Source: Las Vegas Sands
The special administrative region of Macau is the only area in China where casino gambling is legal. Demand in the region has boomed over the last several years, and casino operators Las Vegas Sands (LVS -0.22%), Wynn Resorts (WYNN -0.74%), and Melco Crown Entertainment (MLCO 0.47%) have benefited tremendously from this growth.
However, a combination of factors have caused gaming revenue in Macau to decline in recent months, hurting the stock price of casino operators with a big presence in the region: Las Vegas Sands stock has declined 18.5% year to date, Wynn Resorts stock is down by 4.3%, and Melco Crown stock has fallen by a whopping 33.7%.
While it's hard to tell how long this situation might persist, chances are this short-term weakness is creating a buying opportunity for long-term investors in Macau casino stocks.
The problem
Based on data from the Macau Gaming Inspection and Coordination Bureau, casino revenue in the region declined by 11.7% year over year in September. This was the fourth consecutive month of declining revenues, and a considerable acceleration versus declines of 3.7% in June, 3.6% in July, and 6.1% in August. Cumulative data for the January to September period still shows a 5.9% revenue increase due to strong performance in the first five months of the year, but the trend is not pretty.
Interestingly, as dismal as these numbers might seem, the September figure was actually better than feared: Wall Street analysts were expecting a decline of between 13% and 15%.
Providing reason for cautious optimism, the Macau Government Tourist Office on Monday said the region received 775,913 visitors in the first five days of October for China's Golden Week holiday, a healthy 14.4% increase from the number of visitors during the same period last year.
Better than expected gaming revenues and strong visitor traffic for the Golden Week holiday could suggest the worst is over for Macau. However, it's far too early to tell with any certainty that a recovery is already in place, so investors in Macau casino stocks might want to monitor demand statistics closely in coming months.
The opportunity
Authorities in China are implementing a series of measures against corruption, including visa and credit card restrictions on VIP gamblers in Macau in order to stop illegal maneuvers to siphon money from mainland China to the region. In addition, decelerating economic growth and a weak property market in China are putting additional pressure on Macau.
It's impossible to tell with any precision how long these factors could drag on Macau casinos, but the-long term growth story remains intact. Economic growth in China, improving transportation infrastructure, and more attractions for all kinds of visitors should generate plenty of opportunities for casino operators in Macau to thrive for years to come.
Gaming is a lucrative business, and Las Vegas Sands, Wynn Resorts, and Melco Crown have delivered impressive financial performance over the last five years while capitalizing on the unique opportunities presented by their presence in Macau.
While Melco Crown is investing for growth in the Philippines, all of its sales and profits currently come from Macau. Las Vegas Sands has operations in the U.S. and Singapore, but the company is highly exposed to Macau when it comes to both current profits and growth plans.
Wynn Resorts is a bit more diversified, though Macau is a crucial market. Wynn generated 32% of revenue from Las Vegas in the second quarter of 2014, with the remaining 68% coming from Macau.
Perhaps for this reason, the weakness in Macau has had a greater impact on shares of Melco Crown and Las Vegas Sands in recent months than on Wynn Resorts' stock. In addition, Las Vegas Sands and Melco Crown are trading at cheaper valuation ratios than Wynn Resorts, as expressed in both their current P/E and forward P/E ratios.
| Sales growth last 5 years | Earnings growth last 5 years | Forecast earnings growth next 5 years | P/E | Forward P/E | Dividend yield | |
| Las Vegas Sands | 25.7% | 50.9% | 16.9% | 19.4 | 14.6 | 2.9% |
| Wynn Resorts | 13.5% | 30.1% | 15.5% | 22.7 | 20.7 | 2.6% |
| Melco Crown | 29.1% | 159.2% | 19.7% | 18.1 | 13.4 | 1.2% |
| S&P 500 index | 18.4 | 17.1 | 2.3% |
Data source: Finviz/Morningstar.
Importantly, the three companies look attractively valued in comparison to the S&P 500 index, especially when considering their extraordinary track record of financial performance and the fact that analysts are still forecasting robust earnings growth in the years ahead.
The takeaway
Demand in Macau will probably be hard to predict in the middle term, but uncertainty usually creates opportunity for investors. Las Vegas Sands, Melco Crown, and Wynn Resorts are remarkably profitable companies benefiting from exciting potential for growth over the coming years, so this might be the right time to buy these powerful growth stocks at convenient valuation levels.
