Macau Rebound Moving Along, Full Recovery Coming in 2022, Says Morningstar

Posted on: May 24, 2021, 10:26h. 

Last updated on: May 24, 2021, 12:19h.

Gaming equities with heavy Macau exposure are lagging their Las Vegas-centric and regional counterparts this year.  Investors are jittery are about the sluggish pace of recovery in the world’s largest casino center and a recent uptick in coronavirus cases in Mainland China.

Macau stocks
Masked individuals walk through the streets near Casino Lisboa in Macau. One research firm sees recovery there taking shape more rapidly than previously expected. (Image: Bloomberg)

Two prime examples of the adverse impact those scenarios are having are Las Vegas Sands (NYSE:LVS) and Melco Resorts & Entertainment (NASDAQ:MLCO). Shares of which are off 3.15 percent and 6.52 percent, respectively, year-to-date. Encouragingly, some analysts believe near-term headwinds will be fleeting, and that Macau’s rebound efforts will gain momentum.

Despite the near-term challenges, management comments on an uptick in May Golden Week traffic and gradual improvement in month-on-month gross gaming revenue, or GGR, are encouraging,” writes Morningstar analyst Jeniffer Song in a new report. “In addition, interest in vaccination is increasing after the pandemic has spiked in several countries over the past few months.”

Mainland China is vital to Macau’s bounce-back efforts because the country accounts for 70 percent of tourism to the gaming hub. Plans to establish a travel bubble with Hong Kong — another major artery of visits to Macau — are also essential but have been stymied by rising COVID-19 case counts there.

More Optimistic Time Line for Macau Recovery

Analysts almost universally opined that the special administrative region’s (SAR) casino industry would recover more rapidly than competing Asia-Pacific markets or Las Vegas.

Amid problems issuing individual visit scheme (IVS) visas and slow progress on the vaccination front, some research firms are dialing back expectations for when Macau’s gaming-dependent economy will return to pre-pandemic highs. For example, Moody’s Investors Service recently said that won’t happen until 2024.

With daily vaccination rates soaring from 16 million to 17 million from four million to five million two weeks ago, and herd immunity reachable by the end of this year, Morningstar sees a full recovery taking shape in Macau next year.

“We tweak our full-year 2021 earnings forecasts for the six Macao gaming companies we cover to reflect our updated GGR assumptions, while we maintain our fair value estimates and long-term outlooks,” said Song.

The research firm covers each of the six Macau concessionaires and says SJM Holdings is its preferred idea, citing “potential market share gain, financial health, and valuation attractiveness.”

Macau Stocks Somewhat Inexpensive

Investors willing to wager on Macau stocks bouncing back don’t have to pay up to make that bet, as the group is slightly attractive on valuation relative to historical norms.

“At the current market levels, the Macao gaming sector is now trading at about 10-11 times 2022 enterprise value/EBITDA, which is slightly below our valuation and the sector’s historical mean of 12-13 times,” according to Song.

The Macau concessionaires with listings on major US exchanges are LVS, Melco, MGM Resorts International (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN).