Macau's gross gaming revenue to climb 14%

Check out which gaming firms will lead the pack.

According to Barclay's Research, it expects gross gaming revenue (GGR) growth of 14% in Macau this year. Its examination of macro- and wealth-related indicators (IP/property) shows a high correlation with gaming sentiment, supporting our view that near-term growth is sustainable. 

Here's more:

We expect this to accelerate from 2015/16 and look for long-term growth, based on: 1) increasing penetration of non-Guangdong visitors (currently at less than 1% penetration);

2) we expect improved infrastructure, new casino launches and new non-gaming offerings to accelerate demand growth starting in 2015/16, particularly in the higher-margin, mass-market gaming segment. We initiate on five gaming companies.

Galaxy (OW) is our top pick for its growth momentum, likelihood of being the first to open a new casino on Cotai and reasonable valuation. In this report, we also explore what to watch for longer term (2013-14, 2015-20andbeyond 2020) to assess growth.

Positive on Macau Gaming stocks, as we expect: 1) industry growth trends to be sustainable near term, accelerating in 2015/16; 2) the structurally faster-growing massmarket segment to drive casino revenue growth and margin expansion;

3) an average 15% EBITDA CAGR for our 5 stocks in 2012-14E, before accelerating from 2H15. We believe valuations are reasonable, with selective stocks offering 4-5% dividend yield.

Stock picks: We also like valuation laggards MGM China and SJM (both OW), expecting solid growth with 4-5% dividend yields. We assume coverage of Sands China with an OW, liking its strong execution in capturing mass-market growth.

We view Wynn Macau as a premium brand and operator, however, rate it EW, as we believe it is fully valued.

All our PTs are based on SOTP. Galaxy and Sands China to see the strongest earnings growth, as: 1) we believe Cotai will continue to attract players from the Macau Peninsula, especially the mass players; 2) we expect those with newly added tables to see better growth; and 3) we looked at mass and VIP EBITDA per table and expect further upside.