Admittedly there are still some challenges and uncertainty for the gaming stocks. Unrest in HK is as yet unresolved, there will continue to be margin pressure from worker demands for higher wages, table allocations for the 2015-16 openings have not been declared, the impact of the smoking ban is not clear, nor is what there will be in the way of a lasting effect from the anti-corruption campaign. Now we can add generalized fear over ebola following the case in the US.
So the street remains cautious as evidenced by this morning's PM indication for lower prices.
It will be interesting to see what the analyst community does with the news of the end of the anti-corruption campaign. I suspect they too will remain cautious for all the reasons I've mentioned. For me, I keep reminding myself Macau's gaming revenue is still expected to hit $80B within 3-4 years, the new casinos will get their table allocations, the government is likely to compromise on current foreign worker restrictions, the smoking ban will not have much of an effect, and VIP play will gradually rebound though some will still seek to remain out of the spotlight of Macau. Consequently, I feel like MPEL is an attractive investment @ $26.
I have to say I am a little surprised, given the ramifications of the announcement for ALL gaming segments, that the stock wasn't up 10%. Maybe the "on going" nature of the campaign has put a lid on the response. All 'n all this is obviously the best news to hit the sector in a very long time.
I think Japan will approve gaming this year, or eventually. The larger question for MPEL is whether they will be chosen to be one of the operators.
Most seem to be in the "Macau is slammed" camp with dire predictions about everything from VIP roll to returns per table for mass. David Bain is among the few longer term optimists, especially with regard to his price targets. While regional competition and higher labor costs play a role in forward looking assumptions it seems the larger factor of disagreement is the long term effect of the corruption crackdown. Apparently not only for VIP but mass as well.
I tend not to focus on opionions about PT's as much as the rationale for them. I guess the thing to remember is as logical and well thought out as those rationales may appear to be today, those of the past have proven to be wildly optimistic. These guys are making predictions based on what they see now and really have no idea what will happen 6 months from now. And that statement cuts both ways though expectations have gotten so low it is hard to imagine actual conditions becoming even worse.
Month-to-date September Macau GGR checks and thoughts
According to our checks, September’s GGR run-rate indicates a -16% year-over-year (“YoY”) monthly result, or MOP24.5b (USD$3.2b), including slot assumptions. Checks indicate mass GGR was trending close to flat through September 14, but rebounded somewhat last week. Our September year-over-year (“YoY”) GGR forecast remains from -15% to -19%. We anticipate September mass GGR will end at or slightly better than +7% YoY while VIP will finish near –21%.
Our month-to-date GGR check is likely in line with cautious near-term investor expectations, in our view. However, we believe our forecast for a single-digit mass increase in September may be below most outlooks. As we discussed in previous publications, we believe China President Xi's anti-corruption campaign (and certain Mainland economic uncertainties) are not just impacting VIP, but premium mass as well – which is a sizable controlling piece of the overall mass market (80/20 rule).
Based on investor conversations, we believe most near-term issues disrupting GGR have bled into Macau stock performance, while long-term positives (new supply, infrastructure, etc), as well as short-term ones (potential for increased capital returns to shareholders and gaming expansion legislation in Japan) are more or less dismissed at this point.
The potential for further downside stock pressure remains, especially as near-term expectations for mass gaming results rebalance, in our view. However, we believe significant longer-term gain opportunities from current levels outweigh near-term downside risks – and we note recent stock declines have driven increased attention from longer-term investors (and we are beginning to see more intermediate-term interest as well) to the sector.
Not just that, the PT's are predicated on the belief the corruption crackdown will have a lasting effect on mass/premium mass/VIP until the end of time. It seems some of the sell-siders are playing the expectation game of setting them so low beats are inevitable.
But there is no escaping there have been a series of governmental policy decisions by both Macau authorities and the Chinese government which are severely hurting profits. The most impactful being the corruption crackdown coming from Beijing and the labor policy set by Macau. One is hurting volume and the other margins. A large measure of how investable the casino stocks are depends on one's perspective on if and how these matters might be resolved. Li's potential impending visit to Macau may ease the minds of some VIP's and members of the other segments as well. I suspect the labor shortage causing higher wages is more problematic unless Macau lifts the ban on non-residents being employed in certain positions.
Taken as a whole though, the collapse of the growth narrative hinging on capacity expansion has been nothing short of stunning.
Lowering Macau GGR estimates; Macau Company specific estimates and targets
We lower our CY14 gross gaming revenue ("GGR") growth outlook to 0% from our already below consensus estimate of +3% (our September GGR outlook goes to -15% to -19% from -5% to -9%). We also lower Macau Company specific estimates and target prices below. We believe our new estimates eliminate a trend representative of “Chinese Water Torture” - constant minor downward estimate revisions on the heels of mostly known GGR disruptive issues.
Although we see near-term downside risk to Macau GGR/Company specific consensus (please see following page for Sterne estimates versus consensus), we continue to believe Macau’s longer-term outlook to be too compelling to step to the sidelines, especially at current stock levels.
Our view is that most of those “short” Macau names are positioned so for the near-term and generally have a positive longer-term view. Many other shorter/intermediate-term investors remain on the sidelines awaiting a bottom/stability – but also desire to eventually invest in Macau. Long-term investors are using the opportunity to research new openings and Island infrastructure projects, and are consolidating or slowly building stock positions. We believe there is a strong long-term upside potential versus downside risk from current levels, even in wake of a near-term weakening Macau marketplace (see our note out today, “Takeaways from Macau meetings – so far; Near-term trends worsening; Long-term remains a stock “look back” opportunity”).
MPEL. CY14/CY15/CY16 EPS to $1.45/$1.65/$2.24 from $1.53/$1.76/$2.39. Target to $50 from $54. MPEL trades at 6.6x CY16E EV/EBITDA and 11.8x CY16E EPS (while still at a peer-low P/E, note that accelerated D&A artificially lowers EPS versus others). Versus 3Q/4Q/2015/2016 EBITDA consensus we are in-line/-8%/in-line/+10%.
Sterne Agee's post Q1 adjusted EBITDA estimate for 2015 was $1.826B. The current EBITDA estimate for 2015 is $1.790B.
The stock price has gone down 40% in response to a negligible decrease in EBITDA estimates.
I'd say there might be something wrong with this picture. One can argument the stock was over valued at $45. But a 40% shelllacking seems a bit overdone.
This is part of an article on Fitch's Macau coverage.
Fitch Ratings Inc has cut its full-2014 growth forecast for Macau’s casino gross gaming revenue (GGR) to 4 percent. Continued weakness in the VIP segment led to the downward revision.
“We are revising the forecast down from 10 percent, which was already reduced in mid-July from our initial forecast of 12 percent, but we note that long-term fundamentals remain strong,” the ratings agency said on Thursday.
It added: “The VIP segment has been pressured recently by tightening of junket credit and the corruption crackdown on the mainland. We think these pressures are temporary and expect VIP to turn back positive in early 2015 as year-on-year comparisons get easier and as the mentioned pressures subside, although the exact timing is hard to handicap.”
The new forecast for full-2014 “incorporates the balance of the year’s growth for mass, VIP and slots of +15 percent, -15 percent and +5 percent, respectively.”
Fitch’s latest estimate equates to 3.5 percent average monthly declines for the remainder of the year."
From July 21............
"In a research note published on Sunday (before last week’s GGR numbers were available), Morgan Stanley urged more investor patience and believed Macau’s VIP gaming market may well improve in the second half this year.
The reasoning? China’s macro indicators are edging up. China’s GDP grew 7.5% in the second quarter, ahead of the 7.4% consensus estimates. Fiscal and monetary policies there are likely to remain loose in the second half, which is great for the more credit-sensitive VIP gaming segment.
How would an upturn in VIP revenue growth help the Macau market? VIP gaming growth is strongly correlated with P/E multiples. As the VIP segment recovers, we should expect re-rating in the Macau stocks.
Morgan Stanley gave a historical example: After Macau’s VIP revenue fell 8% year-on-year in July 2012, stock prices fell by 10% on average. But as the revenue decline narrowed to 1% in the following August, the stocks rallied by more than 20% over the next three months."
The point being they could (I hope) be wrong again.
Maybe the best that can be said at this point in the cycle is the stock may have hit an investable low, unless of course all the bad news is not actually out. -10% growth for Sept. is pretty bad news so I agree it was encouraging to see the stocks hold up fairly well, getting sold a bit due to HK's 500 point loss the other day. But is there any good news coming to give the group a catalyst? The market certainly isn't expecting one and neither am I.
The annihilation of the gaming stocks is most decidedly not about the economy which is by almost all measures improving. It isn't even all about what is happening at the moment. As you have said, toast, it is about the market's lack of certainty about what the future will bring. And it is about, as far as MPEL is concerned, the mis-directed focus on GGR instead of the higher margins derrived from the still growing mass side of the biz.
IMO the group continues to respond to headlines of lower GGR resulting primarily from the shortfall in VIP gaming. The reason for the shortfall is well understood. What is not known is whether the corruption curbs will be less harsh going forward and thus whether VIP will have a decent rebound. Currently, the consensus seems to be no major improvement for VIP thru Q4.
The casino companies still generate a lot of free cash to service debt, pay divi's, and buy back stock. They are still going to make, as you say, a lot of money in 2014. But the multiples have compressed as growth has slowed.
IF you believe 2015 is a different story with dimishing "headwinds" and added capacity then this is a great time to be accumulating for the turn. If you believe 2015 estimates for GGR growth of around 10% are too high, and the group will not see multiple expansion, then $40 could be very far away indeed. How quickly you think it gets back to $40 depends on which scenario you believe will play out.
Longer-term upside catalysts include: 1) The diminishment of near-term headwinds described in our August 15 note; 2) new supply ramp working to invigorate spend per/visitation and transform Macau into an overnight from day-trip market; 3) key infrastructure ramp (HK/Macau bridge, etc).
Lowering CY14 GGR to +3% from +5%; If your time-horizon exceeds several months, we recommend buying volatility
According to the DICJ, August gross gaming revenue (“GGR”) was MOP29.9b or -6% year over year (“YoY”), coming in at the low end of our -2% to -6% estimate range. For the month, we believe VIP table revenue was down high double digits while mass table revenue was up high double digits. We lower our CY14 Macau gross gaming revenue estimate to +3% from +5%. We continue to view CY14 as a transition year in Macau ahead of multiple years of sequential market growth driven by visible, high-margin mass volumes.
Our 3Q14 market GGR estimate is -5%, driven by a -17% YoY forecast decline in VIP, offset by mass table growth of +18%. As written previously (August 15 note “Acknowledging NT headwinds...), our 3Q14 GGR estimates call for Macau GGR growth to be the worst since 2Q09.
Our September year-over-year GGR forecast is between -5% and -9%.
While we continue to believe overall CY14 Macau market estimates are too high, investor sentiment on its strong, longer-term mass secular story is excessively too low.
Bears will use the next several months of forecast YoY negative growth to promulgate near-term headwinds (which are real), as longer-term investors should be positioning for 3 years of sequentially improving growth, culminating in a $77b gaming revenue market by year-end of CY17 from $47b in CY14 (13% CAGR).
Near-term upside catalysts include: 1) Return of capital to shareholder increases (upsized dividends and buybacks); 2) potential gaming expansion in Japan; 3) October’s National Day (slightly offset by China’s fourth plenary session, also in October); 4) very easy VIP hold comparisons in November/December.
Longer-term upside catalysts include: 1) The diminishment of near-term headwinds described in our August 15 note; 2) new supply ramp working to invigorate spend per/visitation and transform Macau into an overnight from day.
I understand the spam poster has been posting that I set up a new MPEL board. That is not the case.
The best thing to do is either put all his aliases on ignore, report him to Yahoo, or both.
MPEL, WYNN, LVS, MGM: Adjusting Estimates
We adjust Macau company specific estimates following our new CY14 Macau gross gaming revenue estimate for +3% from +5%. Given our adjustments are mostly VIP driven (lower margin) and our forecasts were already fairly conservative, our EBITDA/EPS changes are relatively minor. The largest differential from our 3Q14 estimates versus consensus is WYNN where we are ~8% below Macau EBITDA Street forecasts.
MPEL. CY14/CY15/CY16 EPS to $1.53/$1.76/$2.31 from $1.56/$1.80/$2.39. Target remains $54. MPEL, ahead of multiple near-term casino opening catalysts, trades at 6.9x CY16E EV/EBITDA and 12.3x CY16E EPS (while still at a peer-low P/E, note that accelerated D&A artificially lowers EPS versus others). It remains our top pick.
They also revise estimates for LVS, MGM, and WYNN.
We believe the above issues sound worse than they are – none are currently systemic, but all pick mildly at 2H GGR results - and there could be slight potential downside to our CY14 +5% GGR estimate. We believe most headwinds diminish by next year, coinciding with market transformative, growth driving new supply and infrastructure beginning in mid-CY15 and lasting through CY17. In other words, we suggest those with an intermediate to longer-term outlook use Macau stock stagnation as a buying opportunity.
Market Share. According to our checks, table-only market share from August 1 through August 24 is: SJM at 22.0% (vs. table-only July share of ~24.8%), Galaxy at 21.0% (vs. ~21.0%), LVS at 25.0% (vs. ~22.8%), MPEL at 13.0% (vs. ~11.9%), WYNN at 10.0% (vs. ~10.9%), and MGM at 9.0% (vs. ~8.6%).
Macau – August 1 - 24 GGR check and thoughts
According to our channel checks, Macau table-only gross gaming revenue (“GGR”) is MOP21.9b (USD$2.7b) from August 1 to August 24. The August GGR run-rate indicates a -4% year-over-year (“YoY”) monthly result, or MOP29.4b (USD$3.7b), including slot assumptions. Our August GGR goes to -2% to -6% from -3% to +2%. We continue to view CY14 as a transition year in Macau ahead of multiple years of sequential market growth driven by visible, high-margin mass volumes.
August 17 - 24 daily table GGR showed an over 9% decline from the previous week. We believe soft VIP volumes and hold were the primary reason for the week-over-week decline. We believe mass volumes remained steady but note forward construction disruption on mass floors as operators begin to prepare for tighter smoking regulations to take effect in October.
The month-to-date GGR check is (very) slightly below cautious near-term investor expectations, in our view. At the current run-rate, August would end +3.5% month-over-month versus the historical average of +5.7%.
As cited in our August 15 report, “Acknowledging NT headwinds ahead of transformative supply and infrastructure growth; Lowering estimates/targets,” we believe there are several second-half (“2H”) CY14 growth mitigation issues, in our view.
2H growth mitigation issues include: 1) Lengthening junket receivables from players; 2) a partial VIP player cooling effect from a sustained high-profile China corruption crackdown; 3) VIP room operators spreading capital to other regions as well as a modest decrease in and/or higher cost funding for smaller room operators; 4) new smoking restriction reconfiguration construction disruption on the mass floors (also potential for slightly strengthened VIP vs. mass GGR mix when new regulations take effect); 5) one-off issues such as the “Occupy Central” campaign (short-term visa controls), World Cup disruption; and 6) no new supply.