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Macau Gaming - Incorrectly Valued Or Structural Decline?

|Includes:LVS, MGM Resorts International (MGM), WYNN

The big 6 Macau gaming names have lost HKD395 billion in market value this year. This is a 27.7% decline from last Decembers' valuation. The bearish outlook of Macau was confirmed by declines in monthly casino revenue figures in both June -3.7% yoy, July -3.6% yoy and August at -6.1% yoy.

VIP accounts for approximately 70% of the gaming market, of which margins to the house accounts to approximately 10%; the mass market on the other hand has an EBITDA margin of approximately 40%. As such, the mass market should benefit the house more than the VIP market, whilst VIP declines will influence the headline monthly figures more.

2013 gross gaming revenues amounted to MOP360,748m. Street has downgraded GGR growth in 2014 from 15% to 12% to only 4% due to weaker VIP outlook and a slowing run rate in the mass segment. In addition to headline macro downgrades, the target price of the companies are reduced because of analysts employing lower EV/EBITDA multiples in deriving their target price.

The aggregate net income before extraordinary items for the big 6 in 2013 amounted to HKD53,449m and aggregate EBITDA amounted to HKD67,129m. As such the universe traded at 6.55x GGR to net income (1 HKD = 1.03MOP) and 5.22x universe EBITDA. Net income is distorted by other items such as non gaming income and interest income.

The accumulated January to August gross gaming revenue between 2013 and 2014 exhibited growth of +8.1% yoy at MOP250,377m.

For consensus estimates of 4% growth to play out, the accumulated revenue between September to December must amount to approximately MO124,802m vs 2013's figure of MOP159,816m, a MOP35,014m decline ,or in other words, a 6% decline for the rest of the year.

As such, the 27.7% decline in market value for the big 6 is more a result of multiple contractions than the headline decline this year (you would need the Macau market to shrink 25-30% to justify this year's decline assuming people priced the companies correctly last year).

Were the multiples and valuations simply too high in the past? Or are we entering a stage of terminal slowdown?

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: MGM, WYNN, LVS