'Worst Is Over' For Macau; Credit Suisse Upgrades MGM, Las Vegas Sands And Wynn Hong Kong Shares

In a report published Tuesday, Credit Suisse analyst Kenneth Fong commented on the Macau Gaming sector, noting that the "worst is over" and it is now time for investments to accumulate shares. "We believe that the worst is over for the sector, given the negatives are well-known, the sector is under-owned, we see a fundamental shift towards supportive policy (from both Macau and the central government), and seasonally stronger moths are ahead," Fong wrote. "We see attractive risk-reward here as the potential downside is somehow supported by government policy, and the upside from an industry recovery and new projects is not fully priced in." Elaborating on the "negatives are well-known" thesis, Fong noted that with fixed cost's contribution increasing, the earnings upside from a recovery "should be strong." In addition, with the VIP segment's share falling to only 20 percent of EBITDA, upon a full smoking ban, a 10 percent hit to the VIP segment would only hurt total earnings by two percent. Finally, the construction of new projects has already slowed and the analyst suggested that the government authorities has factored in the supply situation in its policy formulation. Fong further argued that long-term investors will find the sector attractive when GGR (gross gaming revenue) stops falling which will put an end to Wall Street's earnings cut and allow investors to "refocus on the structural story" of Macau. For short-term investors, if revenue sequentially improves, stocks will "surge" as they are under-owned and "crowded" with short sellers. On the other hand, if revenue weakens further (which the analyst sees as the "less likely" outcome), stocks may not fall as much as expected and investors could look to re-enter the space in a few months when planned visa loosening restrictions begins to reflect in GGR data.

Fong stated that investors will begin focusing on the Cotai growth option of which

has the "biggest growth option from Cotai."

should benefit when GGR stops falling given its "large asset base." Finally,

has a "solid" product positioning, especially given its Cotai option.

Of note: Fong upgraded the Hong-Kong listed stocks of MGM China, Sands China and Wynn Macau (not to be confused with US-listed issues) as follows: MGM China was upgraded to Outperform from Neutral with a HK$20 price target. Sands China was upgraded to Outperform from Neutral with a HK$38 price target. Wynn Macau was upgraded to Outperform from Neutral with a HK$16.80 price target.