The combined market cap of Macau’s six concessionaires has fallen back to the same level it was a year ago – still only half of pre-COVID levels – leaving analysts baffled as to why another strong quarter of growth in Q3 has done little to drive stock prices north.
In a weekend note, JP Morgan’s DS Kim, Mufan Shi and Selina Li noted that Macau gaming stocks had fallen back to a combined market cap of just US$59 billion, less than half of 2019 levels and near identical to this time last year when Macau was still in the grip of the COVID-19 pandemic.
Despite ongoing concerns over macro-economic conditions in China – and noting that both Wynn Macau and Galaxy Entertainment Group had missed on 3Q23 EBITDA estimates – the analysts said they were “puzzled” as to why stock prices remained so stubborn given otherwise positive sentiment from the sector.
“As far as valuations go, many of these names are actually trading at historical trough multiples,” they wrote. “This, to us, is really compelling because: (1) gaming licenses have been fully renewed, which removed the biggest overhang for the sector in the past decade; (2) the business mix today is better than ever before, with ~90% of revenues coming from mass and non-gaming that are higher-margin, more stable and more predictable than VIP; and (3) we see limited downside risks to consensus, even under reasonably conservative macro scenarios.
“The combined market cap of the six operators is only US$59 billion, back to where it was a year ago, and this feels to us overly punitive.
“Last year was full of uncertainty and overhangs, because some market participants weren’t sure about license renewal, China’s reopening and even survivability of some operators. But now all those worries are completely in the rear-view mirror, and the pace/magnitude of recovery so far has been better than even the most bullish street expectations, by a wide margin.”
The analysts added that any impact from last week’s results announcements by Wynn and Galaxy seem overstated given that EBITDA misses were primarily luck driven, while commentary on Q4 earnings so far suggest growth is continuing. JP Morgan has, in response to this commentary, revised upwards in estimates for the December quarter to predict mass GGR growth of 12% quarter-on-quarter.
“This suggests the reopening recovery is still ongoing, which we think should cushion cyclical headwinds from China macro/consumption to some extent,” the analysts said.
“We understand valuations alone may not drive the stocks in this market, but we can’t help but think these stocks are oversold. At the current level of FCF yield … just the cash-flow paying down debt should generate ~15% annual returns on equity for names such as MGM, Wynn and Melco. We see great value in Macau names.”