A recent surge in the consumption of luxury travel and retail products in mainland China suggest a more attractive operating environment for Macau concessionaires in 2021, with lower costs and greater focus on premium mass likely to boost EBITDA margins in a post-COVID world.
According to a Tuesday note from Morgan Stanley analysts Praveen Choudhary, Gareth Leung and Thomas Allen, recent volatility in Macau gaming stocks present an opportunity for investors – particularly those with higher exposure to the premium mass segment such as Melco Resorts & Entertainment and Wynn Macau Ltd.
Among the key indicators are mainland consumption trends, with visitation to the holiday island of Hainan, which was down 87% year-on-year in March, now back on par with 2019 levels. Luxury sales were up 13% year-on-year in September and 18% year-on-year in October, suggesting “strong pent-up demand by Chinese consumers.
“On top of this, a strong Chinese economy (GDP +9% in 2021) and stronger RMB are positive for premium mass,” the analysts said.
“Companies have cut their operating expenses meaningfully, suggesting higher EBITDA margin in 2021/22, which will also be helped by mix change (towards mass). Finally, valuation of 11x EV/EBITDA on 2019 actual suggests upside (long term average of 12.5x).”
Morgan Stanley also predicts a further increase in visitation, and therefore GGR recovery to Macau, during the end of year holiday period, buoyed by a recent directive by China’s National Immigration Administration for its citizens to limit overseas travel in the coming months.
“We see a continued clamp down on online gambling and overseas travel to bode well for Macau,” the analysts state.
On its top picks, Morgan Stanley ranks Melco ahead of the pack on higher exposure to premium mass and large cost reduction, while Wynn Macau is also attractive on premium mass exposure, cheap valuation and the potential to be a “key beneficiary if China-US tension eases post President-elect Biden’s victory.”
