20150724-高盛-Fairly_valued__earnings_revisions_to_turn_positive__Wynn_to_CL-Buy_29页_665kb

Macau Gaming Sector Summary: Fair Valuation, Earnings Revisions, and Investment Outlook

Core Content

The Macau gaming sector is currently assessed as fairly valued, with the recent price rally bringing it close to mid-cycle levels. The report highlights the removal of a policy overhang due to the relaxation of transit visa policies, which has led to a rebound in Macau stocks, with an average increase of 16% from trough levels. This policy shift is expected to drive a recovery in gross gaming revenue (GGR), although the initial impact has been limited.

The report forecasts a revised FY15 GGR growth of -28% YoY, implying a daily run rate of MOP707mn for the second half of 2015, followed by a stronger recovery of 13% in 2016, compared to the previous 9% growth. This is attributed to a more accommodative policy environment. Earnings revisions are expected to turn positive, with the historically stronger driver for Macau stocks being the earnings revision momentum.

Key Points

• Policy Impact: The relaxation of transit visa policy has removed a significant policy overhang, which was a major concern for the sector. This is seen as a positive shift, following a period of policy tightening.
• GGR Trends: While the GGR trend has not improved significantly in July, the report remains hopeful about gradual improvement due to increased visits by hardcore gamblers and the upcoming openings of five new casinos.
• Valuation and Earnings: The sector is now close to mid-cycle valuation, with EV/EBITDA at 12.0x and a FCF yield of 7.3% (ex uncompleted projects). Earnings revisions are expected to turn positive as the GGR trend improves.
• Stock Performance: The report notes that individual stocks may perform differently due to changes in market share and GGR trends, creating alpha generation opportunities.
• Operator Leverage: Operators that reinvest more in Cotai, such as Wynn Macau and MGM China, are seen as more leveraged to GGR recovery.
• Capacity Growth: Companies with near-term capacity growth, particularly those without existing Cotai projects, are likely to benefit from the regulator's priority in allocating table quotas.

Rating and Target Price Changes

• On Conviction List

Valuation Matrix

Earnings Revisions

EBITDA and EPS Revisions

Investment Outlook

• Sector Themes: The report highlights that the sector is now at a fair valuation, and the earnings revision cycle is expected to turn positive as GGR improves.
• Stock Selection: Wynn Macau is recommended as a Buy, with a higher upside due to its undemanding valuation and earlier Cotai project opening. Galaxy is also recommended as a Buy due to strong management capabilities.
• Alpha Opportunities: Divergent stock performance is expected due to changes in GGR and market share trends driven by new casino openings.
• Cost Control: Operators have implemented cost control initiatives, which are expected to improve profitability in the coming quarters.

Key Figures

• FY15 GGR Growth: Revised from -24% to -28% YoY
• Daily GGR (2H15): MOP707mn
• 2016 GGR Recovery: Expected to be 13% (vs. 9% previously)
• 2016 EBITDA Growth: Forecasted at 15% (vs. 9% previously)
• FCF Yield (ex uncompleted): Sector average at 7.3%
• Dividend Yield (2015E): 3.2%

Conclusion

The report concludes that the Macau gaming sector is now fairly valued, and the recent policy relaxation has removed a key overhang. Earnings revisions are expected to turn positive as the GGR trend stabilizes and improves. Wynn Macau is highlighted as a top pick due to its favorable valuation and early Cotai project opening. Investors are advised to monitor GGR data closely and consider the potential for alpha generation based on divergent stock performance.