An exceedingly underwhelming Golden Week holiday period, coupled with mounting VIP uncertainty and downside risks to consensus, have led JP Morgan analysts to downgrade Macau stocks on lowered expectations for the year ahead.
In a Thursday note, analysts DS Kim, Derek Choi and Jeremy An admitted hopes that pent-up demand among mainland Chinese gamblers may propel a rapid recovery had been proven false after just 139,280 visitors arrived in Macau over the seven day Golden Week period – down 85.7% year-on-year.
In response, they have downgraded Sands, SJM, Melco and MGM stocks to neutral and Wynn to underweight, with only Galaxy staying at overweight.
“We neutralize our bullish view on Macau SAR gaming to reflect frustratingly poor re-opening trends, mounting uncertainty on VIP and downside risks to consensus,” they state.
“Choppy demand and dwindling hope of ‘return to normalcy in 2021’ make us acknowledge the sector’s risk-reward isn’t as attractive as we had envisioned, despite seemingly undemanding valuation (on 2022, not 2021).”
Asking what went wrong, JP Morgan adds, “We were overly hopeful on the prospect of pent-up demand, which we thought would outweigh the nuisances related to travel arrangement to Macau and stricter capital control.
“Plus, a broadening clampdown on illegal/overseas gambling in China is creating jitters among agents/players at unprecedented levels, in turn throttling any VIP/high-end demand recovery (which, by the way, was touted and supposed to lead the initial rebound).”
On a positive note, the analysts predict an uptick in visitation once the current manual-led visa process – individuals must pre-register, apply in a person at a registration desk then wait 7 to 10 days for approval – is scrapped in favor of the old automated version.
“The entire process is not insurmountable, but it’s probably annoying enough to dissuade many people – especially mass and casual players – from considering Macau as a preferred destination,” they state.
“We do think this is a transitory issue, as it doesn’t make sense to us that a virus has negated anyone’s desire to gamble, whereas a reluctance to travel across the border will gradually go away.
“Moreover, we think suspension of kiosks is a temporary measure (to control the initial pace/flow of reopening) and machines should re-open if and when the government feels more comfortable on traffic-flow between Macau and the mainland.”
Assessing the stocks, JP Morgan rates Galaxy as a “good long hedge against likely volatile momentum given its attractive long-term growth pipeline, best-in-class execution and minimal licensing risks, whereas we see Wynn carrying the biggest estimate and valuation risks due to its relatively oversized VIP exposure.”
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