Macau casino analysts are a persistent bunch.
After shares of Galaxy Entertainment Group Ltd. and five listed peers tumbled an average 27 percent in the past six months through yesterday, analysts have barely touched their bullish ratings, with the consensus call slipping to 4.3 from 4.4 on a scale where 5 equates to a unanimous buy recommendation. No other group of stocks worldwide with market values of at least $10 billion and ratings above 4 has declined so much, according to data compiled by Bloomberg.
Casino profits in the former Portuguese colony are getting squeezed by China’s anti-graft campaign, slowing economic growth and workers’ demands for higher wages. While analysts at Barclays Plc and Daiwa Securities Group Inc. say their optimistic outlook is justified by lower valuations after the selloff, Sumitomo Mitsui Trust (HK) Ltd. predicts securities firms will cut their recommendations as earnings growth slows.
“Expectations for their gross revenue have been too high,” Katsumi Takagaki, the Hong Kong-based investment officer at Sumitomo Mitsui Trust, whose parent oversees about $474 billion, said by phone on Sept. 2. “We’re likely to see some more downgrades.”
Chinese President Xi Jinping has cracked down on corruption and extravagant spending by officials since coming to power almost two years ago. Macau, the only place in China where casinos are allowed, has tightened visa restrictions on mainland visitors and restricted the use of China UnionPay Co.’s debit cards at casinos.
Total gross gaming revenue in the world’s biggest gambling hub fell 6.1 percent to 28.9 billion patacas ($3.6 billion) in August from a year earlier, a third straight monthly decline, Macau’s Gaming Inspection and Coordination Bureau said this week. That compares with the median estimate of a 2 percent decrease by seven analysts surveyed by Bloomberg News. June’s drop in revenue was the first in five years.
“The Chinese government’s efforts to combat corruption are very serious, and that’s preventing many people from going to Macau,” Lewis Wan, the Hong Kong-based chief investment officer at Pride Investments Group Ltd., which manages about $250 million, said by phone on Sept. 2. Disappointing full-year earnings for casino operators may convince analysts to cut stock ratings, said Wan, who doesn’t hold any casino shares.
So far, analysts are sticking with their bullish recommendations. Galaxy Entertainment, founded by billionaire Lui Che Woo, has 29 buy ratings, six holds and zero sells even after the stock tumbled 31 percent from its Jan. 17 record to wipe out $13.8 billion of market value through yesterday. The company’s consensus rating of 4.6 on Bloomberg’s scale has slipped from 4.7 during the period.
Sands China Ltd., the Hong Kong-listed unit of Las Vegas Sands Corp., has 24 buy recommendations, eight holds and zero sells as of yesterday. The stock has fallen 26 percent from its March 6 peak, reducing its valuation to 15.4 times estimated earnings for the next 12 months from 23.4 in December. Hong Kong’s benchmark Hang Seng Index has a multiple of 11, while the Shanghai Composite Index trades at 8.4.
Galaxy Entertainment slid 1.4 percent to HK$56.65 at the close in Hong Kong. Sands China retreated 1 percent to HK$48.20, its lowest level since Sept. 30. The Hang Seng Index declined 0.2 percent.
“At these valuation levels, we believe there are limited downside risks,” Jamie Soo, an analyst at Daiwa Securities in Hong Kong, said by e-mail. New casino openings and improving transport networks mean the mid- to long-term prospects are “very much intact.”
At least seven new casino complexes are projected to open over the next three years, which could add about 3,200 betting tables and more than 11,000 hotel rooms, according to Barclays, which said it remained positive on the city’s gambling industry in an Aug. 26 note.
Macau is building a light rail system and a larger ferry terminal close to the Cotai Strip, Asia’s answer to the Las Vegas Strip, while a bridge linking Macau to Hong Kong and the Chinese city of Zhuhai is under construction. New capacity will attract more mass-market gamblers, Stephen Yang, head of institutional research at Sun Hung Kai Financial Ltd., said by phone from Hong Kong.
Yet risks for the industry abound.
Revenue from so-called VIPs is projected to decline 5 percent this year, Credit Suisse Group AG said in an Aug. 15 report, cutting its forecast from a 1 percent increase. High-stakes bettors accounted for about two-thirds of gambling revenue last year.
More casinos also mean operators will need to find staff in a city where the unemployment rate held at a record-low of 1.7 percent in July, according to government data.
Barclays estimates new projects will need an additional 14,000 to 17,000 dealers and 35,000 other workers, while Deutsche Bank AG says the cost of labor for operators will probably rise 10 percent to 15 percent annually in coming years. Hundreds of casino workers in the city of about 600,000 people protested last weekend, demanding higher pay.
“The street might be underestimating the upcoming labor cost and shortage,” Kathy Xu, a Hong Kong-based investment manager at Aberdeen Asset Management Plc who is avoiding casino shares, said in a phone interview on Sept. 3. Aberdeen oversees about $551.4 billion worldwide. “Investors are worried about the growth potential for Macau going forward because there are many policy risks.”