\nOliver Renick, Bloomberg <\/p>\n
\tWhen it comes to the prospects for casino companies operating in China, options traders are betting against a quick recovery.<\/p>\n
\tContracts to sell shares of Wynn Resorts Ltd. (WYNN) are near the most expensive levels relative to bullish ones in more than two years, data compiled by Bloomberg show. Bearish options on Las Vegas Sands Corp. and MGM Resorts International (MGM) are at least 70 percent more expensive than their one-year average, relative to calls. All three companies operate in Macau, China\u2019s gambling center.<\/p>\n
\tEach stock lost more than 25 percent in the past year as Chinese President Xi Jinping seeks to battle illicit money channeled through Macau\u2019s casinos. The crackdown is scaring away high rollers. Gambling revenue in the former Portuguese enclave fell in 2014 for the first time, ending a decade of growth that transformed it into a betting center bigger than the Las Vegas Strip.<\/p>\n
\t\u201cThings are not going to rebound in 2015, it\u2019s going to be a tough first half of the year,\u201d Timothy Chen, an analyst at Rhino Trading Partners LLC in New York, said by phone. \u201cMacau has been a conduit for money to leave the country. The landscape is changing and no one knows where this could go.\u201d<\/p>\n
\tGambling revenue in Macau declined 2.6 percent last year, and Barclays Plc projected in a Jan. 16 note that sales will drop 8 percent in 2015. Macau is the only place in China where casinos are legal and is viewed as a conduit for officials and businessmen to bypass currency controls and send money out of the mainland to safer havens.<\/p>\n
\tRevenue Loss<\/p>\n
\tWynn\u2019s Macau sales fell 5.6 percent in the third quarter, while they dropped for Sands both in the enclave and in Singapore. The companies get more than 65 percent of their revenue from Macau, data compiled by Bloomberg show.<\/p>\n
\tMGM, the largest owner of casinos on the Las Vegas Strip, reported an unexpected loss in the third quarter as revenue from the U.S. also fell. Analysts estimate earnings will slide 42 percent in the fourth quarter, according to the average projection compiled by Bloomberg. The company gets about 33 percent of its sales from Macau.<\/p>\n
\t\u201cThe companies that have diversified into China are going to be subject to more skepticism,\u201d Jared Woodard, the New York-based senior equity derivatives strategist at BGC Partners LP, said in a phone interview. \u201cThat story keeps popping up, and it seems consistent with the overall policy the president in China has tried to pursue.\u201d<\/p>\n
\tThe biggest earnings cuts for the Macau gaming sector are over, Kenneth Fong, an analyst at Credit Suisse Group AG in New York, wrote in a Jan. 8 note to clients. On Jan. 9, Morgan Stanley raised its rating on Wynn to overweight from the equivalent of a hold.<\/p>\n
\tNew Resorts<\/p>\n
\tCompanies will build new resorts in Macau and gross gaming revenue will climb 13 percent in 2016, according to Fong. Three casino operators are planning to open new resorts costing over $6 billion in the second half of 2015, according to an analysis by Bloomberg Intelligence.<\/p>\n
\tStill, investors are betting that more stock declines await. Seven of the 10 most-owned options on MGM Resorts were bearish, while Sands had eight and Wynn had six, data compiled by Bloomberg show.<\/p>\n
\tBearish one-month options on Wynn shares were 7.7 points more expensive than contracts betting on a 10 percent rally, compared with the one-year average of 4.3 points. On Jan. 2, the ratio known as skew touched 14, the highest in more than six years, according to data compiled by Bloomberg.<\/p>\n
\t\u201cPeople still buy into the long-term idea that if the casinos increase their penetration into the Chinese market, there\u2019s a lot of incremental money there,\u201d Brian Miller, a gaming and lodging analyst for Bloomberg Intelligence, said in a phone interview. \u201cThe risk is in the short term: there\u2019s a lot of supply opening up and the question is if demand will come back to match it.\u201d<\/p>\n
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