Across The Border

Investors warned Macau casino shares still a risky bet

Sands China’s improvement in June mass-market revenues sparks three days of speculation. But experts say the city’s gambling sector is still fragile

PUBLISHED : Thursday, 28 July, 2016, 5:30pm
UPDATED : Thursday, 28 July, 2016, 11:02pm

Analysts are warning against over-enthusiasm for Macau casinos, insisting difficult conditions within the city’s hard-hit gaming industry still persist.

Praveen Choudhary, an equity specialist at Morgan Stanley, has noted in a report that the short-term rallies seen in the sector over the past three days “are unsustainable, as fundamentals have not improved”.

Gaming shares rose on Tuesday after Macau casino operator Sands China reported — within its second quarter results — that revenues from the general public saw a return to positive year on year growth in June, the first month of growth in two years.

The glimmer of recovery sparked an overall rally in casino stocks in Hong Kong.

Comments from Sheldon Adelson, the chairman of Sands China, that “stabilisation appears to be here”, also helped stoke the buying frenzy.

Sands China shares rose 6 per cent on Tuesday, the most in four months, meaning the stock has risen 19 per cent this month.

Other major casino players have also outperformed the Hong Kong benchmark in the past month. Wynn Macau and Galaxy Entertainment Group have gained 21 per cent and 16 per cent, respectively, and both mirrored Sands’ 6 per cent rise on Tuesday.

However, market commentators say investors were getting carried away by the hype.

“The one-month growth in Sands China’s mass-market revenue was taken by investors as an excuse to speculate on the stricken casino players,” said Victor Au, chief operating officer at Delta Asia Financial.

The one-month growth in Sands China’s mass-market revenue was taken by investors as an excuse to speculate on the stricken casino players
Victor Au, chief operating officer at Delta Asia Financial

He says it’s too early to suggest any “turnaround” for the industry, adding one-month’s growth cannot be interpreted as a “fundamental improvement in business”.

“Speculation can easily and successfully lift casino stocks, especially when the Hong Kong stock market is now on a rising trend,”Au said.

“We should wait another two to three months to see whether the Macau gaming industry is fundamentally improving or not.

“The performance of casino operators during China’s golden week holiday [around the mid-autumn festival] in October is critical to measure any improving fundamentals,” he added.

Sands China’s improved mass-market June revenue was actually the sole good news within its statement.

According to its financial results for the April-June period, it made US$1.48 billion in total net revenues, a 16.4 per cent drop on a year ago, while its net profit was down 39.0 per cent at US$237 million, both in line with market expectations.

Speculators also viewed two significant new openings this year as a sign of recovery.

The US$4.1 billion Wynn Palace is scheduled to open August 22, while Sands China’s own $2.7 billion Parisian project is slated to open September 13.

But Choudhary from Morgan Stanley, said without any clear signs of a recovery in demand, he remains unwilling to chase the stocks.

“The supply-driven demand theory did not work in 2015, competition is rising, and EBITDA estimates may fall,” he added in his report.

Au from Delta Asia Financial agreed, adding he will wait and see how the industry reacts to the new openings.

“It is highly possible, however, speculators will ride on the openings of new casino resorts to drive the shares higher again.”

He added the city’s casino operators are still finding it hard to improve business levels short term without any increase in high rollers at the VIP end of the market.

Macau’s VIP revenue has been hammered since 2014, after the Chinese government launched its crackdown on corruption, amid the country’s economic slowdown.

“So far, VIP business is showing no signs of recovery and I don’t expect the Chinese government to relax its restrictions on Macau gaming industry to boost those VIP takings,” Au added.

Hanna Li Wai-han, a strategist at UOB Kay Hian (Hong Kong), holds a same view, and thinks the vital VIP segment will continue to see negative growth, albeit at a slower pace.

The better news is she does not expect any further policy restrictions, allowing her to remain cautiously optimistic the city’s casino operators will continue to enjoy “moderate improving mass-market business”.

“With more visitors coming to the city over the summer holidays, the third quarter will see a continuous improvement in mass-market revenue, which will produce higher profit margins than the VIP segment,” added Li.

Official figures show visitor arrivals to Macau in June increased 4.9 per cent to 2.4 million compared with June 2015, with overnight visitors rising by 13.9 per cent.

Li said there is no doubting that visitor traffic to the city “is on the upswing”.