Macau casino operator Melco Crown's planned exit from the Hong Kong stock market sparked fears about the health of casinos operating in the world's largest gambling hub amid sliding revenues, but experts dismissed worries of a domino effect.
Late on Friday, Melco Crown Entertainment said it will apply to delist from the Hong Kong Stock Exchange (HKEX), citing limited fundraising opportunities, compliance obligations as well as limited trading volume compared with its U.S. shares. Melco Crown is a joint venture between Hong Kong gaming tycoon Lawrence Ho and Australian billionaire James Packer and has been dual listed on the Nasdaq and HKEX since 2011.
The announcement sent its American Depositary Receipts (ADRs) tumbling as much 5 percent on Friday and Hong-Kong listed shares down 6 percent on Monday.
The announcement comes amid a severe downturn for Macau's gambling environment as mainland China cracks down on high rollers, corruption and money laundering. The city's December gross gaming revenues (GGR) tanked 30.4 percent on year, official data showed last week, adding up to a 2.6 percent decline in 2014 annual revenue - the industry's first-ever decline.
Fitch forecasts negative 4 percent GGR for 2015, with the first half of the year expected to bear the brunt of the pain before stabilizing in the second half. Barclays is more optimistic, expecting a return to positive growth in the second half.
"I don't think there's anything sinister going on in the delisting of the Hong Kong entity," said Nicholas Studholme-Wilson, vice president and senior research analyst at Sun Hung Kai Financial.
Melco Crown's decision to delist is based on technical reasons unique to the company and isn't reflective of other casinos, he added: "If you've actually looked at the trading volume of this stock, no institution could ever deal in this counter. It's ridiculously illiquid and at this day, it's so easy to deal in U.S. stocks if you live in Hong Kong so you might as well just have one listing."
The only related-activity that might occur in the gaming sector may be from within the Melco Group itself as it tidies the company's holding structure, he added.
Alex Bumazhny, director of gaming, lodging and leisure at Fitch Ratings, also dismissed speculation that other casinos could follow suit. "I would take this news [of the delisting] as face value," he said. "We do have a positive view on Melco Crown generally speaking, since they have good exposure to the mass market, which is where the sweet spot is."
Chinese president Xi Jinping is pushing for Macau to diversify beyond its reputation as a casino hub and promote non-gaming, family-oriented tourism instead. This transition will undoubtedly be painful, noted David Mann, regional head of research for Asia at Standard Chartered Bank, especially since the former Portuguese colony will be competing with neighboring markets like Hong Kong.
"It's like a micro-version of what we're seeing in China, we can talk about the shift towards services and consumer-led growth but it's a lot easier said than done," he said.
The past few months exacerbated worries of the health of Macau casinos following a smoking ban in October and changes in the allocation of playing tables for new entrants to the scene this year: Galaxy Entertainment's Galaxy Macau Phase 2 and Melco Crown Entertainment's Studio City.
"We do see risks in the new projects, [especially] since the government wants to concentrate more on non-gaming projects. The allocation of gaming tables will be sparse, and companies will have to reallocate them from existing projects," Bumazhny of Fitch Ratings said.
As for investment strategy amid Macau's turmoil, CIMB recommends a bottom-up approach: "Favor companies with new capacity additions as they are likely to see the strongest market share gains and earnings growth during 2015."