Corruption curbs, slower economy in China hit casinos

Singapore

FOR five years, Hong Kong investors couldn't go wrong on casinos. Now they're losing more on them than on any other stock and money managers from ABN Amro Private Banking to Macquarie Funds Group don't see the slump ending soon.

Gambling operators accounted for the five biggest declines on the MSCI Hong Kong Index this year, with the market value of companies in the industry dropping US$75 billion this year through last week, according to data compiled by Bloomberg. Sands China Ltd plunged 39 per cent, wiping out US$26 billion in value, as China's efforts to curb corruption spurred the first declines in Macau's gaming revenue since the global financial crisis.

With China facing the slowest economic expansion since 1990 and policymakers clamping down on extravagant spending, high-rollers are wagering less in the only place in the country where gambling is legal. Nomura Holdings Inc sees no end to the slide in Macau's gambling receipts, forecasting at least a 3 per cent drop next year. Two-thirds of visitors to the world's biggest gaming hub come from mainland China.

"We're still avoiding Macau casino stocks," Daphne Roth, the Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about US$230 billion, said. "They've been hit by China's anti-corruption drive. Even with the recent declines, valuations are hard to justify as we don't see an immediate improvement in gaming revenues."

Galaxy Entertainment Group Ltd rallied more than 6,400 per cent to lead gains on the MSCI Hong Kong Index in the five years through 2013, according to data compiled by Bloomberg. The stock traded at 16 times estimated earnings after tumbling 38 per cent this year through last week, with its valuation peaking at 48 times in January 2010. Wynn Macau Ltd traded at a multiple of 15.8 times and Sands China at 15.2 times, compared with 15 times for the MSCI Hong Kong Index as at Dec 19.

Casino revenue in Macau dropped 20 per cent to 24.3 billion patacas (S$4 billion) in November from a year earlier to cap a six-month decline, the gaming bureau said this month. Revenue may fall 0.6 per cent this year, according to analysts surveyed by Bloomberg, after jumping 19 per cent to US$45.2 billion in 2013.

Macau's government has tightened visa rules for Chinese visitors and cracked down on the use of UnionPay debit cards to bypass mainland currency controls.

As Chinese President Xi Jinping's anti-corruption campaign intensifies, it was announced this month that former security chief Zhou Yongkang would stand trial on charges including leaking state secrets and taking bribes. High-level officials including Bo Xilai and Liu Tienan, who ran the National Energy Administration, have received life sentences.

Mr Xi last week urged Macau to diversify its economy to ensure sustainable development. "Macau's economy has developed rapidly in the past years, but certain deep-seated problems have surfaced and development risks have built up," Mr Xi said.

High-stakes gamers are being lured away from Macau as casinos from Las Vegas to the Philippines and Australia offer perks including private jets. VIP players of baccarat, a card game favoured by Chinese gamblers, accounted for 60 per cent of Macau's gambling receipts this year through September, compared with 66 per cent for all of last year. In the 12 months through October, a measure of baccarat revenue gained 8 per cent in Las Vegas compared with a one per cent rise for all other games, according to Bloomberg Intelligence.

The Asian city faces a labour squeeze ahead of the opening of new resorts that will require at least 50,000 workers, Bloomberg Intelligence said.

Macau is hoping that more small fish can help make up for fewer whales. Mass-market customers tend to provide wider margins than high-rollers. Mass-market baccarat revenue rose to 31 per cent of total gaming receipts this year through November, compared with 25 per cent for all of 2013, according to gaming bureau data.

Galaxy, Sands China and Melco Crown Entertainment Ltd are planning to open integrated resorts next year that will have a combined 6,000 rooms, according to Bloomberg Intelligence. "These new casinos will provide additional hotel rooms to accommodate more mass-market players," Angela Lee, an analyst at China Merchants Securities Co in Hong Kong, said on Dec 8. "This will be the major driver for the sector next year."

Analysts have been trimming casino price targets, with the average 12-month projection for SJM dropping about 40 per cent from a year ago. Gross gaming revenue is expected to fall to an average of 27.5 billion patacas a month in 2015 from this year's forecast of 30 billion patacas a month, Macau Chief Executive Fernando Chui said on Dec 7.

"December will have very soft gross gaming revenue," Sam Le Cornu, senior portfolio manager at Macquarie Funds, said on Dec 19, a week after visiting Macau. "Picking the right timing to pick the Macau stocks is difficult. We're still underweight Macau casinos as a whole. We're readying ourselves for a very good buying opportunity." BLOOMBERG