he brokerage expects the industry to almost double from US$45 billion in casino revenues currently to at least USD 80 billion for two reasons:
“Our analysis suggests that a penetration rate of [approximately] 25%-plus indicates a mature market,” analysts Louise Cheung and Purdy Ho write. “If we assume each Mainland Chinese visitor makes [approximately] two-three trips to Macau per year, this implies unique visitors from China are actually about 6-9 million, which implies a penetration rate of just 1.4-2.1%.
“To put it another way, Mainland Chinese visitation to Macau needs to increase to [about] 217 million, or [about] 12 times the 2013 level of 19 million, before Macau approaches a mature market.”
• Supply is driving growth:
In an under-penetrated market, as more casinos become available in Macau, the pie will expand with a multiple effect. “In mature markets such as the US, one gaming position serves [approximately] 200 people, while in Australia, one gaming position serves about 70 people. In Macau, one gaming position serves around 1,900 people. Even after we account for the 2015-2017 growth spurt, one gaming position in Macau only serves [approximately] 1,300 people.”
Noting the historical impact of new supply on the market, they say, “Since 2004, gross gaming revenues recorded a 27% CAGR through 2013 while gaming positions increased at a 21% CAGR through the same period.”
Not surprisingly, Nomura doesn’t hold with the prevailing sentiment among investors that Macau casino stocks, currently trading at an average of 16 times EV/EBITDA, might be maxed out in terms of upside.
“The stocks likely now reflect some value for future Cotai projects, and thus the multiple appears temporarily high,” Ms Cheung and Ms Ho write. “Our [target prices] are based on historical multiples on 2015F estimates, discounted back one year, plus the [present value] of new projects, and we still see over 20% upside for ‘Buy’-rated names. We further valued the stocks on FCF/share (applying 16-19 times FCF multiples) and yielded comparable TPs.”
They add that they recognize the current nervousness, particularly with regard to the impact of a China slowdown and related liquidity issues that mainly affect sentiment about the VIP segment. Therefore they suggest exposure to mass-market names, listing as their top picks Sands China, Melco Crown Entertainment and SJM Holdings.
“Sands China should continue to grow from its underutilized asset base,” they write. “We like Melco Crown for its undemanding valuations, despite generating 70%-plus of its EBITDA from mass sources. Neither stock appears to reflect any value for its Cotai projects, which could be the second and third to open in 2015. “SJM is our dark horse pick. It trades at the most undemanding multiple in the sector, which should narrow as we expect its market share to stabilize in 2014.”