China’s anti-graft campaign has won many plaudits in the investment community since it started back in late 2012. The country, headed by reforming president Xi Jinping, has signaled to the markets that it is prepared to get its house in order and fight corruption, something that is seen as long overdue. But while the aggressive pursuit of offenders is no doubt polishing China’s image as somewhere to do business, investors are increasingly wary of the indirect effects of the government baring its teeth.
China’s gaming capital, Macau, is a clear example of the collateral damage that can result when Beijing moves in. Macau stocks underperformed the Hang Seng Index by 41% in 2014, according to a research report by Morgan Stanley, with the anti-corruption campaign being one of the main reasons cited.
“Most of the main Macau gaming stocks moved together in 2014 with the exception of SJM Holdings, which declined more than the others due to market-share losses last year,” says Praveen Choudhary, Asian gaming analyst at Morgan Stanley.
SJM Holdings fell from above HKD26 per share to around HKD12 last year.
Michael Ting, gaming sector analyst at CIMB, adds: “SJM Holdings was probably hit the most because people are probably also looking at the lack of earnings growth potential. SJM's overall gross gaming revenue market share is likely to decline as the company's competitors bring in new capacity before SJM does. Lisboa Palace, SJM's new Cotai property, is not expected to come online until 2017 or 2018. SJM is constrained because of its inability to add tables and hotel rooms. SJM don’t have that much excess room to give to the premium mass player, which is a type of high-end player.”
Stock drops
Galaxy Entertainment’s stock dropped from highs of close to HKD86 per share 12 months ago to around HKD40 per share now, according to figures from the Hong Kong Stock Exchange. Another big player, Wynn Macau, saw its share price drop from around HKD38 per share at the start of 2014 to roughly HKD20 per share at the end of the year.
Elsewhere, MGM China stock went from around HKD36 per share at the start of 2014 to below HKD 20 by year end. Sands China saw its stock price drop from close to HKD68 to near HKD38 in the same period. And Melco Crown’s stock price fell from HKD126 per share in January last year to around HKD63 per share at the start of 2015.
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The anti-corruption campaign has gone on longer than most people expected, which has come as a surprise. Things are starting to fall apart in Macau because people thought the campaign would cease and it has not
Richard Huang, CLSA |
Determining who the winners and losers are in the Macau gaming meltdown is tough. The financial statements of the gaming companies themselves highlight several names that held the stock last year.
Galaxy’s interim report for 2014 lists Waddell and Reed Financial as having 6.96% of issued share capital at June 30, 2014. Wynn’s interim report listed JPMorgan Chase as having a long position in the company of 5.12% of issued share capital at June 30, 2014. And SJM Holdings’ interim report shows that as of June 30, 2014, the Capital Group Companies had 6.78% of issued share capital and Capital Research and Management Company had 4.96%. The Capital Group Companies is the parent company of Capital Research and Management Company, according to the report.
Capital Group and JPMorgan Chase declined to comment. Waddell and Reed did not respond to a request for information.
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The monthly gross revenue figures in the second half of 2014 for so-called ‘games of fortune’ published by Macao’s Gaming Inspection and Coordination Bureau show continued monthly comparative declines with the previous year. The figure for December alone was down over 30% on the same month in 2013.
“The anti-corruption campaign has gone on longer than most people expected, which has come as a surprise,” says Richard Huang, equity analyst at broker CLSA. “Things are starting to fall apart in Macau because people thought the campaign would cease and it has not. Senior figures have been affected, with some being removed from their government posts and others being arrested.”
The effects of the anti-graft campaign on Macau stocks is plain to see, but market sources point to the impact as an indirect effect of attempts to clamp down on money laundering.
Some of Beijing’s targets can be more direct, threatening a company’s reputation and possibly its valuation. Back in September, pharmaceutical giant GlaxoSmithKline was forced to pay a fine of £297 million after being embroiled in a bribery scandal in China, demonstrating that even large international companies are not immune.
“An investor needs to be a bit sharp about who you are dealing with,” says Keith Pogson, global assurance leader and senior partner, financial services, Asia Pacific at Ernst & Young. “You would need to be careful if there is one large shareholder in a company who is politically connected and therefore vulnerable.”
Key risk
One senior banker in Hong Kong says: “People can look at sectors that are impacted by anti-corruption, but the key risk for the investor is the individual, who can get broadsided by it.”
The ability of investors to navigate this political minefield could well prove to be one of the keys to successful investing in China this year, with proximity to the market potentially proving to be a strong advantage.
“Traders in Hong Kong might see it differently to traders in London and New York,” concludes one Hong Kong trading source. “The long-term investors may have the patience to remain in those stocks, but short-term traders may pull out.”