Macau's entertainment value

Lex - It isn't over until the fat lady sings, we are told. Yet the opposite may be true of Macau's decline. Casino operators there could use a bit of opera - indeed any sort of tourist attraction - to diversify their revenues. Heavy reliance on gaming (relative to more mature markets such as Las Vegas, where more than half of the top line comes from other sources) has caused a precipitous collapse in first- quarter earnings. Analysts, initially slow to react, are ever more bearish as the longer-term realities of the crackdown on Chinese officials' conspicuous consumption hits home.

Over the past 12 months, earnings expectations have dramatically fallen: across the sector, forecasts for this year and next have been cut by about half. Much of the erosion has occurred this year.

So the stocks still do not look cheap, despite large share price falls: some sector names trade as high as 18 times 2016 forecast earnings.

Worse, previously dependable dividend yields, based on strong cash generation, are increasingly in doubt. After the US close on Tuesday, Wynn Resorts, parent company of Wynn Macau, cut its dividend by two-thirds. It blamed the downturn in Macau and an "uncertain" outlook in the territory. The market was surprised: shares in both companies fell by about a tenth.

Alternative regional destinations may be winning as Macau loses: Barclays says that VIP turnover at Australia's Crown Resorts and Echo Entertainment together rose 73 per cent in the second half of last year.

Still, Fitch Ratings, among others, expects that Chinese VIP gaming will pick up in the second half of this year. In reality, it is extremely hard to forecast when the situation might improve. The slide in gross gaming revenues has, in fact, accelerated in the first quarter of this year. It is down two-fifths from a year ago.

Predicting the turnround will be hard, but if the share prices' close tracking of gaming turnover is any guide, investors can wait and watch the data.

Meanwhile, attempts to diversify are nascent. Non-gaming accounts for only 10 per cent of sales. Somebody call that fat lady.

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