Analysts at investment bank Morgan Stanley have labelled the current price of Macau gaming stocks as too low, suggesting prices are certain to rise in late 2021 and into 2022 on capacity expansion, concession extension and rising demand from Chinese luxury consumers.
In a Friday note, Morgan Stanley’s Praveen Choudhary, Gareth Leung and Thomas Allen lower their 2021 Macau GGR estimates by 10% to MOP$189 billion (US$23.6 billion) due to travel remaining sluggish, but increase their 2022 GGR and EBITDA estimates, with EBITDA now expected to be 8% higher in 2022 than in 2019 at US$10.27 billion due to mix improvement and cost cutting during the COVID-19 pandemic.
But such strong recovery expectations are not yet reflected in stock prices.
“By 2H21, we expect to see that 2022 consensus estimates are too low,” the analysts write. “We are 5% higher than consensus for 2022 EBITDA. Thus, we recommend accumulating on any weakness in 1Q21.”
According to Morgan Stanley, there is considerable upside potential for Macau in three key areas. They include Macau’s gaming concessions, all due to expire in mid-2022 but which the analysts expect to be extended by three years and announced in mid-2021.
Also notable is new hotel room capacity, with three major new developments due to open in 2021 by way of Grand Lisboa Palace with 1,900 rooms, Galaxy Phase 3a with 800 rooms and The Londoner Macao which partially opened in 2020.
“This increase in room nights by 10% should see a corresponding increase in premium mass revenue,” Morgan Stanley writes.
Finally, the analysts point out that China nominal GDP in 2022 is expected to be 22% higher than 2019, but that consensus expectations for 2022 Macau net revenue are only 4% higher than 2019, “suggesting upside potential.”
Pointing to current stock price, the analysts note that valuation is currently at 11x EV/EBITDA on 2022 estimates, which they say allows for at least a 15% upside to long term average and up to 50% in their bull case.