Wall Street is finally accepting that the boom days of Macau, the world's gambling mecca, are over.
Analysts are now assessing the damage. And it's become clear that Macau has a weak link: Wynn Resorts.
As Morgan Stanley pointed out in a recent note, the casino operator owned by billionaire mogul Steve Wynn has substantial exposure to the region. A whopping 77% of its revenue are generated from its Macau property, so you can imagine the bust makes an impact.
Its other properties are in Las Vegas.
The company's most recent quarterly earnings, reported in February, were expected to be awful. They turned out to be worse. Wynn Macau's revenue fell 32% from the same period a year before.
"China remains a big question mark," Wynn said in a conference call following the company's earnings announcement. "We have more questions than answers, thousands of our Macau employees are anticipating promotion and a better life because of Wynn Palace ... We have learned in the last 12 years to behave in China, and that is to listen carefully to what the leadership says and to conform with the program as we are their guest ... We wait for an announcement from the government with baited breath ... What we are seeing in China is an entrenchment."
Earlier this month Wynn encouraged Macau staff to take unpaid leave for the first time since the financial crisis.
"As all operators do during seasonally low periods, we encourage team members to take vacation time, whether paid or unpaid," a Wynn spokesperson told Business Insider.
The problem is that this isn't just cyclical. President Xi has made it clear that he wants Macau to be a cleaner, more family-friendly place. Unfortunately, that means less activity. And until that transition is made, existing businesses will be crushed.
"It appears that we misjudged the extent of the near-term headwinds (the full effect of which we may not have even fully yet reflected) and we should have stuck to our initial cautious stance," wrote Morgan Stanley.
The reality is that the really the one "headwind" that matters — the Chinese government.
Macau's economy contracted by 17% in the fourth quarter of 2014 alone. Last year, 16% of all high-roller financing companies shut down. President Xi has made it clear his wide reaching anti-corruption campaign is tracking both wealthy gamblers — the hardest hit in Xi's probe — and retail gamblers — through China's debit card, UnionPay. So, there's nowhere to hide.
There are those on the mainland who have complained that the Xi's anti-corruption drive is hurting the economy — that it's contributing to an already naturally slowing economy in transition — but there is zero expectation that the situation will change. The government has made it clear that it has no plans to come to the rescue as it has in the past.
We know that because Chinese state news site, Xinhua addressed Xi's doubters in an editorial this weekend: "those who are clear about corruption's evil nature have dismissed the opinion [that anti-corruption is hurting the economy] as "absurd" and "weird" instead, applauding the country's anti-graft campaign since Xi Jinping took office as general secretary of the Communist Party of China Central Committee in late 2012," it said.
And so the future of Macau, which in the next few years is supposed to include the construction of billions worth of new properties on the island, is suddenly looking more grim to Wall Street. Morgan Stanley does not see a turn around coming until 2019.
In this environment, Wynn is in the position to get walloped.
Casino CEOs are "going to have to step up their efforts around the world and in Las Vegas," professor Michael Green of the University of Las Vegas told Business Insider. Wynn's dependence on Macau, once a great strength, is now a huge liability.
Let's looks at a few of Wynn's peers. Outside Macau, MGM has a large operation in Las Vegas and smaller operations geared toward retail gamblers around the US in cities like Detroit and Reno.
Las Vegas Sands, Morgan Stanley argues, has a stronger presence among the healthier retail gambling segment in Macau. The company also managed to beat earnings in Q4 2014 with the help of revenue and tax breaks at its Singapore property.
This isn't to say that any of these companies are going to have easy go of things. Over the last year, the Market Vectors Gaming ETF, a security that includes the world's biggest casino stocks, has fallen 32%. Wynn's stock is down 45% over the same period.
Someone has to get hit the hardest.
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