JP Morgan recently re-iterated their bullish stance on US-owned Macau Casinos. The research note written by analysts DS Kim and Sean Zhuang forecasts that the annual revenue growth would exceed investors’ expectations. Earlier this year, in January, JP Morgan stated that “Sands remains a low-risk, solid return investment opportunity in Macau”. Though the team at Countach Research is bullish on some Macau stocks as well, we think that JP Morgan is missing the risk for the US-owned players.
Who are the casinos?
In Macau, you have 6 publicly listed licensed casinos. Three of them are majority US-owned and the other three are Chinese-operated.
The US ones are Wynn (75% of their revenue is generated in Macau), Sands (64% of their revenue), and MGM (23% of their revenue).
The Chinese-operated ones are SJM Holdings, Galaxy Entertainment Group and Melco Crown Entertainment (US-listed).
Licenses for operation.
It’s become a popular rumor that the Chinese government might not extend the licenses for the US-operated casinos because of the ongoing political argument. This argument has been supported by a recent statement from Macau city’s secretary of economy and finance, when he said “The development of the gambling industry concerns China’s national security and the overall interest of Macau.”
No matter what, we think that argument is useless. It does not matter.
The MGM license expires in April 2020 and the Sands/Wynn licenses in June 2022. Although the owner of Sands, Sheldon Adelson, is one of the largest republican donors, and hence important to President Trump, it would not be worth the risk for Beijing to interfere.
If the Chinese government wants to strike back, they would not significantly attack US companies operating inside China. They have much bigger levers to pull. In fact, throughout this trade war, the Chinese government has been holding back on their powerful measures.
China’s Tropical Island.
Other rumors, though not confirmed by the government, is that the tropical island of Hainan might receive a special gambling war.
This would support provincial economies and prevents capital flight through Macao. A new international airport should be under construction as well. However, once again, we see no risk here. We even see it as highly unlikely that a new law will be introduced that would permit gambling on the island, which is part of the mainland.
The real risk.
The US-owned Macau casinos are sitting on what could be called a geopolitical fault line, according to HK-based analyst Steve Vickers. We have to look back at recent events to understand the potential implications.
In 2016, the US army deployed a THAAD anti-ballistic missile defense system in South Korea. This was seen as a provocation to the Chinese government.
What happened was: the Chinese population decided to boycott companies from South Korea. The shopping tourism near disappeared, hurting the local South Korean economy.
Meanwhile another large conglomerates, the Lotte supermarket chain that invested $9.6 billion in China, saw Chinese revenues decline by 77%. As a result, they had to close shop and leave the country.
The important thing to note is that the Chinese government did not order any Chinese to do anything. The population, as a reaction to their country being provoked, decided to boycott the South Korean companies.
The US-owned casinos in Macau are likely to follow the same fate if the political heat between the two superpowers doesn’t cool down. With China being the rising power challenging the US leadership, we do not expect it to cool down anytime soon. History has shown time and time again that a conflict between the rising power and the established power doesn’t just go away with a simple trade deal.
Will there be growth?
We do expect growth in Macau. The recently developed HongKong-Macau-ZhuHai bridge will enable more visitors to come to Macau. As of recent, 70% of the visitors are of Chinese nationality. While there is no exact data available, we expect a far greater percentage of the actual money spent in Macau to be of Chinese origin as well.
Keep in mind that the casino industry in Macau is about five time larger than that of Las Vegas already…
It has all the signs of being a no-brainer where to invest for Macau Casinos. However, we think it’s best to place a hedged bet on the Macau Casino industry.
As the two largest US-owned casinos have HK-listed stocks for the Macau based casinos, it is easiest to short those without acting on the US-listed stocks. To counterbalance the short of the HK-listed US-owned casinos, you can go long an equal amount of the Chinese-operated casinos.
We think it is best for the US-owned casinos to restructure the ownership and find more neutral partners to avoid potential boycotting. Of course the answer as to whether that is necessary is yet unclear, but we will have more clarity within the coming 12-24 months.