Macau Stocks are Ahead of Themselves - Credit Suisse (MGM) (LVS) (WYNN)
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Macau gaming stocks are on watch today after Credit Suisse issued a cautious note on the sector and downgraded a couple names. Analyst Kenneth Fong notes that while the sector has rallied ~30% over the last three months, fundamentals are not as strong as they appear.
"Although GGR is turning to positive growth in August, the daily revenue has been hovering around MOP550-600 mn (since 2Q15) despite the addition of three new casinos," th enotes. "The new AML rules and junket consolidation may continue to drag VIP. Without a healthy VIP recovery, mass would be slow. Margin: 2Q EBITDA margin was flat QoQ despite better mix, highlighting pressure from competition. With more supply added in 3Q, margin could worsen. Cash flow: FCF conversion from EBITDA weakened on operating deleverage and lower new project return, e.g., Sands FCF/EBITDA ratio fell from 92% (2014) to 83% (2017e). Dividend: Casinos may need to reserve cash for debt repayment, with gaming license approaching expiry in 2020/22, hurting payout."
While they agree that GGR has bottomed, share prices have priced in an overly optimistic outlook. Fong notes the sector is trading at the second highest valuation since 2011, with growth resumption yet to be proven and outlook clouded by industry oversupply and competition. Even in the firm's blue sky case, only two stocks have upside.
The firm downgraded Wynn Macau to Underperform from Neutral and MGM China to Neutral from Outperform. Galaxy is the firm's only Outperform rated name in the space.
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