China Stock Market Crash Likely to Hurt Macau VIP, Premium Mass - Deutsche Bank (MPEL)

China's stock market crash is likely to hurt Macau VIP and premium mass demand, said Deutsche Bank analyst Karen Tang. The report noted in extreme cases, some have even withdrawn deposits with junket operators to cover margin calls. Tang also said the destination may be losing its appeal.

"Macau stocks had rallied 15% since the transit visa relaxation on 1st July, in the hope that GGR will improve. Yet, July MTD GGR/day was only MOP596m (still-35% yoy), merely 3% above the seasonally-weak June. We fear that Macau is losing its appeal to visitors: June marked the 4th month of falling visitation (total -8% yoy; Chinese -10% yoy)," said Tang. "The recent Chinese stock market crash would likely hurt VIP & premium mass demand. Historically, there is a high (70%) correlation that Macau GGR falls six months after Shanghai A-share falls. After the recent rally, we see more downside risks."

"Even after Galaxy added non-gaming, Macau’s visitor arrivals still fell 8% yoy in June (Chinese visitors -10% yoy). Similarly, despite the hotels, overnight visitors from China fell 10% yoy. Chinese outbound travelers now seem to be less interested in Macau. For the 1st time in years, Macau has dropped off from the “Top 10 destinations for summer travel” list, a survey conducted by Ctrip. We think the reason lies not within Macau (lack of new elements), but beyond (visa relaxation by other countries + weak currencies). In June, Macau received 10% yoy less Chinese visitors (-430k yoy) while Japan received 167% yoy more Chinese visitors (+289k yoy). June data for Thailand is not out yet. But in May, Thailand received 12% yoy more Chinese visitors (+380k yoy)," continued the analyst.

Tang added, "Macau stocks now trade at an expensive 15x DBe EV/EBITDA (historical 12x). Under normal seasonality, Macau GGR should improve from MOP580m/day in June to MOP650m/day in Aug, shrinking GGR decline from -37% yoy in 1H to - 30% yoy in Aug. If the summer peak is muted, the market may be disappointed. After the recent pop, we see more downside risks as junket liquidity has slightly tightened after the recent Chinese stock market crash; some junket agents have withdrawn deposits in Macau to fund margin calls for stock investments in China. We fear more small/mid-sized junkets may need to close down later this year."

Deutsche Bank as a Sell Rating on Melco Crown (NASDAQ: MPEL) with a target of $18. US-listed Las Vegas Sands (NYSE: LVS), MGM Resorts (NYSE: MGM), and Wynn Resorts Ltd (NASDAQ: WYNN) are covered by another analyst.

For an analyst ratings summary and ratings history on Melco Crown Enter. click here. For more ratings news on Melco Crown Enter. click here.

Shares of Melco Crown Enter. closed at $20.47 yesterday.

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