Beijing’s anti-corruption drive seems to have taken Macau out of Lady Luck’s favor. The dry run for Macau – the only destination in China where gambling is legal – has stretched beyond expectations as revenues declined for the twelfth consecutive month in May 2015.
Gross gaming revenues for the month of May fell 37.1%, per the Macau Gaming Inspection and Coordination Bureau, marking the ninth consecutive monthly double-digit decline. However, as in the past few quarters, the monthly decline was in line with analysts’ expectations. It seems that the market has well understood the trend and is therefore able to predict the results.
Macau has been sluggish since Jun 2014. The slowdown reflects a nationwide crackdown on corruption in China that compelled Macau officials to impose strict restrictions on VIP gamblers to stop billions of dollars from being siphoned off illegally from mainland China to Macau. Restrictions like limitation on the use of state-backed payment processor UnionPay made it harder for players to obtain cash to gamble.
Tighter restrictions on visas and the smoking ban in casinos worsened the situation further. Moreover, high-stake gamblers are curtailing spending amid a cooling Chinese economy, which has added to the woes. China reportedly grew at its slowest pace in six years at the start of 2015, indicating that the economy is still weighed down by a housing glut, debt and industrial overcapacity.
How Things Got Worse
As if the sluggish economic conditions and the anti-graft campaign were not enough, China reportedly further extended its crackdown on illicit funds transfers to Macau in Dec 2014. The new security drive enabled it to access all transfers through the state-backed UnionPay credit card, thereby helping identification of distrustful transactions in Macau. This further lowered footfall and hit Macau casino revenues.
In Feb 2015, it was announced that a full ban on smoking in all indoor workplaces in Macau – including all casinos and other gaming venues – is likely to be implemented by 2016. This would compound woes as the smoking ban, if implemented, would further hurt revenues.
Repercussions
Gambling revenues declined 2.6% year over year in 2014. Per analysts, gambling revenues in Macau have fallen annually for the first time since casinos were liberalized in 2001.
Macau's visitor arrivals reportedly fell 4% year over year in the first quarter of 2015 and so did spend per visitor. Meanwhile, owing to a significant decline in gross gaming revenues and visitor spending, Macau’s Gross Domestic Product (GDP) has declined for three consecutive quarters. After the second quarterly decline, the region was declared to be in recession.
Casino Players Bearing the Brunt
Below are 4 stocks that are likely to witness further downside as Macau is a key operating region for these companies. These stocks have nosedived lately. Also, analysts have downgraded their ratings on these stocks and cut target prices over the past one year on a gloomy outlook for Macau.
Based in Las Vegas, NV, Wynn Resorts Ltd.’s WYNN share price has plunged 51% since Jun 2014. This Zacks Rank #5 (Strong Sell) casino operator has missed the Zacks Consensus Estimate for earnings in two of the trailing four quarters and has an average negative earnings surprise of 14.16%. Wynn Resorts currently owns 72% of Wynn Macau, Ltd., which operates an integrated resort in the Macau.
Also based in Las Vegas, NV, Las Vegas Sands Corp. LVS, carrying a Zacks Rank #5, has seen its shares go down 32.5% since Jun 2014. This leading casino operator’s earnings have missed the Zacks Consensus Estimate in two of the trailing four quarters. The company has posted an average negative earnings surprise of 0.43%. Through its 70.1% ownership of Sands China Ltd., the company owns and operates a collection of integrated resort properties in the Macau.
Based in Central, Hong Kong, Melco Crown Entertainment Ltd. MPEL is a Zacks Rank #3 (Hold) stock. Its share price has plunged 45.5% since Jun 2014. This owner and operator of casino gaming and entertainment resort facilities in Asia has missed earnings estimates in all the trailing four quarters and has an average negative earnings surprise of 17.05%.
Based in Las Vegas, NV, MGM Resorts International MGM is a Zacks Rank #3 company, shares of which have tumbled 25.8% since Jun 2014. This owner of casino resorts has missed the consensus mark in two the trailing four quarters and has an average negative earnings surprise of 13.99%. MGM Resorts is the owner of 51% of MGM China.
Moving Forward
Though the decline in revenue rates has stabilized, market analysts continue to expect the downside to continue going forward. This is why it may be a good idea to adopt a caution stance on these stocks for the time being.
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