Macau's Revival Progresses Steadily, Complete Recovery Forecasted for 2022, Affirms Morningstar.
Struggling gaming stocks with significant presence in Macau are lagging behind their Las Vegas-focused and regional equivalents this year. Investors are wary due to the slow pace of recovery in the world's largest casino hub and the recent surge in COVID-19 cases in Mainland China.
Two clear examples of the impact these circumstances are having are Las Vegas Sands (NYSE:LVS) and Melco Resorts & Entertainment (NASDAQ:MLCO). Their shares have dropped by 3.15 percent and 6.52 percent respectively, since the beginning of the year. However, some analysts are optimistic that these short-term obstacles will soon pass, and Macau's recovery will pick up pace.
Jennifer Song, a Morningstar analyst, writes in a new report that comments on an increase in May Golden Week foot traffic and a gradual improvement in month-on-month Gross Gaming Revenue (GGR) are positive indications. Furthermore, interest in vaccination has grown after the pandemic has escalated in various countries over the past few months.
Mainland China plays a crucial role in Macau's recovery as it contributes 70 percent of tourism to the gaming hub. Plans to establish a travel bubble with Hong Kong, another primary source of visits to Macau, are essential but have been delayed due to the surge in COVID-19 cases there.
More Optimistic Timeframe for Macau Recovery
Most analysts initially believed that Macau's casino industry would recover faster than other Asia-Pacific markets or Las Vegas. However, due to difficulties in issuing individual visit scheme (IVS) visas and slow progress on the vaccination front, some research firms have revised their expectations for Macau's gaming-dependent economy returning to pre-pandemic levels. Moody's Investors Service, for example, predicts this won't occur until 2024.
However, Morningstar remains optimistic, suggesting that a full recovery in Macau may take place next year. With daily vaccination rates increasing from 16 million to 17 million within the last two weeks, and herd immunity reachable by the end of this year, Morningstar believes a recovery is shaping up in Macau.
"We revise our full-year 2021 earnings forecasts for the six Macau gaming companies we cover to reflect our updated GGR assumptions, while we maintain our fair value estimates and long-term outlooks," said Song.
Morningstar covers each of the six Macau concessionaires and favors SJM Holdings as its preferred idea due to its potential market share growth, financial health, and attractive valuation.
Bargain Hunters' Paradise: Macau Stocks
Investors looking to take a gamble on the rebound of Macau stocks don't have to pay heavily to do so, as the sector is slightly attractive on valuation compared to historical norms.
"At the current market levels, the Macao gaming sector is now trading at around 10-11 times 2022 enterprise value/EBITDA, which is slightly below our valuation and the sector's historical mean of 12-13 times," according to Song.
The Macau concessionaires with listings on major US exchanges are LVS, Melco, MGM Resorts International (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN).
