Sweeping new regulations are being floated for casinos in Macao that threaten the investment thesis of the entire gambling market in China, even as the region continues to struggle to climb out of the very deep hole caused by the coronavirus pandemic.
The promise of intense new oversight, limits on the number of concessions or licenses issued, limits on the number of table games allowed, and having government officials oversee daily casino operations could set back resort plans for a rebound. China's also considering requiring casinos to get permission from the government before distributing dividends to shareholders.
Although there is a 45-day public comment period that will run through the end of October and the exact shape of the regulations is a big unknown, Wall Street wasted little time in downgrading the sector.
Still, some casino operators will be impacted worse than others based on the degree of exposure they have to the city. One of the biggest losers could be Las Vegas Sands (LVS -0.54%), which last year sold all of its remaining U.S. properties to go all-in on Asia.
While that is obviously a much wider market than simply Macao, as the resort operator currently has operations in Singapore and it still has its eye on Japan, Sands is almost wholly dependent upon China for its survival.
Reasserting control over business
Beijing is undertaking a broad-based attack on businesses influenced by Western culture. The communist country imposed massive fines against Alibaba for supposed monopolistic practices, thwarted Ant Financial's proposed IPO, took ownership stakes in TikTok owner ByteDance and Tencent's Weibo, and filed a lawsuit against Tencent's WeChat messaging app.
Now the Chinese government is turning its attention to the casino industry, which was decimated by COVID-19. While there was hope the industry was slowly on its way back to health, as year-to-date monthly gaming revenue is 70% above last year's level, it is still reporting revenue more than 80% below 2019's level and August gaming revenue was 47% below that of July.
The promise of strict new regulations could further impede any recovery and investors would be wise to steer clear.
Revenue and profits put at risk
Wynn typically generates over 70% of its revenue and earnings from Macao, despite having properties in Las Vegas and Boston. However, because of the lingering effects of the pandemic and the limits on travel and tourism to Macao, Las Vegas represented the bulk of revenue and adjusted property EBITDA last quarter.
Melco is also primarily dependent upon Macao, though it operates City of Dreams Manila in the Philippines and City of Dreams Mediterranean in Cyprus. Other resort owners including Galaxy Entertainment and SJM Holdings are similarly situated and equally at risk.
Ready to implode
The industry was already sitting on the ticking time bomb of concession renewal, which is scheduled to begin next year. While the six major concession holders are still expected to survive the renewal process even under the new regulatory regime, the proposal looks to do away with sub-concessions to keep growth in check.
Shares of the China-based businesses trading on Hong Kong exchanges plummeted more sharply than did their U.S.-based counterparts. Wynn Macau's stock was down over 30% in Hong Kong, but Wynn Resorts shares have fallen less than 10%. Sands China lost 28%, but Las Vegas Sands is down just 5%.
MGM Resorts (MGM 1.94%) could be the winner here since it has the least exposure to China, deriving the most of its revenue and profits from Vegas and other U.S. regional markets. Its stock was down just 2% after the news.
Investors might just want to cash in their chips on Macao casino stocks and put them into those with big U.S. operations if they see Las Vegas, Atlantic City, and other destination cities generating strong returns.