Is There Justifiable Panic For Macau Stocks?

09/15/21 03:22PM EDT

Below is an excerpt from a complimentary research note by our Gaming, Lodging & Leisure analyst Todd Jordan. We are pleased to announce our new Sector Pro Product Gaming, Lodging & Leisure Pro. Click HERE to learn more.

Is There Justifiable Panic For Macau Stocks? - 9 15 2021 3 10 45 PM

Trading in Macau stocks was ugly yesterday, as investors bid LVS and WYNN back down 10-11% following a nice recovery over the past month. 

If that appeared “panicky” to some then what would they call the overnight trading in the Macau stocks traded in Hong Kong?  Sands China (1928.HK) led the way with a 32% drop and all the major Macau stocks declined at least 20%. 

This carnage was mostly sparked by new gaming law proposals released yesterday in conjunction with the concession renewals.

While the industry still seems unanalyzable from an investment perspective to some extent, our overall view is that the proposals offered little clarity surrounding the future operating structure – it’s as uncertain now as it was before the draft proposals were released. 

While our contacts on the ground also lack conviction in how the structure will ultimately look, they now feel strongly that all the concessionaires will get renewed. 

There are many ways to interpret the vague government proposals and the markets seem to be assuming the worst on all of them.  Let’s run through some of the potential repercussions that investors seem to be fearing:

  • More government oversight/involvement – This was always going to be the case but what form will it take?  Government officials placed inside the companies?  On the Boards?
  • Government regulating and determining financial policy – Could the government limit dividends or share repurchases?  Obviously, this would be a big negative, but would they really go this far?
  • Eliminating sub-concessions – What would this mean for Sands and MGM who currently operate under sub-concessions?  Probably very little as new concessions need to be issued anyway so presumably Sands and MGM would just receive primary concessions and no concessionaire would retain the ability to offer subs in the future
  • Higher gaming tax rate – Always a possibility but no indication was given that the rate would go higher.  It’s already a high relative rate and Macau has almost always run a budget surplus and even now retains a lot in its coffers
  • More local ownership – Will the concessionaires be forced to give away a part of their share base or will there be a buy in?
  • More non-gaming – The government could require more non-gaming capital to be expended.  We believe the companies already are anticipating this and could generate decent ROIs assuming the other proposals are not to return inhibiting. Enhanced Hotel room product, F&B, Entertainment options have been known to improve the GGR and profitability of the IRs, not hurt them.  
  • Crackdowns on money laundering – This has been going on for a while anyway so wouldn’t be much of a surprise.  The junket segment will no doubt be pressured but anyone who was buying Macau stocks without assuming junket revenues would diminish over time was not paying attention.  The question becomes, how would further crackdowns impact the premium mass segment?  It’s unclear how much premium mass business is originated by premium mass players trying to launder money.  We’d say the % has been on the decline for a long time, however.  Besides, the underlying potential demand for gambling from 1.4 billion people in China is huge and much bigger than say 2019 gaming volumes.

What is clear is that if many of these fears come to fruition, the ramifications for future investment in China by any business could be huge. 

Has China given up on foreign investment? 

We find it hard to believe that they have despite the ragingly negative sentiment.  That said, are we pounding the table on Macau stocks?  With no Macau stocks on the Hedgeye Best Idea List, the short answer is no. 

The industry is almost unanalyzable from an investment perspective due also in part to zero tolerance Covid policies that can shut down the SAR in short notice.  Besides, there are much less riskier opportunities in GLL and even in gaming as we continue to recommend regional gaming stocks. 

However, we’ll continue to provide our perspective and feedback from our contacts in Macau as there are many people who are willing to take on significant risk for significant upside. 

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