Buying Opportunity: This Scandal Slashed Casino Prices, But Is A Long-Term Blessing in Disguise


A Suncity Group limo outside of Macau Galaxy resort in Macau awaits its VIP passengers. Photo: Reuters

Gaming stocks have taken hits over the last few weeks as investors have balked over PR issues involving "junkets" in Macau, the third party operators that provide service to VIP gamers. Shares of Melco Crown (NASDAQ: MPEL  ) , Las Vegas Sands (NYSE: LVS  ) , and Wynn Resorts (NASDAQ: WYNN  ) all dropped over these regulatory and public relations issues. However, these issues will turn out to be a blessing in disguise for these companies, and those investors who stay on. Why? Because mass market consumers are the future of profits in Macau, not VIP gamers, and the sooner casinos make the switch to focus on this segment, the better. This is just one more motivator to make that switch.

In April, Credit Suisse analysts reported that over $1 billion was being laundered through Macau casinos. "Junkets" as they are known in the industry, are third party operators that provide high-end service to VIP players and mainland Chinese officials coming to Macau, such as helicopters to bring the players between Hong Kong and Macau, among other VIP perks.

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For example, the Credit Suisse report called out one particular such operator, Neptune Group, which is one of the three largest junket operators in Macau. The wife of the group's owner was detained by authorities earlier this year with liquid assets over $25,000, something the authorities are investigating with possible links to laundered money through her husband's group. Neptune Group wasn't alone--the list of junket operators which had potential shady relations grew to 20 operators as police continued their investigations related to money laundering.

This sort of soap opera-worthy material has scared some investors out of gaming companies with operations in Macau.Now, with all of this harmful press and potentially daunting regulatory backfire for the Macau gaming industry, how is this possibly a blessing in disguise?

Say goodbye to VIP, and hello to mass market
Mckinsey analysts have pointed out that the new middle class in China, comprised of nearly 200 million consumers in 2012, is still growing at incredible rates. The analysts say that by 2022, this group's share of urban consumer demand should more than double what it was in 2012. Because the main consumer base of players in Macau are Mainland Chinese gamers, and the middle class in China is continually expanding its leisure traveling, gaming revenues are likely to continue climbing as more and more gamers from Mainland China travel to Macau.


Mainland Chinese make up nearly two thirds of all visitors to Macau. Source: Public Administration of Macau

Profiting with the shift from VIP high rollers to mass market consumers
Gaming companies in Macau have been largely focused VIP gamers in the past, such as the high rolling executives, new money, and government officials. However, new industry trends are emerging with more profit coming from this mass-market segment of gamblers, such as the rising middle class and younger generation gamers coming mainly from Mainland China. Now, companies like Melco Crown and Wynn Resorts are preparing to focus on this market segment to lead growth in the next few years. But which company is prepared to get the most from this flood of Chinese middle class gamers?

One company is gaining the most from the mass market switch
Wynn Resorts and Melco Crown both posted sizable revenue increases during the first quarter of 2014, led in large by mass market growth in excess of total growth. According to the company's 2013 annual report, Melco Crown received less than half of its revenue, just 49.8%, from VIP clients and those serviced by junkets. This is down from 53.4% of all casino revenues in 2012 and 61% in 2011. However, the company that has proven to be able to gain the most from the rising mass market is still Las Vegas Sands.


Photo: Las Vegas Sands 2013 10Q presentation

Photo: Las Vegas Sands 2013 10Q presentation

Las Vegas Sands has captured the most revenue growth from this segment. Over the last four years, Sands has taken more than twice as much revenue from mass market gamers in Macau as Melco Crown, and more than three times as much as Wynn Resorts, according to the company's 2013 year-end results.

Healthily increasing mass table revenues is one reason to be excited about Las Vegas Sands' continued growth aspects on this market. Another is the company's bet on occupancy with more and more hotel rooms becoming available in the next year, more than any other major operator. Most of these rooms will be built into Sands newest casino-resort, The Parisian, coming in 2015. While Melco Crown and Wynn will also have new resort in the next 1-3 years, Sands will have the biggest increase in hotel rooms.

Foolish opportunity: Stocks are down on what could be a good trend
Stocks of the major Macau-focused gaming companies such as Las Vegas Sands, Melco Crown, and Wynn Resorts are down over the last few weeks as short term investors have been scared out of the market over these potential PR and regulatory issues involving shady junket operators. However, for us long term investing types, these recent issues show that the industry will continue to make the switch from VIP to mass market consumers, to the benefit of our portfolios. These companies, especially Las Vegas Sands, which has done it best so far and is making the biggest bet on this segment, are setting themselves up for future gains, and Foolish investors should take a look at the current discount in these companies as a potential buying opportunity.

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