Investors not cautious enough on Macau, Morgan Stanley says

Investors are still not cautious enough on Macau gaming stocks despite the sell off that has resulted in a 37 percent underperformance relative to Hong Kong’s benchmark Hang Seng Index this year, Morgan Stanley says in a note.

“While sell side is generally negative, we see investors are inclined to add positions. We see further risk to earnings and PTs, thus retain our Cautious view on the industry,” the bank said.

It says there are four main risks to stocks — demand regulation, earnings and valuation.

Although the slump in demand due to China’s anti-corruption campaign and tighter visa regulations is well understood, the firm said the recent drop in Chinese visitation and the fall in grind mass revenue were a blow.

The number of mainland visitors was down 18 percent in March year-on-year, while there was also a significant drop in hotel occupancy across all flagship hotels. This dents the theory of an underpenetrated Chinese tourism market driving demand, Morgan Stanley said.  

It also said it doesn’t believe that the potential cap on Chinese visitors at 21 million, a full smoking  ban and strict conditions for license renewal have been factored into consensus earnings estimates.

“We believe consensus expectations of margin expansion in 2016/17 are difficult to justify, considering slow ramp of Phase 2.”