Gaming analysts have been a little skittish on the outlook for Macau’s gaming industry recently due to the ongoing trade war between the US and China. That feud has had an impact on Macau’s performance and the first few months of 2019 have not brought a great deal of improvement for the industry compared to last year, leading analysts to lower expectations. However, it now appears that the decreases have reached their lowest point, making this perhaps the best opportunity for would-be investors to climb aboard.
According to analysts with JP Morgan Securities (Asia Pacific) Ltd., “We think even the ‘bears’ would agree that the investment thesis for Macau has always been about ‘structural growth of mass’ and ‘abundant cash-flow’ – and that both stories remain intact, if not enhanced.” The analysts, DS Kim and Christopher Tang, provided their comments in response to mass-market gambling compared to VIP gambling, which saw a year-on-year decline of 13.4%. Mass-market gambling, on the other hand, jumped 16.1%.
Morgan Stanley analysts Praveen Choudhary, Thomas Allen and Dan Xu chimed in, as well, predicting a rebound may be coming. They asserted, “We see earnings revisions to have bottomed and a few companies (Sands [China Ltd] and SJM [Holdings Ltd]) are seeing positive earnings revision.”
They further offered that the current quarter could offer the best entry point for potential investors to pick up stocks of companies operating in the Macau casino scene. The analysts forecast a drop of 2% quarter-over-quarter in Macau casinos’ EBITDA (earnings before interest, taxes, depreciation and amortization), but believe the third quarter could see EBITDA growth of around 3%.
The trio of analysts explained, “…we note that in the past Macau stocks have usually underperformed in the second quarter, but outperformed in the third quarter, thus could provide a good entry point. This along with high free cash flow-to-equity yield (8 percent), strong balance sheet (less than 1x net debt/EBITDA) and high dividend yield (more than 4 percent) should make the industry defensive.”
Choudhary, Allen and Xu further asserted, “Industry valuation is attractive at an estimated 10.4x 2019 and estimated 9.1x 2020 in enterprise value/EBITDA terms, compared to the long-term (last-eight-years) average of 12.5x.”
The Macau gaming industry, according to JP Morgan, could have discretionary free cash flow of $7-$8 billion – equal to almost one-fifth of industry gross gaming revenue – this year. This represents an amount larger than the net debt seen at the end of 2018, which was reported at a combined $5.6 billion for the industry.