Macau Casino Stocks Extend Slide on Regulatory Fears, JPMorgan Downgrades All Six Operators
Posted on: September 15, 2021, 10:20h.
Last updated on: September 15, 2021, 12:15h.
Macau casino stocks are sliding for a second day, as officials in the special administrative region (SAR) look to take a more active regulatory role in the gaming industry.
News of the tighter regulatory grip is catching the six concessionaires and investors by surprise. Macau casinos are already grappling with a slower-than-expected recovery from the coronavirus pandemic. And with gaming permits expiring in June 2022, casinos are also dealing with a murky timeline for license renewals.
Macau operators must now contend with the specter of the local government potentially taking a more heavy-handed role in casino operations, increased government equity ownership and mandates on how operators spend capital, including possible restrictions on dividends.
While it’s unclear how strictly the government would control their [operators’] capital, we believe the hefty dividends of pre-Covid days would likely get scrutinized, if not restricted, in turn making the story of ‘attractive free cash flows’ — which was the reason why we liked the sector — far less compelling, in our view,” said JPMorgan in a note to clients today.
The bank downgraded all six Macau concessionaires to “neutral” or “sell” ratings with the SAR’s US-based operators, namely the China units of Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) bearing the brunt of the punishment.
Punishment for Macau Stocks
In Wednesday’s Asian session, Macau gaming equities plunged, as regulatory fears prompted investors to depart the names.
The six concessionaires bled a combined $18.4 billion in market capitalization, with Sands China – the largest operator in the SAR – accounting for more than $8 billion of that total. Sands China and Wynn Macau each lost about a third of their market value today. The Macau unit of Wynn Resorts is now on its worst two-day streak since the start of the coronavirus pandemic.
Gaming drives 55.5 percent of the local economy. But speculation about Macau exerting more control over casinos comes as global investors are already fleeing Chinese stocks. This is due to a broader regulatory clampdown that creates more of the uncertainty that market participants disdain.
“We think this announcement would have already planted a seed of doubt in investors’ minds, which is probably enough to de-rate these names until clarity emerges on key points,” said the JPMorgan analysts.
The selling pressure is carrying over to US trading, as shares of LVS and MGM Resorts International (NYSE:MGM), the majority owner of MGM China, are each off more than three percent, while Wynn is off 7.7 percent. Hong Kong-based Melco Resorts & Entertainment (NASDAQ:MLCO) is down nearly 18 percent on volume that’s roughly triple the daily average.
Future of Macau Casinos
Some market observers are speculating that as Macau seeks to alter its gaming laws ahead of the retendering process, license duration could be reduced from the current term of 20 years. There’s also talk that government could seek to increase competition in the gaming industry.
Bernstein believes the operators currently in place aren’t going anywhere.
Our view remains that the six operators here today will be here tomorrow,” said the research firm.
Regarding the possibility of dividend regulation, that talk comes as US-based Macau operators still aren’t paying, or are delivering substantially reduced payouts.
Authorities argue ensuring concessionaires are making investments in properties prior to delivering shareholder rewards, and that they have the financial capability to pay dividends is a policy that’s been in place for two decades — a period in which Macau gross gaming revenue (GGR) surged almost 22 times.
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