Macau gaming : Growth outlook remains solid through the quarter pole

Our recent meetings in Macau and an evaluation of solid 1Q14 market-wide gross gaming revenues (GGR) point to continuing positive trends for gaming demand, and likely margins. In Macau, we also heard about the potential for even higher, better-quality visitation growth, and the status and risks of new projects on Cotai. So far this year, we have seen major volatility in monthly GGR growth (YoY) and unpredictable news flow. The six Macau operators’ shares have lost up to 14% YTD, despite a 20% rise in 1Q14 GGR (our forecast: 18%), helped by encouraging visitation trends and signs of still-improving margins (on revenue mix and declining VIP commissions).

We maintain our 2014 GGR growth forecast of 17%, with similar mid-teens growth over each of 2015-18, and a doubling of EBITDA for five of Macau’s six operators by 2017. We are far less concerned about mainland ‘tightening’ than we are over the potential impact of prolonged weakness in real estate prices.

We upgrade Sands China (SCL, 1928 HK) and SJM (880 HK) to OP (from IL) on valuations and confirm our OP ratings on Melco Crown (MCE, MPEL US), MGM China (MGMC, 2282 HK) and Galaxy Entertainment (GEG, 27 HK). Our estimates suggest the Cotai projects of MGMC, SJM and SCL are valued negatively by the market, and thus, we see this as a good opportunity to accumulate.