Macau casino stocks have rallied so far in 2023 as China has paused many of its COVID-19 travel limitations. Nevertheless, Macau gaming revenue still hasn’t recovered compared to 2019 levels, and some investors may be concerned that the stocks may have limited extra upside from here.
The Numbers: On Monday, Bank of America analyst Shaun Kelley noted that he supposes optimistic earnings revisions for Macau stocks Wynn Resorts, Limited (NASDAQ: WYNN), Las Vegas Sands Corp. (NYSE: LVS), and MGM Resorts International (NYSE: MGM) in coming months.
In addition, Shaun Kelley mentioned that these days Macau has recovered around 47% of its 2019 pre-pandemic gross gaming revenue (GGR) run rate, together with 78% of the mass market, non-VIP revenue. However, after a strong start to the year. In addition, he said Las Vegas Sands and Wynn are trading at 12x and 10.5x probable 2024 EBITDA already only a 10% to 20% discount to historical averages.
The mix of gaming revenue in Macau has changed dramatically in the last decade with VIP’s share dropping from 73% in 2010 to an estimated 24% in 2022,
Shaun Kelley said.
Kelley said bulls would argue positive earnings revisions, pent-up demand, improved operating efficiency and margins and valuation upside are enough to own the Macau casino stocks at currency levels. However, bears would say 2024 consensus estimates have little upside, mass market spending has historically generated very little long-term growth and capital returns could be more limited than they were during previous growth cycles.
- Suggested read: Why Macao Is Getting Tougher on its Giant Casinos.
Noticeably, Macau casino traffic keeps up an improving trend in February; Jefferies pointed to strong results for Macau casino operators in February. The firm’s industry checks indicated a higher VIP rate of growth and a steady mass market rate since the Chinese New Year holiday, according to Seeking Alpha.
“Macau GGR continues to demonstrate resilience, boosted last week by a higher VIP win rate. Although gaming revenue likely peaked post the holidays, we think current levels imply positive EBITDA generation,” noted analyst David Katz.
How To Play It:
Bank of America has the following ratings and price targets for U.S.-listed Macau casino operators:
Las Vegas Sands: Neutral rating, $62 price target. Wynn: Neutral rating, $110 price target. MGM: Neutral rating, $46 price target. Melco Resorts & Entertainment Ltd (NASDAQ: MLCO), Buy rating, $17 price target.
In a conclusion, the renewal of Macau gaming licenses and the pause of COVID-19 travel restrictions have removed two of the biggest overhangs of the past couple of years for Macau casino operators. However, China’s regulatory crackdown on VIP junket operators suggests it’s unlikely for high-growth VIP revenue to return to pre-pandemic peaks anytime soon, clouding the long-term outlook for Macau.
