Shares of casino operators extended recent sharp selloffs on Thursday, as J.P. Morgan analyst Joseph Greff added the insult of downgrades to the injury of tighter Macau regulations.
The gaming companies with Macau-centric operations have been hit hard this week since the government of Macau SAR (Special Administrative Region), China, recently recommended allowing only gaming-license holders to distribute profits to shareholders, after receiving government approval, and for direct government supervision of gaming companies.
On Thursday, J.P. Morgan’s Greff downgraded Las Vegas Sands Corp. LVS, -0.96%, Wynn Resorts Ltd. WYNN, -1.85% and Melco Resorts & Entertainment Ltd. MLCO, -0.73%, all to neutral from overweight. He cut his stock price target for Las Vegas Sands by 36% to $38, for Wynn by 27% to $89 and for Melco by 52% to $10.
“In short, we don’t like the uncertainty and opacity surrounding Macau and China policy, particularly after this announcement, and particularly at a time when the Macau government is encouraging (preferring/sort of requiring) further potential meaningful capex in Macau/Hengqin island as a consideration of a license renewal,” Greff wrote in a research note to clients.
Las Vegas Sands’ stock slumped 0.9% in afternoon trading, to sit just above the nine-year closing low of $36.77 hit on Aug. 19, while Wynn shares shed 1.9% toward a 10-month low. Melco’s stock slid 1.0%, putting it on track for the lowest close since August 2012.
Greff said Macau’s decision to tighten regulatory oversight of casinos could weigh on spending by gaming patrons, as well as cut the casinos’ ability to repatriate Macau free cash flow back to the U.S., at least relative to the past.
“While it’s unclear how strictly the government would control their capital, we believe the hefty dividends of pre-COVID-19 days (especially for [Las Vegas Sands/Wynn]) would likely get scrutinized, if not restricted,” Greff wrote.
Las Vegas Sands stock has dropped 9.9% so far this week, while shares of Wynn have fallen 16.5% and Melco’s have tumbled 22.1%. In comparison, the SPDR Consumer Discretionary Select Sector exchange-traded fund XLY, +0.55% has gained 1.0% and the S&P 500 index SPX, -0.05% has tacked on 0.3% this week.
Rather than those three companies, Greff said he preferred regional/Las Vegas-focused casinos, such as Boyd Gaming Corp. BYD, +3.29% and Red Rock Resorts Inc. RRR, +2.25%, both of which he still rates at overweight.
Boyd’s stock has gained 3.9% and Red Rock’s has rallied 9.2% this week. Shares of MGM Resorts International MGM, +2.97%, which has a relatively small presence in Macau, have slipped 1.7% this week.