China's stock rout deals Macau casinos a bad hand

Already battered by China's slowing economy and its relentless crackdown on graft, Macau's gaming industry also has to deal with the surprise devaluation of the yuan, which spread panic to global markets.
Already battered by China's slowing economy and its relentless crackdown on graft, Macau's gaming industry also has to deal with the surprise devaluation of the yuan, which spread panic to global markets.PHOTO: BLOOMBERG

Market turmoil leads to drop in earnings, less tourist traffic as mainland punters stay away

MACAU • China's recent stock market rout is causing more troubles for Macau's hard-luck casinos, which are already in the grip of a downturn that entered a 15th month in August.

For Macau junket operator Iao Kun Group Holding, that market turmoil is one of the key reasons why gamblers are holding back. Nasdaq-listed Iao Kun's VIP rooms reserved for high-rollers lost 20 per cent of their clients in the three months to August as "some don't have the capital to come and play", its financial controller, Mr Derrick Wong said.

"They now need to catch their breath and recuperate." Chinese high-stakes bettors "will wait until the economy gets better and then they will have spare money," he said in a telephone interview. "This is luxury, it's about spare money."

China's slowing economy and its relentless crackdown on graft have hurt the shares of casino operators such as Sands China and Galaxy Entertainment Group.

Last month's surprise devaluation of the yuan spread panic to global markets, deepening concerns over the state of China's economy and further damping sentiment for Macau's casino industry. 

PESSIMISTIC ABOUT GROWTH

If you ask me what I'm most worried about: the Galaxy expansion hasn't grown the market to the extent that we expected... We have been disappointed by the gross gaming revenue in the last few months.

MR AARON FISCHER, A HONG KONG-BASED ANALYST AT CLSA, on the negativity which could spread to other new casinos due to open soon

The Bloomberg Intelligence Macau Gaming Index has plummeted 67 per cent from its peak on Jan 20 last year.

Casino stocks extended Tuesday's decline to close lower, with Galaxy, Wynn Macau, SJM Holdings and MGM China Holdings falling more than 4 per cent, while Sands China lost 3.2 per cent by the end of trading in Hong Kong. The Hang Seng Index fell 1.2 per cent.

"The yuan devaluation affects sentiment because of the lowered purchasing power among the Chinese," Mr Wong said.

Iao Kun runs five exclusive casino gambling venues at Macau casinos, including Galaxy and Sands China. Tourist traffic from the mainland, which accounts for two-thirds of the total, has fallen for five straight months since March.

The weakening currency will have an 8 to 10 per cent downward impact on mass gross gaming revenue next year, as converting yuan to the greenback-pegged Hong Kong dollars, the main currency for gambling, will cost patrons more, Daiwa Securities analysts wrote in a note last month.

Adding more negative news to the mix, Macau police arrested 17 people in a raid on five shops thought to be using China UnionPay point-of-sale terminals to illegally take cash out of China. The arrests may herald further restrictions on the use of UnionPay, making it harder for bettors to skirt currency controls.

There has been some positive signs. The Macau government has relaxed visa rules to allow visitors transiting through the city to stay longer and travel more frequently, and it may ease a proposed smoking ban. But the overall sense remains negative.

Galaxy's new casinos, which opened in May, and the summer holiday season failed to rouse a return of mainland Chinese visitors to the former Portuguese colony, with August's gaming revenue slump widening to 36 per cent after easing since February.

September does not look too promising for Macau either, according to Mr Grant Govertsen, an analyst at Union Gaming Group.

While China has scheduled a three-day holiday to commemorate the 70th anniversary of Japan's defeat in World War II, gamblers may stay away given the gravity of the occasion as "there appears to be an elevation in the call for patriotic sentiment," he wrote in a note on Tuesday.

The negativity could spread to other new casinos due to open in Macau this year and also next year, said Mr Aaron Fischer, a Hong Kong-based analyst at CLSA.

"If you ask me what I'm most worried about: The Galaxy expansion hasn't grown the market to the extent that we expected," he said. "We have been disappointed by the gross gaming revenue in the last few months."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 03, 2015, with the headline 'China's stock rout deals Macau casinos a bad hand'. Print Edition | Subscribe