Short term
Trade view / 09 October 2017 at 11:47 GMT

Signs of fatigue could hit HK casinos in the short term – #SaxoStrats

Head of Equity Strategy / Saxo Bank
Instrument: 00027:xhkg
Price target: 45
Market price: 53.60

Casino stocks have done well outperforming the market since early 2016 and the Hong Kong listed have done especially well with Galaxy Entertainment up 160% since early 2016 as headwinds from regulatory crackdowns on gambling and corruption have eased. 

September was the 14th consecutive month of gross revenue growth up 16% y/y, but mainland arrivals to Macau during the first four days of the National Day Golden Week period, typically the busiest period, were down 2% compared to the same period last year. This could be the early signs of some fatigue. China's government has also not changed its stance on tightening controls and crackdowns on capital outflow. There has been recent news that Macau's biggest tour junket operator, Suncity Group, has asked its employees to take extra precautions when moving money between Macau and the mainland.

Valuation global casino peers
Based on expectations for return on invested capital to cost of capital (ROIC/WACC) and current valuation measured by current enterprise value to invested capital (EV/IC), it seems Galaxy Entertainment is relatively overvalued compared to its peers. Even Las Vegas Sands look overvalued while Caesars Entertainment looks undervalued.

Given a more mixed outlook and the shares being relatively overvalued we recommend selling Galaxy Entertainment shares with a short-term outlook for the share price to decline back to levels from early July.

Management and risk description

The biggest risks to our sell idea on Galaxy Entertainment are better Chinese macro fundamentals and better than expected Q3 earnings and outlook when the company releases Q3 results on October 26th. Better mainland foot traffic over the coming months on a y/y comparable basis could also restart sentiment and take Hong Kong casino stocks higher. Another risk is that investors will not care about the latest weakness and focus on the long-term growth. Invested capital has grown from HKD 14.4bn to HKD 57.9bn since early 2009 translating into 17.4% annualised growth. This is also the main reason why this trade is structured to be short-term as the long-term potential will likely take the stock higher over time.

Galaxy Entertainment weekly share price
Galaxy Entertainment
Source: Saxo Bank 


Entry: the position is entered on the market open in Hong Kong tomorrow

Stop: we are placing our stop at 57.25 so that we exit our trade should the stock make new record highs.

Target: we are targeting the 45 level which was the key support level during the early July selloff and would likely be the natural anchoring point with the 200-day moving average arriving at this area over the coming weeks. 

Time horizon: we indicate short-term here but it could extend to medium term if the expected price adjustment takes longer.

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on is found here
Peter Garnry Peter Garnry
The opening fill was 53.20
AlexF AlexF
Im in 53.7 hope will be a better short idea than Addidas last time
Peter Garnry Peter Garnry
The Adidas short was not good. We misjudged the business momentum feeding into valuation/price.
SilverRanger SilverRanger
What's the easiest way (and preferably free) to get EV/IC and ROIC/WACC for companies?
Peter Garnry Peter Garnry
@SilverRanger I don't think there is an easy way at least free and public. Many numbers go into the calculation and they are typically not the ones most focus on


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