Will US firms’ Macau casino licences get politicised by US-China trade war? Don’t bet on it

As the US-China trade war escalates, with all economic ties between the two countries at risk of being politicised, investment banks and fund managers are keeping a close eye on casino licences for American companies in Macau.

“The US-owned Macau casinos are sitting on what could be called a geopolitical fault line,” said Steve Vickers, the chief executive of Hong Kong-based specialist risk consultancy Steve Vickers & Associates.

“First, one of the main Macau casinos is the largest donor to the United States Republican Party and, thus, directly to President Donald Trump’s party finances.

“Second, the casinos’ long-term Macau concessions are being reviewed – unfortunate timing – and these key decisions as to renewals will be made in Beijing, not Macau.

Macau casinos could get caught in US-China trade war crossfire, say analysts

“Third, the arrest of the Huawei executive recently may be seen by some in the Communist Party as a personal attack on the leadership elite.”

If Beijing wishes to up the ante in the trade war, the US-owned casinos in Macau represent a potential target for retribution, he said.

“To date, the Chinese have been quite careful not to escalate the conflict into a direct assault on US interests. But, it remains to be seen what the current attitude is towards Macau and the huge cash outflow associated with the large US casinos.”

Currently, three of the six casino operators in Macau, the only part of China where gambling is legal, are US-owned. Las Vegas Sands, which operates the Venetian Macau, is owned by major Republican Party donor, Sheldon Adelson. Wynn Resorts operates Wynn Macau. MGM China, jointly set up by MGM Resorts International and Pansy Ho Chiu-king, is 56 per cent owned by the US hospitality giant.

Each of these operators holds a licence for gaming operations. But these licences will expire in 2020 or 2022, after which everyone has to bid again.

MGM China’s licence will expire on March 31, 2020, while Las Vegas Sands’ and Wynn Macau’s permits become due on June 26, 2022.

These gaming businesses have “profited mightily” since 2001, soaking up funds gambled away by mainland Chinese visitors, said Vickers. “Now, though, the Chinese leadership has cause to ask whether to allow American companies such a boon, particularly given the strong and very visible ties between one or two of the gaming tycoons and President Trump.”

The stock market has been worried about the Macau gambling sector’s outlook in the past few months, on the back of an economic slowdown in China, reduced cash flows and policy risks. Shares in all six casinos have plunged since July. Wynn Macau, MGM China, Melco International Development and SJM Holdings have all lost more than 20 per cent.

Growth in Macau’s gambling revenue has slowed down since April. It reached 25 billion Macanese pataca (US$3.1 billion) in November, up 8.5 per cent from a year earlier, but down 8.5 per cent from October.

Several investment banks have downgraded their forecasts for the sector. Deutsche Bank issued a report last week and forecast a cooling in Macau casino stocks. The German investment bank slashed its estimate, predicting a 5 per cent fall in Macau’s gambling revenue in 2019 – instead of 4 per cent growth.

Morgan Stanley has also cut its 2019 forecast to 5 per cent growth, from a previous expectation of 12 per cent growth.

Some funds are shorting the sector. Jim Chanos, the famed short-seller who founded Kynikos Associates, said last week he is betting against Wynn and Las Vegas Sands, particularly their Hong Kong-listed Asian operations, while going long on Chinese operators, according to CNBC.

In light of the trade war, it does not make much sense that these US operators should trade at a premium to their Chinese rivals, said Chanos.

The current five-year term of Macau’s chief executive, Fernando Chui Sai On, ends on December 19, 2019. And analysts are concerned that if Chui does not deal with the renewals during his term, there will not be much time left for the next administration before the first batch of licences expires in March, 2020.

Chui said last month in his 2019 policy address that the government was “actively working on” terms for the rebidding of casino licences, but did not elaborate.

Lionel Leong, the city’s secretary of economy and finance, said later in November, at a legislative meeting: “The development of the gambling industry concerns China’s national security and the overall interest of Macau.”

He said the government would hear public opinions and analyse the situation before making a decision.

However, analysts and fund managers also think Beijing is likely to exercise caution as too much could be at stake if the US-operated casinos become a target.

“There is no guarantee that they [China] will link the current friction to Macau. In any event, this is always on the table,” said Vickers. “It will depend to a very large extent on the level of Chinese ire, and as to what other measures they have in mind.

Macau casino shares down 40 per cent since June as trade war deters Chinese high rollers

“To do so would certainly be seen as a personal attack and might be counterproductive.”

Kenny Tang Sing-hing, the chief executive at China Hong Kong Capital Asset Management, said: “I understand the market is worried about the casino licence issue, given the trade war is getting worse. But I think Beijing will be cautious with actual action.”

Vitaly Umansky, senior research analyst for global gaming at US sell-side research and brokerage firm Sanford C. Bernstein, said he thought the licences would be granted, although perhaps with new concessions to ensure the cash flow is reinvested back into Macau.

“I don’t see the Macau concessions being used in any way as a bargaining chip for trade. It is not going to achieve anything, and I don’t think the Chinese government is going to go down that path,” he said.

“We don’t know what US-China relations are going to be like in 2021. They could be fantastic, or very acrimonious, in which case companies in general are going to have a lot more to worry about than what happens to three Macau casino operators.

“There are much bigger levers the Chinese government can use if it wants to go down that path.”

Commenting on Jim Chanos’ short bets against the casino operators, Umansky said short-sellers could have a short-term impact on stocks, but not huge.

“Jim Chanos went short and went very public on it. Short-sellers have done this before, with vocal campaigns against American operators,” he said.

“Having people short sell in 2018 because they think concession rebidding might create a problem for an American operator because of the trade situation that exists today, is basically guess work.”

Las Vegas Sands refused to comment, while Wynn Macau and MGM China did not reply to requests for comment by the South China Morning Post.