New Year Bonanza to Lift Bets on Macau
Investors are turning more positive about Macau following a two-year slump in the world's biggest gambling hub.
A sharper focus on the more profitable mass market is paying off for casino operators, while VIP punters are starting to return after their wings were clipped by Chinese President Xi Jinping's crackdown on corruption. Betting in Macau rose 10 percent last quarter to 60.4 billion patacas ($7.6 billion).
The signs of recovery are scaring away the bears.
Rattled by the recent slowdown, casinos and resorts in Macau looked to middle-class tourists to revive sales. Wynn Macau Ltd.'s new casino on the Cotai strip and Sands China Ltd.'s Parisian -- a hotel complex with a half-size replica of the Eiffel Tower -- are attracting crowds, while restrictions on cash machine withdrawals weren't as harsh as some had feared.
Macau is set for a further boost over the week-long Lunar New Year holiday, which this year starts on Jan. 27. This is usually peak season for visitors.
DS Kim, a Hong Kong-based analyst at JPMorgan Chase & Co., said booking trends for junkets and hotels are upbeat and might be on track to surpass the Golden Week holiday in October last year. "We stay bullish on the sector for genuine upturns in demand, profits and cash flows in 2017 and onward," he said.
Las Vegas Sands Corp. offered a note of caution when it kicked off casino earnings season in the U.S. on Wednesday. Results missed forecasts largely because of the success of punters at the newly launched Parisian in Macau, it said. In the earnings call, the company's president Rob Goldstein singled out one gambler in particular. "She wins every day and she is doing very well. And, she affected the numbers," he said.
Over the past 12 months, returns on a Bloomberg gauge of casino stocks were almost three times higher than those of the Hang Seng Index. In January 2016, Wynn Macau's shares touched a record low and Sands China was trading at the lowest level since 2012. They’re up 84 percent and 52 percent from this time last year. Galaxy Entertainment Group Ltd., another industry leader, has jumped 72 percent.
Morningstar analyst Chelsey Tam said in a recent note that Macau's mass gaming revenue growth will peak at 15 percent in 2019, as the Chinese traveling population grows and the opening of the Hong Kong-Zhuhai-Macau Bridge and light rail transit alleviate capacity constraints and help increase visitors. Growth will taper to high single digits through 2025, Tam said.
While valuations have come off November highs, when the Bloomberg Intelligence Macau Gaming index had a price-earnings multiple of 29, the highest since April 2010, the gauge is still trading at 25 times estimated earnings.
"It all comes down to valuation,'' said Angelamaria Hanlee, an analyst at China Merchants Securities (Hong Kong) Co. "Although the long term growth looks pretty good, it's more like the market already knows about it so I don't think there is much room to improve.''
Risks to the recovery include a wider smoking ban in VIP gaming areas later this year and potential for Chinese government policies restricting capital outflows. "Capital flight controls from the continued depreciation of the yuan could limit VIP growth and junket operators' financing capabilities," said CICC Research, which is "cautiously optimistic" on the Macau gaming sector.
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