Macau casino stocks plunge over done, analysts say

Published in: Latest Intelligence

Macau’s casino stocks plunged this week following a media report that officials are planning to clamp down on illegal money transfers, though some analysts said the fears were overblown.
Sands China (1928.HK) dropped more than 4 percent on Thursday, though ended off its low for the session, MGM China (2282.HK) was down more than 8 percent, while Galaxy Entertainment (0027.HK) fell more than 7 percent. Wynn Macau (1128.HK) was also off more than 7 percent and Melco Crown (6883.HK) gave up more than 6 percent.
U.S. listed shares of the parent companies also plunged in U.S. trading.
The report, published in the South China Morning Post and picked up by other media, said that China UnionPay Co. mobile card-payment devices were being used illegally in the enclave to circumvent China's currency controls and have been seized by police.
Funds obtained illegally through card-swiping come to an estimated $6 billion, or about 12 percent of Macau's annual mass-market chips purchased, Bloomberg said in a separate report, citing Deutsche Bank analyst Karen Tang.
A decline of that size would pare EBITDA for the six largest casino operators in Macau by 2 percent to 6 percent, with Melco Crown and MGM China the worst-affected, she wrote.
However, Sterne Agee said in a note that it believes the share price drop is overdone and there are no new regulations from UnionPay. The company recently organized a training activity to prevent cross-border point-of-sale relocating and anti-money laundering. The primary purpose of the training was to prevent patrons from taking portable devices across the border and swiping their UnionPay card to withdraw cash (often in the casino), avoiding currency controls, it said.

“While a tighter focus on cross-border point-of-sale relocating could result in additional targeting, our contacts suggest – and we agree – it is very doubtful we see a noticeable disruption to mass GGR from this,” Sterne Agee said.
UBS concurs saying it isn’t the first time for reports of such a crackdown and instead this should be viewed as an ongoing policy of operators and local police seeking to ban individuals from this activity.
It also pointed out that this method of using China UnionPay to obtain cash is a relatively small-scale affair.
“The more common method of using CUP to obtain cash is through purchasing goods in watch & jewellery shops, done through properly registered Macau CUP terminals. According to various operators and local sources, there have been no policy changes in that activity. We estimate the second method accounts for 10-15 percent  of mainland mass players' sources of cash for gambling,” it said.
Still the reports come at a delicate time with sentiment also harmed earlier this week by reports that officials plan to clamp down on mainland Chinese using third-country transit visas to enter Macau and then not traveling on to their stated destination.
Macau immigration rules permit mainland passport holders to stay in the territory up to seven days if they use Macau as a transit to other destinations.

Analysts at Bank of America Merrill Lynch said the city’s gross gaming revenue may decline by 3 to 5 percent if new restrictions are imposed.
“Macau shares also corrected sharply in late June 2012 on talk about changing visa and CUP policies. We note the market corrected sharply initially but rebounded to previous levels within two months,” UBS said.
Also adding to the jitters have been reports that the principal of smaller junket Kimren may have absconded with between HK$8 to $10 billion in cash. Analysts have noted that the reports are unconfirmed and according to checks with operators there has not been any notable change in VIP volumes.
It was also a rough week for shares in lottery firms after China’s lottery and sports betting authorities said the industry regulator has not yet authorized any websites or companies to undertake online lottery sales.

Although regulation is expected later this year, mainland media Jinghua Times cited lottery officials as saying such activities were currently illegal, throwing uncertainty over operations of existing lottery firms.

Beijing-based lottery system provider China LotSynergy Holdings (1371.HK) and rival REXLot (555.HK) declined 11.5 and 12.2 percent respectively, while New York Stock Exchange-listed 500.com (WBAI) plunged 12 percent in U.S. trading, despite reporting stellar Q1 results.

500.com is one of two firms allegedly permitted to run online lotteries on a trial basis, while others are technically operating in a “grey area.” However, New York’s The Rosen Law Firm said it had started an investigation into NYSE-listed 500.com, questioning its assertion it is legally permitted to sell sports lottery tickets online in China. Stock in the company rebounded from Wednesday’s plunge and were up about 8 percent in Thursday’s session.  

Traders in Hong Kong said small-cap casino stocks are losing their lustre after running up sharply on news of deals and other transactions that have ultimately disappointed.

A big loser over the week was Sun International (8029.HK), a listed unit of Suncity Group, one of the largest junket operators in Macau. Its shares fell by more than a quarter after it made a much smaller-than-expected gain on the sale of an asset.

Sun International, one of the two publicly listed firms controlled by Suncity, founded in 2007 by Macau businessman Chau Cheok Wa, sank by 26.6 percent over the week on heavy volume.

The firm said it was selling a 60 percent stake of wholly-owned subsidiary ACS, a computer software and hardware company, for HK$6.2 million, but made a profit of just HK$49,000 from the sale.

The buyer of the stake was former ACS director Tam Kit Keung, who resigned on April 17th, 2014. Tam said he paid for the asset in cash, without elaborating how he financed the deal.

Sun International stock hit a 52-week low of HK$0.28 on Monday, after falling from its peak of HK$1.16 in January. Sister firm Sun Century (1383.HK) reached a 52-week low on Wednesday and finished down 11.3 percent over the week at HK$0.315, losing half of its value from its 52-week high on HK$0.66 hit on January 7th.

“It is abnormal to dispose of HK$6 million worth goods for a profit of HK$49,000,” said a gaming analyst said, who requested not to be named because his firm covers the sector.

In Singapore, shares in Genting Singapore (GENS.SP) surged 2.7 percent after it after posted the highest adjusted EBITDA in three years. Despite the gain, the shares were flat over the week.