Initial reports on Macau’s gambling industry this year have stated that the gross gaming revenue (GGR) of the sector is expected to see some declines this year. Despite the decrease in revenue, however, casino stocks remain a solid investment. JPMorgan analysts add that the stocks are still worth buying, but as a long-term investment.
Yesterday, JPMorgan published its analysis of the industry, predicting that a “cyclical slow-down” in China’s economy will most likely impact Macau’s casino business. This, it points out, was not new news for investors and shouldn’t have a major influence over stock prices. Analysts DS Kim and Sean Zhuang explained, “Most of the negatives are well known and already (if not overly) priced-in.”
The analysts expect the GGR in Macau to shrink by 1% this year. They also believe VIP gambling will shrink by 6% and that mass-market revenue will increase by 3%.
The firm asserts that Macau casino stock investors need to consider long positions. It adds that the two preferred stocks are Wynn Macau and Sands China, but that the entire Macau sector is strong. The analysts state, “The trends in Macau have been surprisingly resilient if not strong – despite [a] (very) challenging macro backdrop and ever-growing concerns over [a] downturn.”
Kim and Zhuang continue, “Granted, these stocks are (still) tethered to macro factors and overall market volatility, but we see good values and believe the risk-reward is compelling for patient investors.” They are particularly favorable of Wynn Macau, stating, “Even the sceptics would agree that the quality of Wynn’s assets is among – if not the – best in the global gaming industry (e.g. product offering, service quality, brand name etcetera), which is supported by the best-in-class management team.”
Further on Wynn, the analysts provide in their note, “Its historical-trough earnings before interest, tax, depreciation and amortisation [EBITDA] multiple of 10 times is too attractive to ignore, in our view. We see an opportunity to purchase the best-quality asset at a great bargain.”
With regards to Sands China, they point out, “Sands remains a low-risk, solid return investment opportunity in Macau. We look at Sands as an attractive way to play the structural mass story given its outsized exposure to this segment (mass and non-gaming driving 90 percent plus of EBITDA)…” and state that this was in addition to “its unparalleled dominance in mass with ample room inventory and powerful cluster. Moreover, this stock is essentially VIP-risk-free (junkets comprising about 5 percent of its EBITDA).”
The analysts suggest that investors need to pay attention to fourth-quarter earnings reports, which are expected to appear toward the end of January. They state, “Eyes will be on qualitative comments on [the] demand environment and [the] 2019 outlook, especially considering recent GGR beats that bucked the trend of deteriorating consumption in China. We would expect management’s tone to be ‘better-than-feared’ and ‘cautiously optimistic’, in that mass and non-gaming demand has been robust with no clear sign of [a] downturn, and that this should be the pillar of likely resilient profit and cash flow momentum in 2019, cushioning the negatives from [an] anticipated VIP slowdown.”
