Las Vegas Sands (NYSE:LVS) and other Macau-centric casinos could be in trouble in the waning months of 2014 after Hong Kong, about 40 miles across the strait from Macau, on Friday cut its full-year economic forecast.
Hong Kong officials now see the economy expanding 2%-3 percent this year, down from a February projection of 3%-4 percent growth, after data showed gross Q2 domestic product fell 0.1 percent vs. the prior quarter, below analyst estimates.
Hong Kong Financial Secretary John Tsang said on his blog that purchases of watches, jewellery, electronics and other high-end goods fell sharply.
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“Annual investment spending fell markedly; private consumption over the same period recorded only a slight increase,” he said, adding performance for those sectors was the worst since Q1 of 2009.
Macau casino resorts rely on tourists from throughout China and nearby Asian countries, as well as affluent VIP customers from around the globe.
Gambling revenue for the world’s top casino destination has contracted in recent months amid a perfect storm of factors. Among them: China has made it harder to get credit amid a deliberate belt-tightening.
And gamblers, especially VIPs, have shied away due to a crackdown by the Chinese government on junket operators and pawnshop lenders. China says some lenders use the government-backed debit/credit card system to illegally launder money.
Wells Fargo analyst Cameron McKnight, citing the government crackdown, began warning early this year that the second half would be choppy for Sands, Wynn Resorts (NASDAQ:WYNN) and MGM Resorts International (NYSE:MGM), which rely on Macau for the bulk of their revenue and growth.
On Friday, McKnight said the situation is deteriorating. “With slowing mass (middle-class tourist spending) growth in July and few signs of improvement in August, trends have turned from choppy to rocky,” he said in a report.
Wells Fargo cut its stock price target for Sands from 90-100 to 80-85, and for Wynn from 260-270 to 245-250.
Additionally, “We are reducing our 2H14 Macau market total revenue growth estimate from 4 percent to -2 percent on lower mass market revenue growth assumptions,” McKnight said.
Still, McKnight projects Macau casino growth will resume eventually as the effects of these factors are absorbed. “We remain bullish on the medium and long-term outlook. We see a $100 billion-plus Macau market over the next five years,” up from about $50 billion currently, he said.
Sands shares were down 1.4 percent in midday trading in the stock market today. Wynn and MGM were both down about 1.5%. Hong Kong-based Melco Crown (NASDAQ:MPEL) slid more than 3%.
Category: Hong Kong