Drastic new regulations are being launched for Macau casinos that threaten the investment thesis of the entire gambling market in China, even as the region continues to struggle to emerge from the very deep hole caused by the coronavirus pandemic.
The promise of intense new surveillance, limits on the number of concessions or licenses issued, limits on the number of table games allowed, and the fact that government officials oversee the daily operations of the casino could delay plans from the station for a bounce. China is also considering requiring casinos to obtain government clearance before distributing dividends to shareholders.
While there is a 45-day public comment period that will end in late October and the exact form of regulation is a big unknown, Wall Street wasted no time in downgrading the industry.
However, some casino operators will be more affected than others depending on their level of exposure to the city. One of the biggest losers could be Sands of Las Vegas (NYSE: LVS), which sold all of its remaining US properties last year to take full advantage of Asia.
While this is obviously a much larger market than just Macau, given that the operator of the complex is currently operating in Singapore and still has its eye on Japan, Sands is almost entirely dependent on of China for its survival.
Reaffirm control over business
Beijing undertakes a widespread attack on businesses influenced by Western culture. The communist country imposed massive fines against Ali Baba for alleged monopoly practices, thwarted the proposed IPO by Ant Financial, took stakes in TikTok owner ByteDance and Tencent‘s Weibo, and filed a lawsuit against Tencent’s messaging app WeChat.
Now the Chinese government is turning its attention to the casino industry, which has been decimated by COVID-19. While it was hoped that the industry was slowly returning to the path of health, as monthly gaming revenue since the start of the year is 70% higher than last year, it is still bringing in revenue. over 80% lower than in 2019, and August gaming revenue was 47% lower than in July.
The promise of tough new regulations could further hamper any recovery and investors would be wise to steer clear.
Income and profits threatened
While Las Vegas Sands is making a big bet on the region, Wynn Resorts (NASDAQ: WYNN) and Melco Resorts & Entertainment (NASDAQ: MLCO) risk of losing big too.
Wynn typically generates over 70% of its revenue and profit in Macau, despite its properties in Las Vegas and Boston. However, due to the lingering effects of the pandemic and limitations on travel and tourism in Macau, Las Vegas accounted for the bulk of real estate revenue and Adjusted EBITDA in the last quarter.
Melco is also primarily dependent on Macau, although it operates City of Dreams Manila in the Philippines and City of Dreams Mediterranean in Cyprus. Other resort owners including Galaxy Entertainment and SJM Holdings are in the same situation and also at risk.
Ready to implode
The industry was already sitting on the time bomb of the concession renewal, which is set to begin next year. While the top six dealers are still expected to survive the renewal process, even under the new regulatory regime, the proposal aims to remove sub-concessions to control growth.
Shares of China-based companies traded on the Hong Kong stock exchanges fell more sharply than their US-based counterparts. Wynn Macau’s stock fell more than 30% in Hong Kong, but that of Wynn Resorts fell less than 10%. Sands China lost 28%, but Las Vegas Sands lost only 5%.
MGM Resorts (NYSE: MGM) could be the winner here as it has the least exposure to China, deriving most of its revenue and profit from Vegas and other regional US markets. Its stock only fell 2% after the news broke.
Investors may just want to cash their chips on shares of Macau casinos and place them in those with large operations in the United States if they see Las Vegas, Atlantic City and other destination cities generating returns. students.
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