Morgan Stanley and Morgan Stanley Asia Limited gave an overview on casino stocks in Las Vegas and Macau.
U.S. Outlook Overview
Morgan Stanley analyst Thomas Allen lowered 2014 Macau growth estimates in a note published Tuesday. Despite near-term concerns, the analyst remains confident for long-term “Macau “mass” and Vegas “recovery” stories.” Allen believes that current levels already reflect the lowered estimates and risks.
Following a meeting in Las Vegas with gaming operators, Allen noted that the operators continue to shift more tables away from VIP to mass in Macau. The smoking ban will go into effect on October 6 and could have some short-term pressure, especially with companies that do not build the smoking rooms. The analyst noted, “None of the US operators said that they will have to remove any tables for smoking rooms.”
Morgan Stanley reported that Las Vegas is seeing more convention business, with contracts having the groups returning for two to three years. In addition, “High-end operators are feeling more comfortable pushing ADRs as mid-tier players have pushed to a point where the gap between their rates aren’t that significant that luxury travelers would choose to stay at a mid-tier property.”
Luxury properties are seeing RevPAR reaching back to peak on weekends but are still down 10 to 20 percent on weekdays. The meeting revealed that mid-tier properties are 30 percent off peak and net-net is roughly 18 percent off.
International customers are benefiting the strip as “The majority of the passengers on our flight from New York were speaking foreign languages and operators noted their value as they have longer booking windows and spend more.”
Optimistic on U.S. Stocks Amid Near-Term Pressure
Allen is optimistic on shares of Las Vegas Sands (NYSE: LVS) and MGM Resorts (NYSE: MGM), rating the stocks as Overweight. The analyst expects Las Vegas Sands to “outperform in Macau, driven by our above consensus market estimates and LVS' high exposure to mass vs. VIP, strong execution, and the continued successful ramp of Sands Cotai Central / Parisian in the future.”
Given the company’s strong free cash flow, Morgan Stanley sees management potentially increasing dividends, stock buybacks and possibly pay a one-time dividend.
MGM Resorts also has a strong balance sheet and “high financial leverage”. Allen remarked that MGM is well positioned given the firms estimates for Macau and Las Vegas operations. Morgan Stanley continued, “we see numerous drivers that create a realistic bull case The “Las Vegas recovery” thesis is clearly building momentum; 2012 LV market EBITDA was still ~30% below peak; MGM saw 13% y/y growth in 2013 and strong convention mix should result in similar growth in 2014. Higher room rates and cost efficiencies are driving >60% incremental margins for MGM's Las Vegas business in our base case Implied U.S. valuation (ex Macau) inline with historical avg. (~10x 2014e EBITDA), despite potential for cyclical upside as Las Vegas has lagged the general consumer recovery.”
The analyst projects double digit growth for Wynn Resorts (NASDAQ: WYNN) over the next few years, noting that the company “should be a leading contender for future US and int’l developments.”
Despite Wynn’s strong balance sheet and record, Morgan Stanley rates the company as Equal-weight given that shares are trading “well above peers.”
On Wednesday, Morgan Stanley Asia Limited analyst Praveen Choudhary gave insight into Hong Kong and Macau Gaming.
Choudhary wrote, “Macau long-term thesis of robust demand, improving infrastructure and expanding capacity via Cotai Phase 2 is still valid. Current forward P/E of 15x is much below long-term average, multiples could look even cheaper in 2015/16 due to inclusion of Cotai Phase 2, and many of the concerns highlighted by analysts/media are probably in the price based on more than 18% underperformance versus Hang Seng Index this year.”
Despite the long-term strength of the sector, Morgan Stanley highlighted “incremental negatives,” including second quarter EBITDA concerns, the smoking ban, and labor shortage. The analyst emphasized that second quarter EBITDA could show “first sequential decline in four years that could drive negative earnings revision” and that a labor shortage could result in a lower valuation for Phase 2.
Choudhary’s analysis surrounds the thesis of “Near-term Pain in Exchange for Long-term Gain”.
Summary of Rating Changes, Price Target Revisions & Current Upside
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