“Critical risk factors”

It is not only those who gamble in Macau who can win on Macau’s casinos. One of the most common ways is to buy stocks from the concessionaires, either directly or through investment funds. But if you want to do this, stop and think for a second. Consider the many risks associated with gaming in Macau which research house Bernstein has recently elaborated upon.

In the final part of its proprietary survey – Macau Gaming: What are Macau customers telling us? – that has, by the way, been widely publicised by the Macau media, it identifies a comprehensive list of such risks. Reading it may give you pause for thought – and maybe prevent you from buying stocks purely on impulse, feeling or guesswork…

“As we’re equity research analysts focused on stocks, we always discuss the risks of stocks in a broad format. As such, we give an extensive outline of the risks that may impact the valuation of Macau gaming companies,” Vitaly Umansky, senior research analyst with Global Gaming, told Macau Business.

In the report, Bernstein analysts explain: ‘Our sector outlook for Macau gaming should be discounted by macro-economic and sector specific risks. Our view is based upon our belief that China’s GDP growth will continue in mid-single digits, the economy will continue to shift towards greater consumer spend and the numbers of individuals achieving income levels sufficient to visit Macau will continue to grow. Thus, one of the critical risk factors to our Macau view is a deterioration of China’s economic backdrop (GDP forecast erosion, loss of stock markets’ indices, decline in real estate values, a decrease in consumer confidence and a decrease in disposable income) or a negative liquidity event.’

What are they referring to when they allude to two ‘critical risk factors’, deterioration of China’s economic backdrop and a negative liquidity event?

Umansky explains: “With respect to liquidity, (1) Junkets extend gaming credit to their VIP customers. Cheaper and more easily available capital in China improves junket (and player) liquidity and allows higher lending to VIP players; (2) VIP players typically use their real estate assets in China as collateral for gaming credit in Macau. Increasing property values (and frequency and speed of property sales) in China helps VIP players obtain additional credit; (3) Junket agents are more likely to extend gaming credit in a more liquid property market in China (and players may feel ‘wealthier’ and ‘more liquid’ in a stronger property market).

“Liquidity remains a key driver of VIP (and high- end Premium Mass) but signs are pointing to moderation in credit growth which may lead to a headwind for high-end play later in 2017. China’s slowdown in liquidity growth (credit extension, money supply, etc.) could have some negative impact upon high-end play in Macau. Similarly, any crackdowns on money outflows out of China could have similar negative headwinds on Macau gaming.”

In addition to the “critical risk factors” is a list of 20 other risks [see this page] ranging from less likely scenarios such as “Change in Chinese consumer attitude towards casino gaming” to perspectives that the market cannot ignore, such as a “significant revision of the concession structure post 2020/2022 …The concessions will expire in 2020 (for SJM and MGM) and 2022 (for the other four operators). Currently, there is no clarity with respect to how renewals will be effectuated or what the final cost of any renewals may be. This in itself is a risk factor that investors need to consider. So, the risk point we make is that there could be downside risk to value if the renewal of the concessions carries large economic cost or carries significant changes in other terms,” concludes Mr. Umansky, from Hong Kong- based Sanford C. Bernstein Ltd.

From labour quotas to social unrest

The other risks, according to what can be read in the last pages of the Bernstein survey Macau Gaming: What are Macau customers telling us? are:
• Change in Chinese consumer attitude towards casino gaming
• Intensified anti-corruption activity in China
• Anti-corruption investigations in Macau tied to casino developments
• China and/or Macau Government clampdown on junket activities
• Increased regulation and/or scrutiny in Macau and/or China of anti-money laundering activities
• Restrictions on use of UnionPay in Macau
• Restrictions placed on Macau pawnshop operators • Expansion of the smoking ban in casinos (especially elimination of smoking lounges currently in place)
• Fewer than estimated number of gaming table allocations
• Delays in construction permits and construction labour quota authorisations

• Delays in securing labour quota authorisations for operational staff in new properties
• Curb on marketing efforts in China showcasing Macau as a destination
• Macau Government issuance of inadequate number of foreign labour visas
• Labour strife, unrest or union organisation in casino properties
• Delays in the opening of infrastructure and transportation projects
• Social unrest in Macau stemming from political and/or economic discontent
• Decrease in visitation to Macau: visa restrictions, terrorist attacks/natural disasters/ epidemics
• Changes to Macau taxation (e.g.) exemption of profits tax from gaming income, limitation on taxation related to dividends
• Significant revision of the concession structure post-2020/2022
• FX: significant weakening of the CNY vs. HKD

This risk page “is a list, it is not a quantitative analysis of probability of those risks or what value impact any of those risks occurring may create. Investors are often focused on the downside, so our risk list highlights the downside events that may impact valuation,” senior Bernstein research analyst Vitaly Umansky concluded.