Goldman Upgrades Wynn Macau, Says Investors 'Too Pessimistic'
While a slowdown in Macau, the world’s number one gaming destination by revenue, has many analysts lowering growth forecasts and cutting stock prices, Goldman Sachs says there’s too much pessimism over the gaming market and investors could see good value in the long term in certain stocks.
Recent signs of recovery in China’s property market, and lowered concerns over the economy should boost weakness in the VIP or high-roller segment in the fourth quarter, according to the investment bank.
The VIP segment, which contributes about 70 percent of Macau’s revenue, has seen a pullback in recent months, because of a credit crunch in China created by monetary tightening late last year.
Goldman, however, points out that Macau’s gambling revenue picked up 12 percent in June compared to the same period last year. Gaming revenue grew just 7 percent year-on-year in the previous month of May, down sharply from growth of 26 percent in the January to April period this year.
The bank upgraded Wynn Macau , a unit of U.S. gaming firm Wynn Resorts , from sell to neutral, because its shares no longer traded at a significantly higher valuation than those of its peers.
“After the 35 percent underperformance in the past year, its [Wynn Macau] valuation premium to Macau peers has narrowed to 16 percent versus 37 percent historically,” the firm said in a note. “As the period of the most drastic earnings downgrade should be behind us, further de-rating of its share is unlikely.”
Wynn Macau shares are down 10.8 percent so far this year, as investors continue to dump the stock on fears of a major slowdown in the world’s largest gaming market. Analysts are calling for revenue growth of around 15 percent this year for Macau’s gaming industry, down sharply from a 42 percent expansion in 2011.
Goldman, meanwhile, has added Galaxy Entertainment to its conviction buy list over Sands China . The bank said it expects markets to be disappointed by weak results from Sands China in the second quarter because it failed to create much hype with the opening of its newest casino on Macau’s Cotai strip in April.
“We had anticipated Galaxy to be vulnerable to market share loss after the opening of Sands Central Cotai, both of which have similar market positioning,” Goldman Sachs said. “However, recent operational data suggests that Galaxy Macau actually gained market share in both the VIP and mass markets, helped by its strong junket relationship and the opening of new facilities.”
Goldman Sachs expects Galaxy to post strong second-quarter earnings in August with a 12 percent jump in revenue, outperforming other casino operators.
“We believe Galaxy’s share has not fully priced in the upside potential from its market share gain year-to-date,” the report said.