Macau Gaming:Aug GGR slightly beat despite severe typhoon im
Strong VIP while mass negatively impacted by typhoons
Macau’s gross gaming revenue (GGR) rose 21.8% YoY to MOP67bn in 3Q17, with VIPgaming GGR growing 35.0% YoY and mass gaming GGR increasing 7.4% YoY. VIP gamingaccounted for 58% of total GGR in 3Q17( 1ppt QoQ). We note two typhoons, inparticular level-10Typhoon Hato in late August, negatively affected the industry’s GGRin August and September, group tours from mainland China being suspended for oneweek. Nonetheless, GGR beat market expectations in August, while being in line withexpectations in September. We are more cautious on the gaming sector’s growth outlookin the short-term, while remaining positive in the long run.。
Quiet Golden Week, followed by high-end GGR recovery
Stocks now priced in too sharp of a slowdown in 2H
Aug GGR beat the recent market expectation of 18.5% YoY growth. Weestimate Aug GGR in VIP segment to have grown 33% YoY, and massGGR to record slower growth of 6% YoY on reduced visitor arrivals due totyphoons. Two typhoons have hit Macau in late Aug and the MacaoGovernment Tourism Office has suspended package tours to the city sinceAug 25in order to free up resources to help the city recover. Therefore, webelieve mass market has taken a blow.
Visitations negatively impacted by typhoons. Total visitations declined 0.56% in Augustafter growing for five consecutive months. As the government suspended group toursfrom 25to 30August, group visitations declined 7.0% YoY to 677,400. Meanwhile,individual visitations increased 1.6% YoY. Hotel occupancy rate dropped by 3.9ppts to86.4%, after growing for 14consecutive months. Mass gaming revenue growthmoderated by 1-2ppts QoQ in 3Q17. However, looking at Macau’s energy supply andvisitation numbers, we note the typhoons only had a short-term impact, the industryresuming normal conditions before the National Day holidays (1-8October).。
Oct GGR came to the higher end of market expectation of 13-17% YoYgrowth. We estimate Oct GGR in VIP segment to have grown 30% YoY, andmass GGR to record 13% YoY. Oct Golden Week was good but did not reachthe level to surprise the market. However, GGR started picking up in lateOctober after 19th National Congress was held; the sequential improvementin late October could have been mostly driven by high-rollers’ business.
Macau stocks fell 5% over the past 2weeks on concerns that the new facialrecognition feature on ATMs would hurt GGR. After checking with junketoperators and casino managers, we conclude that GGR weakness in the lastweek of June was only a temporary blip due to low VIP play during PresidentXi’s visit to HK. In fact, GGR/day already rebounded strongly last week. Whilewe agree with consensus that GGR growth should decelerate in 2H, we thinkstocks have now priced in too sharp of a slowdown. Macau stocks are nowpricing in GGR growth to slow sharply from 22% yoy in 2Q to 15% yoy in 3Q,while we think 3Q GGR growth should remain relatively strong at 18-20% yoy.We expect consensus upgrades after the 2Q results in late July-mid Aug. For2Q, we expect Galaxy (Hold) to post sequential EBITDA growth while MGMChina (Hold) to post the worst sequential EBITDA decline. In this 2nd phase ofVIP resurgence, we lift ests the most for Wynn Macau (Buy) and Galaxy (Hold)(Figure 18-19).
Full year GGR to grow 17-19% YoY
Short-term pressure. Compared with 1H16, late 2016represents a higher base, whichwill negatively affect YoY growth in end-2017, while positive drivers in the sector havealready been priced in. In addition, we think uncertainties in the housing and commoditymarkets may affect VIP gaming revenue. However, we believe it is unlikely for theindustry to experience a similar downturn to the one seen in 2014in the near future.Overall, we suggest that investors become more cautious on the gaming sector in 4Q17.。
Full year GGR to grow 19% YoY
New ATM rule has no impact on Macau
We expect Sep GGR to record slower YoY growth of 18% YoY, given 1)higher base in Sep 2016which recorded 7.4% YoY growth in GGR, and 2)impact from suspension of package tours to Macau (to be resumed on Sep2nd). Factoring in the impact from two typhoons, we think GGR growth forFY17E should range 17-19% YoY.
Long-term growth potential. We believe the gaming industry is still in a growing stagefor two main reasons. First, population penetration rate (visitations from mainland Chinadivided by total population) is still low at c.1.4%, compared with 10%-plus for Las Vegasin the US. Second, China is experiencing consumption upgrades. As a result, an increasingnumber of people are looking for ways to spend money on outbound travelling andleisure activities. Given its geographical location, Macau is a convenient vacationdestination for mainland tourists. We believe the sector’s healthier business structure,with mass gaming GGR at a historically high contribution level and non-gaming businessdeveloping, will contribute to solid industry growth in the long term.。
We expect Nov GGR to record similar YoY growth of 18% YoY: mass is likelyto continue growing at a stable pace, while we think upside GGR projectionis coming from VIP and premium mass sides. We expect GGR YoY growthto be 20% in 4Q17E from 13%/22%/22% in 1Q/2Q/3Q17.
Macau stocks fell last week on concerns that, starting 3rd July, ChineseUnionPay cardholders can only get cash from the 800ATMs in Macau withfacial-recognition function. But casino floor managers told us that this new rulehas very little impact on GGR because most players can still easily get cash inpawnshops via fake UnionPay purchases. In fact, some pawnshops told usthat their fake-purchase business grew last weekend as players who couldn’tuse ATMs came to them to get cash.
Buy Galaxy and Sands China
Overweight gaming stocks. Despite being more cautious on the gaming industry’sperformance in end-2017, we remain positive on the sector’s growth outlook in the longrun, considering the potential from mainland Chinese visitors. The sector is currentlytrading at 12.8x 18E EV/Ebitda. We like Galaxy Entertainment (27:HK – BUY) in the longrun, while we see opportunities in MGM China (2282:HK – N-R) in the short term, as theonly gaming stock with new property opening scheduled in 2017-18.。
Sector has seen recovery lately but no big upside
Don’t look at Tier-1city property prices; Tier-3cities hold the keys to VIP
The sector is currently trading at 21x FY18E P/E and 13x EV/EBITDA, inlinewith their respective 5-year averages. The sector has underperformedHSI in Aug given the market concerns on typhoon’s impact. With the upbeatGGR in Aug, we believe that the market will regain confidence on thesector. Currently we suggest investors to accumulate Galaxy and SandsChina. We like Galaxy for its continuing strong performance, undemandingvaluation and potential in margin expansion. We also like Sands China forits laggard position and high dividend yield in the sector.
The sector is currently trading at 24x FY18E P/E and 14x EV/EBITDA, in linewith their 5-year averages. There was some profit-taking in Oct due to themarket concern on slowing GGR growth. While sharp pick-up in late Oct hasprovided some recovery to the sector’s performance, we believe overallsentiment has stayed neutral by now. Among Macau names, we believeMelco Resorts is likely to outperform its peers, given desirable 3Q17E resultsand its undemanding valuation.
We’re more bullish on 2H17GGR than the Street because we’ve learnt fromjunkets that most of the new VIPs actually come from Tier-3cities in China, notTier-1cities. As such, property prices in Tier-1cities have very little correlationwith Macau’s VIP GGR (Figure 9). Instead, VIP GGR is mostly correlated to Tier-3city property prices (75% correlation in Figure 10). Unlike in Tier-1citieswhere property prices have softened after govt restrictions, Tier-3city propertyprices are still on the rise. Hence, we believe Tier-3cities are still minting outfresh nouveau-riche VIP gamblers, ready to contribute to Macau.
Recent pullback creates buying opportunity; key risks
Macau stocks are trading at 13x DB 12m fwd EV/EBITDA, slightly below 1stddeviation over historical avg. Near term, talks about the completion of the HKMacau-Zhuhai Bridge may spark optimism on the mass market, which may reratethe sector to 15x. Longer term, sector multiple should be driven by GGRmomentum. So momentum slowdown can cap valuation multiples. We valueMacau stocks on SOTP with target multiples on 2017E EV/EBITDA. Downsiderisks include a sharp slowdown in GGR momentum, a change in investorpreference from momentum stocks to value stocks and regulatory changes.Upside risks include milder-than-expected tightening of China credit policy.
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