Analysts grab punchbowl even as casino party swings Article:
Any negative news could pull down Macau gaming shares suggests Morgan Stanley
All the Hong Kong-listed Macau gaming stocks were up yesterday – by between 3.58 percent and 5.07 percent. A number of analysts are however counselling that some names could face price corrections if valuations get too far ahead of earnings estimates.
Signs of increased risk include shares being “more immune” to positive news from the sector, Credit Suisse analysts in Hong Kong led by Kenny Lau wrote in a client note on Tuesday.
On Monday, Praveen Choudhary, managing director of Morgan Stanley said in a note issued from Hong Kong that the bank was downgrading the stock of Sands China Ltd, Galaxy Entertainment Group Ltd and MGM China Holdings Ltd, from ‘overweight’ to ‘equal weight’.
It cited “limited upside, with no capacity additions before mid-2015 and uncertainty around licences”. The bank added that Macau gaming stocks had outperformed the Hang Seng Index by around 70 percent year-to-date.
The bank rewards SJM Holdings Ltd and Melco Crown Entertainment Ltd by maintaining its ‘overweight’ recommendation on both stocks. It cites in SJM’s case the re-opening of the refurbished Jai Alai casino hotel by mid-2014, along with its new retail mall, plus the transfer of tables to Casino Grand Lisboa from Casino Oceanus, and the opportunities for increased premium mass table games business at Casino Lisboa.
For Melco Crown, it cites the opening of City of Dreams Manila in the Philippines “by mid-2014”, and the opening of Studio City by “mid-2015”, and the start of construction on a fifth hotel tower at City of Dreams.
The bank has an ‘underweight’ rating on Wynn Macau Ltd, suggesting the stock is trading at a premium to its peers.
“We believe Wynn Macau may not receive more tables than peers despite spending more money on [its] Cotai project and thus ROIC [return on invested capital] may come out to be lower initially,” said Morgan Stanley.
Philip Tulk of Standard Chartered in Hong Kong said in a note on October 15 that the shares of the six major Macau operators have risen an average of 11 percent over the previous month and 39 percent over the past three months, compared to the Hang Seng Index’s one percent and nine percent growth respectively for those periods.
But he said the sector’s strong share performance, exceeding that of higher forecasted earnings “makes sense”. “The denominator [EBITDA] reflects only current operating earnings, while the numerator [enterprise value] reflects the market’s assessment of value for both current operations and (in a PV [present value] sense) future projects,” he wrote.
Agreed we may see more resistance to positive news after the run-up. With LVS, it ran up in advance of good earnings, so it may take a higher amount of good news to push it higher.
Re: risk of negative news, I agree, but it's pretty hard these days to figure what that negative news could be.
Re: Licensing risk, China has historically been reasonable when substantial assets are involved. There is great danger to an economy and government when said governments prove un-predictable and prone to adverse decisions regarding such things...
... just ask the oil exploration companies in Brazil in the wake of the attempt to sue Chevron for $30 billion after they accidently spilled a very tiny amount of oil into the ocean... suddenly, drillers are playing hardball with contracts there given such a demonstration of unreasonableness, and the oil industry is feeling the impact.