Barclays 'Cautious On Magnitude' Of Macau Recovery

In a new report, analysts at Barclays explained their position on Macau gaming operators. Despite a positive overall view on Macau, analysts downgraded Melco Crown Entertainment Ltd MPEL and the Macau units of Las Vegas Sands Corp LVS and Wynn Resorts Ltd WYNN based on current valuations following the recent rally in the space.

Recovery coming, but VIP still uncertain
Analysts are now calling for a 26 percent decline in 2015 gross gaming revenue (GGR) in Macau versus their previous forecast of an 8 percent decline. They believe that Q4 will be the first quarter of positive year-over-year (Y/Y) revenue growth.
In addition, analysts are calling for only 2 percent GGR growth in 2016. They attribute the weak growth to both the potential 2016 smoking ban in casinos and the continuing government corruption crackdown, which analysts feel will discourage the return of VIP players.

Forecasts
Analysts are calling for EBITDA growth in 2015, 2016, and 2017 of -31 percent, +6 percent and +10 percent, respectively. Barclays 2015 and 2016 EBITDA estimates are 21 percent and 28 percent below consensus, respectively, and they believe that other analysts will soon be scaling back estimates as well.

Catalysts & risks
Analysts mention weak 1Q15 results and consensus downward EBITDA revisions as potential negative catalysts for Macau stocks. They list positive June GGR numbers and sufficient table allocations to Galaxy as potential upside catalysts for Macau stocks.
Analysts downgraded Melco and Sands China from Overweight to Equal Weight and Wynn Macau from Equal Weight to Under-Weight. They maintained their Equal Weight rating on the Macau unit of MGM Resorts International MGM.

Disclosure: the author owns shares of Melco Crown Entertainment.