There's no question that Macau's gaming stocks have struggled over the past year. As you can see below, Las Vegas Sands (LVS -0.92%), Wynn Resorts (WYNN -1.16%), and Melco Crown (MLCO -1.28%) have all lagged the market by a wide margin.
LVS Total Return Price data by YCharts
Driving these struggles has been China's crackdown on corruption and Macau's subsequent drop in gaming revenue. But now that stocks have fallen and the corruption crackdown is in full swing, is it time to buy?
The Parisian in Cotai will be Las Vegas Sands' next Macau resort. Image source: Las Vegas Sands.
Why now is the time to buy gaming stocks
The VIP market in Macau has been the hardest hit by the crackdown on corruption in China, but long-term this may not be a bad thing. A few years ago, I highlighted a well-known secret that Macau was actually a haven for money laundering with rich Chinese circumventing the country's rules on money exiting the country. The crackdown slowed down that flow and probably other illegal activity, so Macau will now grow from a more stable (and legal) base.
In a note to clients, Union Gaming analysts gave a similar opinion Monday saying, "the VIP business has been permanently changed-and we would argue that it is for the better." They also said that now is the time to "get back in" gaming stocks, which is one reason the industry's shares popped Monday.
Why now is the time to buy
We may be in a new normal for Macau gaming, but profits may not struggle as much as you think. According to Las Vegas Sands, the mass market is about four times more profitable than VIP play based on each dollar of gaming revenue and in 2014 mass market baccarat play was up 16.3% while VIP play was down 10.9%.
Even if we assume casino earnings will be down, stocks aren't trading at insane multiples. If we look back, even late 2014 gaming revenue was at about the same run rate as 2012 in Macau. Below I've shown the 2012 EBITDA figures for Melco Crown, Las Vegas Sands, and Wynn Resorts along with their enterprise value/EBITDA multiple given today's enterprise value.
|
2012 EBITDA |
EV/2012 EBITDA | |
|---|---|---|
|
Melco Crown |
$920.2 million |
14.4 |
|
Las Vegas Sands |
$3.80 billion |
13.7 |
|
Wynn Resorts |
$1.58 billion |
12.1 |
Source: Company earnings reports and Yahoo! Finance.
The 2012 figures aren't a perfect comparison and don't include a full year's operation of Sands Cotai Central for Las Vegas Sands, but they give an idea of where value may lie given the lower gaming revenue figures in recent months.
If Macau has reached a "new normal," this could be a new foundation for long-term, healthy growth in the region.
Wynn Palace is the first resort in Cotai for Wynn Resorts. Image source: Wynn Resorts.
Growth is coming back to Macau
In the next few years, each of the six concessionaires in Macau will complete a brand new resort on Cotai. This will make the region an even larger draw for mass market tourists from China and abroad as well as diversify Macau's sources of revenue.
Today's resorts are being built with lavish hotel rooms, restaurants, shopping, entertainment, and more. Long-term, this will reduce the region's reliance on gaming and lead to more stable revenue that won't fluctuate with the government's whims.
The headlines may be bad in Macau right now, but long-term a crackdown on corruption will likely be a positive for the region. It wasn't long ago that much of Las Vegas was run by the mob and it turned out the legitimate casinos that are there today make more money than the mob run casinos ever did. We may look back on late 2014 and early 2015 as a similar road bump for Macau's gaming revenue and if we do it'll be a great buying opportunity for investors.
