China economy slows, Macau casinos suffer

Reuters/Tyrone Siu

• Wynn
  Resorts this week forecasted doom for revenues in the
  gambling capital of the world, Macau.
• Some on Wall Street say the casino giant is being
  overly conservative, but economic indicators on mainland China
  tell a different story.

We know that China’s economy is slowing dramatically, and one of
the places where you can see that very clearly is Macau, the
gambling capital of the world.

Wall Street was reminded of that on Wednesday, when
Wynn Resorts reported earnings. While the third quarter
didn’t look that bad — Macau revenue was up over $200 million
from the same time a year before — the casino giant had a dark
outlook for the fourth quarter. Wynn projected earnings 20% below
what Wall Street expected.

According to analyst Cameron McKnight at Credit Suisse, this
implies that the Macau gambling market could be negative over the
last two months of 2018.

“Wynn noted that Golden Week was very strong in October,
but business dropped sharply after that and has remained volatile
since then,” McKnight wrote in a note to clients. “Further, the
company noted that it does not believe it is losing share – this
means their guidance is either extremely conservative or the
market has turned negative in November and December.”

Wynn’s stock fell 12% on Thursday following the report.

Wynn makes the lion’s share of its revenue from its two casinos
in Macau, so of the American casino operators on the glittering
Cotai Strip, Wynn is most susceptible to market volatility. 

But of course this would be bad for the entire industry. A
slowdown of the kind Wynn is projecting is a flashback to a dark
time for the casino world, when a slowing Chinese economy and new
government regulation sent casino revenues crashing as much as
50% in 2014 and 2015.

Now there are some on Wall Street, like Carlo Santarelli at
Deutsche Bank, who think that Wynn made an “overly
conservative guide.”

And the gentleman is entitled to his opinion.

But macro data is on Wynn’s side. As McKnight notes, gaming
revenue tends to lag credit cycles on the mainland by 15 months,
and as we know, about a year ago the Chinese government started
to slow the flow of credit through its economy.

Credit Suisse

And then there’s the housing market. McKnight posits that Macau
gambling revenue lags Chinese housing prices by 8 months.

Credit Suisse

All sorts of signals in China’s housing market are flashing red
right now. Earlier this week
S&P warned that weaker Chinese property developers were
in danger of default. Housing sales
fell 3.6% in September, and new research
indicates that 22% of all homes in China are
unoccupied.

So far, as Societe Generale economist Wei Yao pointed out in a
note to clients, China’s real estate investment — which makes up
half of all investment in the country — has stayed pretty stable.
But she does not see that lasting very long.

From a recent note to clients (emphasis ours):

“Real estate investment and construction growth remained
surprisingly resilient in light of further weakening in housing
sales. Investment growth strengthened from 13.8% in 2Q to 14.5%
in 3Q, despite the slight moderation to 8.9% in September from
9.3% in August.

Growth in new floor space started surged to 27.8% in 3Q –
the quickest since 2014 – from 16.6% in 2Q, thanks only partly to
positive base effects.

In contrast, housing sales contracted by 3.6% in September,
bringing down the quarterly growth rate to 2% from 3.1%.
We still believe that demand determines supply, not the
other way around, and that, as a result, the strong trend in
housing supply is unsustainable.“

The world will get fresh credit data from China next week, and
perhaps it will show that policymakers have decided to loosen
conditions in the face of a downturn and a potential trade war
with the United States.

Even so — since Chinese credit is leading Macau gaming revenue as
an indicator — that means Macau will have to continue to work
through some pain for the next few months.

The question is going to be not whether the pain is coming, but
how long it’s going to last.