By Sean Geary
Macau gaming stock Melco Crown Entertainment (NASDAQ:MPEL) dropped more than 7% in trading on Tuesday after reports that the Chinese government would step up its efforts to weed out money laundering in Macau.
Although Macau gaming stocks recovered Wednesday in Hong Kong (NYSEARCA:EWH), investors in America remain concerned with certain elements of equities in these sectors.
Language from China’s next head of state, Xi Jinping, frightened investors Tuesday, as the leader-in-waiting promised large-scale economic reforms, including a crackdown on corruption.
However, one facet of this initiative involves money laundering in Macau. Chinese citizens face a number of restrictions on moving money out of the country, and one of the ways that a number of the members of China’s elite circumvented these obstacles was through the use of junket operators.
Junket operators are more easily able to move money between Mainland China and Macau. Not only do they provide liquidity to high rollers who otherwise would not be able to bring as much money into Macau, junkets also allow wealthy Chinese to move money out of the country without penalty.
Furthermore, junket operators cause a headache for American regulators, as some have ties to organized crime.
While it’s unfair to label all junket operators as engaging in illicit activities, the dealings of some will likely have discernible policy effect on the group as a whole. Further restrictions on junket operators are likely to adversely affect casino stocks with Macau gaming exposure like Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN), as these companies rely heavily on the high-end segment for gambling revenues. A lack of liquidity for Mainland high rollers would certainly be problematic.
The increase of regulations pertaining to junket operators is surely not bullish, but it may be a bit of a stretch to go short these names based solely on this announcement. Investors in the segment should continue to pay careful attention to any concrete policy plans from Beijing, but also keep an eye on Chinese macroeconomic data. A return to growth over the next few months in time for the important Chinese New Year holiday could be very bullish for Macau gaming stocks.
However, investors should steer clear of beaten-down, high-yielding Asia Entertainment and Resources (AERL), a VIP gaming promoter, as their business model could be affected by new policy.