It's time to go all in on Macau gaming stocks: Pro
Macau casino plays got crushed last year as the sector hit a rough patch, but with the prospect of a recovery increasing, some analysts say now's the time to scoop up these battered shares.
"Waiting until mid-year to begin accumulating positions will have missed a large chunk of upside, so now is the time, as Macau will quickly become a crowded long on the first signs of recovery," said Grant Govertson, principal analyst at Union Gaming, who upgraded the gaming sector to a "buy" from "hold" last week.
The bullish call is premised on hopes that the world's biggest gambling hub will see signs of a recovery in the second half of 2015. Govertson notes that a slowdown in the decline of monthly gross gaming revenue (GGR) – the amount wagered minus the winnings returned to players – beckons a period of stabilization, with the drop in revenue likely to be "less onerous" in coming months.
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GGR in the Southern Chinese territory fell 17.4 percent on-year to $2.97 billion in January, figures from the Macau gaming and inspection bureau showed, marking the eighth consecutive monthly decline. That followed a 30.4 percent plunge in December and 19.6 percent decrease in November on the back of varying factors including a decline in the number of VIP gamblers, regulatory curbs and a smoking ban.
As such, shares of casino operators like Sands China, Wynn Macau and Galaxy Entertainment Group in Hong Kong plunged more than 30 percent last year.
However, share prices will soon rebound, with negative sentiment in the sector likely to bottom this quarter, according to Govertson: "The government has taken various actions to 'reset' Macau and it seems they are back into making Macau the preferred entertainment destination of China."
Other positive factors
Investors are also becoming more optimistic on casino plays due to factors like valuation multiples trading below historical levels and China's corrective efforts that have "cleansed" the gaming enclave.
Meanwhile, new casino properties due to open this year will lift the fortunes of some operators, like Galaxy Entertainment. Macau's second-biggest player expects the completion of new amenities by mid-2015. Union Gaming forecasts 32 percent upside for the Hong Kong-listed equity over the next 12 months, while Deutsche Bank has a "buy" call, noting that gaming shares tend to rally 38 percent in the 2-3 months ahead of a new opening.
Barclays has an overweight rating on Melco Crown, on hopes that the operator will reap better revenue growth when its Macau Studio City located along the Cotai Strip, opens by year end.
Don't go all in, yet
Other market watchers are more cautious.
While agreeing that valuations render Macau's gaming stocks "almost a screaming buy", CIMB maintains its neutral rating for now.
"Unless you see another major shock in terms of policy, we think current valuations are quite supportive," CIMB analyst Michael Ting told CNBC. "But on the other hand, we don't see many positive catalysts in the near term."
Credit Suisse prefers to wait on the sidelines, noting that the sector isn't exactly at its cheapest. A fragile recovery and unattractive earnings expectations also leave little margin of safety for investors, analysts wrote in a report.
"Even if GGR recovers gradually into the second half, the sector would still be trading at a price-earnings ratio of about 18.4 times expected 2015 earnings, versus the historical average of 17.6 times, leaving limited upside. If the recovery is slower than expected, the sector can easily see a sharp correction on a combination of earnings downgrade and multiple de-rating," the report said.