Macau gaming provides a bright spot in China’s generally grim investment landscape as the industry benefits from increased domestic tourism even as overall investor sentiment remains negative.
Both in fixed income and equity, Macau gaming companies, particularly those with US-based parents such as Las Vegas Sands, Wynn Resorts, and Studio City, provide investors with strong fundamentals that outweigh the generally downbeat market sentiment.
Bonds, both high yield and investment grade, of US-affiliated Macau gaming companies are currently trading at 7% to 10% yields. The spread between the bonds of the US-based parent companies and those of their Macau-based affiliates trading in Hong Kong has widened.
Equities are also generally undervalued. Wynn Macau, for example, was trading at HK$6.76 (86.4 US cents) on Tuesday (February 27), much lower than Morningstar’s valuation of HK$8.8 per share following the firm’s decent fourth-quarter performance and a minor tweak to earnings forecasts.
“The results came in slightly above our expectations, helped by higher win-rate and stronger sales growth at the firm’s peninsula property after a prolonged renovation closure,” says Jennifer Song, senior equity analyst at Morningstar. “In addition, a favourable mix shift to higher-margin mass gaming and cost efficiencies also drove adjusted Ebitda margin 140 basis points higher from 2019’s level, to 32.6%.”
The case of Macau’s gaming industry is unique in the sense that the fundamentals are getting better while market sentiment is getting worse.
The Macau gaming industry’s strong fundamentals were confirmed by Fitch Ratings in a report issued on February 21, with the rating agency expressing optimism on the improved prospects for the industry in 2024 based on a steady recovery in inbound tourism, which was particularly evident during the recent Lunar New Year holiday period.
“We expect the mass-market segment to contribute to this positive trend,” says Samuel Hui, director of corporates at Fitch (Hong Kong) Limited. “Tourists from mainland China to Macau surged during the eight-day Chinese New Year holiday, which was a day longer than usual. This influx reinforces our expectation of a recovery in Macao’s gaming sector for the rest of the year, despite the economic headwinds facing China. This resilience is in part due to a shift in Chinese consumer preferences towards service-oriented sectors, like domestic tourism and entertainment.”
Data from the Macao Government Tourism Office show that inbound visitor numbers for the first seven days of the Lunar New Year holiday period increased by 2.6% compared to the same period in 2019. Over the full eight-day holiday, visitor arrivals totalled 1.4 million, up from 1.2 million visitors in the same period in 2019.
