UBS Turns Less Cautious On Macau, Prefers MGM China & Melco Crown

The good news for Macau investors continued On Wednesday as UBS released a note upgrading its outlook for the battered Chinese gaming hub. According to UBS analyst Anthony Wong, the firm is now shifting its outlook on Macau from cautious to constructive.

Visitation restrictions eased
Following this week’s announcement that June gross gaming revenue (GGR) in Macau came in slightly above expectations, the Chinese government announced that it would be easing visitation restrictions to Macau for mainland China residents. The fear that the government would instead be tightening visitation restrictions had been weighing on the share prices of the Macau casino operators. Shares of Las Vegas Sands Corp LVS, MGM Resorts International MGM, Wynn Resorts Ltd WYNN and Melco Crown Entertainment Ltd MPEL are all trading sharply higher this week following the news.

Downside risk limited
Wong believes that the new restrictions provide some insight into the Chinese government’s toward Macau. New anti-corruption policies and smoking bans on the island have hit casino operators hard, but this latest move indicates that the government can also step in and provide some support to the ailing industry.

Wong predicts that the new visitation rules reduce the risk of further downgrades on Macau stocks, but that the policy change alone are likely not impactful enough to lead to upward GGR estimate revisions.

Outlook
At current valuation levels, Wong sees the potential for 10-15 percent upside for Macau stocks. UBS currently has Buy ratings on Melco Crown Entertainment and the China unit of MGM. It has Neutral ratings on the China units of Wynn and Las Vegas Sands.

Disclosure: the author owns shares of Melco Crown Entertainment.