Are Casinos About to Be Hit Hard by a Downturn?

Source: Melco Crown. 

After news broke on July 1 that Macau's gambling revenue for the month of June had taken a beating, shares of casino operators with a presence in the market popped up. The two biggest movers were Melco Crown Entertainment (NASDAQ: MPEL  ) and Las Vegas Sands (NYSE: LVS  ) , which both rose more than 2%, while Wynn Resorts (NASDAQ: WYNN  ) saw its shares inch up 1%. In light of this development, it seems odd that some of the companies with the most exposure to Macau's (apparently) shrinking market are seeing investors pile in. Is it possible that there's something more at play here?

Macau shrank... so what?
For the month of June, gross revenue stemming from games of fortune declined 3.7% to $3.41 billion from the $3.54 billion reported the same quarter a year earlier. In spite of this decline, however, the bigger picture still seems to be rather healthy. Year to date, Macau's casino revenue has jumped 12.6% to $24.19 billion this year from $21.48 billion seen during the same six-month period in 2013.

Source: Gaming Inspection and Coordination Bureau of Macau (Industry).

To put this in perspective, Las Vegas, the U.S.' gambling hub, reported gaming revenue of just $7.2 billion in the first five months (June data has yet to be released) of 2014. This represents roughly flat revenue compared to the same time last year.

According to analysts, the drop experienced by the casino industry last month was driven by gamblers electing to wager on the World Cup being held in Brazil. With this major event in mind, analysts anticipated Macau's gaming revenue to decline anywhere from 2% to 6%, so actual results came in a bit on the lower end of the distribution.

Source: Las Vegas Sands.

Although it may seem unlikely for a soccer tournament in Brazil to draw such a large amount of revenue from Macau, evidence suggests this type of scenario may not be too far out of the question. On June 19, police arrested 22 individuals stationed between mainland China, Malaysia, and Hong Kong for running an illegal $645 million betting syndicate in Macau whose sole purpose was to place bets on the outcome of the World Cup. This amount alone more than makes up for the drop in gaming revenue seen in June compared to the same month last year.

Who's most likely to benefit moving forward?
Based on the data provided, it's possible Macau's gambling industry could have seen an increase this year in comparison to last year had it not been for the World Cup. In the event that the adjusted upward trend in the market continues, companies like Melco Crown, Las Vegas Sands, and Wynn Resorts could provide the best opportunities for the Foolish investor.

Currently, Wynn Resorts is one of the largest players in Macau's booming market. In 2013, the company generated about $4 billion in sales from the region, up nearly 7% from $3.8 billion in 2011. While this is good for the company's shareholders, there is one problem with the casino operator.

(2013 Macau Exposure) Revenue Percent of Total Revenue
Melco Crown $5.1 billion 100%
Wynn Resorts $4.0 billion 71.9%
Las Vegas Sands $9.0 billion 65.3%

Source: Melco Crown, Wynn Resorts, Las Vegas Sands.

Unlike rival Las Vegas Sands, Wynn Resorts has seen its percentage of sales coming from the area stay virtually flat at 71.9%. This suggests the company's exposure is very high, but management is unable to scale up into the region, or is unwilling to do so for the sake of the benefits that come with diversification.

Las Vegas Sands, meanwhile, generates a more modest 65.3% of its sales from Macau, but in dollar terms of nearly $9 billion, the company trumps Wynn Resorts. Even more impressive than this, however, is the casino operator's dedication to growing its market presence in Macau. Over the past three years, management at Las Vegas Sands has increased its sales stemming from the region from a far lower base of $4.9 billion, which converts to 52.4% of the company's consolidated revenue.

Source: Wynn Resorts.

While both Las Vegas Sands and Wynn Resorts generate a hefty percentage of their revenue from the region, the best pure play in the market appears to be Melco Crown. In each of the past three years, Melco Crown's revenue has come exclusively from Macau and has seen its top line grow 33% from $3.8 billion to $5.1 billion. This rise in revenue beats out the 7% increase experienced by Wynn Resorts and isn't terribly shy from the 46% growth posted by Las Vegas Sands.

Foolish takeaway
Given the information released concerning Macau's gaming market, some investors might be hesitant to take a stake in any companies with a great degree of exposure to the region. However, when you consider that there is sufficient evidence supporting the assertion that the decline in the region's gaming industry was caused by the World Cup, these concerns should melt away.

For this reason alone, the Foolish investor who can look past the headlines of a falling market in Macau and decides, instead, that the future for these companies will only get brighter, then an investment might make sense. This is especially true for Melco Crown and Las Vegas Sands, which happen to be growing rapidly, and which have a tremendous amount of exposure to Macau's gaming market.

The prospects for Melco Crown and its pers pale in comparison to the next big thing!
Compared to the long-term potential for casino operators like Melco Crown, Las Vegas Sands, and Wynn Resorts, the next big thing to hit cable will let you make money while sitting right in your living room!  That's right, no travel!  You see, cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2014, at 6:10 PM, spokanimal wrote:

    Much too simplistic to compare the drop in Macau gaming revenues with outside betting on the World Cup.

    There was also the uncertainty surrounding evolving policy surrounding Union Pay Credit Card Terminals, reductions in Visa permits for transit visas from 7 days to 5, and other credit machinations impacting VIP play.

    It's fair to say that folks were sizing up all those factors while sitting at home watching the World Cup. As the world cup has progressed, Macau's Francis Tam has been providing color and clarification to those factors, so I would anticipate some pent-up demand to occur in Macau once the World Cup is completed.

    Also pertinent was the drop in gaming revenues experienced during the world cup 4 years ago.

    Further, the Visa permitting and Union Pay issues produced a counter-balancing impact, in that Las Vegas experienced a more than 20% surge in bacarrat revenues in May as the impact of the Macau restrictions were first being leaked out. VIP gamblers typically travel further from home than Macau during Golden Week holidays (early May), so the regulatory restrictions that were evolving at the time simply heightened the impact on Vegas.

    Spokanimal

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