Another “slow” month in April coupled with an in line earnings season could continue to keep the lid on these high fliers.
Don’t get us wrong. We’re bullish on Macau and Asia gaming over the long term, especially LVS. However, we think a better entry point for LVS may be forthcoming. MPEL and WYNN are down 10% and 8%, respectively, but we think there could be more downside there as well. What’s wrong with Macau? Not much but when expectations get too high, even minor catalysts such as a couple months of deceleration and an upcoming earnings season that could be just “in line” could keep a lid on these high fliers.
The Hedgeye forecast for 2014 monthly year/year GGR growth is approximately 15% (annually year/year) which is probably in line with consensus – I hate that. But it is likely that our monthly model correctly predicts only a high single digit/low double digit growth March following an accurate Jan/Feb growth projection of +24%. Moreover, April is likely to again fall below the December/January/February run rate as follows.
CONSIDER THE BACKDROP
- Bad press about money laundering
- Near peak stock valuations
- Property prices growth slowing
- Chinese stock prices lower for the year
All of these concern us to varying degrees and are not reflected in our monthly projections that you see above. That chart is just the Math. Given the cushion we see in terms of demand, we are less concerned with 3 and 4 as it relates to the impact on actual revenues. No doubt, if April is another disappointing month as we expect, the macro will be part of the storytelling – rather than the Math as we see it. What worries us is the storytelling itself combined with 2. Despite the equity value drawdowns in March, history tells us there is more room to fall, particularly for MPEL and WYNN given that they are not likely market share gainers.
We’ve often talked about demand cushion. Mass cushion is derived from the simple fact that the visa scheme and infrastructure prevents full demand – more people want to come to Macau more often than they can. VIP cushion resides with the junket. It’s our belief that more of the side betting has and could continue to flow through the legal channel; that is, the casino.
This brings us to the underside of Macau gaming – money laundering. Balancing the PRC’s desire to show Taiwan that the SAR system can succeed and have Macau and Hong Kong prosper, the government will save face on appearances of corruption and crackdown on junkets, if necessary. This is always a risk and would have a negative impact on near-term junket activity. The recent flurry of media reports on Macau money laundering are not very revealing – it’s generally accepted that it happens, a lot in Macau – but that’s not really relevant. What is relevant is if there is the appearance of a crackdown.
SENTIMENT INDICATOR
The sell-side is extremely positive on Macau and the Macau gaming operators – some investors might categorize the sell-side infatuation as “extreme” as measured by the total number of buy versus sell ratings. Recent sell-side activity was to increase price targets based on higher multiples and not higher estimates.
RECENT TRADING TRENDS
The first 1000 bps of underperformance vs the S&P 500 Index by each name is now in the book. Growth is under performing and these were the best performing names in 2013. While we expect the sell side to rally support and reiterate their buy ratings and price target - despite slowing year/year GGR growth – it may not be enough over the near-term.
CONCLUSION
We see a few months of tough trading for the Macau stocks which would be exacerbated by a junket crackdown. We’re not hearing of any and believe the risk is low but decelerating growth and an in line earnings season – albeit on higher estimates following February - should keep a lid on the momentum. The good news is that the underlying fundamentals look good and the long-term growth outlook is very positive. LVS would likely be the first stock we would return to on the long side.