Investors in Macau gaming stocks can benefit from adopting a “12-month buy-and hold strategy” despite recent stock declines, according to analysts from investment bank JP Morgan.
In a research note obtained by Inside Asian Gaming, analysts DS Kim and Sean Zhuang state that the negativity surrounding Macau stocks have been somewhat overblown and that the risk-reward case for investors is compelling.
All six of Macau’s concessionaires have experiences major declines over the past six months, with Wynn Macau falling from HK$30.95 to HK$16.78, Sands China from HK$44.30 to HK$33.30, Galaxy from HK$70.00 to HK$44.90, Melco International from HK$27.00 to HK$14.78, MGM China from HK$22.05 to HK$12.36 and SJM Holdings from HK$7.37 to HK$6.68, having reached a high of HK$11.26 in May.
“We are under no illusion that these stocks will rally sharply in the near term given the uncertain macro and market backdrop, especially amid well-anticipated earnings downgrade by the Street,” Kim and Zhuang state.
“However, it would be extremely challenging to pinpoint the absolute bottom for these cyclical stocks anyway, and we see potential returns (~60% returns over two years, including dividends) as markedly bigger than the risks (primarily macro-related) at current levels.
“We thus believe that medium-term investors who can do a 12-month buy-and-hold strategy here will enjoy asymmetrically strong returns, and we recommend accumulating. At the end of the day, the potential (or perceived) downturn that the industry is facing today should be a cyclical one, hence does not warrant a structural de-rating in valuations. Fear not, not even your bear-case scenarios, we say.”
The JP Morgan analysts estimate that in absolute worst-case scenario, industry demand will decline just 1% in 2019, assuming a 7% decline in VIP GGR and a deceleration in mass growth to +4% – both around 10% lower than recent trends. However, they add that these estimates are likely “too bearish” and unlikely to materialize. They also note that, even taking into account such a bearish outlook, industry EBITDA can still print small positive growth next year, thanks to resilient non-gaming/mass demand (85%+ of EBITDA), ongoing margin ramp-up of new casinos and broadly benign cost environments.”
Kim and Zhuang rate Wynn Macau as their top pick, citing a rare opportunity to purchase the “best quality asset at a bargain price”, followed by Sands China and Galaxy.
“Time is on our side,” they state. “Granted, a lack of positive catalysts makes it difficult to establish a bottom for these stocks, while sentiment could stay negative in the near term amid well-anticipated estimate cuts by the Street. Our instinct is that most revisions should be done into upcoming 3Q results, after which we expect the stocks to grind higher and climb the ‘wall of worry’ with normalizing multiple – after all, the potential (or perceived) downturn that the industry faces today should be a cyclical one, so does not warrant a structural de-rating. Hang in there, as the rewards for those who wait could be handsome.”
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