Chinese gambling enclave Macau posted its seventh straight month of rising gaming revenue in March, beating analyst expectations by a wide margin. As it is the second consecutive month of growth without external factors like government edicts or new casinos opening to skew the results, it looks like the recovery is finally real.
Yet it was going up against some pretty easy year-over-year comparisons, much as it has been since the rebound began, making it almost a certainty it would handily beat last year's results. But since it will soon begin lapping the new, higher revenue levels, investors might wonder whether all the easy gains have been made and results going forward will become tougher to beat.
Back from the brink
There's no question Macau is better off than it was, and Las Vegas Sands (LVS -0.74%) and Wynn Resorts (WYNN -1.42%), two of the biggest casino operators that derive the lion's share of their revenue from the peninsula, have seen their stocks rise on the brightening outlook. Shares of both trade 20% higher than they did a year ago, while Macau-based Melco Resorts & Entertainment is up 33%.
And not without good reason. Gaming revenue hit its lowest point last June, recording just 15.9 billion patacas, the local currency, or about $2 billion, and have steadily climbed since. This past February and March, when Macau posted revenue of 23 billion patacas and 21.2 billion patacas, respectively (approximately $2.9 billion and $2.6 billion), was the first time since December 2014 and January 2015 the enclave saw back-to-back months of gaming revenue north of 20 billion patacas. The percentage gains were also healthy as well, representing 18% growth each month.
Yet that just underscores how far Macau had fallen. With consistent mid- to high-teen gaming revenue, it was at levels 40% to 50% below what the casinos had been raking in before the Chinese government cracked down on corruption and luxury, sending the region into a tailspin.
The March gaming revenue, for example, though higher than last year, are on par more with the levels achieved in 2011 and 2012 rather than in the succeeding two years, when revenue was 31 billion and 35 billion patacas, respectively.
House of cards?
Yet 2013 and 2014 also marked years in which the Chinese economy benefited from the government implementing a number of stimulus spending programs, which is credited with causing the country's economy to grow 6.7% last year, as well as fueling a number of bubbles, notably housing. That's important because there is a relationship between China's housing market and VIP gamblers in Macau as they often use property as collateral when staking their bets. However, China is now in the midst of program to clamp down on housing and is taking measures to keep prices from rising any further.
That could mean MGM Resorts (MGM -0.42%) will be opening its new Cotai resort just as the gaming market runs into a wall again. Twice delayed, the new MGM Cotai casino is expected to open in the back half of the year, which may be just as the economy stalls.
Still, MGM derives most of its revenue from Las Vegas, and though any downturn would hurt, it isn't nearly as exposed to Macau as Wynn, which derives almost 64% of its revenue and 62% of its adjusted property earnings before interest, taxes, depreciation, and amortization from Macau; or Sands, which generates 59% of its revenue from the enclave.
With the easy money having been made in Macau and the region soon to be lapping the start of the recovery, just as the effects of major stimulus spending programs wear off and the government cracks down anew on the housing bubble, casino operators may find themselves at risk of another correction.