By Kate O'Keeffe
The stunning decline in gambling revenue in Macau is raising
concerns about the casino industry's $20 billion-plus expansion
plans in the Chinese territory.
Gambling revenue in Macau fell 39% in April from a year earlier
to 19.17 billion patacas ($2.42 billion), according to official
data released Monday. Revenue has fallen for 11 straight months,
including a record 49% drop in February, and has now fallen 37%
this year.
The losing streak has been reflected in dismal earnings from
Macau's six casino operators, sending their Hong Kong-listed shares
down by an average of 45% and prompting analysts to question their
plans for lavish new casinos. These projects were launched when
annual gambling revenue for Macau, a $44 billion market that still
rakes in seven times as much as the Las Vegas Strip, was growing by
the size of the Strip's revenue each year.
Among the major projects under way is the $4.1 billion Wynn
Palace from Wynn Resorts Ltd. scheduled to open in March 2016. On
Wynn's earnings conference call last week an analyst asked the
company's chairman and chief executive, Steve Wynn, why he doesn't
slow construction of the project or scale it down.
Mr. Wynn interrupted him: "Hold on. You can't slow it down. It's
being finished and there's bank obligations. You can't slow it down
in Macau. The building is sitting there. The skin is on. They're
getting ready to fill the lake. Staff is hired."
At the same time, Mr. Wynn said he is not getting straight
answers from the government when he privately seeks clarity on
policies. "The government is tentative at best in responding to us.
I think that's a reflection of a little bit of their own
uncertainty under the circumstances," he said. "There's a new boss
in China, Xi Jinping, and his agenda is something that everybody is
adjusting to."
The first project to be completed--a major expansion of Galaxy
Entertainment Group Ltd.'s flagship resort--is expected to open
this month. New multibillion-dollar resorts from Macau's five other
operators, including Las Vegas Sands Corp. and MGM Resorts
International, are expected to open in the coming years.
Macau has been struggling since Chinese President Xi Jinping's
crackdown on corruption began to hit hard last year. The
campaign--unprecedented in scope--has brought down many top
mainland officials and scared off the high rollers who used to blow
billions on baccarat in Macau, the only place in China where casino
gambling is legal.
On Las Vegas Sands' earnings call last month, Chairman and Chief
Executive Sheldon Adelson said of the outlook in Macau, "We are
sailing in uncharted waters, and I hope we don't sink like that
boat off in the Mediterranean." First-quarter net profit was down
34% from a year earlier, to $511.9 million, as profit from Macau
plunged 54%.
JP Morgan analyst Joe Greff asked on the same call whether the
company would leverage its balance sheet to sustain dividend
payouts in the U.S., and how much leverage it would be willing to
take on.
"That all depends who you're asking," said Mr. Adelson. "I'm
asking you, Sheldon," said Mr. Greff, but Mr. Adelson declined to
commit to a number.
Despite the concerns, many casino companies operating in Macau
have strong balance sheets thanks to the booming business of
previous years, and they have been able to readily get financing
for the new construction.
The crash in Macau's VIP gambling business, driven by the
corruption crackdown, has been joined by another worrying trend,
analysts say: a significant drop in revenue from lower-spending
customers. At Las Vegas Sands it was off 21% in the first quarter
from a year earlier.
Credit analysts are raising concerns about the big spending at a
time of falling revenue. Standard & Poor's Ratings Services
placed Wynn's ratings on negative watch last month before the
company even reported earnings, citing a worse-than-anticipated
gambling environment in Macau. S&P currently rates Wynn's
corporate debt at double-B-plus, which is considered below
investment grade.
Wynn reported a net loss of $44.6 million for the first quarter,
compared with net income of $226.9 million a year earlier, and
slashed its quarterly dividend to 50 cents from $1.50. Its shares
fell 17% the next day.
In a report entitled "Is this 2009?," CreditSights analysts
Chris Snow and Nicolas Rios said the dividend cut "telegraphed the
magnitude of management's concern about the state of their markets,
and the melancholy in Steve Wynn's voice harkened back to the dark
days surrounding the Encore opening in Las Vegas."
Wynn opened Encore in December 2008, as the financial crisis
roiled U.S. markets and sent Las Vegas into a tailspin.
Write to Kate O'Keeffe at Kathryn.OKeeffe@wsj.com
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