Morgan Stanley Downgrades Macau, Melco Crown Entertainment

In a new report, analysts at Morgan Stanley downgraded their outlook for the Macau gaming market and its four major U.S. listed players, Las Vegas Sands Corp LVS, MGM Resorts International MGM, Wynn Resorts Ltd WYNN and Melco Crown Entertainment Ltd MPEL, from In-Line to Cautious. In addition, analysts reduced their gross gaming revenue (GGR) grow forecasts for Macau through 2017.

Supply/demand imbalance
With the opening of a wave of new resorts starting in a matter of weeks, analysts anticipate a 50 percent increase in the number of rooms available in Macau in the next 18 months.

Along with the increase in room supply, analysts list several risks to room demand in the near-term. These risks include continued government anti-corruption policies, a potential cap on visitation numbers, a potential extension of the smoking ban to VIP rooms and slower-than-expected transportation infrastructure development.

The numbers
Analysts reduced their GGR outlook for Macau in 2015, 2016 and 2017 from -25 percent/+10 percent/+9 percent to -26 percent/+6 percent/+8 percent, respectively. In addition, analysts cut their 2015-2017 EPS estimates for Macau names by 5-18 percent.

Valuation shows little upside
Analysts see little wiggle room for Macau stocks when it comes to valuation. “Based on our revised earnings, the industry is trading at 15.6X EV/EBITDA, 21.2X P/E and 5.4% recurring FCFE yield on our 2015 estimates, thus [valuation] is not compelling.”

Outlook
Morgan Stanley analysts downgraded Melco Crown from Equal-Weight to Underweight.

The ratings on the Chinese units of MGM and Las Vegas Sands were maintained at Equal-Weight, and Wynn’s Chinese unit was maintained at Underweight.

Disclosure: the author owns shares of Melco Crown Entertainment.