Investors’ optimism in Macau rebound might be overstated, analyst warns

By Mia Chapman Updated
Macau and Chinese authorities arrest 46 people for suspected loan sharking

The views of investors may be overly optimistic when it comes to Macau’s gaming stocks, given the region’s slow vaccine rollout and economic recovery.

Asia Gaming Brief reports that in a report previewing the first quarter earnings, analyst John DeCree argued that consensus estimates for next year and as a result the relative stock valuations are likely to be too high.

At present, the consensus view is for a full recovery to 2019 levels on both revenue and EBITDA next year, which Union Gaming argues may be unrealistic.

The firm said Macau gaming stocks are currently trading at an average of 13.5x 2022 EBITDA, which is higher than the group’s five-year average of 12x forward EBITDA.

“We are taking a more conservative view and assume FY22 aggregate revenue and EBITDA return to 90 per cent and 95 per cent of FY19 levels, respectively,” De Cree wrote, saying VIP is only likely to be at 50 per cent of its pre-pandemic levels, whilst mass market will outperform at 105 per cent.

Macau is seeing incremental growth in both gross gaming revenue and visitation, with visitor numbers hitting a 15-month high in mid-April.

However, analysts agree that there’s little visibility on when the two key drivers to putting Macua on a stronger growth trajectory are likely to come about.

The first of those would be the restoration of electronic applications for individual visa scheme visas and the reinstatement of group visas.

The second would be a reopening of borders with Hong Kong, which accounts for about 15 per cent of Macau’s gross gambling revenue.

Macau authorities have stressed that Hong Kong needs to go 14 days without any cases of local transmission before it will consider opening the borders.

Twelve new cases were recently recorded in the state, but just one of those was locally transmitted.

DeCree also said vaccination rates have been slower than expected across all jurisdictions.

“Based on commentary from government officials in Macau, Hong Kong and China, we may not see a complete reopening until mid-2022, making a full recovery in FY22 difficult to achieve,” he said.

In terms of individual stocks, Union Gaming recommends Melco Resorts & Entertainment and Galaxy Entertainment.

The firm said Melco is trading at a discount to its historical share prices, while Galaxy “represents one of the most compelling long-term growth plays in all of Asian gaming and both companies come with less perceived concession renewal risk.”

Macau scraps casino coronavirus test certificates

A coronavirus test certificate is no longer required to enter Macau casinos, GGR Asia reported in March.

From midnight, March 3, people wishing to enter Macau casino floors will no longer need to show a test certificate proving they are free of COVID-19 infection.

The rule where all individuals from mainland China arriving in Macau must have a negative nucleic acid test report issued within seven days of arrival, stays in place, authorities said.

A number of investment analysts had suggested that the COVID-19 test requirement for entry to Macau itself and the duration of the test certificate validity was an inhibiting factor for would-be tourists to Macau from mainland China.

The mainland is currently the only place to have a largely quarantine-free travel bubble with Macau.

DS Kim, an analyst at the JP Morgan banking group said in a note that dropping the need for the test certificate might be a “tiny step toward further easing” of restrictions on the market.

But he observed: “Since those entering Macau from China would already have negative test results anyway, the rule change is unlikely to affect inbound demand.”

But the change would probably “help revise demand” from “local” players, who had been “nearly absent since mid-July,” he added.

Brokerage Sanford C Bernstein said in a Wednesday memo that “Macau locals play is likely two to three per cent of gross gaming revenue in the market”.

Analysts Vitaly Umansky, Tianjiao Yu and Louis Li described dropping the COVID-19 test requirements for casino entry as a “positive step forward on the path to normalcy, but we do not see any border changes forthcoming in the immediate near-term.”

The local authorities had introduced the COVID-19 test certificate rule for casino entry with effect from July 15.

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