

Scott Chan and Erwan Rambourg said in a recent research note that the volatility for Macau’s gaming sector is likely to persist, as there is no “meaningful pick-up” in gaming revenue.

In addition, macro concerns should continue dragging VIP performance, as there are fewer big-spending Chinese tourists due to the economic slowdown and the sweeping crackdown on extravagant government spending, they added.

HSBC is also advising investor caution in the short term, as share prices could be driven by second half results, which should start mid-July.

Analysts from Sanford C. Berstein, too, predict Macau’s gaming sector to be “volatile” in the near term.

“The VIP model is structurally challenged by China’s anti-corruption campaign, which dampens high-end spend, ” said Vitaly Umansky, a senior analyst at the research firm.

Longer term, however, Umansky said industry growth would be driven by a “paradigm shift from VIP to mass”.

Mass [market] will be the driver of rejuvenated growth beginning in 2016 and continuing through the rest of the decade – the execution of a supply-driven market
Vitaly Umansky, senior analyst at Sanford C. Berstein

“Mass will be the driver of rejuvenated growth beginning in 2016 and continuing through the

rest of the decade – the execution of a supply-driven market,” said Umansky.

The swearing in of new Philippine president Rodrigo Duterte could also have a position effect on Macau, he said, as the hardliner has already vowed to go after online gambling in the Philippines, with websites there making a lot of their revenue from mainland punters.

Umansky and his team predict a pick-up in annual gambling revenue growth for Macau in the second half of this year, but said the projection is based on the belief that China’s GDP growth will continue in mid-single digits, and the economy will continue to shift towards greater consumer spending.

Other potential risks highlighted for the sector include intensified anti-corruption activity in China, tightened scrutiny in Macau and mainland China against money-laundering, and significant weakening of the Chinese yuan against the Hong Kong dollar.