Today’s announcement of China’s central bank raising rates seems to have spooked the Macau gaming stocks. Historically, higher rates have been good for gaming revenues in Macau.
The Macau gaming stocks listed in the US and the S&P are taking a bruising today following the announcement that China increased benchmark rates by 25bps. We think WYNN and LVS are expensive and October growth may disappoint recently elevated expectations. However, recent history shows that higher rates have been good for Macau gaming revenues, not bad.
This morning we took a look at the last three years of Macau revenue data and regressed it on the China 1-yr Lending Rate. We found that the correlations between interest rates and total gaming revenue, Mass gaming revenue, and Rolling Chip volume were all around 0.75. That is a positive 0.75, not a negative correlation. Moreover, interest rates were statistically significant in explaining the changes in gaming revenues with the highest t-stat present in the Mass to Interest rate equation.
Our macro view at Hedgeye is that higher interest rates and currency valuations are conducive to higher consumer spending. This would explain the positive correlation with Macau gaming revenues and especially Mass gaming revenues. We understand the liquidity argument that VIP revenues are driven in part by the availability of credit. Higher interest rates do not necessarily mean less liquidity. China appears to be awash in cash with capital still flowing in. We do think the liquidity certainly needs to be monitored closely but for now we are not worried about a 25bp increase in rates.
MPEL looks to be most unduly penalized today since it is a pure play on Macau. However, recent market share gains and market growth should lead to significantly better Q3 EBITDA and EPS than currently projected by analysts. This should finally be the quarter that MPEL beats, and estimates move higher.