imminent crackdown on high rollers in Macau?

an anti-corruption campaign

Overnight The Times of London published an article saying that the new administration in Beijing will begin a crackdown on corruption in China shortly after the start of the new year late this month.  This will included an attack on organized crime (triad)-related money-laundering junkets by gamblers to Macau.

Most Hong Kong-traded Macau gambling stocks sold off by 5%-7% on the news–the one exception being, oddly enough, MGM China ( HK: 2282), which is strongly linked to Stanley Ho’s daughter, Pansy.  US-traded gambling stocks with Macau exposure are selling off today as well, although to a much lesser extent.

What’s going on?

–I’m assuming the report is true, even though I’ve never–ever–seen The Times break an important stock market-related story.  If I had to guess, this is a deliberate leak from the police in Hong Kong.

–The extent of triad influence in Macau today is unclear.  In colonial Macau it’s thought to have flourished, with the rumored help of the Ho family of SJM Holdings–then the monopoly casino operator.  In my view, one of the main reasons the SAR invited American firms like WYNN and LVS to establish casinos a decade ago was to be a counterweight to traditional influences–partly for their superior technology, partly for their far superior compliance procedures.

–Income inequality, and in particular the vast fortunes that relatives of high officials seem to routinely accumulate, is a topic of increasing political concern in China.  It’s also a specific target of the new administration.  So a crackdown may have more targets than just the underworld.

–The selloff so far has been across the board, ex MGM and MGM China.  If the target is just the underworld, it’s possible that casinos associated with the Ho family, long rumored to have triad connections, would be hit the worst.  If the target is also high rollers in general, add the WYNN interests to the list, since that company specializes in catering to the high roller market.  Arguably, Galaxy Entertainment and the LVS companies will be hurt the least, since they focus on the growing mass market and haven’t had the greatest success in wooing deep-pocketed individuals.

what to do

No one really knows how severe or how long-lasting an anti-corruption campaign focused on Macau gamblers might be.  To pick a number out of the air, it’s possible that the result would be a permanent 10% reduction in the level of gambling in the SAR.  I think that’s probably too severe, but let’s stick with that figure.   After whatever initial downward shock there might be, this would mean a year without much growth in the SAR’s gambling revenues.  The pain would probably be distributed as I’ve described in the previous section.

I believe that the long-term prospects for Macau gambling are excellent–at least unless/until Beijing decides to establish a competing gambling enclave on the mainland.  There’s no sign that’s likely to happen; it’s just the only thing I can see that will upset the apple cart.  I’m all for anything that cleans up illegal activity.  So I look at the threat of a decline in the Macau gambling stocks as a temporary affair and mainly an issue of portfolio risk control.

These stocks have generally been outstanding performers recently, on the idea that the upturn in the Chinese economy now under way will mean a rebound in Macau gambling market growth.  So the stocks may have become outsized parts of your portfolio.  Trim position sizes, if necessary.  Imagine a 20% stock price decline from here.  Are you satisfied to hold all the stock you own now?  If not, cut the position sizes and wait to see what happens.

 

 

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