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Wynn, Sands, Melco Shares Drop as JPMorgan Cuts to Neutral

JPMorgan cut casino ratings to neutral from overweight because China decided to more tightly regulate on Macau.
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Shares of Wynn Resorts  (WYNN) - Get Wynn Resorts, Limited (WYNN) Report, Las Vegas Sands  (LVS) - Get Las Vegas Sands Corp. (LVS) Report and Melco Resorts & Entertainment  (MLCO) - Get Melco Resorts and Entertainment Ltd Shs Sponsored American Deposit Receipt Repr 3 Shs Report fell Thursday after JPMorgan downgraded the casino operators to neutral.

JPMorgan analyst Joseph Greff lowered his ratings from overweight because of Wednesday’s news that China’s government will more tightly regulate the Macau casino business.

He cut his share-price targets to $89 for Wynn, $38 for Las Vegas Sands and $10 for Melco.

Wynn recently traded at $83.19, down 4%; Las Vegas Sands at $37.10, down 3%; and Melco at $10.13, down 2%.

“In short, we don’t like the uncertainty and opacity surrounding Macau and China policy, particularly after this announcement, and particularly at a time when the Macau government is encouraging (preferring/sort of requiring) further potential meaningful capex in Macau/Hengqin island as a consideration of a license renewal,” Graff wrote in a commentary cited by CNBC.

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New regulations could hurt the casinos, even if they keep their licenses, Greff said.

“While it’s unclear how strictly the government would control their capital, we believe the hefty dividends of pre-Covid-19 days (especially those from LVS/WYNN) would likely get scrutinized if not restricted,” he wrote.

Morningstar analyst Dan Wasiolek also is concerned. 

“We plan to adjust our cost of equity higher for narrow-moat Wynn (Macao was 76% of 2019 Ebitda) and Las Vegas Sands (59%), to account for an increased risk premium tied to increasing Chinese government oversight,” he wrote.

“As a result, we expect to lower our Wynn and Las Vegas Sands $114 and $59 fair value estimates by a high-single-digit percentage.”