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Macau casino stocks face a reckoning after searing rally

Bloomberg
Bloomberg12/16/2022 09:56 AM GMT+08  • 3 min read
Macau casino stocks face a reckoning after searing rally
Wynn Macau / Photo: Bloomberg
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A sizzling rally in Macau casino operators appears to have hit a wall, as investors await signs of business recovery and shares approach technical hurdles.

A Bloomberg gauge tracking six operators including Wynn Macau and MGM China Holdings has jumped more than 60% in the past three weeks, compared with a 10% gain in the Hang Seng Index. The near-vertical move has come as an array of positive news — including the new license approval and China’s faster-than-expected Covid reopening — ignited hopes of a revival in the gaming hub.

But such expectations risk running ahead of reality with the timeline of a meaningful return in mainland tourists uncertain. While there is little doubt that the sector will be a key beneficiary if China relaxes border curbs, Morgan Stanley analysts expect the “first full year of fully normalized travel” for the city to only come in 2024.

“I don’t see much upside for the share prices at this moment and there could be some technical pullback in the next two months,”said Dickie Wong, executive director of research at Kingston Securities. “The business is not there yet so it is really the expectation” that’s driving the multiples, he added.

Huge Upswing | The Macau casino gauge has gained over 60% since Nov. 25

See also: China's economy jumping into the Year of the Rabbit

The outsized gains have led to five operators in the gauge trading higher than their average 12-month price targets tracked by Bloomberg. MGM China is trading 37% above analysts’ target.

The casino gauge’s 14-day relative strength index remains above the 70-threshold that some traders see as a sign of overheating, even after coming off the 84 level — the highest since 2013 — it hit earlier this month.

“Markets will start to focus again on fundamentals of each operator and assess how they will be able to achieve balanced growth,” said Steven Luk, chief executive officer at FountainCap Research & Investment. He sees the operators’ non-gambling businesses and the allocation of tables and slot machines as key to their future growth potential.

See also: Shares in Tencent nearly double from October low as China prepares to end crackdown

Despite the recent rally, the index of casino shares remains 40% below a March 2021 peak. Casino revenue has plunged in all but one month this year, with a 56% year-on-year slump in November.

The gauge is poised for a weekly loss after jumping 28% in the prior five-day period.

Morgan Stanley expects earnings to normalize in 2024, but sees limited upside to multiples when compared with the pre-pandemic level of 2019.

“The sector is much more levered and it could take 2-3 years post-Covid to repair balance sheets,” analysts including Praveen K Choudhary wrote in a note earlier this month.

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