Brokerage Sanford C Bernstein has warned Macau to be prepared for another escalation in the wide-scale Chinese anti-corruption campaign that has hit the local gaming industry so hard since 2014.
In a report titled, “Macau policy risks are ever present but there is no need to panic”, Bernstein analysts Vitaly Umansky, Zhen Gong and Yang Xie pointed to a recent softening of China’s anti-corruption campaign as having aided Macau’s recovery which has resulted in nine consecutive months of growth. But they also noted that there were signs the softening could be coming to an end, namely last week’s shutdown of an underground banking operation utilizing Union Pay cards and revelations that the government would implement Know Your Customer mechanisms including facial recognition technology at Macau ATMs.
“Continued softening of the anti-corruption campaign would be positive for recovery of high-end gaming in Macau,” the report said. “However, in March and April 2017 we noticed a small spike in anti-corruption related activity. It is too early to call this a new trend, but it could indicate slowing of the moderation and may in fact be a pick-up in activity (perhaps as we head into the Congress meeting this autumn).
“A step-change may be evident in 2018 after the November 2017 Communist Party and Chinese government reshuffle. There is no guarantee that the anti-corruption campaign continues to soften; it could intensify again.”
In particular the report observes public awareness of the anti-corruption campaign as evidenced by China’s largest search engine Baidu, which saw a huge spike in key anti-corruption search terms “Central Commission for Discipline Inspection (CCDI)” and CCDI head “Wang Qishan”.
“Beginning in 2Q 2014, the volume of internet references on Baidu increased dramatically simultaneous with VIP beginning to falter,” it said. “In recent months, Baidu search index on certain keywords relating to anti-corruption has been declining, reflecting a less intense media focus and public interest in the matter. Continued softening of the anti-corruption campaign would be very positive to recovery of high-end gaming in Macau.”
Baidu search counts for “CCDI” and “Wang Qishan” have more than doubled once again since January.
However, Bernstein notes that there is no need for investors to panic just yet despite recent stock price fluctuations.
“During the past year, Macau stock prices reacted negatively to news of policy risks in the short term, but the impact has been minimal over the longer term,” it said.
“We have repeatedly highlighted the policy risks that can create headwinds for Macau’s gaming sector. We view current stock prices of Macau gaming operators as having (for the most part) reflected the recent recovery in GGR, the profitability associated with renewed growth and the potential risks.
“The risks (especially the policy risks) temper outsized valuation levels, even in light of renewed growth and better fundamentals. For four of the six companies in our coverage universe (Galaxy, MGM, Sands and SJM), we consider their current stock prices reflect relatively fair value.
“Policy risks are ever present in Macau investing, and there is no need to panic. Our long-term investment thesis on Macau as a secular long-term growth story (driven by Mass) remains intact.”
