Toward the end of last month, stocks of Macau casinos soared following the People’s Bank of China (PBOC) lowering interest rates and Beijing revealing a new series of stimulus initiatives aimed at specific segments of the Chinese population.
Earlier this week, those same gaming stocks, along with other Chinese equities, declined after the National Development and Reform Commission (NDRC) did not provide updates on new stimulus, disappointing investors in the process. Nonetheless, certain analysts think it's only a matter of time until Beijing reveals additional financial support for citizens, potentially enhancing Macau casino stocks.
In a recent report, Nomura analysts Ting Lu, Jing Wang, and Harrington Zhang noted that the NDRC does not have the authority to announce stimulus initiatives, and the resulting decline in Chinese stocks was arguably beneficial.
"The corrections in stock markets may not be a bad thing as, in our view, preventing a stock mania and crash is a precondition to successfully jump-start China’s economy,” observed the analysts.
The analysts noted that China's Finance Ministry is hosting a press conference on October 12, where additional economic incentives may be revealed.
Why Stimulus is Important for Macau Casino Stocks
The initial set of stimulus measures revealed by Beijing boosted Macau gaming stocks, but there are other factors that could lead the sector to gain from further support.
“Much of this incoming fiscal stimulus will likely be used solely to fill the fiscal gap faced by local governments. We believe the content of stimulus matters more than its size, as Beijing will have to clean up the mess created by the housing crisis and revamp its fiscal system, as local governments might no longer be able to collect massive revenue from land sale,” added the Nomura analysts.
Pertinent to the Macau gaming environment and the broader Chinese economy is the notion that numerous market analysts think Beijing must increase cash distribution to its citizens, emphasizing that initial payments should come first rather than being the final actions taken. Additional stimulus might come at a moment when Macau stocks, such as Wynn Resorts (NASDAQ: WYNN), the parent of Wynn Macau, are significantly undervalued.
“WYNN’s valuation is also attractive and trades below its historical averages at around 8.5x forward EBITDA estimates, which we believe minimizes the risk to the downside in the event that growth for the global economy slows,” wrote CFRA analyst Zachary Warring in a note.
Upcoming Stimulus Could Be Major
If Beijing proceeds with the September economic incentive initiative, it is expected to be greater than what was disclosed last month. Nomura estimates it might reach up to $283 billion, possibly even higher.
"The actual stimulus would likely be larger than that, as Beijing may tap funding from the People’s Bank of China and the three policy banks to address the debt overhang, especially as it relates to the delayed delivery of pre-sold homes in the property sector,” according to the analysts.
If cash flow directly reaches Chinese middle- and upper-middle-class individuals, it could greatly benefit Macau casino shares.
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