My oh my, Macau.
If you wanted to make money in stocks over the past year or two, Macau wasn’t been the place to be.
While stock prices have been soaring in many sectors, including gaming, the pure plays on Macau concession-holders have been big losers.
Consider this data compiled by Fantini Research’s Patrick Zerkle, percentage changes in the stocks of the six pure plays as of this writing from their 2020 and 2019 highs:
| Concessionaire | From 52-week high | From two-year high |
| Galaxy | – 39 percent | – 39 percent |
| Sands China | – 40 percent | – 46 percent |
| SJM | – 43 percent | – 43 percent |
| MGM China | – 45 percent | – 47 percent |
| Melco Resorts | – 46 percent | – 50 percent |
| Wynn Macau | – 48 percent | – 59 percent |
That’s pretty devastating. And it isn’t typical of any other sector of the gaming industry. For example, the U.S.-listed parent companies have sold off, no doubt dragged down by Macau, but not nearly as badly:
| MGM | – 7 percent | – 7 percent |
| Wynn | – 29 percent | – 35 percent |
| Las Vegas Sands | – 35 percent | – 42 percent |
Note that MGM, which has the least exposure to Macau among the trio above, has declined the least.
Nor is it typical of Chinese stocks. The Hang Seng Index of Hong Kong-listed stocks is down just 11 percent from when Macau casino stocks were hitting their two-year highs in January 2020.
Elsewhere, gamers have prospered. Fantini’s North American Gaming Index hit an all-time high in June and Fantini’s Global Gaming Top 30 Index did so in March, though they are both off since then.
Meanwhile, many casino stocks are at or near their highs.
So what gives?
The immediate answer is Covid-19. Travel from Mainland China and some other locations has been affected by severe travel restrictions in efforts to halt the virus.
Macau bulls and the companies themselves say they’re long-term believers in Macau. The pandemic will end and the process of tapping into the huge China market will resume. As proof of their confidence, all six concession-holders keep investing millions and billions of dollars into upgrades and expansions.
But the sorry story of Macau stocks goes well beyond Covid. The six pure plays hit their all-time highs between October 2013 and February 2014, and have done miserably since. Here are rounded off percentage changes from their highs as of this writing:
- Galaxy – 40 percent
- Sands China – 60
- Melco – 70
- SJM – 75
- Wynn Macau – 75
- MGM China – 75
Two questions for investors:
- How many more years before Macau begins to fulfill the potential that justifies the billions of dollars of investment?
- With stocks down so low for so long, are they screaming buys now?
Finally, there’s a third and perhaps most important question—political risk.
Gambling is anathema to the Communist ideology. And the national Chinese government is capable of squeezing and squeezing until it reaches a point where it can clamp down on activity it doesn’t like.
That’s already seen in efforts to prevent the marketing of gambling to Chinese citizens. This appears to be aimed at nearby countries where developers are building massive casino resorts, seemingly all premised on drawing Chinese players.
And while the effort is not aimed at Macau per se, many people believe it could spell the end of the junket business. Those sanguine about Macau note that casinos make more money marketing directly to players than working through junket operators, but that assumes the national government’s aim isn’t to rein in gambling, period.
Macau bulls will also point to the one-country, two-systems arrangement by which Macau has legal casinos while Mainland China has none. Just look at neighboring Hong Kong to see how one-country, two-systems works when the national government decides to get its way.
Finally, Macau bulls say the national government has always been reasonable, not wanting to crush businesses and/or shatter the confidence of those who want to do business or invest in China.
That’s been true, but it also remains possible that government policies will aim at limiting gambling growth.
Doubling down on Macau may be risky. Geographic diversification might be the prudent course, for casino operators and for investors.
