Analysis: There is room for a positive surprise

Momentum rewards those who follow the trend, right up until the moment it turns. Macau’s casinos have been a case in point. High rates of growth, strong cash flows and generous payouts of 100 per cent (and more) were catnip to the market for years. Dividend yields of over 6 per cent were supplemented by special dividends from Sands China and SJM Holdings. Share prices doubled in 2013.
Then sentiment soured, as China’s crackdown on corruption last year curtailed VIP play and crimped sales. Share prices dropped more than a third for the year. Last week, official figures confirmed what share prices foretold. Annual gaming revenues fell for the first time on record. The sector is still not wildly cheap. Shares in SJM Holdings, the cheapest, trade at 10 times 2015 earnings per share, which are forecasted to contract 6 per cent. Analysts have slashed forecasts by between one-fifth (MGM China) and one-half (Melco Crown) from the 2014 second-quarter peak. Third-quarter numbers were nearly universally weak, bearing out the pessimism. Still, margins at MGM China and Wynn Macau widened and balance sheets are mostly healthy.
The sell-side view remains skewed towards optimism: buys outnumber sells for all the companies. This despite a gloomy outlook for the near term. CLSA expects gaming revenues to fall nearly one-third year on year in the first quarter of 2015 and one-fifth in the second. Hopes for a pick-up in second-half earnings may be borne out, but the quality is likely to be poor. Easy comparisons, and capacity expansion at Galaxy and Melco, are weak cause for cheer.
Still, as analysts catch up with reality and (most likely) overshoot to the downside, there is room for a positive surprise in one big negative assumption: the economic backdrop in China. China’s economy is slowing, but monetary policy has begun to loosen. That could make for recovery with some substance. MDT/Financial Times