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Throwing Up the Stop Sign

The Chinese crackdown in Macau doesn't seem to be a cyclical reaction

Throwing Up the Stop Sign

We have several times over the years warned that the Communist government in China could upset Macau’s casino applecart.

That has clearly happened, as gaming revenues have declined at an accelerating and frightening pace.

 At first, many investors dismissed the revenue declines as just another of China’s periodic crackdowns on corruption meant mostly to generate headlines and punish political opponents.

It should be clear by now, however, that the national Chinese government intends to rein in gaming, not just put on a show. The national government, I don’t think, is much concerned about damaging the industry, which, after all, amounts to foreigners and Hong Kong billionaires making money off mainlanders.

And why should it? There’s enough tourism potential to be developed in China without the need for an obscenely rich casino industry.

Indeed, keeping the casino industry at current levels, or even scaling it back more through visa restrictions and smoking bans, still makes for a very prosperous Macau, and allows the central government to hold the city up both as a model of conformity and as a warning to much more important and independently minded Hong Kong just a stone’s throw away.

Just in case that message wasn’t clear, in the face of 40 percent and 50 percent revenue declines, a top Macau official recently said the city might reduce visas issued to individual mainlanders, a type of visa that provides Macau with 30 percent of its visitors. 

His rationale: the city is too crowded. Such obedience has got to have the leaders of the national government smiling.

 Observers have noted the restrictions might reduce visitation by individual visa holders less than 6 percent, but that it also might be another obstacle to scare away Macau’s disappearing high rollers.

With all of this, there is growing fear that $20 billion worth of casino resort expansion coming to Macau could become an albatross rather than the intended golden goose. For good measure, you can throw in uncertainty about what the Macau government’s pending review of gaming will produce and how upcoming gaming concession renewal negotiations will turn out.

All of this has finally gotten through to investors, who, instead of projecting a return to normal soon, are running away from the stocks.

But where to run?

Sri Lanka has aborted its unborn industry. Japan has yet to generate a consensus for developing casinos. Singapore is what it is. The Philippines, Australia and South Korea plan to entice Chinese players, but President Xi Jinping warns he will not tolerate poaching.

Not even the United States is immune, as the number of Chinese high rollers spending big at Las Vegas Strip baccarat tables has begun to fall.

One answer might be that long-term investors who believe that Macau will resume growth can look for total returns. Las Vegas Sands pays a dividend yielding better than 4.6 percent. The company generates enough cash to keep that payout coming, and big capital expenditures end after next year, meaning more money available to shareholders.

Wynn, though more vulnerable given its greater dependence on Macau and its high rollers, also pays a dividend that, thanks to its lower stock price, is now over  4 percent. SJM just raised its final dividend and noted it amounts to a 70 percent profit payout.

MGM Resorts, though not a dividend payer, has some attractions. It will quadruple Macau capacity when MGM Cotai opens, gets most of its EBITDA from rebounding Las Vegas, and has new casinos in Massachusetts and Maryland to look forward to.

Jon Oh of CLSA just published a research note making the case for LVS as a dividend payer.

The current $2.60-a-share dividend makes LVS stock worth $52 on the dividend alone, he says. A $3 dividend makes it worth $60. Assuming a range of growth rates, Oh comes up with a possible $135 versus his current target of $80.

Further, Sands China can cut its dividend in half and parent Las Vegas Sands would still have double the money it needs to maintain its current dividend, Oh said. And that is conservative, as CEO Sheldon Adelson intends to increase the dividend at least 10 percent a year.

Nor is Oh giving up on Macau. He figures LVS’ Parisian resort that opens in 2016 is worth $12 and will generate $1.159 billion in EBITDA in 2018, a 41.4 percent return on a $2.8 billion investment.

Oh is also a believer in Wynn, sticking to his $246 target price even as the stock fell all the way down below $135.

WYNN also pays a dividend, helped by Wynn Macau, which essentially passes all of its profit along to shareholders, with Wynn Resorts being the majority owner.

When Wynn Macau recently announced a special dividend, it meant $511 million pouring into the parent company’s coffers. And even if Oh’s forecast for the Macau operation’s EBITDA to fall 15.4 percent this year proves out, that would still total $1.064 billion.

That should keep the dividends flowing, though Wynn Macau might have to scale back next year, Oh said.

Much of the Macau story will unveil in the next several months. We’ll see whether a tougher smoking ban is implemented, and, more importantly, whether new properties—Studio City, Galaxy Phase II and Las Vegas Sands’ St. Regis hotel—grow or cannibalize the market.

Last fall, we said that U.S. regional casino stocks were the place to be thanks to all the glum news and forecasts. That increasingly appears to have been the right call.

We might not be too far away from seeing the same opportunity in Macau.

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