Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Sales Trader
Summary: Luxury stocks are making record highs on Chinese demand and given the strong momentum of tourism traffic flowing into Macau, the six casino operators are the stocks to watch and could anticipate further revenue boost during the upcoming Golden week.
Last night, Hermes International (RMS) – known for extreme excess demand over supply bags like Birkin and Kelly – closed at all time high EUR 2,014 taking its market value to EUR 212b with YTD return of 39% but LVMH (MC) reached a probably even more impressive milestone by becoming the first European company to be valued at over $500b closing at record high EUR 902 on the back of strong demand for luxury goods in China on top of appreciating euro. MC is now only $15b away from surpassing market cap of Tesla (TSLA) that is 8th biggest company in the world and once was valued at $1.2t back in early November 2021.
To put things into perspective, the top four stocks – AAPL, MSFT, AMZN & GOOG/GOOGL that also have trillion dollar market value – in S&P500 index are all tech companies but for Euro Stoxx 50 index, two of top four stocks are consumer discretionary luxury brands – RMS and MC - while the remaining two being L’Oreal (OR) and ASML holding (ASML). In fact, the richest person in the world is Bernard Arnault who is the chairman of LVMH and worth more than Elon Musk while the richest woman in the world is Bettencourt Meyers who controls more than 1/3 of L’Oreal.
One of the major overlapping driver of this year’s outperformance from RMS, MC and OR is China reopening with bullish outlook and growth as the recent China’s 1Q GDP YoY coming at 4.5% beating the estimate of 4% and retail sales for March also were better than expected at 10.6% vs est 7.5%. Further more the return since Fed started tightening and raising interest rate from 17 March last year, the contrast is even more clear cut as S&P500 still struggles with negative annualised return of 4% while the European trio with outstanding performance of on average 40% annualised return. We wait and watch as remaining mega cap stocks – GOOG/GOOGL, MSFT, AMZN – report earning this week but so far NFXL and TSLA post earnings price action have been disappointing given recession fears and still high interest/inflation macro backdrop.
Despite forward PE ratio being around 12 times, European major equity indices have done so well last 1 year with double digit return across the board in the exception of FTSE 100 that has higher weighting of energy and material sectors within the index while US indices have gone through correction and looks to be in the transition of either end of slowdown or contraction in the cycle as the yield curve started to steepen from being inverted (3m10y yet to steepen but 2y10y already started). This leaves the Asian indices especially the Chinese indices – with similar PE as EU indices - that are starting to recover and most of the gains came this year - Shanghai composite index (A and B shares) with 6% and CSI 300 (300 A shares) with 3%.
Heading into China’s Golden Week next week, air travel is expected to increase and according to JPMorgan’s latest report, international flights to/from China had already climbed upto nearly half of 2019 level with jet fuel demand returning to almost 75% of pre-covid level. Further to this, Macao Government Tourism Office (MGTO) recently reported that March visitor arrivals increased by 271% YoY and 23% MoM taking the tally to just under 1.96m and 1Q total to nearly 5m while the March number visiting from China rose to 1.24m (nearly 2/3 of total), +165% YoY.
According to the recent data from Gaming Inspection and Coordination Bureau, the gross gaming revenue (GGR) in March hit $1.6b that was the highest since January 2020 even though the number is only half of 2019 level. Given the strong momentum of tourism traffic flowing into Macau and ahead of earnings, the six casino operators are the stocks to watch and could anticipate further revenue boost during the upcoming Golden week that ends next Wednesday. The big two are Galaxy (00027) and Sands China (01928) with similar market cap of over HKD 200b but they differ significantly in terms of the leverage as 00027 with a lot more conservative deb/asset ratio of single digit while having highest EBITDA growth for 2023 so it looks like the best of the bunch. On the other hand, Melco (MLCO) and MGM (02282) have the best YTD return of 20%+ testing long term downtrend line – from 2018 and from 2014 respectively - however they are the cheapest with relatively low EV/EBITDA but
Ticker | Name | Mkt Cap B (HKD) | EV/EBITDA | Total Debt/Total Assets (%) | Sales Growth (%) | EBITDA Growth (%) | Exp Report Date | 3M Price Chg (%) | YTD Total Return (%) |
00027 | GALAXY ENTERTAINMENT GROUP L | 244,230 | 24.16 | 9.87 | 202 | 1,869 | 5/12/2023 | 1.64 | 8.14 |
01928 | SANDS CHINA LTD | 230,254 | 20.52 | 96.39 | 275 | 684 | 7/20/2023 | (4.83) | 10.23 |
MLCO | MELCO RESORTS & ENTERT-ADR | 48,218 | 14.38 | 93.68 | 163 | 1,609 | 5/5/2023 | 9.22 | 20.52 |
01128 | WYNN MACAU LTD | 43,898 | 18.24 | 134.14 | 266 | 339 | 5/10/2023 | (15.05) | (3.33) |
02282 | MGM CHINA HOLDINGS LTD | 39,368 | 15.59 | 105.47 | 224 | 430 | 5/2/2023 | (3.72) | 20.47 |
00880 | SJM HOLDINGS LTD | 28,194 | 36.86 | 61.59 | 214 | 147 | 5/3/2023 | (17.90) | (11.73) |