There's a real panic around gaming stocks these days. Not only is there fear the global economy is slowing, but gaming revenue in Macau has fallen for four straight months, which could be the start of a downward trend in the region.
But hidden among the headline numbers is a silver lining for gaming companies. Mass market gaming is still growing, and it could save profits for some of the world's largest gaming companies. For example, Las Vegas Sands' (LVS -0.65%)focus on mass market play could give the company a good ending to 2014, which could be a boon for this beaten-down stock which happens to be down a whopping 32% from its 52-week high set in March 2014.
Macau's VIP market might be struggling, but mass market tables like these are still booming. Image source: Las Vegas Sands.
VIPs get the headlines, but mass market makes the cash
Most of the money lost in casinos today still comes from high rollers known as VIPs. They gamble hundreds of thousands or even millions of dollars and can swing a casino's profits higher or lower depending on their luck. In the second quarter, baccarat dominated Macau's gaming revenue; 60% came from from VIP baccarat players and 31% from mass market baccarat play.
But VIPs players don't play by the same rules as you and me in the casino. They tend to come with junkets, which provide credit and negotiate incentives such as discounts and kickbacks for players willing to bet big money. As a result of these expenses, the VIP baccarat game has a much lower margin than mass market baccarat.
Source: Las Vegas Sands.
This chart shows illustrates that mass market play is four times more profitable than VIP play in Macau for Las Vegas Sands, which could have a positive impact on the company's earnings.
Why this could be good for Las Vegas Sands
Gaming revenue overall was down 7.1% in Macau this past quarter from a year ago, but we don't know yet how much Las Vegas Sands' mass market or VIP volume rose or sank.
In the table below, I've prepared a sensitivity analysis on Las Vegas Sands' Macau operating profits based on different scenarios in the VIP and mass market. I've built the table assuming $100 in operating profit in Q3 2013 is the comparison. The figures in the table show how much operating profit could change from that $100 based on mass market and VIP revenue swings.
The bolded cells of the table show the sum total of gaming revenue falling 7.1%, as it did last quarter.
|
Mass Market Volume Down 19.2% |
Mass Market Volume Down 7.1% |
Mass Market Volume Up 5% | |
|---|---|---|---|
|
VIP Volume Up Flat% |
$86.56 |
$95.03 |
$103.5 |
|
VIP Volume Down 7.1% |
$84.43 |
$92.9 |
$101.37 |
|
VIP Volume Down 14.2% |
$82.30 |
$90.77 |
$99.24 |
Author's own calculations.
You can see that the bottom-right scenario shows almost no decline in operating profit despite that overall projected 7.1% decline in gaming revenue. This is because mass market play grew enough to offset the decline in VIP play.
This is likely close to the scenario we'll see play out for Las Vegas Sands in the third quarter. Early indications are that VIP play has dropped significantly because of a corruption crackdown in mainland China, but that mass market play continues to rise slowly.
Maybe this isn't bad news after all
The impact for investors is that profits for gaming companies might only be down slightly, or maybe even rise, depending on how the gaming mix changed last quarter and despite an overall decline in revenue.
Las Vegas Sands, in particular, has a high exposure to the mass market in Macau and could see profits rise as a result. It's not time to give up on gaming stocks. In fact, with the mass market still growing, I think this is the time for opportunistic investors to buy.
