Macau casino shares down 40 per cent since June as trade war deters Chinese high rollers
China’s crackdown on corruption and investors’ fears over the impact of the trade war on the economy have sent the stock prices of Macau’s top six casinos tumbling an average of 40 per cent since June, bringing their valuations back down to reasonable levels.
But investors are not convinced the cheaper stocks are a sign that a reversal is on the cards, given expectations that many wealthy Chinese high rollers will continue to give Macau a miss as economic growth and the value of the yuan exchange rate weakens.
Gross gaming revenue in Macau dropped by 17.3 per cent from the previous month to a one-year low of 21.95 billion patacas (US$2.72 billion) in September, according to data from the city’s casino regulator, the Gaming Inspection and Coordination Bureau. Citigroup forecasts October gaming revenue to rebound to 28 billion patacas, when the temporary impact from Typhoon MangKhut has passed.
“China’s economy is still uncertain, so the rich Chinese and the VIPs will stay relatively conservative,” said Kevin Leung, executive director of investment strategy at Haitong International Securities. “I am still waiting to see a big and sustainable improvement in gaming revenue.”
Since becoming China’s president in 2013, Xi Jinping has led an anti-corruption campaign that has reached high profile executives at state-owned enterprises and private sector billionaires, that has sparked a rout in Macau casino stocks.
Adding to the cautious sentiment in the market, Bank of America Merrill Lynch on Monday cut its price target on the sector. The target price on Galaxy Entertainment was cut to HK$61.2 from HK$82.5. Sands China was cut to HK$40.3 from HK$49.7, Wynn Macau to HK$23.9 from HK$33.1, MGM China to HK$14.2 from HK$23.9, SJM Holdings to HK$7.6 from HK$11 and Melco International Development to HK$19.2 from HK$35.2.
Morgan Stanley said in a recent research note that Wynn Macau and Galaxy both suffered from weak VIP revenues in the third quarter after benefiting from those visitors for the previous 12 to 18 months. It lowered its forecast for gross gaming revenue growth to 13 per cent from 16 per cent this year, and to 5 per cent from 12 per cent for 2019.
Sands China’s currently has a 12-month price to earnings ratio of 17.92 times. That compares with its lowest valuation of 10 times pre-downgraded earnings back in March 2015, suggesting that while valuations have cheapened, they have yet to reach the bottom.
Macau aims to become a Las Vegas-style mass market tourist destination, with the upcoming opening of the mega bridge linking the city with Hong Kong and Zhuhai expected to increase traffic and bring more family-oriented customers.
But further infrastructure is still needed for the transformation to be completed, and it will be another two years before the city can shake off its dependence on the gambling business, analysts said.
Asia’s weakening economic outlook and a stronger local currency could still dent mass-market gaming sentiment.
“Macau’s economy has succumbed to headwinds from trade tensions. This, combined with policy risks and higher borrowing costs, might have deterred high rollers from the gaming hub,” said Carie Li, an economist at OCBC Wing Hang Bank.