Macau Estimates Still Too High, Wells Fargo Sees 10% EPS Downside

In a report published Monday, Wells Fargo analyst Cameron McKnight commented on Macau's gaming sector, stating that "stabilization does not equal growth" and the market is adjusting to a "new normal."

According to McKnight, the "new normal" consists of tighter government oversight, a "more muted" medium-term revenue growth rate, and a recovery that is likely to be "flatter than prior rebounds." With that said, the analyst noted that his second quarter and 2015 Macau EBITDA estimates are now 10 and 11 percent below consensus estimates (which are "still too high"), respectively, based on a negative 33 percent year-over-year same-store growth and negative 31 percent year-over-year total growth.

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McKnight said he is not expecting any significant same-store revenue improvements in the near-term given China's policy actions towards the region.

"We assume ADRs will start to improve in July after a full month of Galaxy data has been added," McKnight wrote. "However, once revenues do improve, we do not expect a sharp ‘V-shaped' recovery like 2009 and 2013, given policy settings and lack of broad-based economic stimulus in China."

The analyst also suggested that there is "material" downside risk to estimates and noted that there is a 10 percent downside risk to companies operating in the space.

Estimate Changes:

• McKnight revised his full year 2015 earnings per share estimate on Las Vegas Sands Corp. (NYSE: LVS) to $2.54 from a previous $2.66.
• McKnight revised his full year 2015 earnings per share estimate on Wynn Resorts, Limited (NASDAQ: WYNN) to $2.29 from a previous $2.79.
• McKnight has no full year estimates on MGM Resorts International (NYSE: MGM) and Melco Crown Entertainment Ltd (ADR) (NASDAQ: MPEL).