Macau Gaming Stocks to Gain in 2H21 Due to Concession Extension, New Hotel Room Supply

Gaming stocks in Macau have lost momentum due to the pandemic, but Morgan Stanley analysts expect a rise in late 2021 – early 2022 boosted by three key areas.

Revenue in 2021 to Reach 65% of Pre-Pandemic Levels

The current price of Macau gaming stocks has dropped significantly, аnalysts at investment bank Morgan Stanley point out. The experts anticipate prices to start increasing in the end of 2021 and the beginning of 2022 due to capacity expansion, concession extension and rising demand from Chinese luxury consumers.

Last month, the analysts said that due to the complicated pandemic situation, the Government of Macau will most probably extend the current concessions by up to three years to 2025 instead of opening a tender for gaming licenses.

In a note published on Friday, the financial giant’s analysts Praveen Choudhary, Gareth Leung and Thomas Allen have lowered their revenue expectations for 2021 by 10% to around $23.7 billion or just 65% of what Macau recorded in 2019. The main reason for the cutback is a lack of VIP traffic, which will drag VIP revenue down to 40% of what it was two years ago.

“While macro[economic] indicators are showing upticks… junkets are leaving the field. Both Suncity and Tak Chun are taking stakes in casinos and diversifying away from pure junket business.”

The macroeconomic indicators referred to include possible changes in the domestic Chinese agenda, including gambling laws amendments foreseeing sanctions and jail for casino junket operators who lure Chinese nationals to gamble abroad. Those who lure or organize such activities will face a prison sentence from 5 up to 10 years, along with unspecified fines. The new law will officially enter into force on March 1, 2021.

Revenue and Ebitda Estimates for 2022 are Positive

On the other hand, Choudhary and the rest of the team have improved their revenue and Ebitda estimates for 2022. They are confident that even if 2022 does not recover fully, it could record an increase if operators take the necessary precautions. The analysts upgraded their 2022 outlook to reflect an 8% growth to US$10.27 billion compared to 2019 due to expenditure restraints combined with improvement in operations.

However, the actual price of stocks is contrary to such predictions and ss a result, Morgan Stanley adds:

“By 2H21, we expect to see that 2022 consensus estimates are too low. We are 5% higher than consensus for 2022 EBITDA (earnings before interest, taxes, depreciation and amortization). Thus, we recommend accumulating on any weakness in 1Q21.”

Other key areas that will boost growth are increase in premium mass revenue due to three major developments – Grand Lisboa Palace with 1,900 rooms, Galaxy Phase 3a with 800 rooms and The Londoner Macao.

Finally, the analysts highlight that China nominal GDP in 2022 is expected to rise by 22% compared to 2019.