“We see Macau stocks as excellent plays on China reopening,” wrote J.P. Morgan analyst Joseph Greff in a Thursday investor note.
The sentiment was noteworthy as previously, Greff had been a severe skeptic of a Macanese casino recovery. Stocks he highlighted as the best angles were Las Vegas Sands (LVS), Wynn Resorts (WYNN), and Melco Resorts & Entertainment (MLCO).
He explained, “Macau, until very recently, had been abandoned by investors and has massively underperformed the rest of our coverage universe since the pandemic’s bottom in 2020. This is due to extremely limited travel mobility to Macau (China’s zero-COVID policy) and investors’ concerns over licensing renewal risk and related terms.
“While we are far from being experts on China policy, we think recent policy moves and commentary suggest China and Macau will gradually improve travel/mobility, setting up a recovery in the 2Q23, consistent with our forecasts,” the analyst penned, adding that demand for Macau has historically been strong and congruent with accessibility. The problem, he wrote, “is that Macau has not been consistently accessible,” especially under China’s Zero-COVID policy, only recently scaled back in response to public furor.
Greff allowed that current Macanese gambling revenues were but a shadow of their former self (10 percent to 15 percent of pre-COVID levels), but he saw incremental improvement. He predicted that mass-market play would return to 60 percent of pre-pandemic altitudes next year and 90 percent in 2024.
“We’d like to think these numbers are rooted in conservatism,” Greff appended, hoping for “sizable outperformance” as sentiment improves and Macau continues to recover.
Part of the value appeal of Sands, Wynn, and Melco was their underperformance compared to non-Macau-facing gaming stocks: down 41 percent on average. Also, Macanese casino stocks “generally move with/follow market-wide GGR performance,” raising the prospect of a big payday when Chinese gamblers return. “Macau’s GGR recovery is just bottoming,” Greff observed, raising his price target on Sands to $55/share (from $51), Wynn to $103 (from $91) and Melco to $12 (from $10).
In other gaming spheres, Greff liked MGM Resorts International and Caesars Entertainment for their emphasis on the Las Vegas Strip, “given attractive valuations and a solid backdrop for the market.” He also lauded Vegas-locals heavyweights Red Rock Resorts (a.k.a. Station Casinos) and Boyd Gaming, in part for “generally sound, even encouraging” market fundamentals. Gaming stocks, he remarked, “have sizably underperformed the S&P 500 on investor concerns that well-above pre-pandemic casino spend per trip and significant pandemic margins gains may not be sustainable, given a negative macro backdrop.”
As for negative return on investment in online sports betting (OSB), Greff thinks 2022 represented the bottom of the trough, “as new state launches were complemented with elevated promotions/sign-on bonuses.” The launches meant greater revenue, but at inflated cost, particularly with regard to player acquisition. His sentiments were similar with regard to igaming, a field led by BetMGM, half-owned by MGM Resorts. (Privately held FanDuel dominates OSB.)
Looking ahead, Greff predicted that 2023 would see narrower ROI losses as promotions and other player-acquisition tactics are scaled back and fewer states open up. He foresaw Penn Entertainment posting a slight profit on Barstool Sports, perhaps as much as $70 million. Projected ROI losses ranged from $50 million for Caesars Sportsbook to $475 million for DraftKings, with BetMGM toward the lower end of the scale at around $100 million.
