Wednesday, May 6, 2015

Adelson. &. Wynn balk at




Macau Cold Streak Spurs Construction Queries

As revenue slides, analysts ask about projects launched in palmier days; April drop: 39%

Idle chips in Macau, where April gambling revenue fell 39% from a year earlier.ENLARGE
Idle chips in Macau, where April gambling revenue fell 39% from a year earlier. PHOTO: REUTERS
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The stunning decline in gambling revenue in Macau is raising concerns about the casino industry’s $20 billion-plus expansion plans in the Chinese territory.
Macau’s gambling revenue fell 39% in April from a year earlier to 19.17 billion patacas ($2.41 billion), according to official data released Monday. Revenue has fallen for 11 straight months, including a record 49% drop in February, and has now declined 37% this year.
The losing streak has been reflected in dismal earnings from Macau’s six casino operators, sending their shares listed in Hong Kong down by an average of 45% and prompting analysts to question their plans for lavish new casinos. These projects were launched when annual gambling revenue for Macau, a $44 billion market that still rakes in seven times as much as the Las Vegas Strip, was growing by the size of the Strip’s revenue each year.
Among the projects under way is Wynn Resorts Ltd.’s $4.1 billion Wynn Palace, scheduled to open in March 2016. On Wynn’s earnings conference call last week an analyst asked the company’s chairman and chief executive, Steve Wynn, why he doesn’t slow construction of the project or scale it down.
Mr. Wynn interrupted him: “Hold on. You can’t slow it down. It’s being finished and there’s bank obligations. You can’t slow it down in Macau. The building is sitting there. The skin is on. They’re getting ready to fill the lake. Staff is hired.”
Macau has struggled since Chinese President Xi Jinping’s crackdown on corruption began to hit hard last year.ENLARGE
Macau has struggled since Chinese President Xi Jinping’s crackdown on corruption began to hit hard last year. PHOTO: BILLY H.C. KWOK/BLOOMBERG NEWS
At the same time, Mr. Wynn said he isn’t getting straight answers from the government when he privately seeks clarity about policies. “The government is tentative at best in responding to us. I think that’s a reflection of a little bit of their own uncertainty under the circumstances,” he said. “There’s a new boss in China, Xi Jinping, and his agenda is something that everybody is adjusting to.”
The first project to be completed—an expansion of Galaxy Entertainment Group Ltd.’s flagship resort—is expected to open this month. Las Vegas SandsCorp., MGM Resorts International and others are also planning multibillion-dollar resort openings in the coming years.
Macau has been struggling since Chinese President Xi Jinping’s crackdown on corruption began to hit hard last year. The campaign has brought down many top mainland officials and scared off the high-rollers who used to spend billions on baccarat in Macau, the only place in China where casino gambling is legal. In December, as Macau observed the 15th anniversary of its return to China from Portugal, Mr. Xi paid a personal visit to the casino hub and stressed the need for the territory to diversify its economy, stating that an overreliance on gambling had caused “deep-seated problems.”
On Las Vegas Sands’ earnings call last month, Chairman and Chief ExecutiveSheldon Adelson said of the outlook in Macau, “We’re sailing in uncharted waters, and I hope we don’t sink like that boat off in the Mediterranean.” First-quarter net profit was down 34% from a year earlier, to $511.9 million, as profit from Macau plunged 54%.
J.P. Morgan analyst Joe Greff asked on the same call whether the company would leverage its balance sheet to sustain dividend payouts in the U.S., and how much leverage it would be willing to take on. “That all depends who you’re asking,” Mr. Adelson said.
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“I’m asking you, Sheldon,” said Mr. Greff, but Mr. Adelson declined to commit to a number.
China’s anticorruption campaign cut into MGM’s latest results as well. The casino operator said Monday that its first-quarter revenue declined 11% to $2.33 billion, with revenue from its MGM China Holdings Ltd. unit down by one-third to $630.1 million. VIP table-games revenue at MGM China slumped 45%.
Overall, MGM posted a profit of $169.9 million, or 33 cents a share, up from $102.7 million, or 20 cents a share, a year earlier. The latest period included a tax benefit of $56.3 million.
The crash in Macau’s VIP gambling business, driven by the corruption crackdown, has been joined by another worrying trend, analysts say: a significant drop in revenue from lower-spending customers. At Las Vegas Sands, it was off 21% in the first quarter from a year earlier.
Some analysts are raising concerns about the big spending on new projects at a time of falling revenue. Standard & Poor’s Ratings Services placed Wynn’s ratings on negative watch last month before the company even reported earnings, citing a worse-than-expected gambling environment in Macau. S&P currently rates Wynn’s corporate debt at double-B-plus, which is considered below investment grade.

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Despite the concerns, many casino companies operating in Macau have strong balance sheets thanks to the booming business of previous years, and they were able to readily get financing for the new construction premised on the assumption that the gambling enclave will remain a strong long-term investment.
But times are tough now. Wynn reported a net loss of $44.6 million for the first quarter, compared with net income of $226.9 million a year earlier, and slashed its quarterly dividend to 50 cents from $1.50. Its shares fell 17% the next day.
In a report entitled “Is this 2009?,” CreditSights analysts Chris Snow andNicolas Rios said the dividend cut “telegraphed the magnitude of management’s concern about the state of their markets, and the melancholy in Steve Wynn’s voice harkened back to the dark days surrounding the Encore open in Las Vegas.” Wynn Resorts opened the Encore casino-resort in December 2008, as the financial crisis roiled U.S. markets and sent Las Vegas into a tailspin.
—Tess Stynes contributed to this article.
Write to Kate O’Keeffe at kathryn.okeeffe@wsj.com
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