Macau gaming stock Melco Crown Entertainment (
MPEL
, quote) dropped more than 7% in trading on Tuesday after reports
that the Chinese government would step up its efforts to
weed out money laundering in Macau
.
[caption id="attachment_75407" align="alignright" width="300"
caption="The Wynn & Grand Lisboa casinos, Macau"]
[/caption]
Although Macau gaming stocks recovered Wednesday in Hong Kong (
EWH
,
quote
), investors in America remain concerned with certain elements of
equities in these sectors.
Language from China's next head of state, Xi Jinping, frightened
investors Tuesday, as the leader-in-waiting promised large-scale
economic reforms, including a crackdown on corruption.
However, one facet of this initiative involves money laundering
in Macau. Chinese citizens face a number of restrictions on moving
money out of the country and one of the ways that a number of the
members of China's elite circumvented these obstacles was through
the use of junket operators.
Junket operators are more easily able to move money between
Mainland China and Macau. Not only do they provide liquidity to
high rollers who otherwise would not be able to bring as much money
into Macau, junkets also allow wealthy Chinese to move money out of
the country without penalty.
Furthermore, junket operators cause a headache for American
regulators as some have ties to organized crime.
While it's unfair to label all junket operators as engaging in
illicit activities, the dealings of some will likely have
discernible policy effect on the group as a whole. Further
restrictions on junket operators are likely to adversely affect
casino stocks with Macau gaming exposure like Las Vegas Sands (
LVS
,
quote
) and Wynn Resorts (
WYNN
,
quote
) as these companies rely heavily on the high-end segment for
gambling revenues. A lack of liquidity for Mainland high rollers
would certainly be problematic.
The increase of regulations pertaining to junket operators is
surely not bullish, but it may be a bit of a stretch to go short
these names based solely on this announcement. Investors in the
segment should continue to pay careful attention to any concrete
policy plans from Beijing, but also keep an eye on
Chinese macroeconomic data;
a return to growth over the next few months in time for the
important Chinese New Year holiday could be very bullish for Macau
gaming stocks.
However, investors should steer clear of beaten-down,
high-yielding Asia Entertainment and Resources (
AERL
,
quote
), a VIP gaming promoter, as their business model could be affected
by new policy.
Disclosure: Author and family are net long LVS, MPEL, and
WYNN
