House Doesn’t Always Win as Philippine Casino Bet on China Sours

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In February 2014, Melco Crown Entertainment Ltd. co-Chairman James Packer described the construction of the City of Dreams casino in Manila as a “bet on China.” Sixteen months on, the gamble hasn’t paid off.

With a government crackdown on corruption in China scaring customers away from Macau, where gaming revenue has fallen year-on-year for four straight quarters, the opportunity appeared to be there for other Asian gambling hubs to cash in.

Instead, the anticipated flood of high-rollers from China to Manila’s three casino resorts has so far failed to materialize. The market value of operators like Melco Crown Philippines Resorts Corp. and Bloomberry Resorts Corp. has been shredded as investors fled, making Philippine casino stocks among the world’s worst performers this year. Profits will tumble 56 percent across the industry in 2016, JPMorgan Chase & Co. forecast this week.

“The chain reaction from Macau hit everyone,” said Noel Reyes, chief investment officer at Security Bank Corp., who manages the best-performing Philippine equity fund in the past year. “Expectations VIP players will come in large numbers didn’t happen. The stocks have fallen quite significantly but not everyone is rushing back in, and there’s no clear light at the end of the tunnel.”

Casino shares have crashed even as the benchmark Philippine Stock Exchange Index has climbed 4.4 percent this year, peaking at a record high in April amid official forecasts for two straight years of 8 percent economic growth.

Shares Fall

Shares of Bloomberry, which operates Solaire, have lost 27 percent this year, and Resorts World Manila operator Travellers International Hotel Group Inc. has slumped 35 percent. Melco Crown Philippines tumbled 56 percent as earnings disappointed investors, outpacing even the 36 percent loss at Wynn Macau Ltd., the Chinese territory’s worst-performing casino stock.

Bloomberry added 0.8 percent to 9.08 pesos at the close of trade in Manila, paring a gain of as much as 2 percent, while Travellers was unchanged. Melco advanced as much as 3.8 percent before closing unchanged at 6.01 pesos, the lowest level since December 2012.

JPMorgan Chase & Co. downgraded Melco’s stock to underweight from overweight in a report dated June 21, and cut its 12-month price target by 63 percent to 5.80 pesos.

China Arrivals

Arrivals to the Philippines from China, the country’s fourth-biggest tourist market, fell by about 33 percent to 93,043 in the first quarter as the Chinese government stepped up its anti-corruption drive. A simmering territorial dispute between the two nations over islands in the South China Sea also deterred travelers.

Geopolitics “seems to be getting in the way of seeing planeloads of tourists,” Cristino Naguiat, chief executive officer of the Philippine Amusement & Gaming industry body, said earlier this month.

Bloomberry fell to a first-quarter loss of 533 million pesos (11.8 million) as costs spiked with the expansion of the Solaire casino, increased marketing expenses and provision for bad debts. Travellers’s profit rose 1.6 percent to 1.74 billion pesos, while Melco Crown Philippines, which opened City of Dreams in December, posted a record 3.09 billion-peso loss.

“The first-quarter results raised the question; can there be aggressive growth without the numbers coming from China?” said Richard Laneda, an analyst at COL Financial Group Inc. in Manila. “The growth in earnings didn’t match the pace most wanted to see. The market isn’t overreacting, there’s genuine uncertainty.”

‘Too Optimistic’

Some investors are overestimating the impact of the China market, and the slump in Philippine gaming stocks is excessive, according to Marc Reyes-Lao, an analyst at BPI Securities Corp. in Manila.

Combined profit at Bloomberry, Travellers and Melco Crown Philippines is forecast to jump 47 percent to 13.61 billion pesos next year from 2015, and to 15.59 billion pesos in 2017, according to analyst estimates compiled by Bloomberg. Based on share-price forecasts, Philippine gaming stocks will return at least 40 percent in the next 12 months.

“The dismal stock performance is not totally fundamentally driven,” Reyes-Lao said. “It’s partially because of negative sentiment towards the industry brought about by China’s campaign against corruption. Investors have overreacted.”

JPMorgan reckons those earnings forecasts are “too optimistic.” In the report this week led by analyst Daisy Lu, the bank said Manila casinos are increasingly reliant on China for high-rolling VIP traffic and therefore vulnerable to the government’s corruption crackdown and scrutiny on casino marketing.

For investors including BDO Unibank Inc., the country’s largest money manager, the odds need to improve considerably before they put more chips on the table.

“For long-term investors, this might be a good time to buy, since they have been badly beaten up,” Frederico Ocampo, chief investment officer at BDO, said in an interview on June 15. “We need to see more compelling indicators that things have turned out for the better.”

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