US, China Trade Detente Sparks Rally in Shares of Macau Gaming Operators

Posted on: July 1, 2019, 11:41h. 

Last updated on: July 1, 2019, 11:41h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Buoyed by a strong June gross gaming revenue (GGR) report out of Macau and news that trade tensions between the US and China are thawing, shares of US casino operators with significant China exposure rallied Monday.

In midday trading, shares of Las Vegas Sands Corp. (NYSE:LVS) were up 4.54 percent, putting the stock on pace for its highest close since mid-May. Wynn Resorts, Ltd. (NASDAQ:WYNN), which relied on Macau for 75 percent of its 2018 operating revenue, was higher by 6.18 percent.

At the G-20 Summit in Osaka over the weekend, President Trump and his Chinese counterpart, President Xi Jinping, agreed to restart trade talks between the world’s two largest economies.

Following an 80-minute meeting with Xi, Trump proclaimed that the talks went “far better than expected” and that China agreed to up its purchases of American agriculture products, though the US president did not elaborate further.

Soon after the meeting, Trump took to Twitter to tout the success of the talks.

The quality of the transaction is far more important to me than speed,” Trump tweeted. “I am in no hurry, but things look very good!”

In another tweet, Trump said he will not increase existing tariffs on Chinese imports the US is currently levying as trade negotiations between the two sides proceed.

Widespread Impact

While US/China trade discussions have a long way to go, an important step was taken after Trump said he will allow major US technology companies to again sell products to Chinese telecommunications giant Huawei as long as those goods do not have national security implications.

Earlier this year, amid national security concerns, the Commerce Department “blacklisted” Huawei, a major buyer of chips produced by American semiconductor manufacturers. At the height of the trade tensions in May, the PHLX Semiconductor Sector Index slumped almost 16 percent.

That is relevant because technology is the largest sector weight in the S&P 500 and with that group stumbling in May, other market segments, including gaming stocks, slumped as well.

Of the three US-based gaming companies with significant Macau exposure, MGM Resorts International (NYSE:MGM) was the best performer in the fifth month of the year, losing four percent. LVS, the owner of five Macau properties, including Sands Cotai Central and the Parisian, plunged almost 20 percent in May while rival Wynn slid about 25 percent as US/China trade hostilities flared.

The upbeat Macau June GGR and signs trade pressures are ebbing prompted some gaming industry analysts to make somewhat encouraging comments.

“We expect all the operators on the upcoming 2Q19 earnings calls to reiterate what is already known: that the high end of the market remains challenging given a number of headwinds and the mass market is stable,” said Barclays analyst Felicia Hendrix in a note obtained by Casino.org. “In this environment, we view LVS as the most investible Macau related stock and WYNN and MGM as longer term beneficiaries of investments they are currently making for future growth (renovations at the Peninsula for WYNN and the ramp of their high end business for MGM at Cotai).”

The Long View

Last year, the US imported nearly $540 billion worth of Chinese goods, including clothing, electronics and furniture, but China took in just $120.3 billion of US-produced items, creating a trade deficit of about $420 billion, or about $50 billion more than the market value of Johnson & Johnson.

Much still needs to be worked out between the two sides, including assertions by the US that China swipes trade secrets and bullies big technology companies. Near-term trade talk fragility has some analysts focusing on gaming stocks with sound long-term fundamentals.

The analyst views Macau gaming and visitation growth trends as “solid” for the next 10 years.