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Recent crackdowns have proven that few sectors are immune from Beijing’s control. But no industry seems as vulnerable as the Macau gaming market. His losing streak has only just begun.
The most recent push for the nanny state in China ranges from excessive online gambling to cosmetic surgery these days. The game, however, has long been on Beijing’s radar. A regulatory review by Macau, the world’s largest gaming hub, has begun. Among the new restrictions, government officials will oversee daily casino operations and limit the number of casino licenses.
Most worrying is the latter. During previous repressions, shareholders could be reassured about the time remaining on gambling licenses for a period of 20 years. However, in June of next year, casino operators will have to submit new applications.
If the new laws limit the number of licenses to less than six, some operators could close their doors. The unraveling of the relationship between the United States and China puts operators based in the United States at a disadvantage, including Wynn Resorts, MGM Resorts and Las Vegas Sands. Either way, changes in the tendering process can increase costs.
The timing couldn’t be worse. Even before the pandemic, China put travel restrictions in place as protests hit Hong Kong. Casino profits have suffered. Revenues from VIP table games plummeted as mainland tourists, who made up nearly three-quarters of total visitors, stayed away. High fixed costs, including rent, maintenance and renovation bills and the salaries of tens of thousands of employees, don’t help. As Chinese regulators tighten capital controls, gamers should have less money to spend in Macau, even when border controls are relaxed.
Stock prices of Wynn Macau and SJM Holdings have fallen by more than half this year, while their peers Sands China and Galaxy Entertainment fell by more than a fifth on Wednesday alone. Those of the U.S.-listed Las Vegas Sands and Wynn Resorts, which relied on Macau for about two-thirds of the group’s sales before the pandemic, fell this week.
It could be even worse. Even after halving since mid-March, Galaxy Entertainment is trading at a high enterprise value of 6 times forward sales. After the Sars outbreak in 2003, its multiple fell below one. In China, cities have started new closures as the Delta coronavirus variant begins to spread.
The bet for investors is to guess which operator will renew its license and which will not. This risk outweighs all opportunities for a possible return of high yielding continental players. Don’t double down.
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