Happy Thanksgiving from GGB; Newsletter Returns December 4

Investors Riding a Rollercoaster in Macau

Has all the current upside of Macau’s red-hot casino market been priced into the shares of its six operators? JP Morgan’s Kenneth Fong thinks so, and his view sent their stocks tumbling earlier this month.

Shares of Macau’s casino concessionaires have been on a rough ride this month in the wake of a JP Morgan Chase report suggesting that valuations may have topped out given the current state of the market.

In a note to investors, Hong Kong-based analyst Kenneth Fong said the market has already priced in a “significant growth” assumption from the resorts under development on Cotai, while labor shortages and gaming-table allocations may add risks.

He expects the gaming revenue growth to slow to 17 percent this year. It  grew almost 19 percent last year to surpass US$45 billion, a result that has been a factor in prompting analysts to factor in more aggressive growth assumptions than may be warranted, in Fong’s view.

 “Valuations are approaching a fair point,” he wrote, concluding that “the sector is at risk of entering a period where there is more room for downside rather than upside surprise.”

The report sent MGM China Holdings to its biggest drop after Fong cut its rating to “neutral” and recommended investors reduce their holdings in its competitors as well. Galaxy Entertainment Group fell 5.5 percent in the aftermath of the report, Sands China and SJM Holdings dropped 4.1 percent and 2.7 percent, respectively, Wynn was down 2.2 percent, Melco Crown dipped 3.8 percent.

Wells Fargo Securities analyst Cameron McKnight said he believes the macroeconomic environment in China “remains generally supportive of growth” but added that credit expanded in December at a rate that was down 25 percent compared with December 2012 and “a continued deceleration could potentially weigh on mid-2014 results” in Macau.

McKnight had “outperform” ratings on Sands, Wynn and Melco Crown, and a “market perform” rating on MGM.

RBC Capital Markets’ John Kempf noted that gross gaming revenue through mid-January was up about 17 percent year over year but that could slow in February, which is when most of the Chinese New Year holiday falls. Looking back at CNY 2013, mass table revenue last February was the lowest of the year.

Kempf had an “outperform” rating on Sands, Wynn, MGM and Melco Crown.