Gaming | Short-sellers target MGM as downturn for casinos persists

Vehicles drive past the MGM Macau casino resort

As 2015 draws to a close, investors are shunning the advice of analysts by increasing their bets against casinos in Macau, the world’s largest gambling hub.
For example, short interest in MGM China Holdings Ltd. is nearing the record reached on Nov. 20, data compiled by Bloomberg and research firm Markit Ltd. showed. That’s as analysts predict the company, a unit of the largest casino operator on the Las Vegas Strip, will deliver the best return among its beleaguered peers in Macau.
The fallout has spread beyond Macau’s borders, hitting global gambling magnates such as Steve Wynn and Australian billionaire James Packer, who is said to be considering taking some of his casino assets in Crown Resorts Ltd. private [see page 6]. Despite China’s relentless crackdown on corruption and slowing economy, some investors have taken the advice of analysts calling a bottom to Macau’s gambling downturn – now in its 18th month – only to get largely burned, with the exception of the occasional rally.
Investors “are still shorting, because they think the analysts are wrong. They don’t believe we are close to the bottom,” Linda Csellak, head of Asia Pacific Equities at Manulife Asset Management, said in an interview. “The short side probably believes the worst is not over yet.”
Share prices of Macau casinos have seen brief rallies since the slump started in early 2014, only to collapse again as signs of optimism proved to be unsustainable, according to Karen Tang, an analyst in Deutsche Bank AG. For instance, a 15 percent rebound in Bloomberg Intelligence’s index of Macau stocks in October 2014 was cut short after the government imposed a smoking ban on casino floors that was more stringent than operators had expected.
Part of the reason why Macau is so unpredictable is because casino executives and analysts struggle to anticipate policy changes. Some have turned to frustration, with Las Vegas tycoon Steve Wynn blasting Macau’s government in October for their lack of clarity. Others have just gotten busier: Daiwa Securities Group Inc. analyst Jamie Soo, the top Macau analyst tracked by Bloomberg, switched his investment ratings on Sands China Ltd. three times in two months.
Macau’s high-stakes gambling industry will continue to be squeezed by restrictive policies on capital outflow including a crackdown on underground banks and illicit use of debit-card transaction terminals from China UnionPay Co., Eddie Tam, Chief Executive Office of Hong Kong-based Central Asset Investment, said in an interview. Other headwinds include the depreciation of the yuan, which will increase the costs for mainland Chinese to gamble in Macau, he said.
“The industry lacks a growth engine,” Tam said.
MGM China is seen as particularly vulnerable among the city’s six casino operators due to its lack of exposure to the Cotai Strip, the latest gaming area being developed in the Macau peninsula. Newer properties such as Melco Crown’s Studio City, which opened in late October, have taken market share from older casinos.
For its part, MGM China’s $3 billion project in Cotai is scheduled to open in the last quarter of 2016. Wynn Macau Ltd.’s first Cotai project won’t open until mid-2016 and SJM Holdings Ltd.’s first project in the district, Lisboa Palace, is slated to open in 2017.
Still, analysts expect MGM China shares to gain about 43 percent in 12 months, according to the average target of 22 analyst estimates compiled by Bloomberg, after plunging more than 70 percent from their January 2014 peak. That’s the best return potential among its peers as analysts again expect the industry to start recovering – this time from next year. MGM isn’t immediately available to comment.
Manulife, for one, thinks the worst is over and the Canadian insurer’s $86 million fund focusing in Asia Pacific stocks has started investing in Macau casino companies since November.
“I just can’t see things getting a lot worse,” said Csellak, who expects Macau casino stocks to recover next year after the sell-off. “I think it’s probably a better buy than sell at this level.” Daniela Wei, Cindy Wang and Moxy Ying, Bloomberg