The temporary thawing of trade tensions between the United States and China is set to ease concerns surrounding Macau concession renewals and benefit the stocks of Macau’s three US-based concessionaires – Wynn, MGM and Las Vegas Sands (LVS).
The potential positives of last week’s G20 Summit – which saw US President Donald Trump and China’s Xi Jinping agree to a 90-day trade truce ahead of further talks – were highlighted in a series of notes from investment bank Morgan Stanley on Monday predicting an improved outlook for the three IR operators.
It follows recent stock price falls amid concerns that the looming US-China trade war could negatively impact their prospects of having their gaming licenses re-instated upon their looming expiry – MGM in 2020 followed by Wynn and LVS in 2022.
“A thawing of the trade tensions between the US and China should alleviate some concerns around Macau concession renewals,” said Morgan Stanley’s Thomas Allen, Praveen Choudhary, Bradford Dalinka and Michael M DeLalio.
“While the Macau concession language notes that the licenses must be re-tendered upon expiry, numerous conversations with Macau-focused lawyers, legislators and operators have suggested that the incumbents are best positioned to continue to operate, unless the Chinese/Macau governments decide otherwise.
“Given what appears to be an improving trade relationship between US and China, we see a greater likelihood the concessions are renewed, at some cost.”
Morgan Stanley noted that Wynn and LVS saw their largest ever quarterly declines in top 100 asset managers’ portfolio allocation in 3Q18, with LVS having US$9 billion of capital withdrawn by three asset managers and Wynn US$4 billion.
“This group is primarily made up of long only investment funds that, based on our conversations, saw outsized risk of these companies losing their Macau concessions given the trade tensions between China and the US,” it said.
Notably, Morgan Stanley maintains LVS as its preferred Macau stock.
“We continue to recommend investors own LVS as the way to play the Macau structural growth story,” it said. “LVS is the mass market share leader in the market (at 30%, second highest has 18% share) driven by the greatest number of hotel rooms (12,000, next closest 4,000). Consensus in our view wrongly assumes LVS loses market share in Macau in 2019 while we believe the continued strength in mass market versus weakness in VIP/premium mass will lead to LVS holding share and driving EBITDA outperformance.
“In addition, we see LVS as the front runner to win one of the three casino licenses in Japan, and see $3 to $7 of incremental present value from a Japan license.”
The thawing of trade tensions aside, there are also other potential upsides on the horizon for Macau’s gaming stocks including better than expected November GGR growth of 8.5% on the back of strong grind mass as well as impressive numbers utilizing the recently opened Hong Kong-Zhuhai-Macau Bridge.
Macau’s Public Security Force last week revealed that 800,000 visitors either entered or departed Macau via the bridge in the first month of operation, representing around 14% of total visitation – well above Morgan Stanley’s 500,000 estimate.
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