Gamblers and investors share a tendency to overrate the past as a guide to the future. The so-called “gambler’s fallacy” is why roulette players believe they can hit winning streaks, and why mutual funds warn that past performance is no guarantee of future results.
It might also be why Macau’s casino stocks have been so battered this year.
On the face of it, the territory’s gaming industry seems to be in a horrible place:
But investors should only worry about a drop in revenue if it means a company’s debts are unsustainable, or its equity overvalued. Neither looks to be the case in Macau:
The enterprise value of the big six Macau casinos comes in at an average 12.5 times forecast Ebitda -- ahead of the 11.5 for the four publicly traded players on the Las Vegas strip, though not by much. The Macau companies also don’t need to worry so much about their lenders breathing down their necks: all have net debt of less than four times Ebitda, a metric achieved only by Las Vegas Sands in the U.S.
The territory is in the process of transforming itself from the high-rolling, Bugsy Siegel days -- when the growth industry was VIP gamblers betting $10,000 a hand on baccarat -- to the more profitable mass market business.
While revenue from high rollers continues to decline, the take from ordinary gamblers was flat in the September quarter, suggesting that part of the industry may have bottomed out. The casino operators are certainly betting on growth: Melco Crown will open its mass-market Hollywood-themed Studio City development later this month, and new MGM, Wynn, Sands and SJM hotels will add nearly 10,000 rooms to the city by 2017, increasing capacity by about a third.
Macau’s lackluster occupancy rate this year raises legitimate questions about demand for all those new rooms. But with Chinese house prices rebounding from lows earlier this year and outbound tourist numbers hitting a record in the June quarter, there may yet be room for growth.
SJM Holdings currently has Macau’s biggest overall market share and the second-highest exposure to the mass market, after Sands China. After subtracting net cash of about $2.7 billion, the casino business is worth $2.13 billion, less than the U.S. racecourse owner Penn National. With analysts forecasting that SJM will post almost five times as much net income in 2016 as Penn, that looks worth a punt.