Mass ramping up, Wynn and Melco to benefit

Capacity expansion, ramp up of recently opened properties, transportation infrastructure improvements and strength of the Chinese premium consumer should continue to push up mass over the next five years, says Bernstein in a note on Tuesday.

The brokerage said it has revised its estimates for 2017E-2022E CAGR to 8 percent for Total GGR, 6 percent for VIP and 11 percent for mass.

Industry-wide adjusted EBITDA is expected to achieve a CAGR of 11 percent on better business mix and improving operating leverage.

However, several risks that may be headwinds for VIP and the higher end of premium mass include possible re-escalation of China's anti-corruption campaign, moderation in liquidity and money supply growth, slowdown in the real estate prices, further impediments to capital outflows from China, and a potential lack of f/x (RMB vs. HKD) benefit that was evident in 2017, said Bernstein.

Top picks for the brokerage in the sector (rated Outperform) includes MLCO, which Bernstein says should improve its position further as a premium mass operator with the opening of Morpheus, and Wynn Macau, which will continue to benefit from stronger mass ramp up at Wynn Palace and benefit from the share it has taken in VIP.

In related news, Deutsche Bank on Tuesday recommended a “Buy” recommendation for parent company Wynn Resorts - based on an expected acceleration of capital returns from Wynn Macau.

“We believe the potential exists for dividends from the Macau entity to Wynn Resorts to triple over the next two years (2017E $422 million / 2019E $1.25 billion), said the brokerage.

DB also says it continues to believe Wynn Palace will “garner, at the very least, a fair share premium that is in line with the long term fair share premium at the Peninsula asset.”

“At a high level, VIP business remains consistent, as well capitalized junkets continue to exhibit strong demand trends and normal / healthy repayment cycles. Management remains of the view that market growth is less relevant over the near to medium term, as it believes it can continue to take share as the Palace ramps, specifically in the premium mass segment, and the VIP environment remains strong,” said the brokerage.

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