The Macau bull thesis just died

Old and new in Macau. Photo: Getty

Officials in the world’s largest gambling hub have announced that visitation to the island will be capped at 21 million, according to the Macau Business Daily.

This is to “rebalance” the quality of life of Macau’s residents, but unfortunately it also cuts down visitation to the island by roughly a third, as Macau saw 31 million visitors last year.

And increased visitation was the only argument Macau bulls had left to hold on to. They have been saying that more visitors will come to the island as new casino projects break ground in 2015 and 2016, and that those gamblers would reverse the trend we’ve seen since the summer of last year when casino gaming revenues on the island started to collapse. Wall Street analysts are now cutting estimates even more.

The source of all of this consternation is Chinese President Xi Jinping’s anti-corruption drive. It has killed the high-roller market on the island (who wants to gamble with surveillance cameras everywhere?), and even retail gamblers are having their debit cards (they use UnionPay in China) monitored.

This 21 million cap is equal to the number of visitors to Macau during all of 2014. Back then, though, some of them were high rollers who spent millions a night. Because of the anti-corruption, though, those high-rollers won’t be coming. Xi is trying to turn Macau into a more family friendly place. Like Las Vegas, but with more Disney World-like rides.

Across Wall Street, analysts are in a race to reduce estimates for casino revenue, and subsequently, their stock price estimates for the companies that collect those revenues. Remember, since Macau came the global headquarters of gambling in the early 2000s, some of these companies, like Las Vegas Sands and Wynn Resorts, have tripled their revenue.

“We are reducing our estimates for LVS, WYNN, MGM, and MPEL following a very soft Q1 in Macau,” wrote Wells Fargo analyst Cameron McKnight in a recent note. “Our 2015 Macau EBITDA estimates are now ~10-15% below consensus, respectively, based on -27% yr/yr same-store growth and -25% yr/yr total growth (prior -19%).”

The policy change could also have a significant impact on James Packer’s fortunes, through his investment in the Melco Crown joint venture which has already been seeing some significant revisions to forecasts in recent months.

McKnight’s April estimate for Macau gaming revenue is that it will drop 37-40% from April of last year.

“Given China’s policy actions towards Macau, we don’t see a reason to expect any significant same-store revenue improvement in the near-term, with our estimates only embedding a marginal stabilisation after an extremely soft Jan-March results. We expect estimate revisions over the coming month to align closer to our estimates,” McKnight wrote.

What’s going on all over China isn’t helping either. The whole country’s economy is slowing down. Xi’s corruption crackdown is not meshing well with the government’s plan to move from an investment based economy to one based on consumption. The fact that some consumers are scared to spend is exacerbating an already difficult situation.

So even those who want to check out Macau, may not be in a position to do so.

Of course, the idea that the corruption crackdown is hurting the economy is one that the government has used state media outlets to reject.

And once Xi says something is rejected, you better believe that’s all there is to it.

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