8 minute read
MACAU
Trade war creates headwinds for Macau gaming stocks
Macau gaming stocks are feeling the heat from the trade war between the U.S. and China, falling to their lowest levels in a year, with some analysts cutting their growth forecasts on concern for a slowdown in China’s economy.
Advertisement
Both Deutsche Bank and Morgan Stanley have both recently reduced their estimates for gross gambling revenue for this year and next. Deutsche Bank’s forecast for 2018 has been trimmed to 13.9 percent from 14.2 percent, while it expects growth to drop to 6.8 percent in 2019 and slow further to 5.1 percent in 2020.
Morgan Stanley, while noting that it still sees Macau as a long-term growth story, cut its 2018 GGR estimate to 13 percent from 16 percent and more than halved its estimate for next year to 5 percent from 12 percent previously.
“3Q18 EBITDA in general will disappoint, and we expect consensus earnings revision to be down meaningfully over the next few months,” Morgan Stanley analysts Praveen Choudhary, Jeremy An and Thomas Allen said in a report. “Macau in a slowing growth environment tends to underperform, and we do not expect the stocks to trade above long-term averages.”
September GGR rose only 2.8 percent yearon-year – affected by casino closures during Typhoon Mangkhut and related disruptions. However, without the disruptions, analysts say growth would have still been in double digits.
And Union Gaming managing director Grant Govertsen said that although stocks have fallen, as yet there is no discernible impact on the ground.
“Clearly everyone is on edge and watching to see what happens. There has been no change in customer behavior so far,” he said. “Obviously the stocks are baking in a significant downturn in Macau next year, which could, of course, happen although so far there are no obvious similarities so far between the global financial crisis-led slowdown in 2008/09 or the anti corruption-led slowdown in 2014/15 and today.”
Still, the trade war shows no sign of abating, with tariffs affecting about $260 billion in bilateral trade, which are already having a negative impact on China’s economy.
Factory activity stalled in September after 15 months of expansion, with export orders falling the fastest in over two years, a Caixin survey found. New investment growth is also at a record low.
On October 7th, Beijing announced it was cutting reserve requirement ratios by one percentage point from Oct. 15th to give the lower financing costs and give its economy a boost.
The trouble is many of the worst-hit provinces are the southern export-trade driven coastal regions, which form the main feeder markets for Macau.
“If you look at the Macau market, 75 percent of revenue is from VIPs and premium mass, these are basically high-net-worth individuals, with a lot from Guangdong and other coastal provinces,” Bernstein Research analyst Vitaly Umansky said in a recent podcast. “If their own economic situation worsens as a result of a trade war and China slows, we are going to have significant headwinds to new growth in Macau and that’s where the short-to-mediumterm concern lies.”
Umansky said he is not optimistic of a short-term solution to the trade battle, which he sees as being part of a larger geopolitical struggle.
“If you take a step back and think about the parties around President Trump and their view of China as a strategic competitor, it’s hard to see how this all goes away relatively quickly.”
He said any trade concessions designed to trim the deficit are unlikely to be seen as a victory by those who regard China as a potential threat.
There is little doubt that the first sector to feel the strain will be the high rollers and those operators with the biggest exposure to VIPs will be the hardest hit.
Morgan Stanley recently raised its rating on Sands China, the most mass market-focused of Macau’s operators to overweight from equal weight, while cutting Galaxy Entertainment from overweight to equal weight.
It cited Sands’ mass exposure, high dividend payout and yield and strong Q3 outlook for its decision. It also said it favours MGM China over Wynn Resorts and Galaxy as it’s cheap with the ramp up of its new Cotai resort not yet priced into the stock. It noted Wynn and Galaxy have high exposure to the VIP and premium mass business.
Longer term, there remains a question mark over whether the tension between Beijing and Washington will have any impact on the concession renewals for the Macau operating licenses.
Govertsen said it’s highly unlikely that trade wars will have any impact whatsoever as we do not expect any decisions to be made until well after 2022.”
Umansky agreed that a present, the renewals are too far away, but added it’s something to keep an eye on. If tensions continue to ratchet up, the U.S. operators could find themselves at higher risk than the locals.
Wynn Macau
Wynn Macau (1128:HK) operates two resorts, with its $4 billion Wynn Palace opening in 2016. The company’s original property is on the Macau Peninsula. The Wynn Palace has 1,700 hotel rooms and 90 percent of the resort will be non-gaming. The resort has two further plots of land available for development and the company is considering adding more non-gaming attractions. (Wynn results 25th)
SJM Holdings
SJM Holdings (880:HK) has 22 casinos in Macau, though the former monopoly has been losing market share to new IRs on Cotai. The company recently announced the appointment of Paul Baker, a former Genting executive, to head its Lisboa Palace IR. The opening of the $4.6 billion resort has been delayed until the second half of next year. Duty-free retail operator China Duty-Free Group will be one of the anchor tenants of the retail space at the new resort, with 7,500 square meters of retail space on the first floor. (Earnings on 30th)
MGM China
MGM China (2282:HK) is operating two casinos, with its MGM Cotai IR opening in February. The IR, with its jewellry box design, is already contributing to group results. The HK$27 billion IR features 1,400 hotel rooms and suites, meeting space, high end spa, retail offerings and food and beverage outlets as well as the first international Mansion at MGM for the ultimate luxury experience. (Earnings on 30th)
Galaxy Entertainment Group
Galaxy Entertainment Group (27.HK) has three main properties and runs three City Club casinos inside hotels. The company’s Galaxy Macau Phase 2 and Broadway at Galaxy Macau opened on May 27, 2015, almost doubling the capacity of the resort. The company is seeking a license in Japan and also wants to build an IR on Boracay in the Philippines, though President Rodrigo Duterte has said he will not allow that to proceed. For Q3, Galaxy reported a six percent increase in its net revenue to $13 billion. Group adjusted EBITDA was $3.9 billion, up 10 percent year-on-year. Despite the increase, Galaxy said it suffered from bad luck in its gaming operations which impacted adjusted EBITDA by $332 million.
Sands China
Sands China (1928:HK) has five properties in Macau. The $3 billion The Parisian opened in September 2016 and is now a key driver of group results. It features a scale replica of the Eiffel Tower, nearly 13,000 hotel rooms, two million square feet of retail-mall offerings and two million square feet of MICE capacity. Announcing Q3 results, Chairman Sheldon Adelson expressed confidence in Macau’s potential and said the company would be stepping up investments across its Cotai properties, with new projects to be rolled out in 2020 and 2021. For the quarter, total revenue for Sands China increased by 13 percent to $2.2 billion, while adjusted property EBITDA reached $754 million, an increase of 15.8 percent year-on-year. Bernstein Research said the results were largely within its expectations.
Melco Resorts & Entertainment
Melco Resorts & Entertainment (6883. HK) has three casinos and the Mocha Clubs. The company operates the City of Dreams and Studio City in Macau and the City of Dreams Manila. The company’s Studio City International Holdings unit recently raised a total of $359.4 million in a U.S. Initial Public Offering, with a final offer price of US$12.50 per ADS. The company sold 28.75 million ADS in its offering, accounting for approximately 38.7 percent of the enlarged issued share capital of Studio City. Upon closing of the global offering, Melco said that its interest in Studio City will be diluted from 60 to 57.3 percent but will remain as Studio City’s majority shareholder.
Pansy Ho touts non-gaming focus
Pansy Ho Chiu King, co-chairperson and executive director of MGM China says that Macau operators have been “collectively positioning” themselves to appeal to non-gamblers ahead of the 2020 and 2022 concession renewals.
Ms. Ho said: “I think it is conducive for the industry as a whole to have the extra time to put together a stronger proposition and to demonstrate we are capable of attracting the non-gamers.” Ms Ho was quoted by Macau Business as saying. “…we shall have to see, because everyone is asking the same question, is it [the diversification efforts] effective? We will see if this will be changing the landscape,” she added. The first of Macau’s gaming concessions are due for renewal / rebidding in 2020.
However, the government has kept hush on how the process will be conducted – saying only that it is currently “researching” the renewals at this stage.
Macau gaming taxes up 17 percent year to August
The Macau government saw its direct taxes from gaming reach MOP70.9 billion (US$8.7 billion) from January to August 2018, up 17 percent from the prior year period.
During the same period in 2017, the government recorded gaming taxes of MOP64.1 billion. In 2016, gaming tax revenue reached MOP 54.9 billion in the period. The accumulated tax revenue makes up for 86 percent of the MOP82.4 billion in gaming tax revenue targeted for the full year.
The increase in gaming tax revenue is attributed to a similarly strong growth in gaming revenue. However, a slowdown has been expected for the second half of 2018.
