Casinos/Macau: it is time to take the chips off the table 

Macau updates

Recent crackdowns have proven that few sectors are safe from Beijing’s control. But no industry looks as vulnerable as Macau’s gambling market. Its losing streak is just getting started. 

China’s most recent nanny state push extends from excessive online gaming to cosmetic surgery these days. Gambling, though, has long been on Beijing’s radar. A regulatory review by Macau, the world’s largest gambling hub, has begun. Among the new strictures will be having government representatives supervise daily casino operations and limiting the number of casino licences.

Most worrying is the latter. During previous crackdowns, shareholders could take comfort in the time remaining on the 20-year-long gaming permits. However, in June next year, casino operators will have to submit new applications.

Should the new laws limit the number of licences below six, some operators could go out of business. Fraying relations between the US and China puts US-based operators including Wynn Resorts, MGM Resorts and Las Vegas Sands at a disadvantage. No matter what, changes in the tender process may push costs higher.

The timing could not be worse. Even before the pandemic, China put in place travel curbs as protests hit Hong Kong. Casino earnings suffered. VIP table game revenue fell as mainland tourists, which made up almost three-quarters of total visitors, stayed away. High fixed costs including rent, maintenance and renovation bills and wages for tens of thousands of staff do not help. As Chinese regulators tighten capital controls, gamblers should have less cash to spend in Macau even when borders controls are relaxed.

Share prices of Wynn Macau and SJM Holdings are down more than half this year, while peers Sands China and Galaxy Entertainment fell more than a fifth on Wednesday alone. Those of US-listed Las Vegas Sands and Wynn Resorts, which relied on Macau for about two-thirds of group sales pre-pandemic, have dropped this week.

This could get even worse. Even after halving in value since mid-March, Galaxy Entertainment trades at a hefty enterprise value of 6 times forward sales. Following the 2003 Sars outbreak its multiple fell below one. In China, cities have started fresh lockdowns as the Delta coronavirus variant begins to spread.

The gamble for investors involves guessing which operator will renew its licence and which will not. That risk outweighs any opportunities of an eventual return of high-rolling mainland gamblers. Don’t double down.

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