Chanos, the founder of Kynikos Associates, stated that his firm is short Wynn Resorts. The company’s Macao operations are one of several foreign-owned casinos that are seen as vulnerable as the local government conducts a review of licensing rules for the businesses, which is set to conclude in less than a year.
“We’ve been saying for years that people are ignoring the concessions that are set to expire next year. The law will expire in June of next year and will need to be rewritten. … “We believe that the very lucrative Macao concession will be reduced, if not drastically reduced,” Chanos said.
Since Macao authorities announced the start of a 45-day consultation period last Tuesday, casino stocks have taken a beating. Wynn’s stock dropped nearly 18% last week. In the midst of a broader market sell-off, the stock fell about 3% on Monday to around $80 per share.
While some investors and strategists have cited Wynn as a value-based reopening play, Chanos believes the stock is overpriced.
“It’s one of the most expensive casino stocks out there,” he said, referring to the market value of its stake in the Hong Kong-traded Wynn Macao and the parent company’s more than $5 billion in debt.
Chanos added, “Wynn should be trading in the 40s right now.”
Chanos is a well-known short seller on Wall Street. He made a large bet against Enron two decades ago, and he is also shorting Chinese coffee chain Luckin in 2020.
Wall Street appears to be wary of Wynn’s stock in general. According to FactSet, 50% of Wall Street analysts have a neutral rating on Wynn, compared to 43% who have a buy or overweight rating.
JPMorgan downgraded Wynn and several other casino stocks on Thursday due to the uncertainty surrounding future rules and regulations in Macao.
However, the weakness appears to have been ongoing over the last few weeks rather than a reaction to the Asia headlines. The backdrop includes flattening earnings-growth forecasts at a time when the fiscal pipeline appears to be clogged, legislative deadlines are approaching, debt-ceiling shenanigans are in full swing, and the Fed appears ready to begin the tapering process.
-While still broadly in the “routine pullback zone” and less than 5% from a record high, this setback is a bit thornier right now than the half-dozen 2-4% dips that preceded it in 2021.
-If the S&P 500 remains in the red, it will be the first time this year that it has closed two consecutive days below its 50-day average. So far today, the index has fallen below the August intraday low and has failed to reclaim that level (4370-ish).
-The action is similar to the September 2020 correction in some ways: A peak on September 1-2, driven primarily by mega-cap growth stocks, which fall just as policy/economic anxiety rises (pre-election/fall Covid surge last year). The Dow has outperformed the mega-cap growth names by 12 percentage points over the last three months, and the QQQ ETF has seen extremely heavy inflows, indicating that a portion of the market needs to rest and cannot act as ballast. For what it’s worth, the last year’s pullback bottomed around the 100-day average, which is currently near the minus-5 percent level near 4300.
-On the plus side, the average stock is well off its high as of today, cyclicals peaked in early June, and the selling this morning registered some downside extremes, implying that a bounce attempt isn’t far off.
-Also, Treasuries aren’t rallying all that hard, and US credit spreads aren’t widening, indicating that there isn’t a lot of panicky safety buying or systemic stress in the markets just yet. We could certainly get there – the 2015 China devaluation and the 2011 Euro sovereign debt crisis, which included a US debt-ceiling standoff and rising oil prices, are on the market’s memory map. But I’m not seeing it at this point.
-The well-known seasonal weakness from now until October – particularly this week, after option expirations – is likely keeping dip buyers on the fence. After today, we should see some decent oversold readings across the markets, which will be a component of an eventual bounce but not the entire package.
-As noted last week, sentiment has already shifted sharply to the bearish side, which is a positive all else being equal. A 10% correction would be unpleasant if it occurred, but it would be beneficial in the long run.
-NYSE volume is running 90% to the downside, so we’re getting a flush. Small-caps are being pummeled, but the Russell 2000 is still a couple percent above its August low.
-VIX surges above 25, in sync with the market, and is now trading at a slight premium to the October VIX futures price – a minor oversold/fear signal. We reached a high point in the late-April/early-May market drop near 28. Traders will be looking for a peak and decline on the VIX chart to indicate that the market fever has subsided.
Macao casino stocks
“The planned review of Macao’s gaming laws sparked a significant sell-off of casino-operator shares as Macao’s Gaming Supervision and Coordination Bureau proposals signal tighter regulatory control,” Morningstar’s Jennifer Song wrote in a note on Wednesday.
“We believe this could reduce visibility on casino operators’ long-term business outlook,” said Song, a senior equity analyst at the firm. “We raise our fair value uncertainty rating for Macao gaming companies to very high from high, and we lower our fair value estimates by 22 percent -45 percent as we believe some of the measures may limit the pandemic recovery.”
To be sure, Morningstar is not alone in lowering its valuations of Macao casino stocks; JPMorgan recently urged investors to exercise caution in the sector as well.
Shares of casino companies listed in Hong Kong were slammed on Wednesday as Macao launched a 45-day public gaming consultation. In a single session, Wynn Macau and Sands China both lost more than a fifth of their value.
The sell-off largely continued over the next few days, with Wynn Macau’s stock falling 35.45 percent for the week and Sands China falling more than 43 percent.
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Morningstar has lowered its price target for Wynn Macau from 17 Hong Kong dollars per share to 9.2 Hong Kong dollars ($1.18), while Sands China’s fair value has been reduced from 43 Hong Kong dollars per share to 26.50 Hong Kong dollars ($3.40).
Other Macao casino stocks, such as Galaxy Entertainment, SJM Holdings, and MGM China, have also seen their fair value estimates reduced by Morningstar.
Song outlined three areas of concern for sector investors.
To begin, the proposed changes to the gambling law are intended to increase scrutiny on casino operators and increase local ownership, implying “more direct government supervision on the operations of gaming companies.”
Second, she mentioned the potential threat to casino junkets and VIP business from China’s crackdown on cross-border currency outflows and money laundering.
She also mentioned that there is little transparency surrounding the renewal of gaming licenses.
“The policy direction is fairly vague, in our opinion,” she said, “but the reference to social responsibility sends chills down the spines of investors, given recent developments in China’s technology and education sectors, and represents a major new source of uncertainty.”
Nonetheless, the Morningstar analyst described Wednesday’s sharp sell-off in Hong Kong-listed casino stocks as “overdone,” saying Macao’s long-term vision of being a world-class center for tourism and entertainment remains unchanged.
“While increased scrutiny of casino operators reduces visibility on the long-term business outlook,” Song said, “we believe Macao’s perspective is closely tied to its gaming tax contribution.” “When combined with the government’s integration plan with Hengqin Island, we believe the long-term outlook for mass market and nongaming contribution remains promising.”