Morningstar | Macau Gaming Undervalued for Long-Term Investors Amid Weak Sentiment
Despite fears around a trade war and China's economic slowdown, the narrow-moat Macau gaming market’s competitive positioning and demand remain strong, and we believe the current weak sentiment presents a good buying opportunity for long-term investors. Our fair value estimate for Sands China is now HKD 45 per share (versus HKD 42 prior), for Galaxy Entertainment HKD 58 per share (versus HKD 54), for Melco Resorts $21 per share (versus $22), for MGM China HKD 20 per share (versus HKD 21.50 per share), for Wynn Macau HKD 23 per share (versus HKD 22), and for SJM Holdings HKD 7.70 per share (versus HKD 8). All of the Macau gaming stocks we cover appear undervalued with the exception of SJM Holdings and Melco Resorts. Our fair value estimates assume gaming licenses will be extended; the risks of more stringent requirements are already captured by our assumption of a 1% per year increase in gaming revenue tax for five years as all the licenses will be renewed in 2022.As a result of weaker consumer sentiment, the trade war, and an economic slowdown in China, we have brought forward the assumptions of a cyclical downturn to 2019. We now forecast Macau gaming revenue growth to decline by low single digits in 2019 before returning to growth of low single digits in 2020 and midsingle digits in 2021 as the Chinese economy recovers. We do not expect the gaming sector will see a downturn as severe as 2015 as we have not seen signs of a gaming bubble this time around. We forecast VIP gaming revenue to decline by high single digits in 2019 and low single digits in 2020 and recover to low-single-digit growth in 2021. In our estimate, mass gaming revenue growth will decelerate to low single digits in 2019 and reaccelerate to high single digits in 2020 and 2021.
We maintain our long-held view that the region presents attractive high-single-digit annual gaming revenue growth long term. The opening of Lisboa Palace, Londoner, and Galaxy Macau phases three and four, along with the new resort openings in the past few years, should revitalize appeal for Macau and drive gross gaming revenue in the coming decade.
SJM Holdings is an investment holding company based in Hong Kong. Co. is the holding company of Sociedade de Jogos de Macau and is engaged in the development and operation of casinos and related facilities in Macau Special Administrative Region, the People's Republic of China. Co.'s casinos are located in prime locations on the Macau Peninsula and Taipa Island. Gaming operations are comprised of VIP table gaming, Mass Market table gaming and slot machines. Co. is organized in two segments: Gaming Operations (operation of casinos and related facilities); and Hotel and Catering operations (hotel, catering and related services).
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