Macau stocks gain as analysts and investors cheer benign gaming law, though satellites lose out

Investors and analysts have welcomed the amendments to Macau’s gaming law, which proved to be far less draconian than feared for the six operators, but which appear to sound the death knell for satellite casinos.

Shares in all of the companies jumped on Friday, with Sands China and Melco Resorts & Entertainment leading the way, up 7 percent and 16.6 percent respectively. The other operators all showed gains of about 4 percent.

The government appears to have heeded the concerns of the industry in its amended law and has dropped some of the more contentious proposals that were presented in September, which triggered the biggest ever one-day decline in Macau’s gaming stocks.

Ben Lee, macau
Ben Lee, Managing Partner, IGamiX Management and Consulting

“The new terms are much softer than most had expected, said Ben Lee, managing partner of IGamiX Management & Consulting.
“The dropping of the proposed gov rep and direct dividend control are positives.”

“Going against our previously held beliefs that the new concession tender would be done and dusted by June, we now believe that the govt will likely grant an short 6 months extension to the end of the year due to a high level of interest by potential new applicants,” he said.

The proposals in the new bill must now be put to the Legislative Assembly for review and the government has said a short extensions may be proposed if that process proves lenghthy.

David Green, principal of Newpage Consulting, also said he was pleased the government had listened to feedback, but cautioned there are still details to be revealed.

“I caution, though, that yesterday’s release was more an explanation of what changes should be expected, rather than a presentation of the Bill that the Legislative Assembly will be asked to consider,” he said. “I expect there will be matters contained in the Bill that are either not referenced in yesterday’s release, or incorporate important details that have not thus far been disclosed.”

David Green, Macau, stocks, macau gaming law
David Green, Principal, Newpage Consulting

The government has capped the number of concessionaires at six and has done away with the sub-concessions as expected, which has been interpreted to mean that it’s highly unlikely one of the current companies will lose a license.

There will be no changes to the taxation regime, which at 39 percent is already among the highest in the world.

The government has dropped a proposal to appoint a manager to oversee the business of the operators and there are no proposals to restrict capital distribution. The operators will need to inform the government of any “major financial decisions.”

“We see this as a way for the government to have some say in financial decisions that could create financial problems (ie liquidity issues, or not investing as necessary under the terms of the future concessions,” Bernstein Research said in a note.

The government has raised the minimum capital requirement to MOP5 billion from MOP200 million and has said that the concession holders cannot publicly list more than 30 percent of their stock. 

Bernstein said that this was a new point that wasn’t in the original proposed amendments and is puzzling as the local entities that hold the licenses are private. However, it said that based on its initial discussions it doesn’t believe there will be any impact on the publicly traded parent companies, although more details are needed.

The license period has been reduced by half to 10 years and can be extended by up to three years in exceptional circumstances, which Green said was a concern.

“I think it is too short for any prospective concessionaire, given the government is likely to require a premium for the grant of new concessions, whether it be cash or in committed investment expenditure,” he said. “Assuming Macau continues to pursue a zero-COVID environment, and we are entering our third year of the pandemic, this is likely to act as a serious brake on the willingness of tenderers to commit to substantial outlays.

“A 10-year term won’t be sufficient to provide an acceptable return. However, it will work for the existing concessionaires, I think, provided they are not asked to commit to significant investments in areas outside their core expertise of gaming, hospitality and entertainment.”

The main losers from the proposed amendments appear to be the satellite casinos, which need to be absorbed by the concessionaires over a three-year period. 

Alidad Tash, macau, stocks, macau gaming concessions
Alidad Tash, Managing Director, 2NT8

“The satellites’ image wasn’t very attractive,” said Alidad Tash, managing director of 2NT8, who views the proposal as positive. “They were mostly pure casinos, appealing to grind mass and junkets. By demanding the absorption, the government followed through with its demand for the more wholesome integrated resorts and non-gaming revenues (something the satellites were not).”

The satellite amendment mainly affects SJM Holdings, but will also impact Galaxy Entertainment and Melco Resorts & Entertainment. Bernstein said the government wants the actual premises at these casinos to be owned by the concessionaire. The end result is likely to reduce the number of casinos or eliminate them altogether.

“The economic impact of this (On SJM in particular) is unclear without further details,” it said. 

There are currently 18 satellite casinos in Macau of which 14 operate under the license of SJM, three under Galaxy Entertainment Group and one of Melco Resorts & Entertainment.

Some of the more prominent properties include Fisherman’s Wharf, owned by Macau Legend, Ponte 16 and Paradise Entertainment’s Kam Pek Paradise. 

Lee said the proposed changes would “change the landscape,” in Macau.

The gaming law amendments announced on Friday also increase the shareholding stake of the local managing director to 15 percent from 10 percent. While not specifically clear, Bernstein said that it appears that shareholding will be based on non-voting stock as at present and therefore won’t have a major impact.

Deutsche Bank analysts called the amended laws a “decidedly positive event,” which removes a key element of the bear case against Macau.

Several firms have issued research notes in recent days saying that they were becoming more bullish on the prospect for Macau operator stocks. After dropping about 60 percent over the past year, they argue that the potential upside rewards now outweigh the downside risk.

The gaming law amendments were a key regulatory overhang and clearing some of the uncertainty will be another positive for the markets. 

Analysts say some further clarity about the expectations of the government are likely to come out during the re-tender, such as expectations on suitable investments and social responsibility.