Deutsche Bank Remains Bullish On The World's Biggest Gambling Market
After a rough 2014, analysts at Deutsche Bank believe that now is the time to buy battered Macau gaming stocks.
A recent research report laid out the bank's case for Macau.
Interest Rate Cut
Historically, Macau’s gross gaming revenue (GGR) has had a high correlation with China’s interest rate.
Last week, China’s surprise interest rate cut of 40 basis points was its first rate cut in more than two years. Deutsche Bank analysts point to China’s last rate cut in the summer of 2012 and the VIP gaming growth that began about a month later.
Interest rate cuts are typically good for property prices in China, and the historical correlation between property prices and Macau VIP revenue has been 73 percent.
Analysts also reference the stabilization of the French Fine Wine Index as a leading indicator that Macau GGR may soon be stabilizing as well. The index is one measure of the spending capabilities of wealthy Chinese.
Border Gate Access Extension
On November 18, the Chinese government announced that, starting on December 18, the Cotai border gate will be open 24 hours a day. Prior to this announcement, the gate was only open from 9 AM to 8 PM.
In addition, the Gongbei border gate, which accounted for about half of Macau’s visitors in the third quarter, had its open hours extended by two hours.
Possibly of more importance to long-term Macau investors is this: The government spokesperson indicated that the Gongbei gate will likely eventually be open 24 hours a day.
Deutsche Bank analysts believe that the extra Gongbei gate access will not only allow for more visitors, it will ease congestion at the gate. In addition, 24-hour access at the Cotai gate might encourage visitors to stay outside of Macau but still gamble there, the analysts add.
Valuation Of Macau Stocks
Although the Macau sector is currently trading near its five-year average enterprise multiple (EV/EBITDA) of 12, this number represents a 9 percent discount to its multiple over the last two years of 13.6.
Deutsche Bank analysts believe the multiple expansion of the past two years has been justified, stating: “We think multiples have gone up because Macau stocks started to get dividend support from 2013.”
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