This weekend is the National Holiday weekend in Hong Kong. Based on tourism number forecasts, Morningstar analysts expect travel demand to rise by around 2% compared to 2020; however, this number is still only 80% of 2019 levels. Morningstar data show that Chinese trip-booking platform Trip.com saw its domestic business regain a strong foothold in July, but the recovery has been significantly slowed through September. Imported COVID cases, including those that carry the Delta variant, have caused concerns for visitors planning cross-province trips.
One of the popular destinations among domestic travellers is Macau, but stricter COVID control measures are expected to play a part in reducing travellers’ interest in a short trip to Macau for the October Golden Week.
Tighter Inbound Controls
Ahead of the holidays, Macau detected one imported and two new local COVID cases. Mass testing for all residents and visitors in the city followed. Tightened containment measures include a 24-hour negative COVID-19 test result for all departures, and compulsory quarantine measures for incoming persons. This time, unlike previous outbreaks, the Macanese government confirmed that it would not suspend the operation of casinos.
Jennifer Song, senior equity analyst, believes that mainland visitors planning a trip to Macau are concerned about quarantine requirements when they return home, and would rather visit mainland cities that do not require a quarantine in and out of the town. She thinks tourist traffic will reduce, regardless of whether the government wants to keep the casinos and resorts open for the week.
Therefore, Song retains the very high uncertainty rating for the six casino operators in the city. In addition, she maintained her fair value estimates for these operators, viewing them as undervalued.
“Judging from the previous success of the Macanese government in controlling an outbreak, the delayed recovery will possibly be resumed in the final months of 2021,” says Song. But this ultimately depends on the development of the global and China’s pandemic situations.
Recovery Path
Song believes the sentiment downturn over the near term has little to do with the sector’s long-term prospects.
Macau’s gaming revenue will be driven by pent-up demand from mainland China tourism, and China’s expanding prosperity.
Also, Hong Kong tourists may soon be allowed to cross the border and visit Macau. Song says: “The authorities’ conversation on the possibility and steps toward a re-opening of the Hong Kong-mainland border presents a positive move. The creation of a travel bubble with Hong Kong is on the horizon.”
According to her, the influx of Hong Kong visitors will help add 15-20% tourists to Macau based on the pre-COVID visitation figures. Coupled with the rollout of vaccinations, a meaningful recovery for casinos could arrive in 2022-23.
Industry Reforms
On a side note, investors should be vigilant on an impending reform that is believed to change the whole landscape of the gaming business in Macau.
The city’s administration has initiated a public consultation that closes by late October, seeking to revise gambling law, supervision and licenses. Last month, Morningstar assigned a trim in fair value estimates of the six casino operators, in a range between 22% and 45%, due to the uncertain outlook of industry rules. Also, operators with a U.S. background may be impacted more than the local peers as the Chinese government seeks a more direct supervision on the sector.
Song says Galaxy Entertainment (00027), an entertainment business arm under the conglomerate K. Wah Group, remains best positioned over the long term. “The company stands out with strong management and quality assets, and robust balance sheet and large landbank.” Meanwhile, SJM (00880) offers an attractive risk-reward profile. The opening of the firm’s first Cotai property Grand Lisboa Palace would lead to a solid market share gain and improved operating efficiency by transferring redundant labor to the new property over the long term.
©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.
.jpg "Kate Lin")
