Gross gambling revenue, or GGR, growth estimates for Macau in the range of 7-20 percent are less unrealistic for 2017 in the context of China's policy to limit withdrawals for China UnionPay account holders a few days ago to check capital outflow. This restricts the growth potential for GGR to around 10 percent, says Nomura.
"We are dubious about VIP sustainability because, 1) Beijing policy risk increases whenever junket growth surges, as it did in Nov; 2) plugging the currency outflow through Macau is a priority," Nomura Instinet analysts wrote in their note on Gaming Outlook for 2017/18.
The Monetary Authority of Macau had imposed the limit on ATM withdrawals to 5,000 from 10,000 patacas effective from December 10 after it was revealed that almost 10 billion patacas in China UnionPay ATM were withdrawn in just one month, the SCMP had reported earlier this month.
The risks could potentially affect Macau stocks that currently seem "inflated" but could deliver gains in 2018, the brokerage said.
"Valuations of the Macau stocks are inflated and seem not to discount policy, currency, and competitive risks. Consensus estimates already reflect 10 percent GGR growth, but even if GGR growth were 15 percent, the stocks would be valued in line with their 10-year average forward multiple. To buy the stocks at today's valuations, investors must be discounting growth into 2018 to justify their enthusiasm, so there is little room for disappointment," Nomura Instinet analysts noted.
Las Vegas
Unlike Macau, Las Vegas is likely to sustain its current year's momentum with potential for upside going forward. "Our positive thesis on Las Vegas in 2016 extends into 2017, particularly in a Brave New Trump World. Our 5% RevPAR growth estimate next year is ahead of consensus at 3.3% and could have upside as demand for group meeting space spills over into the shoulder (lower-priced) periods," analysts Harry C. Curtis, Daniel Adam and Brian H. Dobson wrote.
The upside is also likely to come from a buoyancy the US economy is expected to see under the Trump Administration. "Stronger GDP and corp. profit growth under a Trump administration should drive incremental leisure and corp. demand, which could push LV RevPAR estimates up by 100+bps."
MGM to gain the most
"MGM is the clear beneficiary of this trend with 61% of EBITDA generated in Vegas. For the first time in 10 years, MGM will be in a position to return cash to shareholders, which could meaningfully expand the universe of investors able to own the stock to include dividend/yield-seeking investors.
"We are increasing our price targets on MGM, LVS, WYNN and MPEL from $34/$49/$77/$13 to $35/$50/$79/$14, respectively, to reflect our revised Macau estimates in 2017E. In our view, though, for the stocks to outperform from here they need GGR growth in excess of 15 percent to justify their valuations. The exception is MGM, with a potential upside of 22 percent," the analysts said.
MGM Resorts and Las Vegas Sands (LVS) are listed on the NYSE, while Wynn Resorts Ltd (WYNN) and Melco Crown Entertainment (MPEL) are listed on NASDAQ.
