Morningstar slashes its price targets for Macao casino stocks, flags areas of concern

Published Sun, Sep 19 20218:56 PM EDT

Morningstar slashed its price targets on Macao casino operators as regulatory uncertainty hammers their Hong Kong-listed shares still reeling from the collapse in travel during the pandemic. "The planned review of Macao's gaming laws sparked a significant sell-off of casino-operator shares as the proposals by Macao's Gaming Supervision and Coordination Bureau signal tighter regulatory control," Morningstar's Jennifer Song wrote in a Wednesday note. "We think this could reduce the visibility on casino operators' long-term business outlook, and we raise our fair value uncertainty rating for the Macao gaming companies to very high from high, and we lower our fair value estimates by 22%-45% as we believe some of the measures may limit the pandemic recovery," said Song, a senior equity analyst at the firm. To be sure, Morningstar is not alone in lowering its valuations of Macao casino stocks, with JPMorgan recently also urging investor caution on the sector . Hong Kong-listed shares of casino firms were slammed on Wednesday as Macao kicked off a 45-day public gaming consultation . Wynn Macau and Sands China both lost more than a fifth of their value in a single session. The sell-off largely continued in the next few days, with Wynn Macau's stock falling 35.45% for the week while Sands China plunged more than 43% in the same period. Morningstar reduced its price target for Wynn Macau from 17 Hong Kong dollars per share to 9.2 Hong Kong dollars ($1.18), while Sands China's fair value has also been slashed from 43 Hong Kong dollars per share to 26.50 Hong Kong dollars ($3.40). Morningstar also cut its fair value estimates for other Macao casino stocks, including Galaxy Entertainment , SJM Holdings and MGM China . Areas of concern Song highlighted three areas of concern for investors in the sector. Firstly, the proposed revisions to the gambling law is set to heighten scrutiny on casino operators and increase local ownership, suggesting "more direct government supervision on the gaming companies' operations." Secondly, she cited the likely risk to casino's junkets — trips for high-rolling customers — and VIP business from China's crackdown on cross-border currency outflows and money laundering. She noted there's also little transparency surrounding the renewal of gaming licenses. "The policy steer is fairly vague, in our view, but the reference to social responsibility is sending chills down the spines of investors, given recent developments in the technology and education sectors in China, and represents a major new source of uncertainty," she said. Still, the Morningstar analyst characterized the sharp sell-off in Hong Kong-listed casino stocks on Wednesday as "overdone," saying Macao's long-term vision to be a world-class center for tourism and entertainment remains unchanged. "While the increasing scrutiny of casino operators reduces visibility on the long-term business outlook, we think Macao's perspective is closely tied with its gaming tax contribution," Song said. "Coupled with the government plan of integration with Hengqin Island , we think the long-term outlook of mass market and nongaming contribution remains promising."

People wearing protective masks sit on a bench as Macau Tower stands in the distance in Macau, China, on Tuesday, March 3, 2020.

Billy H.C. Kwok | Bloomberg via Getty Images

Morningstar slashed its price targets on Macao casino operators as regulatory uncertainty hammers their Hong Kong-listed shares still reeling from the collapse in travel during the pandemic.