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Howard Stutz

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Macau mired in cold streak

24 Sep 2014

By Howard Stutz
The situation has gone from bad to worse in Macau.

Last week, the investment community used a news event a world away to prop up the stock of one Macau casino operator.

On Monday, the Chinese gaming market was red-flagged when Wells Fargo Securities gaming analyst Cameron McKnight became the latest Wall Street researcher to post warning signals.

McKnight told investors Macau could see another six months to a year of declining gaming revenue, in part because of Chinese government maneuvers, economic uncertainty and market pressuring factors.

Still, he wasn’t willing to write off Macau.

The analyst projects the market will produce $100 billion in annual gaming revenue in the next five years — more than double the record-setting $45.2 billion produced in 2013.

“We remain positive on the long-term outlook,” McKnight said. “We note that only about 8 percent annual gaming revenue growth is needed to support economic returns for the upcoming gaming supply through 2018.”

That’s good news to Wynn Resorts, Limited, MGM Resorts International and Las Vegas Sands Corp., which have publicly subsidiaries traded on the Hong Kong Stock Exchange, control a large swath of the Macau market, and will spend billions of dollars to open hotel-casinos on the Cotai Strip in 2016.

McKnight, however, downgraded the stocks of the Macau casino companies from Outperform to Market Perform.

“We remain strong believers in the long-term secular growth story of Macau, but we feel near-term uncertainty has increased,” McKnight said.

Macau gaming revenue has tumbled in the past three months. The last time that happened was five years ago. Macau’s monthly gaming revenue declined seven straight months from December 2008 to June 2009.

Through August, Macau gaming revenue is up 8.1 percent, compared with the first eight months of 2013. Analysts hold little hope that September will break the three-month slide.

J.P. Morgan gaming analyst Joe Greff last week speculated the market’s downward spiral was near the bottom, though an expected revenue decline in September could reach double-digits.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said investor sentiment in Macau “continued to crater,” which could create a buying opportunity if stock prices dip.

Wieczynski said Wynn Resorts’ win last week of the Boston-area gaming license from Massachusetts was welcome news.

“It infuses a positive talking point into the story at an opportune time,” Wieczynski said. “Given the level of negativity that has surrounded the Macau operators collectively of late, we will take a positive wherever we can get it.”

Macau provides world-class uncertainty.

The mainland Chinese government is on an anti-corruption crusade, which has frightened off some high-end customers. Meanwhile, new visa restrictions implemented by Beijing have slowed visitation from neighboring provinces.

A smoking ban on mass-market gaming floors will be implemented Oct. 6, adding uncertainty to revenue trends.

Also in October, the National Congress of the Communist Party of China will host its national meeting in Beijing. The event, held once every five years, could include some discussion of Macau or legal gaming in general.

McKnight said Wells Fargo has been “one of the more cautious houses” this year when it comes to evaluating the Macau gaming sector. Fundamentals and estimates have deteriorated throughout the summer, he said.

“We’ve been seeing almost weekly news flow and data that’s more surprising and appears increasingly negative,” McKnight said.

Macau casino watchers are also wringing their hands over a PBS Frontline/New York Times investigative report to appear Tuesday. Four years in the making, the report explores Macau’s VIP junket business, which international law enforcement authorities consider influenced by organized crime triads.

“We have seen a preview of the Frontline report, and it appears to be deeper and more granular than previous critical reports,” McKnight said.

Despite the negativity in the air, nothing will change the plans for the Macau projects in development: the $4 billion Wynn Palace, the $2.9 billion MGM Cotai and Las Vegas Sands’ $2.7 billion Parisian.

Greff hopes for a boost from Macau’s annual Golden Week holiday in mid-October.

McKnight said the market might not settle until after December, following an expected visit to Macau by Chinese Premier Xi Jinping. He also told investors the market would easily absorb the new hotel and gaming capacity of the three resort developments.

“It is possible the Chinese government starts loosening credit policy and stimulating the economy in the fourth quarter, as it did in 2012,” McKnight said.

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