Analyst Research Report Snapshot

Title:

Gaming Sector: 2014 Macau Gaming Outlook

Price:

$127.00

Provider:

Sun Hung Kai Financial

Date:

06 Jan 2014

Pages:

12

Type:

AcrobatPDF

Companies referenced:

0027.HK 0880.HK 1128.HK 1680.HK 1928.HK 2282.HK 6883.HK

Available for Immediate Download
Summary:

* 2013 – As per our usual process, we like to look back before looking forward. 2013 turned out to be better than expected for Macau casino operators. A slower than normal 2nd half in 2012 and political concerns over the VIP gaming segment meant original 2013 forecasts based on trajectory were conservative. Analysts were expecting 2013 gross gaming revenue (GGR) growth in the low teens; it grew 18.6% y/y. The surprise was from VIP growth, up in the low double digits versus estimates of mid single digits. Mass gaming revenues were helped by the promotion of premium mass gaming from casino operators while slot revenues were hurt by the removal of machines due to Macau’s ban on slot parlors near residential areas plus operators’ preference for more lucrative table games. The sector was up 100% in 2013 compared to 2.9% for the HSI. * 2014 – We see 2014 as another good year for Macau casino stocks driven by solid double digit revenue growth and opportunities for gaming companies to improve margins through continued revenue diversification in mass gaming. We estimate GGR growth of 14% y/y in 2014, based on a 7.5% increase in VIP table revenues and 26% improvement in mass (mass tables + slots) gaming revenues. We expect mass gaming to contribute 38% of sector revenue in 2014 compared to 35% in 2013. * By year end, outside observers might point to 2014 as a quiet year for Macau gaming. Unlike previous years 2014 will lack a significant new supply of gaming tables, hotel rooms or infrastructure completion to anchor on. However, there remains room for operators to drive improvements of existing properties. We see continued focus on premium mass gaming and innovative adjustments made throughout the year to improve table yields. 2014 therefore will be more of a preparation year by the city and gaming operators for the next big leg of gaming growth in Macau starting in 2015. Construction continues on 7 new hotel and 3 major infrastructure projects, with more to begin this year. * Furthermore, we believe valuation multiples will remain at elevated levels as investors look beyond 2014, accounting for a significant increase in gaming capacity in Macau from 2015 through 2018 to match still unmet Chinese gaming demand. We argue that the supply-demand dynamics in the industry remain favorable for the six licensed gaming operators in Macau. Rising incomes in China, RMB appreciation and growing tourism in the Pearl River Delta should all be positive for Macau gaming growth this year and beyond. * Recommendation – With valuations running significantly above historical levels, investors remain wary of share price pullbacks. Therefore, we believe for 2014 the names to own will be the ones with the most capacity to capture growth, thus less risk for valuation downside. Our top sector pick is Galaxy (27.HK) with a target price of HK$74/share. Further upside to our target price will come in the way of details on expansion Phases 3 and 4. For operators with limited growth, we like Wynn Macau (1128.HK) due to support from aggressive payout of dividends and long-term potential. Institutional research and sales contacts: (852) 3929 6154, stephen.yang@shkf.com (852) 3920 2676, richard.seaward@shkf.com

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