Macau-facing gaming stocks have been taking a beating amid investor fears that revenue in the world’s largest casino market may be slowing. And investors are suspicious that so-called “channel checks” to forecast casino GGR each month are not working.
Insiders say some high-end players have been staying away over the last several weeks, spooked by weakness in China’s currency and turmoil in the mainland’s financial markets stemming from tensions with the Trump administration over trade.
“The market conditions have more uncertainties, including the potential trade war escalation. High rollers are more cautious, betting less or reducing trips,” said Andrew Lo, executive director of Suncity Group Holdings, parent company of the city’s largest junket operation.
The caution is already surfacing in Macau’s gaming results, with revenue showing two consecutive months of slowing growth. In June, gaming revenue was up 12.5 percent year-on-year to MOP$22.49 billion (US$2.81 billion), but it proved a disappointment as investors were expecting more like 20 percent based on early forecasts pointing to an especially strong month in the offing.
The sentiment contributed to a 21 percent tumble in the Bloomberg Intelligence index for Macau casinos as the Hong Kong-listed shares of MGM China Holdings, Galaxy Entertainment Group and Wynn Macau fell more than 22 percent from four-year highs at the end of May.
Wynn Resorts and Las Vegas Sands, the U.S.-based operators most dependent on Macau, saw their shares fall 6.7 percent to US$71.27 in the case of Sands (NYSE: LVS), a three-month low, and 7.9 percent to $154.14 for Wynn (Nasdaq: WYNN), its lowest closing price so far this year. Melco Resorts and Entertainment’s Nasdaq-listed shares were down 10.6 percent, the largest drop in a year and a half. MGM Resorts International (NYSE: MGM) dipped 3 percent.
High rollers from mainland China, the lifeblood of Macau casino revenue, are concerned about the “message from the weakening yuan,” according to Fielding Chen, Bloomberg’s China economist.
Add to that “the trade-war risk, stock market turmoil and impact on the property sector from deleveraging,” he said. “These factors hurt the pockets of the rich.”
The yuan’s depreciation may also be deterring more casual, mass-market gamblers, who are more price sensitive, said Bloomberg Intelligence analyst Margaret Huang.
Hotels, restaurants and entertainment in Macau are priced in Hong Kong dollars or Macau patacas, which become more expensive when the yuan depreciates.
More benign, “non-recurring” factors also have played a part, according to Tokyo-based brokerage Nomura. “Both junkets and operators have commented about a streak of bad hold; several operators have cited a loss of high-end gamblers to the World Cup; and a plateauing in VIP volume,” analysts Harry Curtis, Daniel Adam and Brian Dobson said in a client note.
Overly rosy forecasts haven’t helped either, according to Nomura, which blames some of the recent softness in share prices on “high investor and analyst expectations caused by inflated consultant estimates, which have now been proved wrong for more than several months”.
Looking ahead, July’s revenue is expected to mirror June’s, finishing at a gain in the low double-digits, according to analysts surveyed by Bloomberg News.
Which isn’t bad at all, according Union Gaming’s Head of Asia Equity Research, Grant Govertsen.
“At this point we’re not concerned,” Govertsen noted in a recent report to investors. “Keep in mind that Macau has bad weeks all the time, and one bad week doesn’t make a trend. That June still grew 12.5 percent on top of a nearly +26 percent comp is impressive in its own right.”
He added, “We think the market is demonstrating its resilience with GDP+++ growth and would look for a rebound in growth rates as comps ease and as new supply begins to ramp more closely in line with historical trends later this year.”
To make matters worse, investors worry that Macau gaming analysts who used channel checks missed the mark by almost 8 percent in June. Consensus had the numbers at 20 percent growth or more; in fact, the industry saw growth of 12.5 percent year-on-year for approximately MOP22.49 billion (US$2.81 billion), according to the Gaming Inspection and Coordination Bureau.
That disparity has called into question the practice of using channel checks, also called consultant checks. According to GGRAsia, the unofficial returns are assessed on a weekly basis. Some brokerages told the news outlet they don’t rely on such data for fear they could be vulnerable to litigation if investors buy or sell stock based on forecasts that don’t pan out.
“In hindsight, we can’t help but question the credibility of these weekly data,” said analysts DS Kim and Sean Zhuang of JP Morgan Securities Asia Pacific Ltd. in a note. “The miss was partly driven by elevated estimates, as the Street had hastily revised up numbers during the month (from +13 percent to 15 percent to +18 percent), reflecting upbeat channel checks from industry consultants.”
Analysts at brokerage Sanford C. Bernstein Ltd said in a Sunday note they too are “skeptical” about weekly channel checks.
“In May, the downward surprise was similarly pronounced,” wrote Vitaly Umansky, Zhen Gong and Kelsey Zhu. “Assuming the accuracy of the weekly channel checks, the implied average daily revenue for the last six days of June would have only been MOP466 million (US$57.7 million).”
In a June 25 memo, the institution expected average daily revenue of MOP730 million to MOP750 million for the balance of the month.
“If not for checks (which were incorrect last month as well), expectations would not have exceeded our +12.0 percent estimate,” wrote Deutsche Bank Securities Inc. analysts Carlo Santarelli and Danny Valoy.
For his part, analyst Grant Govertsen of Union Gaming Asia Securities Ltd. observed that business volumes across Macau “decelerated notably in the last week of June: we’re surveying the market to see if there was a universal root cause, but at this point we’re not concerned.
“Keep in mind that Macau has bad weeks all the time,” Govertsen added. “And one bad week doesn’t make a trend.”
Union Gaming said the estimates could have missed due to a challenging year-on-year comparison with June 2017 (when Macau GGR grew nearly 26 percent); “bad luck” on VIP and premium mass play at some casinos; a “small sliver of players” abstaining during the FIFA World Cup; and the absence of “market-growing benefit from the most recent supply.” The latter is a reference to Melco Resorts & Entertainment’s Morpheus hotel, which is making its 700-plus rooms available in phases.
For the full year, Union Gaming is now forecasting “+16 percent growth, which is 100 basis points lower than our previous forecast of +17 percent.”
The brokerage added, “Our full year forecast can be achieved via average monthly GGR of MOP26.2 billion (+4.8 percent relative to the year-to-date average of MOP25.0 billion and notably lower than the typical second-half versus first-half trends).”
