Teresa Rivas
When it comes to Macau, the Chinese government holds all the cards. Yet casino operators can still profit from the region's massive gaming demand. No wonder then that the stocks took off on news that tour groups will be allowed to return to the island in November.
The stocks could have more aces up their sleeves.
"[The] opening decision by the Macau government (with the implicit signal from China) came earlier than expected and is a very positive sign about a return to normal at some point," says Mark Giambrone, head of U.S. equities at Barrow Hanley Global Investors. "It will be a long race but the gun just went off and the outcome is Macau will boom again just as Vegas has after the restrictions were lifted."
Many industry experts were expecting looser restrictions to come in the first half of 2023, so the November date was encouraging, as it will hopefully allow revenue to ramp back up more quickly, and reduce the rate at which casinos are burning cash.
In addition, the packaged tours will cover Macau's crucial customer hot spots of Guangdong, Fujian, Zhejiang, Jiangsu, and Shanghai, which combined accounted for more than half of the mainland China visitors to the island in 2019.
Macau now expects visitor rates to double to roughly 40,000 a day, although things are still far from normal, as 100,000 daily arrivals were the norm prepandemic.
"It is a clear step in the right direction and will hopefully begin the process of returning to a gaming paradigm we used to recognize," says Bryan Engler, a principal and portfolio manager at Kovitz Investment Group. "That said, we are not out of the woods yet, and I would expect the return to something resembling normalcy to have numerous fits and starts."
That's not surprising, given that China (and other nations) have adopted much stricter control in an attempt to reduce Covid-19 transmission and deaths.
Nonetheless, a fuller reopening, even over a protracted time period, is an opportunity for investors to tap into a rapid growth story that appears on track to return to and ultimately exceed 2019 demand.
UBS analyst Angus Chan is estimating mass gross gaming revenue to reach 40% of prepandemic levels in the fourth quarter, 70% next year, and then jump to 105% in 2024. "Importantly, we believe the mobility relaxation reflects Beijing's policy support for Macau's economy," he writes.
Chan is bullish on the sector in general, but Sands China (1928.Hong Kong) and Melco Resorts & Entertainment (ticker: MLCO) are his top picks.
Barron's noted over the summer that Las Vegas Sands $(LVS)$ looked particularly well positioned, given its good relationship with the Chinese authorities and its steadily-growing-but-underappreciated Singapore business. The stock is up more than 12% since that article's publication, while the S&P 500 is off 3.6%.
Of course, given the uncertainty of an operating environment that hinges on Chinese government policies and decrees, the stocks do deserve some discount. Nonetheless, Macau casinos do offer a hedge to the U.S. travel industry, which already rebounded, and fell again. Although any potential economic softening could impact China as well as the U.S., as Las Vegas Sands' performance shows, the shares are one way to get some exposure that doesn't move in tandem with the domestic market.
"If you're willing to put up with that volatility, I think the Asian gaming corridors will still be some of the best markets to be in [for this] industry," says Engler.
For those willing to roll the dice, the recent bounce could be just the first.
Write to Teresa Rivas at teresa.rivas@barrons.com
(END) Dow Jones Newswires
September 27, 2022 12:13 ET (16:13 GMT)
Copyright (c) 2022 Dow Jones & Company, Inc.
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