Macau Gaming:We remain lukewarm

In March, we suggested investors take profits on Macau gaming stocks, as we believed share prices had run ahead of fundamentals. Despite the recent correction (Fig 1-4) , we are still lukewarm on Macau as we expect a slow-grind recovery, due to excessive table supply (Fig 5) and deteriorating visitor mix (Fig 6), which implies limited upside for most Macau stocks. MGM (2282 HK) is our only Buy idea (22% potential upside), as we believe the risk-reward is attractive with it trading at 14x FY18F P/E, based on our bear-case scenario.

    The 1Q16 earnings season offered few positive surprises with industry EBITDA of USD1.42bn (-2% q-q, -6% y-y), 2% below our forecast of USD1.45bn (Fig 9-10). Any positive surprise was from cost-cutting efforts, but they were offset by declines in the non-gaming operations. Of the five Macau gaming companies that have reported 1Q results, Wynn, Galaxy and SJM delivered 1Q results that beat our forecasts, while Sands and MGM’s 1Q results were slightly softer than expected (Fig 11).