May saw a 7% decrease in the value of Macau’s gambling equities, underperforming Hong Kong’s Hang Seng Index. In contrast to other firms linked to China’s consumer markets, a recent research by the renowned Morgan Stanley banking group recommends that investors evaluate these stocks differently.
Differentiating Elements in a Market Recession
Despite the Macau casino market’s strong trading performance since Covid-19 countermeasures were relaxed in early January, investors’ persistent worries have caused a sell-off. While pointing out that the general market unease regarding China’s consumer industries has had an impact on casino stocks, Morgan Stanley emphasizes the “key differences” that make Macau unique.
Insights from Morgan Stanley Research
Morgan Stanley Research outlines a number of favorable aspects unique to Macau’s gaming industry using data from Refinitiv. First, a number of organizations have revised their estimates of industry earnings upward. For 2023 and 2024, Morgan Stanley’s own projections for operator earnings before interest, taxation, depreciation, and amortization (EBITDA) are 10% to 20% higher than Refinitiv consensus, suggesting potential growth.
Outstanding Recovery and Revisions to Estimates
For the first four months of 2023, Macau’s casino gross gaming revenue (GGR) amounted to MOP49.36 billion (US$6.12 billion), a phenomenal growth of 141.4% from the same period the previous year. This outcome already exceeds the whole GGR for 2022 as a whole. Morgan Stanley has also increased its projections for the gaming sector through 2023 in order to take into account the ongoing speedier recovery.
Expected Leverage and Catch-Up Advantage
The report also emphasizes how Macau’s recovery is presently falling behind of those of other gambling hubs like Las Vegas and Singapore, which have already loosened restrictions relating to Covid-19. But according to Morgan Stanley, Macau will catch up in the upcoming quarters, offering a chance that hasn’t yet been taken into account by the market.
Additionally, the organization views increased financial leverage during an upcycle as a plus for Macau gaming equities. These businesses have a free cash flow yield of over 10% while having accumulated net debt of US$22 billion, indicating that deleveraging initiatives might significantly increase share values above those of cash-rich domestic consumer stocks.
Future Prospects and Dividend Yield Potential
Morgan Stanley expects dividends to resume following the deleveraging process, despite the fact that Macau gaming stocks briefly stopped paying dividends during the pandemic. If the industry begins dividend payments, this prognosis is in line with the likelihood that Macau gambling will provide one of the highest dividend yields, at an estimated 6.8%. In a recent webinar, S&P Global Ratings Inc. also covered the prospect of addressing the dividend issue in 2024.
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