inside asian gaming JUly 2015 4 EDITORIAL Kareem Jalal We crave your feedback. Please email your comments to
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[email protected] or call: (853) 6680 9419 www.asgam.com ISSN 2070-7681 Chief Executive Officer Andrew W. Scott Founder and Editor Kareem Jalal Director João Costeira Varela Editor At Large Muhammad Cohen Contributors Paul Doocey, John Grochowski, James Hodl, Matt Pollins, I. Nelson Rose Graphic Designer Rui Gomes Administrative Assistant Latte Iao Photography Ike, Gary Wong, James Leong, Wong Kei Cheong Is the Worst Really Over? I think we are probably getting close to a capitulation point in China,” wrote investment guru Mark Mobius, executive chairman at Templeton Emerging Markets Group, in a blog post on 9th July. The term “capitulation” refers to the point when sentiment has gone so far in one direction that a turn in the opposite direction, be it higher or lower, is a certainty. Mr Mobius’ blog post coincided with a strong rally that ended a precipitous month-long correction in mainland China stock markets from 12th June which saw the Shanghai Composite index lose roughly 30% of its valuation and the Shenzhen market down nearly 40%. Roughly half of the companies listed in China elected to suspend trading of their stocks during the markets’ roller-coaster ride—something that wouldn’t be allowed on 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 CNN Money . “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 a de-facto suspension of new IPOs.” Furthermore, “the government- backed China’s Securities Finance Corporation—known as CSF—is lending billions to big Chinese brokerage firms so they can buy more stocks. Controlling shareholders and board members have been barred from reducing share holdings via the secondary market for six months.” 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 in Macau’s June casino revenue marked the thirteenth straight month of contraction. While the ongoing slump in the headline gross gaming revenue number hardly seems to indicate a recovery, Credit Suisse analysts Kenneth Fong and Isis Wong see signs for optimism. “We believe that the worst is over for the sector, given the negatives are well-known, the sector is under-owned, we see a fundamental shift towards supportive policy (from both Macau and the central government), and seasonally stronger months are ahead,” they wrote in a research note published earlier this month. After all, if the central government is now willing to support de-facto gambling on the mainland bourses, it could possibly be inclined to ease its tough stance on actual gambling in Macau. Indeed, Macau gaming stocks could be nearing a capitulation point after their year-long selloff, with any good news having the potential to spark a rally. At the end of last month, the announcement that visa rules for mainland Chinese wishing to visit Macau would be relaxed starting 1st July sparked a spike in Macau stock prices. Many mainland Chinese visit Macau on transit visas, which are easier to get than proper visitor visas. Up until 30th June, transit visas only allowed mainland Chinese to stay in Macau for 5 days, but from July they can stay for 7 days. Although unequivocally a positive development, considering the average length of stay of visitors to Macau is a mere 1.1 days, it is not likely to have much of an impact on the market. 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 on mass floors. Ms Ren writes: “This full smoking ban is widely expected to pass and can dent another 10-15% revenue off VIP gaming.” 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 in mid-August, so it will probably have to continue in 2016. They also offer some additional perspective on the bill’s potential impact: “While the government has been keen to ban smoking completely in casinos, there is a lot of pushback from the business community—not only the casino operators, but the surrounding businesses (mainly SMEs), like car service, F&B, travel agents etc. as a sharp fall in gaming revenue would also hurt their earnings and gradually hurt local residents’ lives (public spending cuts if revenue falls further, suspension of 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 to our estimates, with the VIP segment falling to only ~20% of sector EBITDA, a 10% hit to the VIP segment would only hurt total earnings by 2% upon a full ban.” “