Li Gang, Director of China's liaison office in Macau announced last Thursday that the Central government in Beijing would continue to promote measures to support Macau's economy. The gaming counters rallied on hopes that the Chinese government could announce supportive measures to shore up declining Gross Gaming Revenue (GGR) numbers that has negatively impacted the Macau economy. The continued decline in January's GGR numbers as announced by the city's Gaming Inspection and Coordination Bureau (DICJ) today on the 1st of February 2016, raised hopes that the Chinese government could announce such policies sooner than expected.
January GGR numbers better than expected but only slightly
According to the DICJ today, GGR fell by 21.4% from a year ago to MOP18.67 billion ($2.3 billion). The GGR numbers came in higher than the consensus 23% decline expected by analyst but only slightly. The result is that Wynn Macau closed down 1.2% today despite the GGR beat.
Potential stimulus measures to be announced
The announcement last Thursday that the Central government in Beijing will continue to support the Macau economy saw gaming counters rally across the board. Typical with tradition, the announcement lack any meaningful details and is no different in my view to those previously announced.
In October last year, Bloomberg ran an article - Macau Casinos Jump On Report China May Give Economic Support - the article cited Li Gang as saying that Beijing could announce more policies to support the city amidst these economic adjustment.
I want to draw your attention to the words "economic adjustment". Whilst the announcement could see supportive measures being announced to support the casino operators in Macau. I see that likelihood as being very slim especially since the government is looking to diversify the sources of revenue that the Macau government currently gets. The effects are more long-term in nature as it will reduce the dependency of Macau to gambling and strengthen the resiliency of the overall Macau economy. To argue otherwise, would in my view, unwind the restriction measures the government has put in place over the years, which does not make any sense.
The raised expectations for an accommodative policy also adds risk for any investor looking to add positions now as any shortfall in expectations will likely see a sell down in the gaming counters. I therefore view the recent rally in the share price of Wynn Resorts (NASDAQ:WYNN) as short-lived and have added short positions to WYNN last Friday.
At 13x EV/EBITDA (trailing) based on last Friday's close vs. the sector's 9.8x, I continue to think WYNN is unjustifiably trading at a premium. The recent share price rally, which came on the back of news of Steve Wynn accumulating additional shares and the potential for accommodative policies to be announced are also likely to be short-lived in my view.
You can see it for yourself on the above chart. The announcement in October last year saw WYNN rallying during the month but the share price rally fizzled out by November as the market began to weigh the possible impact of the stimulus measures to be announced. I think the impact of the recent announcement, which is really no different from that announced in October last year will see a similar trajectory. On the back of this, I have added short positions in WYNN last Friday.
Disclosure: I am/we are short WYNN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.