Good time for bargain hunters
Macau casino stocks got a lift on news that the Mainland Chinese government will step in to help the gaming mecca revive its flagging casino industry.
In mid-2014, after years of unprecedented and even explosive growth, Macau saw its fortunes plummet due to the government’s anticorruption campaign, which scared off high rollers who supported much of the city’s multibillion-dollar economy.
VIP players accounted for more than 70 percent of Macau’s gaming revenues in the second quarter of 2014, a number that dropped to 55 percent during the same period in 2015. The loss of elite players has decimated the city’s junket operations and forced some operators to close up shop or consolidate their rooms. It has also caused nervousness among casino concessionaires who have invested heavily in lavish new resorts along the Cotai Strip.
Now, help may be on the way. On October 1, Li Gang, director of China’s local liaison office, told the Teledifusao de Macau TV network the Beijing government has a support plan to Macau’s predominant industry, which is now in its 16th straight month of decline. While the official did not outline the rescue plan, news reports indicate they will include measures to boost the mass market and increase tourism.
“Easing of visa restrictions, easier border crossing measures and continued infrastructure improvements could be a few that come to mind,” speculated Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski. “We still expect the VIP market to remain constrained. However, anything that the government does to support the growth on the mass side should be viewed positively.”
Easing the cap on table games would also be an obvious palliative measure, according to a note from Karen Tang of Deutsche Bank AG. Industry pundits and some casino operators including Melco Crown’s Lawrence Ho hope the government rewards companies that have invested heavily in nongaming attractions, such as Melco’s new Studio City on Cotai. President Xi Jinping has demanded such nongaming amenities, saying they will diversify the market and bring in more mainstream tourists.
MGM Resorts CEO Jim Murren seemed confident the Xi administration ultimately will support China’s moneymaking territory. “Is there any reason why the central government would desire Macau not to grow longer term? I can come up with none.”
News that the central government could ride to the rescue sent stocks skyward. On the NASDAQ, Wynn Resorts closed up almost 23 percent on the news, for its biggest one-day jump in six years. On the New York Stock Exchange, Las Vegas Sands closed up almost 11 percent the same day. MGM was up 6 percent on the NYSE. Melco Crown rose 14 percent, Galaxy Entertainment Group rose more than 10 percent, while MGM Resorts and SJM Holdings rose 6 percent.
According to analysts polled by Bloomberg News, investors can get some real bargains in Macau these days. “At these share price levels, the Cotai-ready operators—specifically Galaxy—look undervalued,” said Jamie Soo of Daiwa Securities Co. Soo also upgraded Sands China Ltd. and Melco Crown Entertainment Ltd. Soo, who called his forecasts “the lowest on the Street,” added that GGR in Macau will probably drop 34 percent for 2015 and another 5 percent in 2016. He put underperform ratings on Wynn Macau and MGM China, with a hold on SJM.
But Pauline Dan, the head of Greater China equities at Pictet Asset Management Ltd., said, “In order for casino stocks to become attractive for me as an investor, I’d like to see their prices go lower.”
While optimists say the mass market can make up for lost VIP revenues, Deutsche Bank analysts dispute that view, saying “a meaningful pickup in mass revenue, as a percentage of the mix, has not led to improving margins.”
Their counterparts at CLSA Research said they feel “assured” that the mass segment in Macau will hold steady, but may not grow enough to make up for losses in the VIP market. “The intensity of play behind closed doors (in the VIP private rooms) is the slice of the business that has been decimated,” said CSLA.
For the year to date through September, Macau gaming revenue was down 36 percent year-on-year. According to Forbes, the world’s largest gaming market by revenue produced a record-smashing $45.2 billion in gaming revenues in 2013, but lost 2.6 percent of that in 2014.
A softening Chinese economy hasn’t helped. And other factors have also added to concerns about the special administrative region: a possible full smoking ban in casinos, rigid visa rules (which have been eased somewhat in recent months), the weaker Chinese currency, the imploding junket business, and a high-profile theft from the Dore junket operation at Wynn Macau.
“To state the obvious, any potential measures to help Macau’s visitation would be a big positive for the industry,” said J.P. Morgan’s Joe Greff.
