Stop Worrying About Weekly Macau Gaming Revenue, These 3 Trends Matter More

Gross gaming revenue growth over the prior week is making headlines almost every week, as analysts and investors scramble to adjust their estimates on Macau's gaming industry. This has caused some slight volatility in the prices of the major names here like Melco Crown (NASDAQ: MPEL  ) , Las Vegas Sands (NYSE: LVS  ) , and Wynn Resorts (NASDAQ: WYNN  ) .

But for a Foolish long-term investor, week-by-week noise like this not only does not provide very much useful information, it can be dangerous when it alters your long-term value estimates. So stop worrying about week by week, or even monthly, gross gaming revenue. Instead, look for the long-term trends that are causing huge year-by-year gains in Macau and will continue to do so.


The Macau skyline continues to expand and get brighter, just like its profits. Photo: ChinaTourAdivisors

The danger of this week-to-week noise
Let's look at April of this year as an example. For the third week of that month, the average daily run rate was up 15% over the week before, and shares of the big Macau names jumped on the news. Melco Crown jumped 6%, while Las Vegas Sands and Wynn Resorts increased 4.7% and 4.8%, respectively. Yet in the following weeks gaming revenue was down from those 15% gains and the stocks took a hit as analysts worried whether May would be a slow month. This bi-polar valuation method is not sound long-term investing.

Unless you are buying and selling these companies within weeks (not a very Foolish idea), these weekly numbers don't matter. With $45 billion in gaming revenue in 2013, up 19% over the year before, Macau has proven itself over and over as the gambling profit driver of this decade. Goldman Sachs estimates that by 2017, those revenue figures will climb above $70 billion. If you are planning on buying and holding these companies for a long time, base your Macau gaming value estimates on these three important trends instead.

1) Quarters with rising revenue instead of weeks
Each of our three companies have posted incredibly strong 2013 earnings, and that trend has stayed strong through the first quarter of 2014. Wynn Resorts has been expanding rapidly in Macau over the last decade, and now counts on Macau for 75% of its global revenue. This helped the company post a great first-quarter 2014 earnings release with nearly 10% revenue growth year-over-year. Likewise, Melco Crown, the only pure Asian gaming bet in this list with an origin in Hong Kong and no US holdings, posted first-quarter 2014 net revenue and adjusted property EBITDA increases of 19% and 31% year over year, respectively.

Las Vegas Sands' bet on Macau has paid of for the company and its investors. Photo: Sands

These strong gains for Wynn and Melco Crown were very strong, but Las Vegas Sands managed to do even better. Based on analyst estimates, Las Vegas Sands has 22% market share in Macau. The company's first-quarter 2014 revenue of a record $4.01 billion, up over 21% year-over-year, was also the highest in the industry. The company's huge bet on Macau paid off with nearly 50% EBITDA growth at its operations there.

2) Rising mass-market revenue
Operations in Macau over the last decade have been largely focused on the profits coming from VIPs, the high rollers of the gaming industry. However, companies will bring in more profit from the mass-market segment of gamblers going forward, and these companies are betting accordingly. With increased wealth and leisure travel spending by mainland Chinese, already Macau's largest audience, these three companies are ramping up their mass-market appeal with more rooms and gaming tables.

Mainlanders make up 64% of Macau's visitors. With more and more coming, that percentage going higher will mean huge gains for these companies who bet right. Source: Macau Government Statistics

There is still plenty of growth to come from Chinese mainlanders. Nomura Securities estimates that only about 2% of mainland Chinese have visited Macau, which leaves out about 1.3 billion of China's population. The same group estimates that about 25% of Americans have been to Las Vegas.

Even a fractional increase in the percentage of mainlanders who visit Macau next year would result in a huge jump for the mass-market gaming segment there. With advancements like a new bridge from Hong Kong to Macau, a better rail system that links separate parts of the island for faster transportation to and around the island, and digital passport entry and exit into and out of Hong Kong and Macau, there are plenty of reasons to be bullish that this increase in visitation will come.  


Source: Sands 2013 earnings presentation

Wynn and Melco Crown are both betting big on this trend, but once again, it's Las Vegas Sands that is doing it the best. Wynn posted strong 2013 earnings mostly because its mass-market revenue surged in comparison with its VIP segment. The company's 2013 fourth-quarter profit increased by an astounding 92% year over year, led mainly by an increase of 35% in mass-market gaming revenue in Macau compared with 24% growth in VIP gaming for the same time-frame. Likewise, Melco Crown has already made its bet on mass-market gaming and currently derives more than two-thirds of its EBITDA from this segment.


Mass market table revenue is up 58% for Sands in Q4 2013 over the
same period last year. Source: Sands 2013 earnings presentation

Las Vegas Sands won huge on mass table revenue in 2013 with a 58.3% jump in this revenue segment from the fourth quarter of 2012 to the same quarter of 2013. This increase in mass-market revenue led to net income for the company's Asian operations increasing 40% over the same quarter in 2012.

3) The coming casino boom
The main area in Macau which is spurring new growth and profits is the Cotai strip. The area has seen near-constant development as casino companies build bigger and better resorts, most of which will open in the next year or two.


Steven Wynn shows off his new Wynn resort. Photo: Reuters

Wynn Resorts is hoping for a surge in revenue from the addition of its $4 billion Wynn Palace Cotai which could open as early as the end of 2015. This amazing new resort will help to increase the number of guests that Wynn can host in Macau. One highlight in the company's most recent quarter was that because of mass-market operations its room occupancy rate increased from 93% in the first quarter of 2013 to 98% during the same period of this year. With this casino Wynn has bet on driving even more guests to its properties in Macau.

Melco Crown's CEO Lawrence Ho has continued to drive growth in this quickly expanding company. Photo: Bloomberg

But before Wynn can open the doors to the Wynn Palace, Melco Crown's Studio City resort will have already opened. This cinematically themed integrated resort on the Cotai strip is set to be better than anything Melco Crown has produced yet, with 500 gaming tables, more than 1,500 slot machines, a five-star hotel, a shopping mall, and more.

Analysts have said that Studio City will be the "best situated" resort on the Cotai strip, as it will be directly adjacent to the Lotus Bridge that connects the strip to mainland China via Hengqin Island and is on a proposed stop for the new intercity light rail coming next year.

Yet once again, Las Vegas Sands will win on this one as well. The two casinos on the strip owned by Sands, The Venetian Macao and the Sands Cotai Central, have already posted solid growth and revenue. 

Las Vegas Sands is preparing its own newest integrated casino resort, which will be its fourth resort and fifth casino on the Cotai Strip. The Parisian, which will open in mid-2015 alongside Studio City, is set to be a major advance for gaming in Macau. This resort will be the biggest of the new resorts put up by Wynn or Melco Crown with over 3,000 hotel rooms and suites, roughly 450 table games, 2,500 slots, a retail mall, and an impressive replica of the Eiffel Tower at 50% scale.



The coming Parisian resort on Cotai, the biggest of the coming casinos. Photo: Las Vegas Sands

Look long-term, not week to week, and place your bets on the winner of these three
With these three trends showing support for Macau's current and future strength, let's all stop getting so worked up over weekly gross gaming revenue noise and focus on the bigger, long-term picture. So with that said, which of these three gaming companies is the best bet now? While Wynn Resorts and Melco Crown both offer compelling investment catalysts, Las Vegas Sands offers the most in regard to these three trends. With the most aggressive expansion on the Cotai strip, the best take on mass-market growth, and the highest profit in the first quarter, this company remains a winning bet for Foolish investors.

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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 09, 2014, at 7:21 PM, spokanimal wrote:

    A couple of points:

    First, reported GGR is not "hold adjusted". As a result, any one company's market share can differ from the trend of it's volumes (eg: "drop") by as much as 2 or even 3% market share per month. The shorter the timeframe measuring GGR, the greater the swings can be as a result of "luck".

    Thus, volumes are a better indicator of patronage, and "normalized" financials are better than headline financials. For example, LVS earned 72 cents in Q4, and 97 cents of EPS in Q1, but when normalized for luck, their earnings were flat, at 87 cents per share in both Q4 and Q1.

    Also should note that Melco's Studio City still has not been granted a gaming license. If it opens without one, all their patrons will have to go next door (to the Parisian) to gamble.

    I would say that Studio City would probably eventually GET their gaming license, but I don't know given how the SAR snatched the right to coati parcels 7 and 8 away from Sands after Sands had been given assurances that the parcels were theirs and they had already invested over $100 million into them...

    ... just goes to show, you never know with those fickle Chinese governments.

  • Report this Comment On July 09, 2014, at 8:19 PM, berg80 wrote:

    Thanks for bringing some sanity to the space after a series of articles in numerous publications (MF included) that otherwise are written by authors with a short sighted view and appalling ignorance of Macau gaming. Place your bet now, MSC and all the other casinos coming on line will get their gaming licenses.

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