Inside Asian Gaming

May 2013 | INSIDE ASIAN GAMING 49 INSIGHTS Do you thinkMacau gaming stocks are undervalued in relation to comparable sectors, such as consumer goods? I would say so. The consumer names in China are trading at 20-something times price to earnings while Macau stocks are trading at mid-teens PE while giving you a 4%-5% dividend yield. I think that’s in part because of the uncertainty over the VIP segment, so investors put a valuation discount on Macau names compared to the consumer names. Is it also related to perceptions of how the sector is operated? Yes, that is also true. It is not as simple compared to consumer stocks, and you have a bigger component of policy risk involved as well. And there’s a lot more noise about anti-corruption drives, illicit money transfers. So I think inherently it will make investors feel less comfortable to put a high multiple on the stocks. But as time goes on and the sector gets bigger and investors become more comfortable with it, would the multiples then perhaps converge with those of the consumer names? I would say so. The multiple should gradually converge closer to the consumer names. The sector-average PE is gradually expanding as well. What are the major downside risks to the sector? The volatility of the VIP sector. There’s always a lot of headline news about crackdowns on junkets, officials being detained in China. These things will scare investors. But it seems like all the bad news over the last two years has had very little impact on actual revenue. It’s more noise than actual impact, yes. But it will create uncertainty. Because, like you said, it’s the inherent nature of the business, how it’s operated, it’s always natural for people to associate the two things together. So when investors see this negative news-flow, even though they know that it may not be true, they don’t want to take the risk. Sell first and find out later. Is one of the problems that the investment community perhaps views the sector more simply than they should? They’re too focused on the headline revenue or growth numbers and not enough on EBITDA and margins and the mass story that’s been going on in the past year? Yes. But there are so many sectors now in HongKongandsomany thingsgoingon that I think it would be natural for investors to focus more on the top line and headline growth. It’s easier to understand. If growth goes up, then they can assume sector fundamentals are strong. If it slows down, there will be some concerns. You won’t know EBITDA until the companies announce their quarterly results, so each year you only have four times to find out the profit trend. But every month or even every week you know how the headline revenue is growing. In the short-term the sector will react to the headline. In the medium-term it’s all related to the cash flow and earnings of the companies. So in a way all the short-term noise could offer a lot of potential opportunities for a savvy investor? Yes, opportunities for the investor who really knows how the sector operates. “There is some credit risk involved in the Singapore VIP market which makes it hard for it to grow as big as Macau’s VIP sector, because in Macau you have all the agents doing the debt extension and collection.” The casino floor at Marina Bay Sands, Singapore “When investors see this negative news-flow, even though they know that it may not be true, they don’t want to take the risk. Sell first and find out later.”