2019 is the year of the pig, according to the Chinese calendar. It is also the year that marks the 20th anniversary of the return of the former Portuguese colony of Macau to the motherland of mainland China.
Those reasons — superstitious and sentimental — are on a list put out by Credit Suisse, in an attempt to justify a bullish stance on casino firms operating in Macau, the world’s biggest gambling centre, after a very rocky year. In 2018 the Bloomberg Macau China Gaming index fell by more than a quarter, under-performing the Hang Seng stock index as a whole, reflecting a year of macro pressures as high rollers from the Chinese mainland cut back on spending and borrowing.
That means that this year is beginning on a note of low expectations and undemanding valuations. Still, there are lingering risks — not all of them economic — as China gets ready to celebrate the lunar new year and its reunion with Macau. Perhaps the biggest is the risk that casino companies in Macau will join the growing numbers of firms becoming hostage to Sino-US tensions, whatever happens this week.
Such geopolitical fears eclipse economic dangers such as slower growth, a squeeze on shadow banking and a possible plunge in the value of the currency (such as happened three years ago), triggering huge capital flight.
Today three of the six major Macau casino firms are either wholly or partly owned by American interests, including Sands China, Wynn Macau and MGM China (the last a joint venture with Pansy Ho, whose father Stanley was a towering presence on the casino scene before his retirement several years ago).
All hold concessions from the government for the privilege of operating casinos, which is separate from running the hotels that house them. Sands could be especially vulnerable, in that context, as it is owned by Sheldon Adelson, a staunch supporter of President Donald Trump.
The MGM concession (along with that of Hong Kong-owned SJM Holdings) is the first to come up for renewal, in March of next year.
“Concession renewals remain at the forefront of investors’ minds as we approach the expiry date without any clarity,” noted analysts at the CLSA unit of Beijing-based Citic Securities, in a relatively cautious piece of research published this month. “We cannot rule out Macau getting caught up in the crossfire of US-Sino trade tensions and the fact remains if a more punitive approach were to be levied on either the three American operators, or even all six operators, Macau would be the biggest loser.”
Even if Beijing were reluctant to tear up concessions before they expire, at a time when it is eager to attract more foreign investment, there are other measures the government could adopt, such as levying higher taxes on foreign-owned casinos.
The American operators are also at risk of broader nationalistic effects, which are hard to quantify. For example, when Apple’s sales began to soften in China two years ago, it was because some of the early, price-insensitive adopters decided Huawei phones were superior, thanks to their dual sim cards and nicer cameras.
Today, though, many consumers are boycotting Apple out of outrage at the way local brands such as Huawei have been treated beyond their borders. Another example is Chinese tourists staying away from South Korea when Seoul imported an anti-missile system from the US that could be directed towards the mainland.
“Obviously a beautiful casino hotel without the right to operate a casino inside is not what these operators have in mind,” said one Hong Kong-based hedge fund founder who remained bullish on the sector. “It would be like nationalising $10 to $15bn in hard assets. You can’t revoke a land lease and renege without serious thought.”
This investor also notes that Sands and Wynn employ 30,000 workers, combined, in Macau. “It would be a ‘gulp’ moment if you tell Wynn to leave town and turn the building over to some cut-throat local junket operator or [state-owned enterprise] which cuts health insurance, hires all their relatives as management and skips the fire safety checks to save a few nickels,” he added.
Still, such an outcome is not completely off the table. Beijing has long been uneasy about Macau given its history as a destination for those who want to get money out of the mainland, evading capital controls. Gambling (as well as online gaming) also has its detractors within government, who see the activity as socially unproductive and fiscally regressive.
People born in the year of the pig tend to be wealthy but lose their tempers easily, according to lore. Given all the headwinds in Macau, prudent investors should bear that in mind as they look out over 2019.
