Macau Casino Stock Rally Seen Unsustainable as Downturn Endures

  • Fitch warns of cannibalization as companies open new resorts
  • June quarter usually slowest for gaming firms, JPMorgan says

Are Macau Casinos a Losing Bet?

Macau casino stocks just had their worst week since January, and for Invesco Ltd.’s Paul Chan, there’s no let up in sight.

A gauge containing Sands China Ltd. and other casino operators sank 5.5 percent in the five-day period, after rallying at almost triple the pace of the MSCI Hong Kong Index since a January low. The rebound will falter given operators are adding new gaming tables, industry revenues are dropping and big spenders are staying away from the enclave, he says.

“What recovery? I haven’t seen any recovery yet,” said Hong Kong-based Chan, the chief investment officer for Asia excluding Japan at Invesco, which oversees about $772 billion in global assets. “Top-line revenue growth is not improving and they have moved to the mass market now, which is a low-margin business. I don’t think it is a good time for investors to go into the sector.”

Gambling revenue in the only city in China where casinos are legal has fallen for almost two years, hurt by Beijing’s anti-graft campaign and increased scrutiny of the middlemen who bring in high-rollers. The resulting squeeze in spending by the biggest gamblers has pushed casino operators to earmark nearly $20 billion for resorts targeting families and non-gaming revenue, which Fitch Ratings warns could cannibalize on existing properties.

A Bloomberg Intelligence gauge of six large casino operators jumped 46 percent from a five-year low on Jan. 21 before last week, with Wynn Macau Ltd. leading gains on the MSCI index, which advanced 17 percent. Casino stocks accounted for five of the six biggest losers in the city last week, even as the gauge rose 0.8 percent.

The index of casino shares dropped 0.9 percent to a five-week low at the close. Wynn Macau and SJM Holdings Ltd. slid at least 1.3 percent.

JPMorgan Chase & Co. said in a report this month the rally may lose steam as investors lock in profits and the second quarter is traditionally the slowest for Macau in the absence of major holidays. The brokerage downgraded Sands China Ltd. to neutral days before the Macau-based unit of Las Vegas Sands Corp. reported first-quarter profit that missed analysts’ estimates.

Some 1,600 tables will be added as new projects open in the next two years, according to Fitch. Macau’s casino revenue sank 16.3 percent to 18 billion patacas ($2.3 billion) in March, worse than the 15.5 percent decline estimated by analysts in a Bloomberg survey. VIP revenue, as measured by baccarat that contributes more than half the total gaming revenue, slumped 19 percent last quarter.

New Projects

Alex Bumazhny, Fitch’s senior director in New York, predicts Macau gambling revenue will fall about 5 percent this year.

“We expect some marginal growth going forward but as bigger projects open, there’s some danger that there could be cannibalization for existing properties,” he said.

Sands China is building a $2.7 billion Parisian Macau project, which will feature a replica Eiffel Tower when it opens later this year, and will compete with a $4.1 billion resort from Wynn Macau.

The market is big enough to absorb the additional supply, while an improving Chinese economy will boost risk taking by gamblers, according to Michael Ting, a Hong Kong-based analyst at brokerage CIMB Group Holdings Ltd.

Several recent Chinese indicators including manufacturing activity, retail sales, exports and industrial output have beaten estimates, buoyed by a surge in new credit to more than $1 trillion in the first quarter.

Junket Operators

“Under an assumption that the macro environment continues to improve, this is what can drive cash flows,” said Ting, who recommends investors add to their holdings in Sands and Galaxy Entertainment Group Ltd.

Still, a tightening squeeze in the VIP business may deter big spenders. Macau’s government is working with new junket operators, who bring in the high-stakes gamblers and lend them money, on a proposal that would see a 100-fold increase in the capital requirements for new entrants, according to people familiar with the matter.

The bull argument doesn’t hold water for Alex Wong, who helps oversee $100 million at Ample Capital Ltd. and says the construction of rival gambling centers in South Korea, Japan and Southeast Asia will lure Chinese visitors away from Macau.

“These stocks have been down so much over the last year, so people were expecting things cannot get worse,” said Wong. “I don’t think we would see further momentum from here.”

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