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Beaten-Down Macau Gaming Stocks a Buy: Analysts 

Geraldine Tan|Assistant Producer, CNBC Asia Pacific
Thursday, 24 May 2012 | 3:47 AM ET

Macau gaming stocks have fallen out of favor, with the major names sliding an average of 20 percent since the beginning of May on worries about a sharp slowdown in gambling revenues. But, according to analysts at Nomura, the correction may be close to an end and the recent drop could present an attractive buying opportunity.

Macau's casinos at dusk
Brian Sytnyk | Photographer's Choice | Getty Images
Macau's casinos at dusk

In a note to clients, Nomura analysts Charlene Liu and Michael Shen said they didn’t expect a major slowdown in growth this year.

“This is because we think the business remains healthy and on our latest visit to Macau, operators and junkets alike confirmed that they have not seen any slowdown in the business or lengthening of collection cycle.”

Macau’s gaming revenue rose to $3.1 billion in April, 22 percent higher than a year ago. But it was the 18th month of gradual declines — and many analysts are concerned that tightening liquidity conditions in the mainland and government policies aimed at reining in growth might hurt revenues further.

Herald van der Linde, head of equity strategy, Asia-Pacific at HSBC, noted that analysts had been upgrading earnings estimates for Macau’s gaming sector but the positive news had failed to lift stocks.

He believes the confidence gap between earnings estimates and how far prices have fallen, make the sector an attractive bet.

According to Nomura, the completion of the second phase development at Sands Cotai Central in the third quarter — the casino operator’s latest property along the Cotai strip, an area that has been drawing many high rollers — and the reporting of second-quarter results could change the negative mood in the sector.

Analysts Liu and Shen also believes investors may not need to wait till late August to see a rebound and the stocks could rebound based on their historical valuations.

“We believe that the sector on average has 22 percent upside based on yesterday’s closing in the short run,” they said.

Wynn Macau and SJM Holdings are Nomura’s top picks based on their valuations and their rich dividend yields.

“Both names are further supported by strong cashflow and among the highest dividend yield of 6.5 percent and 5 percent within the sector, ” Nomura said in the report.

The bank has a target price of HK$29.50 for Wynn Macau, representing a 59 percent upside and a price target of HK$20.50, for SJM, representing a 48 percent gain.

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