Macau Bottoming Benefits Kong Kong

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  • Post last modified:March 31, 2016

Tourism across Asia, from Macau to Hong Kong, has dropped off. But this firm is expecting a rebound for stocks and fundamentals.

As measured by the health of the gaming and entertainment sector, analysts are expecting a bounce in discretionary spending driven by real estate investment growth, off balance sheet financing and imports. These factors, according to Macquarie analysts, will drive interest in casinos from the all-important VIP high rollers.

This is especially valuable information for investors in Hong Kong listed casino stocks, as a glimmer of upside is surely welcome. The fundamentals have been hit hard, but the downside is no longer expected to be that bad. Macquarie now expects 2016’s gross gaming revenue to only decline 6% year-over-year vs. a 13% decline previously expected.

With this potential upside, portfolio managers should reconsider selling stocks and think about stock loans instead. Stock loan structures have all the benefits of bonds, call options and stock investments. Stock loans are very investor friendly because of their non-recourse, unlimited upside and low interest structural elements.

Macquarie noted the importance of real estate values in their note. Across China, the real estate market has proved to be strong in the face of uncertainty. The average price of new homes in 70 Chinese cities increased by 3.6% year-on-year in February of 2016, according to Trading Economics.

Data wise, another update on the health of the Macau casino business is expected to be disseminated on April 1-3, 2016 by the Gaming Inspection and Coordination Bureau of Macau. February 2016 numbers were resilient, year-on-year gross revenue from games of fortune were only down 10 bps.

Macquarie, a noted bear, revised their casino stock price targets higher by 2% to 17%. The firm stood their ground on their top-short pick however, Wynn Macau. The street is currently concerned about delays to the Wynn Palace development on the Cotai Strip. Any more delays to this project, according to Macquarie, might force the analyst community to downgrade Wynn.

Hong Kong stocks, from a macro point of view, are likely to keep gains going because the Fed recently put a rate hike on the back burner. The Fed is now expected to only hike interest rates two times this year. Four hikes were previously expected.

With interest rates set to be lower for longer, buoying stock prices, investors should consider stock loans to cover their short-term liabilities…as opposed to selling positions.