Melco Crown has “a target on its back”
The once-might gaming enclave of Macau is now in the grip of a technical recession. According to the Macau Business Daily, the territory’s gross domestic product has registered two consecutive quarterly declines, and gaming revenues have dropped for nine consecutive months, including a 17.2 percent drop in fourth-quarter 2014.
Macau-based economist Albano Martins says the beleaguered city’s gross domestic product could see a double-digit plunge this year. “Everything indicates that the gaming revenue will continue to drop sharply, at least during the first half of the year. That slump will negatively affect Macau’s GDP,” he said.
According to the Statistics and Census Service, the city’s economy shrank 17.2 percent in fourth-quarter 2014, and GDP for the year dropped 0.4 percent following a 10.2 percent decline in the second half.
The decline began last summer, when President Xi Jinping launched an unprecedented anti-graft campaign aimed at high rollers, who account for about two-thirds of gaming revenue, reported Bloomberg News. Xi admonished the gaming city to clean up its act and also diversify its economy beyond gaming, which accounts for some 80 percent of annual government revenues. As the Chinese economy stagnated, so did mass-market play.
Other discouraging developments include a possible smoking ban that would extend to casinos’ VIP rooms. Xi’s government is also looking to put a cap on tourism, which reportedly has compromised the quality of life among residents of Macau.
“Xi doesn’t care if the island’s economy suffers, as long as he gets the cleaner, less corrupt China he’s been working for,” wrote Linette Lopez of Business Insider. “That’s what his anticorruption drive is about. That’s why there are more cameras in casinos to scare high rollers. That’s why even the once untouchable nephew of Macau scion Stanley Ho was arrested along with 99 prostitutes in a sting at Ho’s Casino Lisboa. It’s because the old Macau is dead.”
According to KNPR in Nevada, CLSA gambling analyst Aaron Fisher is forecasting a “longer and more severe downturn than expected” in the former Portuguese colony. “We cut our 2015 estimate from minus 9 percent to minus 26 percent,” Fisher wrote, citing a “perfect storm of anti-corruption measures; a weak macro environment; lower margins for junkets; and endless regulatory changes are resulting in a much deeper slowdown than expected.”
Fisher said the news from Macau will “remain poor for another 12 months.”
Kate O’Keeffe of the Wall Street Journal told KNPR that the downturn actually began in 2012, and is only now taking its toll on the city’s economy. “Now that it has, people really don’t think Macau will ever be the same,” she said. “Both Wynn and Sands are really dependent on Macau, and they definitely have seen a decline on top-line revenue.”
Barron’s reported that Macau stocks “had a bloodbath” last week, with MGM China down 11.1 percent, Wynn Macau down 10.9 percent, Galaxy Entertainment dropping 10.1 percent, and Sands China down 8.2 percent. SJM Holdings fell 6.1 percent and Melco Crown was down 7.5 percent.
In the past month, about US$30 billion has been wiped from the value of Macau-related gaming stocks, said Tim Craighead, director of Asian research and senior casinos and gaming analyst for Bloomberg. “Our forecast for this year in revenue is to be down by 18 percent. There’s been a massive drop in earnings expectations following that revenue rebalancing.”
Melco Crown may be especially vulnerable to the fallout. According to Investopedia, Melco “has a target on its back” because it relies so heavily on Macau for its profits. “Melco Crown plotted its future course on the assumption that Macau had further room to grow,” according to the website. Morgan Stanley slashed Melco Crown from the equivalent of a buy, projecting a 25 percent drop in gaming sales in Macau this year. Meanwhile, the company has expanded its outlook with projects in the Philippines.
The Want China Times reports that another big player in Macau, Galaxy Entertainment Group, is turning to nongaming businesses due to the decline in gaming. Chief Marketing Officer Kevin Clayton said that 90 percent of the HK$43 billion (US$5.5 billion) investment in the Galaxy Macau phase II and Broadway at Galaxy Macau is being funneled into nongaming operations.
“The primary drivers have been the government crackdown and tighter credit,” Matthew Jacob, a director at ITG Investment Research in New York, told Bloomberg. “Trends aren’t getting any better. The rhetoric we have seen is that the government will get even more strict.”
Meanwhile, GGRAsia reports that China is preparing to establish a “super” anti-graft bureau that will investigate high-ranking officials suspected of corruption. Li Gang, director of the Central People’s Government Liaison Office in Macau, warned public officials if they go to Macau to gamble, “they will be discovered.”
Despite some analysts and operators who say the downturn is cyclical and predict an uptick in the gaming sector later this year, Business Insider said that sort of thinking may be delusional.
According to the BI analysis, “The old Macau is dead.”
