Chinese Market: An Ace Up Its Sleeve

Vikas Gattani
CEO,
Progress Capital

For the better part of the past fortnight (February 9 to 13), China was on a New Year holiday. On account of this week-long festival, the country witnessed a slowdown. This also affects most of the other countries in the Asia-Pacific region to some extent.

South Korea, on the other hand, saw a rise in its exports due to the holidays in China. Shipments gained 11.8 per cent (against an estimated gain of 8.9 per cent), compared to a decline of 5.7 per cent in December. Imports rose by 3.9 per cent compared to an estimated increase of 1.4 per cent, and the trade surplus stood at USD 874 million. The biggest hurdle for Korea is Japanese Prime Minister Shinzo Abe’s campaign to drive down the yen to boost Japan’s automobiles and electronics exports, which directly compete with those of Korea.

Apart from the holiday season holdback, China’s exports gained 25 per cent against an estimated 17.5 per cent from a year earlier in January and imports rose by 28.8 per cent against an estimated 23.5 per cent. This leaves the country with a trade surplus of USD 29.15 billion, which is above the USD 24.7 median projection. The country’s inflation was tame at two per cent against 2.5 per cent as reported earlier.

During the last quarter, Indonesia’s economy grew at its slowest pace in more than two years. This was despite an export slump on account of a weakness in commodities being countered by gains in domestic consumption. This has led to an increased pressure on policy makers to add stimulus in a bid to bolster growth. The GDP grew at a rate of 6.11 per cent against an estimated 6.2 per cent for Q4CY12.

A weakening rupiah, declining exports and a widening current account deficit may pose challenges to the Indonesian economy. President Yudhoyono faces pressure to raise fuel prices and curb oil imports as elections are due in 2014. Growth in Indonesia has been led by its robust investments and consumer spending, which contributed 33.16 per cent and 63.45 per cent respectively to growth in 2012.

Thailand’s inflation slowed down in January as a stronger baht made imports cheaper and state subsidies countered higher costs of food and fuel, giving the central bank some scope to cut interest rates further. The CPI for January rose by 3.39 per cent YoY against the estimated 3.5 per cent. PM Shinawatra has extended a diesel tax cut until February end.

As regards the markets, Philippines, Thailand and Vietnam continue to be strong performers in the region along with the Chinese market (both A and H-shares). The first three markets look set for a multi-year bull run given the macro backdrop, political stability and a rise in domestic consumption.[PAGE BREAK]

The Actionable Idea

One of the manifestations of a rise in Asian consumer spending is the growth of Macau as the gambling destination of the world. Macau has been characterised by a number of international-style casinos that have opened up ever since foreign operators were first allowed there about 10 years ago. It has seen many international operators like Sands,
MGM, Galaxy (along with Star World), Wynn etc. open mega-scale casinos with resplendent shopping malls and exhibition-cum-entertainment venues.

Given the Chinese penchant for gambling, the revenues pouring into Macau are now three times larger than those in Las Vegas, and this has happened only in the last five years. The Cotai strip in Macau is the equivalent of the Vegas strip. The chief beneficiaries of this boom are companies like Sands China (1928 HK), Galaxy Entertainment (27 HK) and Melco (200 HK), which have opened their casinos in Cotai strip over the last couple of years.

The story of Macau is yet to take off though. To put this in perspective, it attracted about 28 million visitors, mostly from mainland China in 2011, while the total number of visitors (including Americans) visiting Vegas in 2012 was about 39 million. These numbers must be considered in light of the 1.3 billion population of China against about 340 million of the US.

Till about a year ago, there were two land-based immigration entry points into Macau from China, each having a handling capacity of about 150000 visitors a day. This is now in the process of being expanded to handling about 400000 visitors a day. A new highspeed train line between Guangzhou and Beijing was recently inaugurated, effectively cutting the train travel time from Beijing to Macau from 32 hours to just about eight hours.

Sands China trades at 14.4x the FY13E EV/EBITDA, while Galaxy trades at 10.8x the FY 13E EV/EBITDA. Melco (the latest casino opened in January 2013) trades at 9.4x the FY14 EV/EBITDA. The norm for these stocks is to trade at about one year forward EV/EBITDA of 13x, and all of them look attractive from a medium to long-term investment perspective. The present and the potential valuations definitely call for some investment here.