The current deceleration of Macau’s gaming growth provides a very real opportunity for investors to gain outsized returns, with the market having “overly penalized quality operators with Macau exposure,” according to analysts from brokerage Bernstein.
In a research note published early Thursday morning examining the performance of US-based gaming operators – namely Wynn Resorts, Las Vegas Sands (LVS), MGM Resorts and Caesars Entertainment, analysts Vitaly Umansky, Kelsey Zhu and Eunice Lee state that any large operator with Asian exposure remains an attractive proposition for investors.
And they point specifically to Wynn and LVS as being undervalued amid current global financial fears.
“Over the last five years, gaming stocks have gone through periods of significant underperformance, followed by significant outperformance,” Bernstein observes.
“The last six months have been exceptionally difficult for gaming stocks as Macau growth has begun to decelerate following nearly two years of strong growth and Las Vegas has seen unexpected near-term softness. However, the gaming space has shown, time and again, that if investors pick the right market, the right company, at the right time, outsized returns are possible.
“In the current valuation environment, we favor operators with Asian exposure. The growth engine will largely be from Macau – a US$37 billion gaming and US$4 billion non-gaming market, with 10% CAGR revenue potential over the next five years.
“Higher growth and cash flow generation lead to higher valuation for Macau businesses; however, one needs to be prepared for volatility: a heavy dose of news flows, policy impacts, short-term revenue data and overarching China sentiment sometimes play havoc with stock prices.”
Bernstein points to Wynn, currently trading at around US$103, as boasting potential upside of 63% with a target price of US$166.
“In Macau, Wynn is the most efficient operator with the highest table utilization. The paradigm shift from VIP to mass in the medium term will help boost Wynn’s profit margins as the company garners operating leverage,” the analysts say. “We believe the current distressed valuation for Wynn is impacted by weak China macros and a cyclical slowdown in the Macau market (which is more than priced in), and hence represents an attractive entry point for long-term investors.”
On Sands China, the analysts state that the company is “a clear leader in Macau with a product offering that’’ well-positioned to benefit from Macau’s continued paradigm shift from VIP to mass.
“The market has overly penalized quality operators with Macau exposure,” they add. “While the near-term headwinds for 2019 growth are clear, the market has overly penalized valuations on overall China negativity.
“We are confident in Macau’s long-term growth prospects, and factoring in the risks, we think the valuations for Wynn and LVS are too cheap to ignore.”
RelatedPosts
