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Just because Macau’s gambling industry is stabilizing doesn’t mean the city’s casino shares are worth buying.

That’s according to Pictet Asset Management, which says valuations are too high relative to earnings prospects. Diam Co., a Tokyo-based investment manager, is waiting for more evidence of a sustained gambling upturn before buying. Casino shares declined Monday even after gross gaming revenue for July slipped at a slower pace than analysts predicted.

“I would continue to be cautious,” said Pauline Dan, Hong Kong-based head of Greater China equities at Pictet, which manages about $154 billion. “From a valuations perspective, it’s hard to make a bullish case."

A gauge of Macau casino operators has jumped 14 percent from a low on June 28, outstripping the 9.7 percent advance in Hong Kong’s Hang Seng Index as commentators including Las Vegas Sands Corp.’s Sheldon Adelson said the industry was bottoming out. A Bloomberg Intelligence gauge of six large casino operators trades at 22 times projected earnings, 25 percent above its three-year average and almost twice the level of the Hang Seng Index.

Gross gaming revenue in the city fell 4.5 percent in July, the smallest drop in five months, according to data from the Gaming Inspection and Coordination Bureau. While that was better than the median estimate of a 5.5 percent drop by nine analysts surveyed by Bloomberg, it marked a 26th straight month of declines.

Relative Strength

The index of casino shares declined 0.8 percent on Monday. The measure’s relative strength index rose to 73 last week, above the 70 level that signals to some traders shares are poised to decline.

Sands China Ltd. jumped 14 percent last month to be among the top gainers in Hong Kong as its parent reported mass-market gaming revenue in the Chinese city rose in June for the first time in two years. Wynn Macau Ltd. climbed 13 percent, while Galaxy Entertainment Group Ltd. reached an almost three-month high.

Trading in Hong Kong’s stock market may be curtailed Tuesday due to Typhoon Nida. There will be no morning session if the no. 8 warning remains in place at 9 a.m. and trading for the day will be canceled if it’s still in force after noon, according to the city’s exchange operator.

Cautious Stance

Toshihiko Takamoto, a Singapore-based portfolio manager at Diam, which oversees about $165 billion globally, says casino stocks are unlikely to be a one-way bet and maintains a cautious stance after investors were “repeatedly disappointed” by signs of a recovery.

Casino stocks have rallied in the past only to retreat after a turnaround to Macau’s two-year gambling downturn grew elusive. The latest signs of improvement come amid a building boom in Macau casinos, with the $4.1 billion Wynn Palace scheduled to open Aug. 22 while Sands China’s $2.7 billion Parisian project is slated to open Sept. 13.

Louis Wong, director of Phillip Capital Management (HK) Ltd. says stocks have room to rise further as a crackdown on mainland officials wanes and the new projects bring in more mass-market gamblers.

"Around 10 percent upside is possible from now," Wong said. "The number of arrests of Chinese officials decreased quite substantially since the second half of last year. There is a correlation between the VIP sector and the crackdown on corruption."

Anti-Graft Campaign

The index of casino operators has fallen 67 percent from its 2014 high as Beijing’s anti-graft campaign and increased scrutiny of the middlemen who bring in the high-rollers dragged down gambling revenue in the former Portuguese enclave.

Concerns about demand at new resorts were ignited last week after Wynn Resorts Ltd. said its new casino in Macau may be allotted about half of the baccarat tables analysts were expecting. The local government determines how many gaming tables each casino may offer. Wynn Macau slumped 8.3 percent in the two days through Monday, its biggest loss in six months.

"With high valuations it’s hard to see shares continuing to test higher without real visitor and revenue recovery," Diam’s Takamoto said.