Macau Could Finally Entice Wary Investors, Says JPMorgan

After avoiding Macau gaming equities for more than two years, global investors could revisit the asset class in 2023 in search of value and rebound candidates.

That’s the sentiment of JPMorgan Securities, which said in a report out Monday that Macau casino stocks had been ignored by global investors for some time, but that sentiment is starting to change, indicating the group could offer some upside in 2023. The in the special administrative region (SAR) are Galaxy Entertainment, Melco Resorts Entertainment, MGM China, Sands China, SJM Holdings, and Wynn Macau.

As we head into 2023, we think Macau has the most upside within our coverage universe,” noted the bank.

Not surprisingly, the JPMorgan analysts that authored the report acknowledged “extremely limited travel mobility to Macau” because of China’s zero-COVID policy has been a drag on Macau gaming stocks.

However, mounting civil unrest on mainland China because of the Chinese Communist Party’s (CCP) draconian coronavirus measures could force policymakers to acknowledge what the rest of the world already knows: COVID-19 is highly contagious and it’s impossible to stem its spread in the world’s largest nation by population.

Macau’s retendering process had long been an overhang on shares of the six concessionaires, but last  weekend, that saga drew to a close with the six operators seeing their gaming permits renewed.

Analysts acknowledge that the licenses awarded over the weekend But it’s unlikely local authorities change course and pull permits from the existing operators. As the JPMorgan analysts note, investors have long been concerned about renewal risk  and “mandated uneconomic capital expenditure.” To the latter point, it’s expected the concessionaires will spend about $12.5 billion combined over the coming decade a palatable total for the companies and investors alike.

Over the near-term, the primary issue facing Macau casino stocks is China’s willingness to loosen travel restrictions and its . The reasoning is simple: Data confirms that when the CCP has done that, Macau’s gaming industry benefits.

“We know that in various and small samples sizes that when Macau is accessible, demand is strong,” added JPMorgan.

While may be offering value, investors will likely demand material improvements in monthly gross gaming revenue (GGR) figures. There are signs such improvement is materializing.

The JPMorgan analysts note that GGR is currently running at 10% to 15% of pre-pandemic levels. While that is by no means impressive, it’s better than the 5% to 10% that was recently seen.

“We think there is more room for recovery, particularly within mass GGR in 2023, when we think GGR can approximate 60 percent of 2019 levels, and improving further in 2024, to 90 percent of 2019 levels. We’d like to think these numbers are rooted in conservatism,” concluded the bank.