Winning run ends as Macau plays tumble

United States-listed Macau plays were one of last year's best bets. As the territory overtook the Las Vegas Strip as the world's largest gaming market, shares in Las Vegas Sands Corp more than doubled while rival Wynn Resorts rose more than 80 per cent. But recent weeks have delivered a painful reminder that even the hottest winning streaks must eventually turn cold. Billionaire Sheldon Adelson's Las Vegas Sands, which is spending up to US$14 billion on a dozen casino mega resorts in Macau, earlier this month saw its share price plummet as much as 26 per cent from a January record. The Nasdaq-traded shares in Las Vegas developer Steve Wynn's Wynn Resorts, which opened a US$1.2 billion casino hotel in the territory in September, have shed as much as 22 per cent from an all-time high early last month. Worse still has been Melco PBL Entertainment, the joint venture between Lawrence Ho Yau-lung's locally listed Melco International Development and Australia's Publishing and Broadcasting Ltd. Shares in the Macau casino developer have plunged as much as 40 per cent from their December 19 debut on the Nasdaq after the company said the projected costs of its three planned casino resorts had doubled. While global markets have shivered in the past month, Macau plays look downright feverish. The stocks remain hugely expensive, and investors and analysts are worried about rising costs in Macau, underwhelming growth in visitor spending and infrastructure bottlenecks. Perhaps the biggest surprise came from a recent restatement by the gaming regulator of last year's casino revenues, which showed lacklustre growth in turnover from the mass market of walk-in tourists. 'When you look at Macau, nothing is ever invalidated,' UBS Securities analyst Grant Chum said. 'But the current trends don't support the massively bullish argument - that you build it and they will come, and that each time you open a new property, you are going to see a [surge] in visitation from the mass-market Chinese visitor.' Even after the slump, share prices for Macau plays still represent massive premiums to existing earnings as investors continue pricing in anticipated profits from casino resorts that may not open for two or three years. Las Vegas Sands closed on Friday at US$91.20, 64 times last year's earnings and 56 times estimated earnings for this year. At US$100.65 per share, Wynn is trading at 915 times last year's profit and 42 times the estimates for this year's earnings. 'I think in no small part [the correction] had to do with a concern about China slowing the economy proactively,' Deutsche Bank analyst Bill Lerner said. 'These companies are guilty by association. Even if that does happen, I think ultimately the fundamentals here will prove these [stocks] are different animals.' Mr Lerner noted that despite an 18 per cent increase in Macau's visitor numbers last year, spending per visitor grew only about 1 per cent. He attributed this to an expansion of the mainland's individual visitation scheme, which continues to be rolled out to include more inland cities where residents are less wealthy than their coastal peers. 'Naturally, as you open up new provinces by this individual visitation scheme, you're going to get a different demographic visiting this market,' he said. At the same time, a major mantra of the Macau investment story has lost much of its lustre after a restatement of gaming revenues - the idea that casino supply drives demand. Throughout last year, gaming revenue from walk-in mass-market customers appeared to be growing at a 30 to 40 per cent clip, while growth in the high-end VIP market looked anaemic at about 3 per cent. The apparent trend was doubly significant because casino operators enjoy profit margins of 35 to 40 per cent on mass-market revenues, compared with 10 to 15 per cent margins on VIP business. VIP margins are thinner because increased competition among local and foreign operators has driven up the fees paid to gambling junket agents who act as middlemen to bring in high-rollers, lend them money and collect debt. But last month, the DIJC, the territory's gaming regulator, released restated revenue figures for VIP baccarat and mass-market baccarat. The changes were made to correct a data uploading mistake on the DIJC website, according to Anthony Leong, the head of the audit department. Apparently, some of the revenue from nine-seat baccarat tables had been mistakenly tallied as mass market when it should have been classified as VIP (mass punters gamble with cash chips, high-rollers use special credit-backed VIP chips). The revised figures showed the all-important mass market grew 15 per cent less than previously thought, resulting in a measly 9 per cent increase from a year earlier. On the other hand, the VIP market increased 9 per cent more than previously stated, resulting in an eye-popping 66 per cent leap in VIP revenues during the fourth quarter after the opening of the Wynn resort and Galaxy Entertainment's StarWorld casino hotel.