Macau Gaming Equities Poised for 2021 Rebound on Pent-Up Demand, Says Morgan Stanley

Posted on: November 24, 2020, 09:44h. 

Last updated on: November 24, 2020, 12:05h.

A rebounding Chinese economy and pent-up demand are among the catalysts that could hasten 2021 recoveries for Macau gaming stocks, Morgan Stanley analysts said today in a note to clients.

City of Dreams
Melco’s City of Dreams in Macau seen here. The stock is a Morgan Stanley favorite for 2021. (Image: CNBC)

Six concessionaires, including three US-based companies, operate in the special administrative region (SAR). But the bank sees two standouts heading into the new year — Melco Resorts & Entertainment (NASDAQ:MLCO) and Wynn Macau, the China unit of Wynn Resorts (NASDAQ:WYNN). Melco, which runs the City of Dreams, is Morgan Stanley’s top Macau pick for 2021, extending a run of positive analyst chatter on the name.

For VIP, we see no spike in [mainland] officials being disciplined and liquidity in the system (total social financing, M1 money supply) remains abundant,” said analysts from the bank, adding that a strengthening Chinese currency is also helpful to Macau’s recovery hopes.

Vibrancy among higher-end gamblers and in the premium mass segment is important for Melco and Wynn because those are demographics the operators cater to.

Earlier this month, Morgan Stanley upgraded Wynn Resorts to “outperform” while boosting its price target on the stock to $95 from $90. In doing so, it cited factors such as prospects for a COVID-19 vaccine, recovery in Macau, and a victory by Joe Biden in the presidential election. The bank anointed the Encore operator its favored cyclical idea for 2021.

More Catalysts

Recently, Beijing is cracking down on illicit online gambling and continues enforcing strict international restrictions as an avenue for keeping coronavirus case counts from spiking.

The Morgan Stanley analysts say those efforts are positive for Macau because the SAR isn’t considered an international destination for mainland citizens. With access to illegal internet casinos cut off, gamblers still want to indulge, leading to pent-up demand to visit the peninsula. Speaking of travel controls, the bank sees upcoming catalysts for concessionaires.

“Upcoming catalysts include reinstatement of Individual Visit Scheme (IVS) self-service kiosks, consumers getting used to being tested or availability of vaccine, and opening of the Hong Kong border without quarantine,” according to Morgan Stanley.

Guangdong province resumed issuance of IVS permits in late August, with the rest of the mainland joining a month later. But it’s taking a while for that policy to bear fruit for Macau operators. That’s because would-be visitors have to apply for the licenses in person and must present a nucleic acid test no more than seven days old proving they’re COVID-19 negative to gain access to the casino hub.

Improving Margins

As was expected, Macau operators of all stripes delivered dismal third-quarter financial results. But the positive takeaway from the conference calls is that the companies broke even on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA) in October, and are trending EBITDA positive this month.

That could set the stage for upside in 2021, particularly with many Macau gaming equities now attractively valued.

“Companies have cut their operating expenses meaningfully, suggesting a higher EBITDA margin in 2021/22, which will also be helped by mix change (towards mass). Finally, valuation of 11x enterprise value/EBITDA on 2019 actual suggests upside (long term average of 12.5x),” said Morgan Stanley.