Investors throw in the towel on Macau, move to Singapore

If Las Vegas is currently profiting at the expense of Macau in terms of Chinese gamblers, Singapore is likely to do the same for gaming investors as analysts start advising their clients to sell off shares in operators with property here and put them in a ‘safe haven’ 2,500 km south. Reports from two major US banks popped up recently showing that after three months of waiting for a recovery in Macau the market has decided to throw in the towel and admit that things are still going to get worse for revenues, profits and stocks. The year’s lost and the only solution is to hunker down and wait for an inflection point around the middle of 2015 when the new flow of casino openings starts in Cotai. For investors in gaming stocks, it also means that the party is over for 2014 and that those banking on making money in the near term had better move elsewhere. In a report published recently, Wells Fargo said that ‘after fresh analysis and channel checks, we feel near-term uncertainty has increased to the point that it has become very difficult to pitch Macau gaming as a new-money idea for the next 6-12 months’. Even conceding to being ‘one of the more cautious houses’ regarding the Macau gaming sector, the US bank admitted that ‘we see balanced risk/reward here and believe trends could worsen before they stabilise and stocks settle’. Wells Fargo warned clients that gaming revenue growth in Macau would stay flat in 2014 and 2015 – after years of double-digit performance – while major operators profits predicted for 2015 are overestimated by at least 10 percent. A wave of downgrades will likely occur in the coming weeks as the market corrects its figures. From soft, to rocky, to shattered The deterioration of the gaming sector in Macau this Summer (with several months in a row with heavily declining revenues since June) caused Wells Fargo to change the outlook from ‘choppy’ to ‘rocky’ with investors trying to call the bottom since June to no avail. ‘Since then (downgrade to rocky), we’ve been seeing almost weekly news flow and data that’s more surprising and appears increasingly negative’. A shattered outlook is just around the corner. Wells Fargo listed no less than 23 negative events (versus only 11 positive catalysts) threatening Macau in the coming months and that will probably depress the current downfall of revenues and the underperformance of stocks even further. PBS Frontline and the New York Times will publish two investigative pieces on Macau and VIP junkets that are poised to send shockwaves through media all over the world and scare investors and gamblers. The impact of Reuter’s piece on illegal UnionPay terminals in Macau early this year is just an example of what’s coming. The impact of the smoking ban is unknown, the 4th Communist Party Plenum may divert gamblers from here, with the same happening with Chinese Premier Xi Jinping’s December visit to Macau. These events will add extra pressure on casino operators that are already struggling to attract more players in an environment reeling from visa restrictions, less available credit, a lower profile by junkets and VIPs, and an anti-corruption and anti-lavish spending campaign by Beijing officials. US Big Four downgraded Wells Fargo has not been soft in its approach to the near-term future of Macau’s gaming sector. The bank decided to downgrade the stocks of major operators and cut price performance by 20 percent on average. All four big gambling companies listed in the US – Las Vegas Sands, Melco Crown Entertainment, MGM and Wynn – have been reduced from ‘outperform’ to ‘market perform’ category, meaning that investors are not expecting these operators to perform above the rest of the market. Since January, gaming stocks have dropped 14 percent, while the S&P500, the world’s biggest index listing the world’s major corporations and market thermometer, increased by 9 percent, a lag of 23 percent. The gaming sector, especially the most exposed to Macau, was also downgraded from ‘overweight’ to ‘market weight’, a hint to gaming stock owners to sell off and reduce casino positions in their portfolios. The downgrades come as no surprise with casino shares trading well below their stock price for months. Panic ahead With several negative events in the pipeline and a new flow of downgrades for the next three to six months, investor sentiment could easily turn to panic it did in 2012. This time, however, things could be worse. If in 2012, a 6 percent decrease in estimates caused stocks to lose 25 percent, this year losses could top almost 50 percent. Wells Fargo noted that from this year’s peak, gaming shares have already declined 18 percent, with estimations reduced by 5 percent. With an expected extra downward revision of 10 percent for 2015 profits in the coming weeks, stocks will likely plummet 25 percent from current prices, the US bank said. With no money to make in Macau’s stocks for the next 12 months, gaming investors have to bet on other destinations. Morgan Stanley gave its clients an option: Singapore. The bank underlined that Singapore’s casino market has a better near-term growth profile and more stable cash flow generation than Macau. Revenues are estimated to increase by 20 percent year-on-year in the fourth quarter against a decline of 15 percent expected for Macau. “We expect Singapore revenues to grow 4 percent in 2015, whereas 1Q2015 could see Macau revenues decline by 2016”, wrote Morgan Stanley’s analysts. The bank decided to advise their clients to increase Genting Singapore’s shares in their portfolios – upgrading them from ‘equal’ to ‘overweight’ – as the operator generates healthy cash flow and its performance is likely to be upgraded in the future should Japan legalise casinos next quarter, the groundbreaking at Jeju (South Korea) and the opening of Jeruru Hotel, properties likely to attract Chinese gamblers, most of them diverted from Macau. Morgan Stanley’s focus on Singapore as an alternative to Macau for investors searching for more profitable locations to allocate their investments is set to be a trend in the coming quarter. Whilst gaming shares exposed to Macau will still go bottoms up, investors will stay on the sidelines and wait to re-enter the market when stocks get cheaper, and then re-enter to profit from the expected surge in Cotai openings.