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China May Cut ATM Withdrawal: Are Casino Stocks at Risk?

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Stocks of leading Macau-focused casino operators took a beating on Dec 8, after South China Morning Post reported that the Chinese government is planning to cut the amount that people can withdraw from China UnionPay ATMs in the gaming region.

Thus, reportedly, effective from Dec 10, daily withdrawal limit will be cut in half from 10,000 patacas to 5,000 patacas (or about $1.25 billion to $626 million), thereby widening a crackdown on how gamblers move cash into the enclave.

Consequently, share price of casino companies, Wynn Resorts Ltd. WYNN, MGM Resorts International MGM, Melco Crown Entertainment Ltd. MPEL and Las Vegas Sands Corp. (LVS - Free Report) dived in yesterday’s trading session, as Macau is a key operating region for these companies.

Melco Crown, Las Vegas Sands and Wynn Resorts witnessed a decline of 13.7%, 12.8% and 11.1%, respectively, while MGM Resorts lost 4.3% value.

What’s the Fuss About?

A tough operating environment in Macau weighed on casino stocks in 2015 and for the most part of 2016. Only recently, the mecca of casino gaming – Macau – slowly started returning to life as gaming revenue in the region grew on an annual basis in November with four consecutive months of gains, following the extended slump of over two years.

Particularly, new resorts including Wynn Resorts’ Wynn Palace (opened on Aug 22) and Las Vegas Sands’ subsidiary, Sands China Ltd.’s The Parisian (opened on Sep 13), attracted tourists and leisure gamblers, giving a boost to revenues.

Investors are thus apprehensive that the latest intervention from government officials could prove to be a roadblock for the Macau gaming region. They also fear that the region’s revenues will once again come under pressure.

Gaming Industry Price Index

 

Gaming Industry Price Index

Rationale Behind

China UnionPay is the country's state-sponsored domestic bank card organization and is used by nearly half of mainland China gamblers to withdraw money in Macau. Notably, the move to cut the daily withdrawal limit comes on the back of the finding that as much as 10 billion patacas in China UnionPay ATM withdrawals were made in one month alone.

The Monetary Authority of Macau's new limit is thus part of an effort to halt illegal outflows from the country. In fact, China tightened its capital controls in recent months as the yuan experiences depreciation pressure. Notably, the country’s foreign exchange reserves have also been declining of late.

Our Take

The huge drop in the stock prices of casino companies following the ATM withdrawal news might seem as an overreaction. However, if this leads to additional crackdown on capital heading to Macau, there could be huge implications on the Macau gaming market which may dampen investor sentiments further.

Notably, China's capital controls come at a time when the industry is vulnerable. Though, these policies could be helpful in the long run, these could restrict gaming revenues in the near term. This may reverse the trend for the Macau gambling industry which has finally started to stabilize after a protracted slowdown.

MGM Resorts, Melco Crown and Las Vegas Sands sport a Zacks Rank #1 (Strong Buy) while Wynn Resorts currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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