Long-term investors may have realised that the Chinese government’s crackdown on the online education sector, which it deemed “hijacked by capital”, also extends to other sectors.
Most obviously, this includes the likes of China’s tech giants like Tencent Holdings Ltd (SEHK: 700) and Alibaba Group Holding Ltd (SEHK: 9988) (NYSE: BABA).
However, in the middle of this week it appeared as though Macau’s gaming companies would be the next target of government regulators.
While there are local gaming companies, such as Galaxy Entertainment Group Limited (SEHK: 27), there are also many Hong Kong-listed subsidiaries of Las Vegas gaming giants.
These include the likes of Sands China Ltd (SEHK: 1928), Wynn Macau Ltd (SEHK: 1128) and MGM China Holdings (SEHK: 2282).
So, what happened? And should shareholders of Macau casino stocks be worried?
Tightening casino oversight
This time it was the Macau government announcing that the Chinese territory – a special administrative regions (SAR) like Hong Kong – would start a 45-day public consultation process focused on revisions being proposed to its existing gaming law.
The proposed changes include tightening restrictions on existing operators and appointing government representatives to supervise companies in the gambling enclave.
Effectively, investors have taken this “review” as tantamount to the Chinese government’s reshaping of the business environment in Mainland China.
Clearly, casinos and gaming can easily be viewed as “anti-social” behaviours that are harmful to President Xi Jinping’s vision of “common prosperity”.
Stock prices crumble
Taken in that context, it was no surprise to see share prices of Macau gaming stocks get crushed on Wednesday, with Sands China’s stock closing the day down 33% while Wynn Macau finished down 29%.
The proposed amendments also included a re-examination that “junkets” play in Macau’s gaming scene.
Traditionally a subsector of the industry, junkets operate by luring high rollers from China and extending credit to them.
However, it has been viewed as a murky and corruption-prone corner of Macau’s gambling market that’s ripe for an overhaul.
Nearly all the visitors to Macau’s casinos come from Mainland China so this latest move adds insult to injury following the impact Covid-19 has had on the gaming industry in the territory.
Unsurprisingly, gaming revenues cratered as Covid-19 spread and border closures were implemented in Macau.
In 2020, gaming revenue in Macau declined by a whopping 79% to US$7.6 billion. Mandatory quarantine for visitors from China and Hong Kong is still in place today.
Uncertainty everywhere investors look
Taking a step back, though, investors should be aware that over the past two decades gaming licenses have allowed casino operators in Macau to carry out business.
However, more recently, the expiration of those 20-year licenses (which were up for renewal in June 2022) was an overhang for Macau casino stocks even before Covid-19 hit.
For example, even before the latest falls, Sands China shares were down 35% over the past three years and Galaxy stock was down 11%.
The newest regulations are likely to pressure margins even further for an industry that saw cash flows ravaged by Covid-19.
Meanwhile for shareholders, many of whom had invested in Macau gaming stocks given generous dividends, hard questions will have to be asked about the viability of the industry as a long-term investment.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.
