Wells Fargo Sees Weakness in Macau Gaming (LVS) (WYNN) (MGM) (MPEL)

Wells Fargo analyst, Cameron McKnight, is cautious on the Macau names and believes that we won’t see another V-shaped recovery as the huge liquidity bubble of the past five years continues deflating. He expects yr/yr declines in May to be similar to April levels (-9.5% yr/yr).

With the stocks up 13% so far this year (vs. S&P flat) and increased interest in the group, some investors seem to be taking the view that revenues have stabilized. The analyst thinks it’s too early to call stabilization. Longer-term investors remain concerned on upcoming supply growth.

Key Points:

1) expect similar declines in May -8% to -11% yr/yr

2) Macau room rates show minimal growth

3) April loan data well (-38%) below consensus

4) checks suggest softness over G2E week

5) retail environment is increasingly competitive

The analyst's forward Macau room rate survey shows May rates up only marginally vs. April (+1.4% m/m) and flat to down slightly vs. March. He is starting to see a modest pick-up in July rates (+3.0).

Macau feels slow, with

1) long lines of taxis waiting for passengers

2) reduced traffic in the casinos

3) fewer ferries.

Non-gaming must be more than retail. During a panel at this week’s Global Gaming Expo (G2E) Asia panelists noted Macau can’t rely on retail alone to drive gaming. The retail market in Macau is being impacted by, 1) increased regional and international destinations, 2) rise in online shopping, and 3) anti-corruption making Chinese hesitant to spend on luxury items. This is consistent with our view, Chinese consumers are spending less, they’re spending less on visible retail items, and their tastes are evolving. In addition, several luxury brands (e.g. Chanel) have cut prices in China to offset China’s higher sales tax.

Macro summary: (1) China’s April retail sales rise at a slower than expected rate (+10.1% vs. 10.5% consensus); (2) Press reports indicate China looking to curb growth in shadow banking; (3) Industrial production +6% y/y in April versus consensus of 6.5%, (4) New loan growth rises 14.4% in April (vs. +14.7% y/y in March), and (5) Macau’s Statistics Census Service (DSEC) reported non-gaming spending in Q1 fell 13.6% yr/yr.

Related Stocks:

Las Vegas Sands (NYSE: LVS)
MGM Resorts (NYSE: MGM)
(NASDAQ: MPEL)
Wynn Resorts Ltd (NASDAQ: WYNN)

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