The bullish run of leading casino operators came to an abrupt halt yesterday when UnionPay -- a state-backed payment card company in China -- announced that it would take adequate measures to restrict illegal money transfers from mainland China to Macau casinos. Any such concerted effort would plug a key source of cash for Macau gamblers.
Share prices of units of Hong Kong-listed Macau companies, which include Las Vegas Sands Corp. (LVS - Analyst Report), MGM Resorts International (MGM - Analyst Report), Wynn Resorts Ltd. (WYNN - Analyst Report), and Melco Crown Entertainment Ltd. (MPEL - Snapshot Report) plunged in response. Also, share prices of Hong Kong-listed SJM Holdings Limited and Galaxy Entertainment Group also declined.
What Led to the Onslaught?
Per Chinese law, visitors from mainland China are allowed to bring in $3,200 to Macau, the world's top gambling destination, and can also withdraw an additional $1,600 per day from ATM’s.
The players are legally allowed to use debit cards of state-backed payment card companies like UnionPay to buy goods at a pawnshop and then trade them for local currency at the same store. However, according to Macau officials, players have been found using mobile card-swiping devices in order to get hold of more local currency, which is an illegal practice. The payment card agency believes that this way billions of dollars are being siphoned off illegally from mainland China to Macau.
In order to check money laundering, illegal cash flow and other illegal bank card use, UnionPay International implemented certain risk prevention measures. Also, it keeps a track of large transactions undertaken by merchants and shares all such information with law enforcement bodies.
As a part of this anti-corruption drive, Macau is expected to tighten visa rules (beginning July) for visitors from China, according to investment bank Union Gaming Group. Also, UnionPay targets to track down the non-registered point-of-sale machines (POS), which are used to withdraw cash from UnionPay credit cards.
Impact of the Counter-measures
According to Deutsche Bank AG Hong Kong, funds generated through illegal card swipes amount to $6.0 billion or approximately 12.0% of Macau's annual mass-market chips purchased. It expects that a decline in these funds would dampen earnings before interest, taxes, depreciation and amortization of the six largest casino operators in Macau by 2.0% to 6.0%.
Of late, casino stocks have been in the limelight for some reason or the other. These stocks recently posted solid first quarter 2014 results primarily on solid Macau business. Moreover, a 10.6% increase in Macau gambling revenues for the month of April also had a positive impact on the share price of these companies.
However, prior to that, share prices stumbled on credit growth concerns in China and economic slowdown in the region. The crackdown comes at a critical moment and may dampen investor confidence on the stocks.
According to Nomura Securities, investors are concerned about the situation in China and any negative news from this market would hit casino stock prices. However, given the past trend, Union Gaming indicated that stricter use of cash cards would not curb gamblers' capacity to gamble.