Las Vegas Sands (LVS 0.59%) and Wynn Resorts (WYNN 0.82%) are two of the leading casino operators in Macau, the only region in China where gambling is legal. Both companies have been hurt by declining demand in Macau over the past couple of years, but recent data is pointing to a possible recovery in this crucial market. Which one is the right bet for investors willing to bet on Macau casinos right now?
Things are improving for casinos in Macau
In 2014, the Chinese government started imposing a series of regulations and restrictions on VIP gamblers in Macau. This move was aimed at combating illegal activities and money laundering by VIP gamblers through casinos. Chinese authorities are also trying to turn Macau into a more family-oriented entertainment center, offering more dining, shopping, and live-show activities, as opposed to being exclusively focused on gambling.
These regulations delivered a major blow to Macau casinos. Gambling demand started declining in June 2014, and it has remained in negative territory until recently. However, things turned for the better in August of this year, when Macau gambling revenue grew 1.1% year over year. This was the first month with positive year-over-year gambling figures since May 2014, so it understandably gathered considerable attention among investors in the sector. Adding to the optimism, gambling revenue in Macau increased by a much stronger 7.4% in September, confirming that demand seems to be finally turning around.
This is already being reflected in stock prices. Both Las Vegas Sands and Wynn Resorts stocks are up substantially from their lows of the year on the back of encouraging data from Macau. Nevertheless, they are still considerably below their historical highs before the problems in Macau, so the two companies have a lot of room for recovery.
Wynn Resorts is performing better
When looking at financial performance for the second quarter of 2016, Wynn Resorts is clearly doing better. The company produced $1.06 billion in revenue during the quarter, a 1.9% increase versus the second quarter in 2015. Revenue in Macau grew 3.6%, while the business in Las Vegas showed a 1.1% decline in revenue. Wynn Resorts produced $312 million in adjusted property EBITDA, a measure of operating profits excluding some extraordinary and non-cash items, during the quarter. This represents a 5.8% annual increase.
Las Vegas Sands suffered a bigger 9.3% revenue decline during the quarter, to $2.65 billion. In spite of this, the company managed to produce improving profit margins during the period, as adjusted property EBITDA grew from 34.8% of revenue in the second quarter of 2015 to 36% of sales. Nevertheless, overall adjusted property EBITDA contracted by 6%, to $955 million during the quarter.
Las Vegas Sands offers more upside potential
Both Las Vegas Sands and Wynn Resorts have recently inaugurated new resorts in Macau. Las Vegas Sands opened the $2.7 billion Parisian Macau in September, while Wynn Resorts inaugurated the $4.1 billion Wynn Palace resort in August. However, even when factoring in an increase in competition, Las Vegas Sands is the market leader by a wide margin.
Management calculates that Las Vegas Sands will own nearly 45% of all four- and five-star hotel rooms among gambling operators in Macau by 2017. By comparison, Wynn Resorts is expected to own a considerably smaller 10% of the market. For better or for worse, Las Vegas Sands is the most direct play on Macau among the two.
Also, Las Vegas Sands is clearly the right choice for bargain-hunting dividend investors. The stock pays a huge dividend yield of 5% at current prices, and the company has increased dividends at an average annual rate of over 30% from 2012 to 2016.
Wynn Resorts, on the other hand, substantially reduced its dividends to protect financial resources in 2015, and the stock is now paying a far more modest dividend yield of 2%.
No more bets
Wynn Resorts delivered better financial performance last quarter, and the company is proving to be more resilient in the face of challenging times for Macau operators. However, Las Vegas Sands offers more exposure to a potential recovery in Macau, and the stock is the undisputed winner when it comes to both dividend yield and dividend growth over the past several years.
While Wynn Resorts looks like the safest bet among the two companies, Las Vegas Sands could deliver superior gains if the incipient recovery in Macau continues gaining strength.