HSBC Downgrades Melco Crown, SJM; Says Prefers MGM China, Galaxy

The decline in the Gross Gaming Revenues, or GGR, of Macau gaming companies ended in 1Q16, with the segment recording growth in both VIP and mass. Over the same period, shares of Macau gaming companies rallied 43 percent, from their bottom in January 2016. HSBC’s Scott Chan noted that the stocks seemed to be running ahead of fundamentals.

Analyst Scott Chan pointed out that although GGR sequential growth outpaced that in 4Q15, with VIP revenue growth turning positive for the first time since 1Q14, this could have been due to luck. He added, “…stripping out luck, junket volume could be -1%qoq vs. +2%qoq in 4Q15.”

Chan expects limited margin upside, given a negative gaming mix shift, with an upturn in VIP growth; and limited cost savings upside. An analysis of visitation data indicated the although there was a return of higher quality customers to Macau, net visitation was down y/y in FY15 and has declined year-to-date.

“Current trends imply GGR rate of recovery may not be as fast or pronounced as share prices indicate,” the analyst commented. He expects the Macau gaming segment to witness short-term consolidation.

Rating Changes

Chan downgraded the ratings for Melco Crown Entertainment Ltd (ADR) MPEL and SJM from Buy to Hold, while reducing the price targets from HK$18.50 to HK$16.50 and from HK$6.10 to HK$50, respectively.

The analyst maintained a Buy rating for both MGM China Holdings Ltd and Galaxy Entertainment Group Limited.

Melco Crown

Chan expects disappointing 1Q16 results for the new property, due to increased costs associated with adding new tables on the gaming floor. Although the company is taking steps to reposition its property, it will take some time to get the desired results. Both Studio City and City of Dreams are likely to post lower-than-expected earnings.

MGM China’ performance is expected to be boosted by the opening of MGM Cotai. Galaxy Entertainment also remains a favored stock, given its current discounted valuation, Chan said. He expects the stock to rerate on both improving industry revenue trends and defensive market share.