Macquarie Capital thinks the woes of the private sector in mainland China do the casino business in Macau more harm than the Sino-U.S. trade war.
“Macau gross gaming revenue (GGR) was surprisingly stable after U.S.-China trade tensions escalated in May,” the investment bank said in a note issued on Monday.
It added: “While Macau share prices have reflected sentiment towards trade negotiations, we aren’t convinced the trade war has been the core driver behind Macau’s fundamental softness. Rather, 2019 VIP volumes haven’t been reacting to changes in trade war sentiment.”
The Macquarie analysts looked instead for other deterrents to mainland Chinese VIPs gambling their money in Macau: they found one in the patchy effects of stimuli given to the mainland Chinese economy.
“Conditions for private enterprises have remained weak,” Macquarie’s note said.
“We focus on mainland private enterprises whose leaders, we believe, are today’s VIPs and premium mass. As we look at private business conditions, the outlook is still bleak, with earnings slowing, defaults rising and registered businesses declining.”
Macquarie forecast that the annual volume in the VIP gaming market in Macau would shrink by 15 percent in 2019 partially because of structurally higher hold rates. It estimated that annual GGR in the mass market would grow by 11 percent, meaning annual GGR overall would be about the same as the year before.
“Regardless of the trade war narrative, we don’t expect a recovery in VIP unless policy officials loosen shadow lending conditions. However, this creates an interesting buying opportunity if shadow lending picks up but Macau share prices remain depressed as trade tensions persist (or worsen),” the note said.
The mention to “shadow lending” was a reference to underground banking networks in China. “Without access to China’s traditional financing channels, many private enterprises must access loans from outside China’s banking system,” the Macquarie analysts explained.
“While such easing measures [regarding shadow banking] could occur as soon as the October Politburo meeting, until then we remain cautious on the near-term direction of Macau shares,” the note said.
Macquarie added: “For longer-term investors with time horizons, Macau valuations do appear attractive in our view, particularly Galaxy Entertainment Group Ltd, Melco Resorts and Entertainment Ltd and to a lesser extent SJM Holdings Ltd. However, near-term we expect generally trading driven by volatile sentiment towards U.S.-China trade relations.”
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Macau’s total VIP gross gaming revenue in the first quarter of 2021