Asia gaming and consumer discretionary analyst

Michael Ting

Thematic (Sector/Industry)

Despite the recent relaxation in travel visas to Macau from the Mainland, the recovery in sector revenues has been weaker than expected. Headwinds such as increased government scrutiny on capital outflow has likely hurt gaming sentiment demand from higher spending VIP and premium mass players. We expect these trends to continue and hence believe that Macau gaming stocks could underperform in the near term. However, beneficiaries of the capital outflow restrictions could boost domestic luxury demand and benefit stocks such as Chow Tai Fook whose share price is +17% MTD vs. -7% for the Hang Seng Index.

Despite the recent relaxation in travel visas to Macau from the Mainland, the recovery in sector revenues has been weaker than expected. Headwinds such as increased government scrutiny on capital outflow has likely hurt gaming sentiment demand from higher spending VIP and premium mass players. We expect these trends to continue and hence believe that Macau gaming stocks could underperform in the near term. However, beneficiaries of the capital outflow restrictions could boost domestic luxury demand and benefit stocks such as Chow Tai Fook whose share price is +17% MTD vs. -7% for the Hang Seng Index.

Macau: If It's Not One Thing, It's Another

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Back on the 11 September, shares in Macau gaming service provider <a href="https://www.smartkarma.com/entities/macau-legend-development-ltd" target="_blank" data-smartkarma-citation="entities:16631:1" rel="noopener">Macau Legend Development (1680 HK)</a> ("MLD") were suspended "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0914/2020091101464.pdf" target="_blank" rel="noopener">pursuant</a> to the Hong Kong Code on Takeovers and Mergers".
The same day, Levo Chan Weng-lin, chief executive of Macau's junket brand Tak Chun Group, bought a 20.65% stake (~US$173mn) according to the HKEx <a href="https://di.hkex.com.hk/di/NSNoticeSSList.aspx?sa2=ns&amp;sid=87469&amp;corpn=Macau+Legend+Development+Ltd.&amp;sd=16/09/2019&amp;ed=16/09/2020&amp;cid=0&amp;sa1=cl&amp;scsd=16%2f09%2f2019&amp;sced=16%2f09%2f2020&amp;sc=1680&amp;src=MAIN&amp;lang=EN&amp;" target="_blank" rel="noopener">disclosures</a>. 
That acquisition has now been clarified with this morning's <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0921/2020092100034.pdf" target="_blank" rel="noopener">announcement</a> that Chan had entered into a SPA on the 11 September with David Chow and Sheldon Trainor De Girolamo, to acquire 20.65% of shares out or 1.280bn shares.
Because of a prior agreement entered into between Chow inter alia, who are collectively known as the Covenantors (holding &gt;51% of shares out), following the completion of the SPA, Chan is deemed to be acting concert with the Covenantors and De Girolamo, and will therefore be obligated to make an unconditional mandatory general offer.
The MGO Price will be HK$1.05/share, the same price Chan paid for his 20.65% stake. That's a 9.34% premium to the last close.
As always, more below the fold.

 Back on the 11 September, shares in Macau gaming service provider Macau Legend Development (1680 HK) ("MLD") were suspended "pursuant to the Hong Kong Code on Takeovers and Mergers".
The same day, Levo Chan Weng-lin, chief executive of Macau's junket brand Tak Chun Group, bought a 20.65% stake (~US$173mn) according to the HKEx disclosures. 
That acquisition has now been clarified with this morning's announcement that Chan had entered into a SPA on the 11 September with David Chow and Sheldon Trainor De Girolamo, to acquire 20.65% of shares out or 1.280bn shares.
Because of a prior agreement entered into between Chow inter alia, who are collectively known as the Covenantors (holding &gt;51% of shares out), following the completion of the SPA, Chan is deemed to be acting concert with the Covenantors and De Girolamo, and will therefore be obligated to make an unconditional mandatory general offer.
The MGO Price will be HK$1.05/share, the same price Chan paid for his 20.65% stake. That's a 9.34% premium to the last close.
As always, more below the fold.

Macau Legend (1680 HK): Mandatory General Offer

Equity Bottom-Up

Our top pick within the Macau gaming space remains <a href="https://www.smartkarma.com/entities/sjm-holdings-ltd" target="_blank" data-smartkarma-citation="entities:805:1" rel="noopener">Sjm Holdings (880 HK)</a> due to the expected opening of Grand Lisboa Palace in either late FY20 or early FY21. Using <a href="https://www.smartkarma.com/entities/melco-crown-entertainme-adr" target="_blank" data-smartkarma-citation="entities:810:1" rel="noopener">Melco Resorts &amp; Entertainment (MLCO US)</a> as an example whose share price outperformed the sector in FY19 by 19% due to GGR (gross gaming revenue) market share gains from the new Morpheus hotel, we believe SJM's share price in FY21 may also see sector outperformance due to the earnings benefits of new capacity.

Our top pick within the Macau gaming space remains Sjm Holdings (880 HK) due to the expected opening of Grand Lisboa Palace in either late FY20 or early FY21. Using Melco Resorts &amp; Entertainment (MLCO US) as an example whose share price outperformed the sector in FY19 by 19% due to GGR (gross gaming revenue) market share gains from the new Morpheus hotel, we believe SJM's share price in FY21 may also see sector outperformance due to the earnings benefits of new capacity.

Macau Gaming Stocks: How to Position Over the Next 6-12 Months

Macau August GGR (gross gaming revenue) continued to be weak -94.5% yoy despite the resumption of visas from Zhuhai and the rest of Guangdong Province during the month. We expect September GGR to decline 94% yoy given lower seasonality. Our channel checks for October Golden Week hotel bookings indicate Macau travel demand could be weaker vs. previous Golden Week periods. Overall, we expect the recovery in Macau sector revenues to be a slow process. Top sector pick is <a href="https://www.smartkarma.com/entities/sjm-holdings-ltd" target="_blank" data-smartkarma-citation="entities:805:1" rel="noopener">Sjm Holdings (880 HK)</a> .

Macau August GGR (gross gaming revenue) continued to be weak -94.5% yoy despite the resumption of visas from Zhuhai and the rest of Guangdong Province during the month. We expect September GGR to decline 94% yoy given lower seasonality. Our channel checks for October Golden Week hotel bookings indicate Macau travel demand could be weaker vs. previous Golden Week periods. Overall, we expect the recovery in Macau sector revenues to be a slow process. Top sector pick is Sjm Holdings (880 HK) .

Macau August GGR: When Do the Punters Return?

We compiled 2Q20 Macau gaming market share from the gaming operators' financial reports. One key takeaway is that VIP GGR as a percentage of the total has risen for the third consecutive month. This helps headline sector GGR growth,  but may result in slower sector EBITDA recovery given low VIP margins relative to mass. A second takeaway is that with low VIP turnover, VIP hold rates have a significant divergence from historical norms leading to market share figures which are outliers compared to historical values. We believe hold rates will remain volatile until gaming volumes normalize hence would not read too much into current headline GGR market share numbers. Assuming gaming demand normalizes in FY21, our top sector pick would be <a href="https://www.smartkarma.com/entities/sjm-holdings-ltd" target="_blank" data-smartkarma-citation="entities:805:1" rel="noopener">Sjm Holdings (880 HK)</a> which has the potential to at least see a 50% increase in EBITDA next year given the opening of Grand Lisboa Palace.

We compiled 2Q20 Macau gaming market share from the gaming operators' financial reports. One key takeaway is that VIP GGR as a percentage of the total has risen for the third consecutive month. This helps headline sector GGR growth,  but may result in slower sector EBITDA recovery given low VIP margins relative to mass. A second takeaway is that with low VIP turnover, VIP hold rates have a significant divergence from historical norms leading to market share figures which are outliers compared to historical values. We believe hold rates will remain volatile until gaming volumes normalize hence would not read too much into current headline GGR market share numbers. Assuming gaming demand normalizes in FY21, our top sector pick would be Sjm Holdings (880 HK) which has the potential to at least see a 50% increase in EBITDA next year given the opening of Grand Lisboa Palace. 

Macau 2Q20 Market Share Review: Outliers Everywhere with an Unfavorable Mix

Hong Kong

SJM Holdings Limited offers amusement and recreation services.  The Company operates casinos, hotels, and other tourism-related facilities in Macau.

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SJM Holdings (880 HK)

Macau: If It's Not One Thing, It's Another

The recovery in

Michael Ting

Macau Legend (1680 HK): Mandatory General Offer

Levo Chan Weng-lin, chief executive of Macau's junket brand Tak Chun Group, bought a 20.65%t stake (~US$173mn) in Macau Legend Development (1680...

David Blennerhassett

Macau Gaming Stocks: How to Position Over the Next 6-12 Months

Our top pick within that Macau gaming space remains Sjm Holdings (880 HK) due to the opening of Gr

Michael Ting

Macau August GGR: When Do the Punters Return?

Macau August GGR (gross gaming revenue) continued to be weak -95% yoy despite the resumption of visas from Zhuhai and the rest of Guangdong...

Michael Ting

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Macau: If It's Not One Thing, It's Another

The recovery in

Michael Ting

Macau Legend (1680 HK): Mandatory General Offer

Levo Chan Weng-lin, chief executive of Macau's junket brand Tak Chun Group, bought a 20.65%t stake (~US$173mn) in Macau Legend Development (1680...

David Blennerhassett

Macau Gaming Stocks: How to Position Over the Next 6-12 Months

Our top pick within that Macau gaming space remains Sjm Holdings (880 HK) due to the opening of Gr

Michael Ting

Macau August GGR: When Do the Punters Return?

Macau August GGR (gross gaming revenue) continued to be weak -95% yoy despite the resumption of visas from Zhuhai and the rest of Guangdong...

Michael Ting

Macau 2Q20 Market Share Review: Outliers Everywhere with an Unfavorable Mix

We compiled 2Q20 Macau gaming market share from the gaming operators' financial reports. One key takeaway is that VIP GGR as a percentage of the...

Michael Ting