Photographer: Jerome Favre/Bloomberg

Macau's Top Analyst Says It's Not Too Late as Stocks Jump

  • Daiwa's Jamie Soo sees Galaxy shares gaining another 27%
  • Casino stock index rallies from lowest valuation since 2012

It’s not too late to find stock-market bargains in Macau after an index of the city’s casino operators surged more than 10 percent in two days, according to the industry’s top-ranked analyst.

Galaxy Entertainment Group Ltd., the Hong Kong-listed firm controlled by billionaire Lui Che-Woo, looks particularly attractive amid signs that Chinese authorities have stopped tightening restrictions on visits to the gambling hub, said Jamie Soo, an analyst at Daiwa Securities Co. Galaxy is also set to benefit from its investment in Cotai -- Macau’s answer to the Las Vegas strip -- when a new ferry terminal opens in 2016, he said in a phone interview on Monday.

“At these share price levels, the Cotai-ready operators -- specifically Galaxy -- look undervalued,” said Soo, whose calls on Macau casinos over the past year delivered the best returns among peers tracked by Bloomberg. His HK$29 a share price target for Galaxy implies a gain of 27 percent from Monday’s close.

Soo, who stood out for his bearish views on Macau casinos over much of the past year, upgraded Galaxy, Sands China Ltd. and Melco Crown Entertainment Ltd. last month as valuations plunged to the lowest levels since 2012. The stocks -- battered by China’s anti-graft campaign and slowing economic growth -- are now bouncing back after mainland visitors surged during the Golden Week holiday and investors speculated Beijing will introduce policies this year to support Macau’s economy.

Forward EV/Ebitda falls below 9x
Forward EV/Ebitda falls below 9x

The BI Macau China Gaming Market Competitive Peer Group Index jumped 10.8 percent in the past two days, paring its drop this year to 46 percent. It gained another 6.2 percent on Tuesday in its best three-day rally since 2011. The gauge’s enterprise value is 9.7 times earnings before interest, taxes, depreciation and amortization, or EBITDA. The ratio fell to a three-year low of 8.9 on Oct. 1.

Shares started surging on Friday after Teledifusao de Macau reported that China will introduce more policies this year to support the city’s economy, citing Li Gang, director of the Chinese government’s local liaison office.

The gains extended into Monday as official data showed visitors from China, who account for more than two-thirds of the total, rose 22 percent to 276,557 on Oct. 1 and Oct. 2, the first two days of the nation’s weeklong holiday, a traditionally peak season. That compared with a growth rate of 4.3 percent for the same period in 2014.

JPMorgan Chase & Co. analyst DS Kim echoed Soo’s optimistic shift in a report on Monday, noting that betting from mass-market gamblers rose in the third quarter for the first time in a year and a half.

“We do believe these stocks have reached an inflection point and that it is time to start building positions for the quarters ahead,” Kim said.

Not all the casinos are worth buying, according to Soo. Gross gaming revenue, which sank for a 16th straight month in September, will probably drop 34 percent for all of 2015 and another 5 percent next year, he predicted last month, calling his forecasts “the lowest on the street.” Soo has underperform ratings on Wynn Macau Ltd. and MGM China Holdings Ltd., with a hold on SJM Holdings Ltd.

Even if China’s government does take steps to bolster Macau’s economy, there’s no guarantee that the support will translate into more revenue for casinos, said Pauline Dan, the head of Greater China equities at Pictet Asset Management Ltd.

Ferry Boost

“In order for them to become attractive for me as an investor, I’d like to see their prices go lower,” Dan said.

Taipa’s Pac On Ferry Terminal will open by mid-2016, the Macau Daily Times reported last month, citing the Marine and Water Bureau. The terminal will be five times the size of the existing Peninsula-based ferry terminal, Soo said, and will help fuel a rebound in gross gaming revenue in Cotai from the second half of next year.

Galaxy in May opened its $3.1 billion second-phase expansion of a resort and an adjacent revamped property in the Cotai area, marking Macau’s first casino projects in three years. The company received 71 percent of its second-quarter casino revenue from its business on the Cotai Strip, according to Bloomberg Intelligence. Galaxy has the newest high-end offering in Cotai, while Sands has the biggest gaming table capacity in the area and control of the Cotai ferries, according to Soo.

“We are still cautious on Macau as a whole but believe that the worst is over
soon for Cotai,” he said. “The scheduled opening of the Taipa ferry terminal would mark the inflection point.”

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