Shun Tak: Gamble on Macau

01/27/2015 10:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

For those comfortable buying on the Hong Kong stock exchange, this featured recommendation is a holding company focused on the gambling territory of Macau, explains international expert Adrian Day, editor of Global Analyst.

Shun Tak Holdings (HK: 242) is controlled by Stanley Ho, the Hong Kong billionaire who for many years had the only gambling license in the former Portuguese colony. Its hotels include the SkyCity Marriott in Hong Kong and the non-casino Mandarin Oriental in Macau.

Macau has experienced tremendous growth in recent years, with gambling revenues now ahead of Las Vegas. This year, however, revenue growth has slowed on the back of a crackdown by Chinese authorities on money laundering, as well as more broadly on lavish spending.

It is worth noting, however, that revenue has picked up in November and may signal the bottom has been reached. Macau is the only legal gambling destination in China.

In response, there has been a shift away from the high-rollers towards the mass market, which benefits Shun Tak’s ferry service as well as some of its hotels.

More broadly, just as with Las Vegas a decade ago, there is a trend diversifying out of gambling and adding restaurants, shopping, and lavish shows, plus a theme park is on the drawing board for an island off Macau’s main Cotai island.

Future growth will likely depend on the various development projects, including a residential development in Macau, currently awaiting approval. The shortage of labor, partly driven by the shortage of housing, suggests this will be approved. This could be a catalyst for the stock.

Like most Macau-oriented stocks, Shun Tak has declined significantly this past year; it traded over HK$5 in early 2014. Trading in single-digit p/e’s around 6 times earnings, it also pays a small dividend (1.4%).

But the discount to book value—itself discounting the value of the properties—stands at over 50%, near its historical highest level. (More typical is a 30-35% discount.)

With a turnaround in Macau’s fortunes—plus catalysts at Shun Tak—this is the time to buy this diversified company whose assets more-than protect the stock price.

Although there is an ADR—symbol (SHTGY) (US$4.55; one ADR per 10 shares), it is not liquid and the spreads are wide. As such, I recommend buying the ordinary shares in Hong Kong. HK$3.60 is equivalent to about 48 cents US; a round lot is 2,000 shares.

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