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With Las Vegas lacking significant catalysts and Macau having more potential to return to pre-coronavirus visitation levels, casino operators with exposure to the Chinese territory might outperform their Sin City-focused counterparts over the next year.
This is the assessment of CFRA Research analyst Zachary Warring, who recently expressed a preference for Macau gaming stocks over domestic equivalents. The primary reason for this outlook is the rebounding visitation to the special administrative region (SAR).
"Visitation to Macau in December 2022 was just 389,390 visitors. Visitation for all of 2023 was up a whopping 395% year-over-year, but still only reached 71.6% of 2019 levels,” wrote Warring. “We believe 2024 has plenty of upside in visitation and expect visitation to reach 2019 levels in Q4. Visitation for the first three months of 2024 trended between 80% and 95% of 2019 levels and continues to trend in the right direction."
As a point of reference, annual visits to Macau trended higher in the decade ending in 2019, peaking at 39.40 million that year. In 2023, the number was 28.21 million, indicating a significant potential for Macau operators to return to pre-pandemic norms. Achieving this goal could benefit Macau gaming equities substantially.
In his report, Warring highlighted a preference for the three Las Vegas-based Macau concessionaires: Las Vegas Sands (NYSE: LVS), MGM Resorts International (NYSE: MGM), and Wynn Resorts (NASDAQ: WYNN), maintaining “buy” ratings on all three.
LVS, which recently celebrated the 20th anniversary of Sands Macau, is the largest Macau operator with five integrated resorts there. Sands’ leverage to premium-mass and mass-market bettors, along with its extensive portfolio of nongaming amenities, are seen as significant advantages in the SAR. Warring also noted the operator’s efforts to strengthen its balance sheet and its pursuit of a New York City casino license as potential catalysts for the shares.
“The company has $4 billion in debt coming due in 2024 and 2025, which we believe management will pay off instead of refinancing, improving its balance sheet and boosting EPS. LVS is competing for licensing in New York City, which would be the company’s only U.S. property after the sale of its Las Vegas properties in 2022,” added the analyst. “We believe LVS will generate significant free cash flow and improve its balance sheet in 2024. We expect a positive 12 months from LVS.”
Warring was less enthusiastic about Las Vegas. Clark County officials estimate the combined economic impact of last November’s Las Vegas Grand Prix and the Super Bowl in February at $2.1 billion – an impressive sum, but one that’s already reflected in the shares of Strip operators.
“In our opinion, the growth seen in Vegas over the past six months has come from these two huge events, which are now in the rearview with little to drive growth moving forward,” observed Warring. The race returns this November, but the initial hype that drove room rates higher may not repeat, potentially impacting MGM, the largest Strip operator. However, MGM could mitigate this softness through its stake in MGM China.
Rival Caesars Entertainment (NASDAQ: CZR) has no Macau exposure, meaning its share price largely reflects investors’ sentiments about Las Vegas, regional casinos, and online gaming. Warring noted that Caesars’ substantial debt burden could signal a value trap, but added that the operator might sell some underperforming assets this year to reduce its obligations.
“We expect CZR to sell underperforming assets in 2024 to raise cash and pay down its elevated debt load,” concluded the analyst. “We see limited upside to revenues and earnings before interest, taxes, depreciation, and amortization (EBITDA) from its Las Vegas and Regional segments from these levels, and the company plans to cut back on marketing at digital, which should see a growth deceleration as well. We believe CZR’s forward enterprise value/EBITDA multiple could be a value trap.”
By fLEXI tEAM
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