When you speak to many people who have expertise on the Chinese economy, one of the major issues that comes up is the integrity of the data. Many analysts wonder if the GDP or inflation figures are accurate. They also question the non-performing loans at the banks, and the integrity of the data coming out of state controlled enterprises (which account for much of the economy).
With the Euro-zone entering a recession, and the U.S. barely keeping its head above water, one of the main questions on the minds of investors is the fate of the Chinese economy. Is China going to have a hard or soft landing? Maybe the conclusion is even worse. Maybe the Chinese economy is a house of cards that will collapse much like the U.S. housing bubble. Since the integrity of much of the data is in question, an interesting way to look inside China can be done through analyzing how U.S. companies are performing there.
In this article, we take a look at three major companies doing a lot of business in China, and the numbers look scary. The following companies cater to the Chinese consumer, and paint a negative picture of demand.
Wynn Resorts (WYNN)
Wynn Resorts, named for its iconic founder Steve Wynn, is based in Las Vegas. For decades Las Vegas was the gaming capital of the world, but a few years ago it was passed, and is now dwarfed, by Macau in China. In fact, in the last quarter ended June 30th, Wynn generated almost 75% of revenue from China. Macau has been growing at breakneck speed over the last several years, and has been the core of the gaming growth story. In a shocking twist, Wynn's China revenues were down 7% year over year for the quarter ended June. These numbers indicate that there is something negative going on in China. The figures are even more shocking when compared to the results just 4 months ago, which showed a 10% increase in year over year Macau revenues. Indeed the Macau growth story may be over, and WYNN may be lining up to be an interesting short. I will try to explore this angle in a later article.
Las Vegas Sands (LVS)
LVS, much like WYNN, now gets most of its revenue from China. Sands' China operations reported a 22% increase in revenue year over year for the June quarter. However, this 22% revenue growth has been achieved due to the opening of the latest multi-billion dollar Macau mega resort called Sands Cotai Central. If you take out the revenues from this new resort, which was opened on April 11th, revenues for the June quarter were flat year over year. In other words, growth is gone. This is even more shocking when compared to the March quarter, when Sands China reported year over year top line growth of 25%. Something has clearly changed in Macau in a very short period of time (1 quarter).
AAPL's June quarterly earnings report was the most shocking with regard to China. AAPL has recently entered the Chinese market, and their market share there is much less than in other countries. Since they have only recently entered, one would assume there is a significant amount of pent up demand for Apple products. Apple has been a company whose products are often constrained by supply, and when entering a huge market like China, one may expect demand to be insatiable. What happened in Apple's last quarter was that China sales dropped from $7.9bn to $5.7bn from quarter to quarter. This shocking 28% drop in the top line is being attributed to customers waiting for iPhone 5, and the channel being bloated with too much inventory. The revenue decline in China is compared with an approximate 7% drop for all of Apple's other markets combined. A 28% drop in China revenue is highly suspect and may indicate some significant weakness from the Chinese consumer.
Each of these three earnings reports shows a change in Chinese growth trends. The consumer seems to be slowing in China, and investors should be looking for opportunities to profit from this trend.
Disclosure: I am short WYNN.