In a Wednesday investor note, Deutsche Bank analyst Carlo Santarelli laid out a “bullish Macau view.” Citing second-quarter trends in the Chinese enclave and in other markets, he raised his forecasts for Las Vegas Sands and MGM Resorts International.
“We continue to believe the Macau operator complex offers the most compelling upside potential within the gaming operator group,” Santarelli wrote. He cited several factors, including the low valuation placed on Macau-based operators, as well as “catalysts from improving summer travel and better than expected margin performance.”
He did allow for investor negativity predicated on uncertainty about China’s macroeconomic picture, “geopolitical hesitation” toward the superpower, and uncertainty about how high Macau’s recovery will go. Nevertheless, “investors will garner further confidence regarding the shape of the recovery, while concerns around the potential of a lower ceiling will abate,” Santarelli opined. The same would hold true for investor worries about larger Chinese issues, he wrote.
The analyst reiterated his Buy ratings on both Sands and MGM, noting a $1.4 billion increase in Macanese gambling revenue to date compared with the first two quarters of 2022, up to $5.7 billion. Santarelli stated his conviction that, as access to Macau eases, mass-market revenues will continue to improve and that while win-per-visitor will slip from current elevations, VIP-derived revenue will surpass expectation. The VIP sector has been hard hit by Beijing’s crackdown on junket operators, who are now fewer in number and more tightly regulated.
Looking back on the second quarter, Santarelli predicted the ongoing recovery would take the form of two to three percent growth in the third quarter, followed by eight to 10 percent growth in the fourth. Extrapolating from seasonal trends, he concluded that gambling revenue is still down 34 percent from 2019 levels.
Low hold in both VIP and mass-market play “hampered” Wynn Macau and Wynn Palace, which fell to a 13 percent market share. By contrast, Sands’ flotilla of casinos enjoyed 27.5 percent share, although Santarelli believed those numbers were coming back to greater parity, “based on consultant data.”
In the first quarter, MGM enjoyed a larger market share (15.6 percent) than Melco Resorts & Entertainment’s 13.9 percent, but less than Galaxy Entertainment’s (18.2 percent). SJM Holdings was in last place with 11.7 percent. Santarelli prognosticated that “as visitation normalizes, shares will shift, with larger hotel-room-footprint operators benefiting more so than others.” He also predicted that VIP play would remain volatile and that new products (such as Sands’ The Londoner and SJM’s Parisian) had made little impact on relative market share.
“Net-net, we don’t expect operators to experience material changes in market shares, within each of the mass and VIP verticals, relative to 2019, upon stabilization of the market,” Santarelli continued, adding that MGM had the largest potential upside, particularly with MGM Cotai deployed. Shifts among other operators would be governed by their proportion of mass-market to VIP action, “as mass continues to be a bigger piece of the mix going forward.”
