Macau GGR, EBITDA Recovery Doesn’t Warrant High Stock Valuations


Posted on: April 20, 2021, 10:26h. 

Last updated on: April 20, 2021, 10:43h.

In Macau, gross gaming revenue (GGR) and visitation trends are showing modest signs of improvement. But those upticks may not be enough to be enough to support near-term upside in shares of concessionaires.

Macau stocks
A partial view of the Cotai Strip. An analyst says Macau stocks are pricey. (Image: Bloomberg)

That’s the view of Union Gaming analyst John DeCree, who argues that consensus forecasts for 2022 earnings before interest, taxation, depreciation and amortization (EBITDA) and revenue for Macau operators may be too frothy. As a result, equity valuations are looking somewhat rich.

We are taking a more conservative view and assume 2022 aggregate revenue and EBITDA return to 90 percent and 95 percent of 2019 levels,” said the analyst.

Market observers widely expected recovery in the world’s largest casino center to take shape in the second half of this year. But waiting beyond 2022 for GGR and visitation figures to return to pre-pandemic levels wasn’t out of the question, though it’s at the lower end of forecasts that emerged against the coronavirus backdrop.

This year, Macau’s GGR is expected to be about half of 2019’s levels. The special administrative region’s (SAR) gaming-driven economy is, however, forecast to bounce back in dramatic fashion.

“The Macau economy is projected to rebound by 53 percent in 2021 following an unprecedented economic contraction of 56.3 percent in 2020, based on our assumption for a recovery in gaming revenue to about half of pre-pandemic levels,” according to Fitch Ratings.

Vaccination/Valuation Mix Doesn’t Jibe

Union Gaming’s DeCree adds slow distribution of coronavirus vaccines across Macau and vital feeder markets is also hindering the SAR’s recovery. Fewer than 10 percent of Macau locals are vaccinated, and travel with Hong Kong will remain restricted until that SAR goes 14 days without a locally transmitted case of COVID-19.

“Based on commentary from government officials in Macau, Hong Kong, and China, we may not see a complete reopening until mid-2022, making a full recovery in FY22 difficult to achieve,” said DeCree.

Given the sluggish pace of vaccinations and VIP spending, the 13.5x 2022 EBITDA multiple currently sported by Macau stocks appears rich. By historical standards, it is because the five-year forward EBITDA average is 12x.

“Uncertainty surrounding Macao’s recovery trajectory remains elevated. Sustained recovery in 2021 and beyond will hinge on steady progress in virus containment, effective vaccine distribution, and China’s evolving policies towards cross-border travel and gaming,” adds Fitch.

Individual Ideas

There are six Macau concessionaires, and neither of the two DeCree recommends to investors are US-based companies.

The analyst prefers Galaxy Entertainment and Melco Resorts & Entertainment (NASDAQ:MLCO), noting the latter is attractively valued relative to its peer group, while Galaxy “represents one of the most compelling long-term growth plays in all of Asian gaming, and both companies come with less perceived concession renewal risk.”

The US-based Macau operators are Las Vegas Sands (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN).