Shares in Macau’s gaming operators have surged 82 percent since the fourth quarter of 2016 and as a result most are overvalued, with investors failing to factor in potential risks from a cyclical economic downturn and license renewals, Morningstar warns.
The firm says that Galaxy Entertainment, Wynn Macau and its parent company Wynn Resorts, Melco Resorts and Entertainment and Las Vegas Sands are all now overvalued.
It says MGM China, Sands China and SJM Holdings are fairly valued, while only MGM Resorts, which gets 20 percent of its EBITDA from is Macau unit, is slightly undervalued.
Morningstar has revised up its forecasts for Macau gross gambling revenue for this year and next, though has trimmed its forecasts for 2020 and 2021 due to an anticipated economic downturn on Mainland China, which typically has a three-to-four year cycle. The firm notes that it is contrary to consensus on its views for 2020 and 2021.
The firm sees GGR of 14 percent this year, up from prior guidance of 4 percent and 15 percent next year, up from 11 percent prior. For 2020, it now expects a decline of 1 percent, compared with a 8 percent gain previously and 2021 to grow by 5 percent, up from a high single-digit forecast.
Growth in the next two years will be helped by the opening of major infrastructure projects, such as the Hong Kong/Macau/Zhuhai bridge, which is expected to improve accessibility.
Then the Mainland economy and housing cycle, which have in the past shown close correlation with Macau GGR, is expected to slow. There is also uncertainty over the concession renewal process, with the risks of high renewal costs and potentially higher taxes.
“After the economic cycle normalizes, we expect mid-single-digit annual gross gaming revenue growth from 2022 to 2027, underpinned by Macau’s low Chinese visitation penetration (around 2 percent of the population visited the gaming region in 2017) and continued infrastructure improvements,” it adds.
VIP revenue is forecast to grow 12 percent in 2018 and 5 percent in 2019 before falling in 2020 and 2021.
“We estimate Macau mass gaming revenue will rise at 15 percent, 23 percent, and 7 percent in 2018, 2019, and 2020, respectively, on the back of a better economy but also due to improved visitor experience as key infrastructure developments are completed.”
The weaker economy is also likely to hit the mass sector in 2021, which is likely to fall 3 percent that year. But mass revenue will show greater resilience, it said.