The hits keep coming for Macau gaming. It seems like each new week brings another round of sell side estimate and ratings cuts. A year ago Chinese regulators began to crack down on high roller “junkets” as part of an anti-corruption push, and this past fall the government instituted a partial smoking ban that very soon could turn into a total ban. Whether it is the chicken or the egg, the rate and the consistency of declining gaming revenues is staggering (last month gaming revenues were down almost 49% year over year); from Las Vegas Review Journal:
The market has had eight consecutive monthly gaming revenue declines. A 2.6 percent dip in 2014 was the first annual gaming revenue drop since American-owned casinos began operating in Macau in 2003
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The past four months of 2014 saw double-digit-percentage decreases, including a 23.2 percent dip in October and a record 30.4 percent decline in December.
Today Bloomberg highlighted (read here) the loss in market cap of “the six main casino operators — Sands China Ltd., Galaxy Entertainment Group Ltd., Wynn Macau Ltd., SJM Holdings Ltd., MGM China Holdings Ltd. and Melco Crown Entertainment” equaling $111 billion, roundtripping the move since Chinese President Xi Jinping took over as the head of the communist party:
WYNN, a stock that we have spent a good bit of time on over the last couple years given what appeared to be an odd mania around prospects despite the backdrop of a weakening economy in China amongst the company’s growing reliance on Macau (about 70% of sales) for much of its expected future growth.
The chart of WYNN doesn’t look too different over the same time period as expected, but I think it is safe to say that the more than 100% gains from the the breakout level in mid 2013 to the stock round-tripping the whole move could be close to be a tad overdone, now down about 50% from last year’s all time highs:
From where I sit the stock could be very near a short term oversold condition with no shortage of recent analyst downgrades, rising short interest near 1 year highs at 8% of the float, and the routine inability for the stock to hold gains. For example this morning, the stock was up nearly 2.5% after last night closing at a new 52 week low, only to reverse and make fresh lows:
Despite the stock’s one way action, options prices seem fairly reasonably priced with 30 day at the money implied vol (the price of options, blue below) at about 35, while 30 day at the money realized vol (how much the stock is moving, white below) is at 39:
At some point the sellers will dry up, at least temporarily and the stock may be close to an inflection point where a long delta or stock alternative long makes sense. Ideally I’d like to see the stock at about $120 with the idea to play for an oversold bounce back above $140.
As a stock alternative risk reversal are starting to make sense as the upside skew means some cheap out of the money calls are available for a quick reversal. The April 110/140 risky is even here and with the stock down towards 120 those strikes could be lowered to play for that theoretical bounce.
Taking a shot for the upside only without downside risk is probably best done in the form of an out of the money call spread. Right now the April 130/140 call spread is about 2.70 and with the stock slightly lower could possibly be had for closer to 2.00.
We’ll keep an eye on it. We’d love to see one last puke where the risk reward lined up in a way that playing for that oversold bounce made sense.