Slowing Growth in Macau and a Crackdown on Corruption Hit Gaming Stocks

Growth in the world's biggest gaming market has certainly slowed during 2012. November's 7.9% growth rate in Macau to $3.12 billion is the fifth month this year that growth has been in the single digits, something that didn't happen in 2010 or 2011.

Gaming stocks haven't responded well to the growth or a report that China's new leaders are going to crack down on corruption in the gaming enclave. I brought up this risk in mid-November, and it's the reason I sold a position in Melco Crown (NASDAQ: MPEL  ) in the past few weeks.

Macau's growth slows
The reason Macau's growth matters so much is that Las Vegas Sands (NYSE: LVS  ) , Melco Crown, Wynn Resorts (NASDAQ: WYNN  ) , and MGM Resorts (NYSE: MGM  ) rely on growth to add to their bottom lines in Macau. Supply has expanded in recent years, and growth is needed to keep profitability up.

But over the past six months, the level of growth has trailed off from the double digits. Here's a look at the amount of gaming revenue in Macau (in Macau patacas) and the growth from last year.

 Month

Monthly Gross Revenue

Y/Y Growth

June 2012

23,334

12.2%

July 2012

24,579

1.5%

August 2012

26,136

5.5%

September 2012

23,866

12.3%

October 2012

27,700

3.2%

November 2012

24,882

7.9%

Source: Macau Gaming Inspection and Coordination  Bureau.

Overall, gaming has grown just 13% from the first 11 months of last year.

Crackdown may hit gaming stocks
Even more troubling is the crackdown of China's new government on corruption. Macau is seen as a common way to get money out of Macau by transferring money through junkets and then out of China. Since the Chinese are allowed to take only $50,000 out of China each year, Macau has become an easy way to escape the regulation. A crackdown could hurt VIP play.

This could affect companies such as Melco Crown and Wynn, which generate most (or all) of their revenue and EBITDA in Macau, and certainly more than Las Vegas Sands or MGM. It could also have a big impact on junkets such as Asia Entertainment & Resources (NASDAQ: IKGH  ) . Investors should keep an eye on revenue growth and watch for potential declines in early 2013 as a result of a crackdown.

Time to be cautious in Macau
Investors are certainly being more cautious today, and I've been selling to limit exposure to Macau. But if stocks fall far enough, there's still reason to be bullish long-term.


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