Dice fall badly for Macau casino bosses
SINGAPORE: The worst is yet to come for Macau casinos after February gaming revenue plunged the most on record, according to one of the few analysts who correctly predicted the stocks would fall this year.
Gaming revenue will keep sliding through mid-year and dividends will be cut as the cost of new capacity eats into free-cash flow, leaving share valuations too expensive, said Jamie Zhou, an analyst at Macquarie Securities in Hong Kong.
The two largest casino operators by market value in the former Portuguese colony have since tumbled at least 19% as China’s economic growth slowed to the weakest pace since 1990 and President Xi Jinping’s anti-graft campaign deterred VIP gamblers.
While a gauge of Macau casinos rallied the most in two weeks on Tuesday as the revenue drop was smaller than some analysts predicted, Mr Zhou is keeping his sell recommendation on the industry. “Macau is in a tough spot,” he said. “We believe dividends will be slashed across the board.”
The six main casino operators — Sands, Galaxy, Wynn Macau, SJM Holdings, MGM China Holdings and Melco Crown Entertainment — have lost US$89 billion in market value over the past year, according to data compiled by Bloomberg.
An index of the stocks added 1.7% on Tuesday, paring its 12-month slump to 46%.
Gross gaming revenue in the world’s biggest gambling hub fell 49% to 19.5 billion patacas ($2.4 billion) last month, Macau’s Gaming Inspection and Coordination Bureau said. That compared with expectations of a 54% decline, according to the median of eight estimates compiled by Bloomberg News.
Macau last year posted its first annual decline in gaming revenue. The industry may face another 8% drop this year, a Bloomberg survey showed, after last year’s 2.6% fall.
Most analysts have remained bullish, with Mr Zhou’s sell ratings putting him at odds with peers. The average consensus on the six operators is 3.8 on a scale where 5 equates to a unanimous buy recommendation. That’s in line with the score for the members of the Hang Seng Index, data compiled by Bloomberg show.
Strategists are most bearish on Wynn Macau, with eight sell calls out of 28 recommendations. Mr Zhou is now the only analyst advising investors to offload Galaxy shares.
Analysts are too optimistic about the outlook for shareholder payouts by casinos, he said. As well as the revenue decline, wage inflation will boost expenses and the cost of opening new venues will drain cash, said Mr Zhou.
“We don’t think the street has fully grasped the negative operating leverage in their earnings forecasts,” he said. “While the consensus has 5-7% forward dividend yields, we see only 2-4% at best.”
Macau casino operators were some of Hong Kong’s best stocks to own in the five years through 2013, with Galaxy rallying more than 6,400%, as more than eightfold growth in gaming spending over the decade through 2013 transformed the former Portuguese enclave into a gambling centre larger than the Las Vegas Strip.
President Xi in December urged Macau to wean itself off its reliance on casinos and turn the city into a tourism and leisure destination. His campaign against corruption has snared more than 100,000 “flies and tigers” or low-ranking and highlevel officials.
“Macau gaming will take some time to recover. They are still struggling to find the bottom,” said Sandy Mehta, the Hong Kong-based chief executive officer of Value Investment Principals. “The crackdown on conspicuous consumption is the biggest headwind. It is great that the Chinese leadership is improving transparency and governance, but Macau will continue to feel the brunt of these measures.”
Representatives for Sands China and Galaxy declined to comment on the companies’ dividend plans. The four other casino operators did not immediately respond to requests for comment from Bloomberg.
The slump in gaming stocks has made shares cheaper. The BI Macau China Gaming Market Competitive Peers Index traded on Tuesday at 16 times earnings, compared with its five-year average multiple of 20.3.