Investment bank JP Morgan has upgraded the stocks of all three US-owned Macau concessionaires – MGM China, Sands China and Wynn Macau – from Neutral to Overweight on what it describes as an “incrementally bullish” view of the sector.
The positive view comes with investor confidence clearly rattled and stock prices down around 60% on average from a year ago. However, JP Morgan’s DS Kim, Amanda Cheng and Livy Lyu believe this means risk/reward on gaming shares is “skewed to the upside with current sentiment as apathetic as at any time since IPOs 10+ years ago.”
Importantly, the analysts note, recent bad news around COVID-19 outbreaks in mainland China and potential travel implications over Chinese New Year has not further moved stocks – suggesting they are already at rock bottom and that pending uncertainties around license re-tendering and the VIP sector are priced in.
“We turn incrementally bullish on Macau SAR gaming,” they write. “Most investors seem hesitant to bottom-finish, citing license risks, VIP fallout and uncertain travel policies as key concerns. These are all valid, but we think the level of concern is unnecessarily high.
“First, on licenses, we think major disruptions such as license losses or tax hikes are unlikely, as suggested in the recent public consultation report.
“Second, we completely write off junkets from our models, but the impact on fundamentals isn’t that meaningful (around 10% of pre-COVID-19 EBITDA). Some may be concerned about a potential spill-over impact, but history – and our recent checks – suggest demand from premium mass or even direct VIP remains unscathed from junket fallout.
“Third, the pace of travel normalization is indeed tough to predict, but we view this as a transitory issue, something that long-term investors can look through when prices are as cheap as today’s.”
JP Morgan sees potential upside to all six Macau gaming stocks with Sands China presenting upside of 40% from its current price of HK$17.68 per share, Galaxy Entertainment Group 32% upside from HK$42.20 and Wynn 27% upside from HK$6.44.