26 October 2016
Despite some headwinds, Macau's casino operators are expected to do well in the medium to long run. Photo: Bloomberg
Despite some headwinds, Macau's casino operators are expected to do well in the medium to long run. Photo: Bloomberg

Why gaming stocks are a good bet

Macau gaming stocks suffered recently due to worries over falling industry revenues and reduced wealth of Chinese equity investors.

Casino revenues of the gaming enclave dropped 16.2 percent in the second quarter of this year from a year ago, according to data released by the city’s Gaming Inspection and Coordination Bureau.

And VIP gaming revenue slumped by as much as 42.2 percent to 69.2 billion patacas in the first six months of this year, exceeding a 37 percent drop in total gaming revenue in the period.

Meanwhile, the industry added 110 gaming tables — taking the figure to 5,814 — in the second quarter, while the number of slot machines increased by 1,504 to 14,192 in the same period.

The VIP room revenue is expected to fall further by 28 percent and 18 percent in the third and fourth quarters of this year respectively, according to Merchants Securities.

Beijing has recently relaxed visa rules for mainland residents to visit the city. And there are also signs that authorities are softening their stance on a proposed total smoking ban on casino floors.

Will these policy measures help the gaming counters recover their mojo?

Well, apart from policy changes, investors need to bear in mind that the prospects of the sector depend on China’s economic growth and stock market health.

Not to mention Beijing’s ongoing austerity and anti-graft campaign.

China’s recent stock market crash has led to a sharp drop in new stock accounts. In June, the number of stock accounts worth 5 million to 10 million yuan fell by 11.5 percent, and accounts worth 10 million to 100 million yuan were down 13.7 percent.

Some investors may have been forced to liquidate their positions due to margin calls.

All this could however be a temporary phase, and the problems are likely to be overcome. 

Beijing still has plenty of policy tools such as interest rate and reserve requirement cuts to bolster economic growth. Meanwhile, low commodity prices could help improve company earnings.

In the long run, a robust economy and expected recovery in stock and property markets will benefit Macau gaming plays.

Meanwhile, there is also potential for some short-term rebound.

Among the various counters, Melco International Development and Wynn Macau have the highest valuation, while Sands China has the best track record of steady earnings growth.

Galaxy Entertainment offers the best growth potential.

Galaxy’s new resort has opened in May. The casino operator has invested US$3.2 billion in adding 57 percent more rooms and 19 percent more gaming tables. And its Ritz-Carlton hotel offers great experience for families. Also, the resort has the city’s largest and most diversified shopping malls for visitors.

Galaxy’s Broadway Macau offers a wide range of hawker-style street market at an affordable price. The company is likely to earn the most this summer.

Galaxy shares tumbled below HK$30 in early July. They are currently moving in the HK$30 to HK$40 range.

Investors can consider collecting the stock at around HK$30 and take profit at HK$40.

This article appeared in the Hong Kong Economic Journal on July 24.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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