Inside Asian Gaming

INSIDE ASIAN GAMING | November 2012 6 and the lowest at about 28%—“And that’s still very high,” he says, “because the cost of capital is very low, it’s roughly 12%, the way we have it.” In essence, Macau has been “de-risked,” is how Mr Monaghan puts it, and therefore is increasingly “investable” for large “yield” buyers for whom positions in the gaming sector would not have been an option in the past. “Where before you had only a few companies that were listed, and they had high debt and new assets under construction whichmaynot havebeenproducing revenue, or if they were under construction they weren’t producing anything, now all of them are producing tons of cash,” he says. “They have paid off their original investments. Now they’re going into a whole new wave, and the whole gearing structure is radically different from what it was before. The industry from a market cap perspective is so much bigger than what it was, but far more relevant. Before you had difficulty predicting earnings, and now it’s easier to predict them getting much bigger.” Dividends figure prominently in this, as you would expect. They’re a rarity in the gaming space everywhere in the world, yet they comprise a whopping $8 of every $100 spent in a Macau casino, CLSA’s research shows. Grant Govertsen, managing partner of Union Gaming Research Macau, says, “You’ve got this unique dynamic where it’s still an explosive growth industry, but they’re also dividend-payers, which opens up these stocks to a class of investors who often limit themselves to only stocks that pay dividends. The companies that don’t pay dividends are in effect limiting their potential shareholder base. So I think ultimately you’ll see dividends paid by everybody.” Currently, four of the six listed Macau names pay them—Melco Crown Entertainment and Galaxy Entertainment Group expected—at a yield that hovers around 6%, about twice the market average. Which speaks also to the fact that the sector continues to trade at relatively lowmultiples, suggesting many have yet to wise up to the cash flow story, or they remain fearful of slowing growth in China or the precarious state of the global economy or both, and this gets co-mingledwithconcerns the slowdown in gaming revenue growth this year and the fall-off in VIP play especially. Share price growth has been strong overall, 620% the last three years, according to CLSA. But there aren’t many analysts who would tell you thegroup isgetting the respect it deserves. At 10 times forward EV/EBITDA the sector is trailing historical averages by about 17%. On a price-to-earnings basis, at recent averages of 14 times 2013 estimates, it’s trading at a discount of roughly 40% to its peers in the hotel sector. “For a lot of good quality consumer categories the P/E multiple can be 20 to 30 to 35 times,” notes Mr Fischer. “So we would say just on a P/E basis they’re cheap. We think the sector’s cheap on every valuation metric. Given that you’ve got good earnings visibility, cash flow visibility, dividend visibility, we don’t feel like that’s priced in.” Mr Govertsen says, “How we would look at it is, OK, the mass market story over the next five, 10, 20 years should be absolutely dynamite. Sustained double-digit growth for the foreseeable future. Which suggests that all six of these companies really do have a “You look at these things and they’re trading at historic low multiples and not too different from US gaming companies, for instance, regional riverboat operators, who are trading at only a slight discount to these names, and you look at the two growth profiles and they’re wildly different.” Cover Story