Capacity expansion, Chinese exploration and concession extension are likely to lead to outperformance of Macau’s gaming stocks in the second half of this year after a sluggish start, according to analysis from Morgan Stanley.
The firm sees 2021 gross gambling revenue of $24 billion and corporate EBITDA of $6.4 billion. That’s 65 percent and 70 percent of 2019 levels, which it says is below consensus for 70 percent and 75 percent of the prior amounts.
However, Morgan Stanley says it remains upbeat and its estimates are 5 percent above the consensus for 2022.
The first reason for optimism is the return of Chinese travel, with the government discouraging travel to overseas destinations, potentially benefiting Macau.
“One third of Asian gaming revenue comes from outside of Macau, part of which is contributed by Chinese consumers and could come back to Macau, with recently unveiled criminal law also making it more difficult for overseas countries to solicit Chinese consumers.”
Economic indicators in China are also pointing to pent up luxury demand and for nominal Gross Domestic Product next year to be 22 percent higher than in 2019. Given the historic correlation between GDP and Macau’s GGR, the numbers suggest gambling revenue could reach $47 billion in 2022.
Morgan Stanley is also predicting that concern over concession renewal will be lifted this year. The concessions come up for renewal in 2022, but the firm argues the government will take the decision to extend the licenses for a further three years from the middle of the year, removing the overhang on stocks.
It says that there is now not enough time for a law to be passed, for the public to be consulted and to prepare the re-tendering process before the concessions expire in June 2022.
“We expect US-backed concessionaires to be re-rated higher if all licenses are extended,” it said. “ Local stocks outperformed US-based names by 16ppts in 2020.”
The third reason to drive demand and provide upside to share prices is also likely to be capacity expansion, Morgan Stanley said. The Londoner comes online in February, while SJM Holdings Grand Lisboa Palace will add 1,900 rooms later in the year. Galaxy Entertainment’s Phase 3A expansion will also add 800 luxury rooms.
“Macau stocks tend to outperform when the industry adds significant hotel capacity (number of rooms), since these drive overnight visitors and premium mass revenue,” it said. “Stocks also tend to outperform 6-12 months before the opening of mega casino openings. We expect 2021 to be an important year in which both of these activities drive outperformance for Macau stocks.”