Macau gaming: The Macau government suspended all casino operations

13 Feb, 2020 17:02
source: ZTResearch

The Macau government suspended all casino operations for 15 days, with gaming stocks’ continued exposure to downside risk

Macau’s chief executive, Mr. Ho Iat-seng, announced on 4 February that in order to curb the spread of the novel coronavirus, all casino operations and entertainment business would be suspended for two weeks. In our report “As short-term risks not yet fully released, investors need to await long-term investment opportunities” published on 30 January, we already pointed out that the novel coronavirus had a significant impact on Macau’s gaming industry in the near term, and the risks of the gaming sector had not been fully released. For the time being, there was no sign of stocks hitting bottom. Out of risk management concerns, it is recommended to wait for the epidemic to be controlled, the number of newly confirmed cases to drop, and the Mainland authorities to re-issue visas for outbound groups and individuals before buying again. As of 3 February, the total number of confirmed cases nationwide reached 20,471 with an increase of 3,233 cases, and the tenth confirmed infection was reported in Macau. At this stage, the epidemic has not shown signs of subsiding. We reiterate the view that the gaming sector is still under pressure in the short term, but the long-term valuation is attractive. The temporary suspension of casino operations will have a significant negative impact on the gaming sector. Although the biggest bearish news has been announced, it depends on whether the closures will be extended if the virus continues to spread. With rising uncertainty and insufficient transparency, investors still need to wait for long-term investment opportunities.

Adjust estimates of Q1 and full-year gaming revenue growth

Earlier in January, the GGR was MOP22.12 bn (same as below), representing a YoY decrease of 11.3%, which was better than we expected. According to the channel data, gaming revenue in the first 19 days of January reached MOP15 bn, and the average daily bet revenue was MOP789 mn. It was estimated that the average daily gaming revenue in the rest 12 days of January was only MOP593 mn. We estimate the average daily gaming revenue during the Golden Week in 2020 will be 41% lower than the same period last year. If calculated on the basis of average daily revenue of MOP593 mn for the Golden Week, the 15-day suspension of casino operations will reduce the gaming revenue by MOP8.895 bn. However, as the Macau government’s stricter health declaration and traffic control for visitors to Macau in the late Golden Week, the number of visitors was further reduced. We reckon the average daily gaming revenue in February will fall from MOP593 mn to MOP450 mn. Considering that the casino closures will last for at least half a month and assuming the casinos will operate for the rest 14 days in February, we have adjusted the estimate for February’s gaming revenue growth from -40% to -76.9%, which is MOP5.85 bn, but we maintain March’s gaming revenue growth forecast at -36.0%. It is estimated the gaming revenue growth of 1Q20-4Q20 will adjust by -41.5% YoY, -29.2% YoY, +4.0% YoY, and +15% YoY, respectively. The full-year gaming revenue is expected to fall by 13.5% YoY, which mainly reflects the impact of Wuhan novel coronavirus in the first half of the year.

Long-term valuation is very attractive, but gaming stocks still have exposure to downside risk in the short term

At present, the sector’s estimated EV/EBITDA for 2020 is 10.19x, which is -1.37 standard deviation of the five-year average of 12.38x. The current valuation is very attractive in terms of long-term investment. The sector has recently adjusted by 16% -26% from high, reflecting some of the impact of the epidemic. However, we reckon that short-term risks are still high, mainly due to the increasing uncertainty in earnings prospects. Investors may overlook the suspension of China’s economic activities which will once again increase the downward pressure on VIP gaming demand. With reference to valuation during the 2016 industry downturn, we believe that the short-term potential decline is about 10% -16%. Yet if the epidemic subsides sooner than we expected and the Mainland authorities re-issue visas for outbound tour groups and individuals, we believe the valuations of gaming stocks will clearly recover.