Time to Bet on Undervalued Macau Gaming Stocks: Brokerage


Solid gaming revenue growth of 40 percent seen in Macau over 2011 is not reflected in the stock price of companies operating in the world’s biggest casino center, says David Bain, Entertainment Analyst at brokerage Sterne Agee, who believes it is time to gain exposure to the undervalued casino operators.

The Venetian Resort and Casino Asia. China. Macau. The Venetian Casino and Resort.
Angelo Cavalli | Getty Images

“The earnings have been increasing but the stock prices haven’t correlated…and consensus continues to move higher on the earnings,” Bain told CNBC on Wednesday.

Gaming revenue in Macau is set to jump almost 20 percent this year, says Bain, largely driven by the opening of Las Vegas Sands’ Cotai Central in Spring and the completion of the Guangzhou-Zhuhai rail line by the end of the second quarter. Zhuhai, located on the northern border of Macau, is a gateway for Chinese tourists coming to the casino city.

“In the near-term, we expect January visitation in Macau to exceed 3 million — an all-time record for the month,” he said. A majority of which come from the Mainland.

Bain adds that worries around a slowdown in gaming revenue growth in Macau, driven by a host of factors including monetary tightening in China and declining property values which could affect the income of its “VIP clients”, were over done.

“In our view, none of these have resonated negatively into Macau earnings, and we do not see that changing near-term,” he said.

Bain currently has a buy call on Melco Crown Entertainment , which derives all its revenue from Macau, and Las Vegas Sands , which generates approximately 60 percent of its earnings from its operations in the city including Sands Macau, The Venetian Macau and Four Seasons Hotel Macau.

His 12-month price target for top stock pick, Melco Crown, is $21.50 or a 92 percent upside from current levels, based on its low valuation, mass premium positioning and the likelihood of the leisure resort Macau Studio City starting construction in the first half of the year. 

“Financing for Macau Studio City is underway and our checks cite early stage hiring has also begun.”

Meanwhile, his 12-month price target for Las Vegas Sands, which is due to report earnings later today in the U.S., is $65 or a 33 percent upside from current levels.

“LVS shares are still at levels close to 12 months ago – and its outlook has improved since then, in our view.”

Bain believes the stock will get a boost from the opening of its Cotai Central casino resort as well as robust operations in nearby Singapore’s Marina Bay Sands (MBS).

Factors including the opening of an underground train line at MBS and tourist attractions like waterfront gardens in June this year, will help attract a constant stream of visitors, he said.

Bain has raised his fourth quarter EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) outlook for both Melco Crown and Las Vegas Sands to $214.8 million from $200.9 million and $861.4 million from $846.0 million, respectively.