MGM China leads Macau casino dip

The broker warned that we may see more negative surprises this earnings season. Analysts Kenneth Fong and Daisy Lu reported: “Valuations have yet to hit “bubbly” levels in our view (21x FY14E P/E, against 20% earnings growth), but multiples have expanded significantly, and the sector has also just seen a wave of Streets upgrades, (notably) more analysts are starting to factor in more aggressive growth assumptions and using DCF to justify valuations. After adjusting price targets to take into account the new casino projects and FY14/15E estimates, we recommend that investors trim positions.”

“Valuations are approaching a fair point. A Macau stock is comprised of two components: value of asset in place, and growth asset (i.e. Cotai operations). J.P. Morgan finds that, using fundamental valuation, only Sands China (LVS) and Wynn Macau (WYNN) have upsides to their current market value. Even for these two names, the upsides are not large, at 13% and 16% respectively.”

Going forward, J.P. Morgan suggests two investment strategies:

1) Short term: we suggest stocks with low market expectations and showing strong operating momentum. (i.e. Wynn) or stocks that are likely to beat in 4Q results (i.e. Melco Crown (MPEL)).

2) Medium term: With no new supply over 2014 and 1H15, the operators that have the most room to optimize are likely to deliver above industry earnings growth. (i.e. Sands China).”

“We believe the sector is at risk of entering a period where there is more room for downside rather than upside surprise,” Kenneth Fong, a Hong Kong-based analyst at JP Morgan, wrote in a research note published yesterday.  The market has already priced in a “significant growth” assumption from the future projects while insufficient labor and gaming-table allocations may add risks, he said.

The bank expects the industry’s revenue growth to slow to 17 percent this year, according to the note.

The operator, controlled by MGM Resorts International (MGM), declined 6.6 percent, the most since June 11. Sands China and SJM Holdings dropped 4.1 percent and 2.7 percent, respectively.

Casino revenue in Macau rose 19 % to us$45.2 billion last year, about seven times that of the Las Vegas Strip.