Shares of casino companies operating in Macau were under pressure on Tuesday and seeing further pressure on Wednesday after Hong Kong officials said they would propose changes to casino regulations to tighten restrictions on operators.
TIGHTER RESTRICTIONS: Hong Kong officials this week announced plans to change casino regulations to tighten restrictions on operators. The changes include appointing government representatives to “supervise” companies in Macau.
Macau's Gaming Inspection and Coordination Bureau aims to complete a revision the city's gaming law by the fourth quarter this year, GGR Asia reported on Tuesday. A public consultation process regarding the revision will begin on September 15 and run through October 29, according to the report. Lei Wai Nong, Macau's Secretary for Economy and Finance, commented that the law includes the "healthy and sustainable development" of the gambling industry through improvements to the regulatory system of casinos, as well as an aim to increase the "competitiveness" of the city's casino industry.
In addition to appointing government representatives, the revisions also propose increasing local shareholdings of casino companies, according to a Bloomberg report.
GAMING COMPANIES CUT AT JPMORGAN: JPMorgan analyst DS Kim downgraded Sands China (SCHYY), Wynn Macau (WYNMF), Melco International (MDEVF) to Underweight from Overweight and MGM China (MCHVF), Galaxy Entertainment (GXYEF) and SJM Holdings (SJMHY) to Neutral from Overweight citing Hong Kong's plans to increase direct supervision.
The government's policy signal indicates "heightened scrutiny on capital management and daily operation with upcoming license renewal," Kim told investors in a research note. The announcement "already planted a seed of doubt in investors' minds, which is probably enough to de-rate these names until clarity emerges on key points, an event that's unlikely to happen this year," said the analyst.
WHAT'S NOTABLE: On Tuesday, Credit Suisse analyst Kenneth Fong told investors in a research note of his own that the consultation has a negative read for the gaming sector as regulation remains a risk. Increased capital requirements, pre-approvals being needed for dividend payouts, introducing government representatives into companies and regulation against accepting deposits of cash or funds could all potential "impact the structural drivers" for the group, added Fong, who thinks uncertainties about the regulation could also be a drag on valuations.
While Macau's tighter countermeasures to prevent the spread of Covid-19 were gradually eased between the second half of June and early July, travel restrictions between Macau and mainland China were again increased in late July due to new Covid-19 infections on the mainland. As of midnight on July 31, people intending to enter Macau on a direct flight from mainland China must hold a nucleic acid test certificate issued within 48 hours proving they are negative for Covid-19, and as of August 2, Macau authorities have also added new locations to the list of places where departing travelers must do a 14-day quarantine upon arrival in Macau.
Macau gaming revenue for August was up 234% year-over year, but was down 82% from the same period in 2019.
OTHERS TO WATCH: Other publicly traded companies in the Macau gaming space include Las Vegas Sands (LVS), MGM Resorts (MGM), Wynn Resorts (WYNN) and Melco Resorts (MLCO).
PRICE ACTION: In Wednesday morning trading, shares of gaming companies in the Macau space sunk, adding to losses seen in Tuesday trading. At time of writing, Las Vegas Sands shares are down 3.5%, MGM Resorts shares have slid 5% and Wynn Resorts is down over 8%.
