Macau’s gaming industry has roared back to life since the city reopened to tourist travel on January 8.
Despite the consistently strong recovery, the total market cap of the city’s six gaming concessionaires has dropped back to November 2022 levels—about US$59 billion, or half of pre-Covid levels.
In a recent note, JP Morgan analysts DS Kim, Mufan Shi and Selina Li confessed they are “puzzled” about the numbers, Inside Asian Gaming reports.
“As far as valuations go, many (operators) are actually trading at historical trough multiples,” the JP Morgan team wrote. “This, to us, is really compelling because: (1) gaming licenses have been fully renewed, which removed the biggest overhang for the sector in the past decade; (2) the business mix today is better than ever before, with ~90 percent of revenues coming from mass and non-gaming that are higher-margin, more stable and more predictable than VIP; and (3) we see limited downside risks to consensus, even under reasonably conservative macro scenarios.
“The combined market cap of the six operators is only US$59 billion, back to where it was a year ago,” the team wrote, “and this feels to us overly punitive.”
They acknowledge Macau’s recent turbulence, but say those fears should now be put to rest. “Last year was full of uncertainty and overhangs, because some market participants weren’t sure about license renewal, China’s reopening and even survivability of some operators,” the team continued. “But now all those worries are completely in the rear-view mirror, and the pace/magnitude of recovery so far has been better than even the most bullish street expectations, by a wide margin.”
Though Wynn Macau and Galaxy Entertainment Group fell short of third-quarter EBITDA projections, and Melco shares have fallen 44 percent since the June 2023 quarter, JP Morgan has revised its fourth-quarter projections upward in the mass segment, predicting gross gaming revenue (GGR) will grow 12 percent quarter-on-quarter.
“The reopening recovery is still ongoing, which we think should cushion cyclical headwinds from China macro/consumption to some extent,” the analysts said.
“We understand valuations alone may not drive the stocks in this market, but we can’t help but think these stocks are oversold. At the current level of FCF yield … just the cash-flow paying down debt should generate ~15 percent annual returns on equity for names such as MGM, Wynn and Melco. We see great value in Macau names.”
In related news, on November 9, MGM China announced a major upgrade at both its Macau resorts, MGM Macau and MGM Cotai, following a record-breaking third quarter. The changes include a redesign of the platinum gaming area at MGM Cotai and renovations of villas at MGM Macau. Six new villas will also be added.
Speaking on MGM’s third-quarter earnings call, CEO and President Bill Hornbuckle described plans to make “opportunistic changes to our casino floor and existing room products to maximize yield, taking care of our mass and premium mass customers and driving international tourism.”
Hornbuckle said it’s “clearly evident that business is booming” in Macau.
