Macau Stock Investors Ponder SOE Specter, Golden Week Restrictions

Shares of Macau casino operators trading in the US are soaring Monday on a day of strength in the broader gaming complex. But investors remain jittery amid coronavirus restrictions ahead of the October Golden Week holiday and fears of increased government interference in gaming operations.

Earlier today, the Macau Travel Industry Council said tourists are canceling room reservations in the casino hub. That s because of confirmation of two new coronavirus cases involving the delta variant in the special administrative region (SAR).

Industry executives , which starts on Oct. 1, could spur Macau s sagging gaming business toward recovery. But that rebound is likely to be put off as occupancy rates for the holiday could be as low as 50 percent to 60 percent, down from previous estimates of 80 percent.

While the government confirmed it would not order the closure of the city’s casinos, we think Macao’s anti-pandemic measures will likely lead to lower traffic during the upcoming Golden Week, as visitors may have concerns on quarantine requirements when they return home,” says Morningstar analyst Jennifer Song.

She adds that Golden Week “hiccups” caused by the new COVID-19 cases add uncertainty to an already volatile situation for Macau stocks.

Last week, stumbled, as local authorities launched a consultation period that includes proposals such as increased government equity ownership, restrictions on how operators spend capital, including dividend payments, and possible use of oversight “delegates.”

Those ideas come against an increasingly tense regulatory backdrop in China – one that s permeating global equity markets and chastening investors in previously beloved Chinese growth stocks. JPMorgan analysts argue that the new specter of elevated government interference in the Macau gaming industry amounts to “SOE-isation” of the business.

“SOE” refers to state-owned enterprise, a corporate structure whereby governments hold significant stakes in companies. While that style is unheard of in the US, it is common in developing economies, such as China, Russia, and others. To date, Beijing is a major investor in the energy, financial services, telecommunications, and utilities sectors, but hasn t pursued large stakes in Macau gaming stocks.

Should that change, it could cast a dark cloud over casino equities, because it would be “difficult to establish a floor for both earnings profile (deterioration inefficiency, plus possible national service) and multiples (relative loss of control, plus dividend cut, plus likely reduced return profile), and hence the stocks,” said the JPMorgan analysts.

The perception that Macau casino equities could take on SOE-like traits is potentially a considerable headwind because historical data confirm SOEs lag broader benchmarks and more privatized counterparts. Additionally, SOEs are widely criticized because governments interests rarely align with those of other shareholders.

However, the likes of Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN), and some market observers argue there s value to be had in Macau casino stocks.

“We maintain fair value estimates for the six Macao gaming companies, and we think the shares remain undervalued, with the market concerned over continued delays in Macao’s recovery amid COVID-19 restrictions,” says Morningstar s Song. “Despite the near-term uncertainty, we think a recovery could start in the final months of 2021.”