Macau Casino Stocks are Unusually Cheap, JPMorgan Analysts Say
In a new report to clients, JPMorgan analysts emphasized that the combined market capitalization of the six gaming companies doing business in Macau is back to where it was a year ago and still half the figure seen prior to the onset of the coronavirus pandemic.
The six Macau operators are Galaxy Entertainment, Melco Resorts & Entertainment, MGM China, Sands China, SJM Holdings, and Wynn Macau. Despite the third-quarter earnings updates being mostly strong for these operators, their shares have not reacted positively, and the stocks are now unusually discounted.
The JPMorgan analysts expressed surprise regarding the low multiples seen across the group, especially considering the broadly positive news flow. They argued that this treatment of Macau casino stocks is ‘overly punitive.’
According to the analysts, the darkest clouds that previously hindered Macau casino stocks are in the past, and several of the operators are generating enough free cash flow to more than cover debt obligations taken on to stay afloat during the pandemic. They believe that the stocks are oversold and see great value in Macau names.
The analysts also pointed out that many of these names are actually trading at historical trough multiples, which they believe is compelling given the recent renewal of gaming licenses and the better business mix today. Additionally, they see limited downside risks to consensus, even under reasonably conservative macro scenarios.
In terms of geographic diversification, specific to Las Vegas Sands, Melco, MGM, and Wynn, investors get the benefit of geographic diversification, though these companies are heavily dependent on Macau for the bulk of their EBITDA and revenue. This dependence is a factor that the analysts believe may contribute to the historically cheap valuation of these stocks.