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Here we go again...

CALL TO ACTION

Notwithstanding the “catch a falling knife” risk, some of these Macau stocks may look like screaming buys, potentially after today’s blood bath.  The uncertain China Macro environment has created the backdrop for fear escalation.  Whether it’s the Union Pay issue rearing its ugly head again or the alleged theft and disappearance of an individual associated with a junket, when it rains it pours.  Historically, heightened fears have created huge buying opportunities.

THE ISSUES

  • Our biggest near-term fear has always been a junket crackdown by Chinese authorities.  The impact on GGR would be meaningful but likely short-lived.  The Chinese government needs to show its constituents that it is against corruption but it also doesn’t want to permanently maim Macau.  Remember that China needs Macau and Hong Kong to succeed to ultimately convince Taiwan to join the SAR structure.  Any crackdown would pressure the stocks but also provide a buying opportunity. 

The latest news (first reported in April) is that a shareholder of the Jin Jin junket may have stolen over $1bn in investor funds and disappeared. While the junket was a player at MGM Macau, Altira (MPEL), and Starworld (Galaxy) the theft itself didn’t appear to directly impact those properties.  However, going forward Jin Jin may not have the liquidity to drive volumes.  More importantly for the market, to the extent that the government decides it needs to keep up the appearance of anti-corruption, any punitive measures could keep some VIP players and junkets out of Macau until the dust settles.

  • The Union Pay Issue – we wrote about this issue in our "Leisure Letter" on March 13, 2014 and March 18, 2014.  The issue seems to always surface when other fears gain momentum and investor sentiment wanes.  Mass players use Union Pay cards to retrieve cash in Macau to gamble and pull money out of China.  We believe Union Pay is a major contributor to the Mass business in Macau and any crackdown on its use would be detrimental to gaming revenues.  However, we’ve heard this story before and we have trouble believing China would slay the golden goose of Mass business in Macau.  If a crackdown is in the works, we haven’t seen the impact as Mass performed very well in April and anecdotal evidence supports a health start to May.  

While we have not seen a copy of the e-mailed statement made by the Macau Police regarding the arrests in February and March of this year related to Union Pay, we believe these arrests are related to the recent reports of individuals who were caught with five illegal Union Pay point of sale processing terminals, over 300 bank cards, 580 point of sale invoices and over HKD3.4 m million in a Macau hotel room.  Finally, we note, there has been NO discussion regarding shutting down the use of Union Pay cards nor the Union Pay processing network. 

  • Credit/Liquidity in China – this is a real concern although we’ve seen fairly healthy volumes as recently as last week.  The VIP business in China was flat in April, slightly below our expectations, and the first week of May showed GGR up 12% over last year and up 38% over the same week of 2012.  With this kind YoY growth and VIP must be doing reasonably well considering it comprises 60-65% of the gaming revenues.

THE CATALYSTS

  • Continued reports of very busy Mass floors
  • To offset any potential VIP slowdown, more “side betting” volume could be pushed through the casino.  This is the VIP cushion we’ve spoken about over the past 2 years.  With casinos providing more liquidity than ever before - and even more if Wynn gets more aggressive – the pressure is on the junkets to maintain volumes.  And we all know there is a lot of side betting volume out there.
  • May GGR surprise on the upside – our model has consistently projected 20% GGR growth for May which would be a positive and potentially a big one considering that expectations have been ratcheted down with the recent news.
  • Japan Gaming Congress next week – Japan looks like a huge potential market and LVS, WYNN, MGM, Genting Singapore, and MPEL all are potential players
  • G2E Asia the week after – investors will meet with managements that could assuage fears

CONCLUSION

  • Given last night’s dismal trading in the Hong Kong listed Macau gaming stocks last night, LVS, MGM, MPEL, and WYNN are all headed sharply lower this morning. 
  • We suspect the stocks will be buys sometime soon as the recent periods of fear have led to concentrated and compacted contractions in the stocks but little change in the intermediate and long term fundamentals. 
  • WYNN remains our favorite name as its Macau property has more levers to pull to bolster its VIP business.