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Is theWorstReallyOver?
think we are probably getting close to a capitulation point in China,” wrote investment
guruMarkMobius, executive chairman at Templeton EmergingMarketsGroup, in a blog
post on 9th July. The term “capitulation” refers to the point when sentiment has gone so
far inonedirection that a turn in theoppositedirection, be it higher or lower, is a certainty.
Mr Mobius’ blog post coincided with a strong rally that ended a precipitous month-long
correction inmainlandChina stockmarkets from 12th Junewhich saw theShanghai Composite index
lose roughly 30% of its valuation and the Shenzhenmarket down nearly 40%. Roughly half of the
companies listed inChinaelected tosuspend tradingof their stocksduring themarkets’ roller-coaster
ride—something that wouldn’t be allowedon exchanges in free-market economies.
Beijing has gone to great lengths to shore up share prices. “The government is doing everything
it can to rescue the markets,” according to a report on
. “The People’s Bank of China
has cut interest rates to a record low, brokerages have committed to buy billions worth of stocks,
and regulators have announced ade-facto suspensionof new IPOs.” Furthermore, “the government-
backed China’s Securities Finance Corporation—known as CSF—is lending billions to big Chinese
brokeragefirmsso theycanbuymorestocks.Controllingshareholdersandboardmembershavebeen
barred from reducing shareholdings via the secondarymarket for sixmonths.”
While it seems China’s equity markets may have turned the corner after just a month of hefty
declines, it’s taken Macau’s beleaguered gaming sector over a year to show signs of having done
the same. The 36% year-on-year drop inMacau’s June casino revenuemarked the thirteenth straight
monthof contraction.
While theongoingslump in theheadlinegrossgaming revenuenumberhardlyseems to indicatea
recovery, Credit SuisseanalystsKennethFongand IsisWong see signs for optimism. “Webelieve that
theworst isover for the sector, given thenegatives arewell-known, the sector isunder-owned, we see
a fundamental shift towards supportive policy (from bothMacau and the central government), and
seasonally stronger months are ahead,” they wrote in a research note published earlier thismonth.
After all, if the central government is now willing to support de-facto gambling on the mainland
bourses, it couldpossibly be inclined to ease its tough stanceon actual gambling inMacau.
Indeed, Macau gaming stocks could be nearing a capitulation point after their year-long selloff,
with any goodnewshaving thepotential to spark a rally. At the endof lastmonth, the announcement
that visa rules formainlandChinesewishing to visitMacauwouldbe relaxed starting 1st July sparked
a spike inMacau stock prices.
ManymainlandChinesevisitMacauon transit visas,whichareeasier toget thanproper visitor visas.
Upuntil 30th June, transit visasonly allowedmainlandChinese to stay inMacau for 5days, but from July
theycanstay for7days.Althoughunequivocallyapositivedevelopment, considering theaverage lengthof
stayof visitors toMacau isamere 1.1days, it isnot likely tohavemuchof an impacton themarket.
As for upcoming policy risk, as
Barron’s Asia
reporter Shuli Ren pointed out in an article arguing
the recent rally in Macau stock prices would fade, “the big elephant in the room” is an amended
smoking bill that came before Macau’s Legislative Assembly on 9th July calling for a full smoking
ban in casinos, including banning smoking in VIP areas—currently, smoking is still permitted on
50% of VIP floor areas—and removing all smoking lounges in casinos—including those currently in
operation onmass floors.Ms Renwrites: “This full smoking ban is widely expected to pass and can
dent another 10-15% revenueoffVIPgaming.”
While the Credit Suisse analysts don’t disagree with that view, they note the long debate and
voting on the bill is unlikely to be concluded by the end of the current council term inmid-August,
so it will probably have to continue in 2016. They also offer some additional perspective on the bill’s
potential impact: “While thegovernmenthasbeenkeen tobansmokingcompletely incasinos, there is
a lot of pushback from thebusiness community—not only the casinooperators, but the surrounding
businesses (mainly SMEs), like car service, F&B, travel agents etc. as a sharp fall in gaming revenue
wouldalsohurt their earningsandgraduallyhurt local residents’ lives (publicspendingcuts if revenue
falls further, suspensionof annual cash rebate to citizens etc.)
“We believe retaining a smoking lounge for both VIP and mass-market could be a possible
solution to ease the pressure on the gaming industry and for the sake of healthy/stable economic
growth. In this case, only VIP business would be further hit by the tightened smoking control rules.
According toour estimates, with theVIP segment falling toonly~20%of sector EBITDA, a 10%hit to
theVIP segment wouldonly hurt total earnings by 2%upon a full ban.”
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