Booming Macau casinos a bet too far for crackdown-dazed investors
MGM China expected to increase 43%, write Daniela Wei and Cindy Wang
AS THE year draws to a close, investors are shunning the advice of analysts by increasing their bets against casinos in Macau, the world’s largest gambling hub.
For example, short interest in MGM China Holdings is nearing the record reached on November 20, data compiled by Bloomberg and research firm Markit show. That is as analysts predict the company, a unit of the largest casino operator on the Las Vegas Strip, will deliver the best return among its beleaguered peers in Macau.
The fallout has spread beyond Macau’s borders, hitting global gambling magnates such as Steve Wynn and Australian billionaire James Packer, who is said to be considering taking some of his assets in Crown Resorts private.
Despite China’s relentless crackdown on corruption and slowing economy, some investors have taken the advice of analysts calling a bottom to Macau’s gambling downturn — now in its 18th month — only to get burned, with the exception of the occasional rally.
Investors “are still shorting, because they think the analysts are wrong. They do not believe we are close to the bottom,” Linda Csellak, head of Asia Pacific Equities at Manulife Asset Management, says. “The short side probably believes the worst is not over yet.”
Share prices of Macau casinos have seen brief rallies since the slump started early last year, only to collapse again as signs of optimism prove to be unsustainable, according to Karen Tang, an analyst in Deutsche Bank.
For instance, a 15% rebound in Bloomberg Intelligence’s index of Macau stocks in October last year was cut short after the government imposed a smoking ban on casino floors that was more stringent than operators had expected.
Part of the reason Macau is so unpredictable is because casino executives and analysts struggle to anticipate policy changes. Some have turned to frustration, with Las Vegas tycoon Steve Wynn blasting Macau’s government in October for its lack of clarity. Others have just gotten busier: Daiwa Securities Group analyst Jamie Soo, the top Macau analyst tracked by Bloomberg, has switched his investment ratings on Sands China three times in two months.
Macau’s high-stakes gambling industry will continue to be squeezed by restrictive policies on capital outflow including a crackdown on underground banks and illicit use of debit-card transaction terminals from China UnionPay, Eddie Tam, CEO of Hong Kongbased Central Asset Investment, says. Other headwinds include the depreciation of the yuan, which will raise the costs for mainland Chinese to gamble in Macau, he says. “The industry lacks a growth engine,” Mr Tam says.
MGM China is seen as particularly vulnerable among the city’s six casino operators due to its lack of exposure to the Cotai Strip, the latest gaming area being developed in the Macau peninsula. Newer properties such as Melco Crown’s Studio City, which opened in late October, have taken market share from older casinos.
For its part, MGM China’s $3bn project in Cotai is scheduled late next year. Wynn Macau’s first Cotai project will not open until the middle of the year and SJM Holdings’ first project in the district, Lisboa Palace, is slated to open in 2017.
Still, analysts expect MGM China shares to gain about 43% in 12 months, according to the average target of 22 analyst estimates compiled by Bloomberg, after plunging more than 70% from their peak in January last year.
That is the best return potential among its peers as analysts again expect the industry to start recovering — this time from next year.
Canadian insurer Manulife, for one, thinks the worst is over and has started investing in Macau casinos since last month.