Macau was once a massive growth driver for casino companies as gaming revenue there grew by double-digit percentages year after year.
But after a challenging two-year period of regulatory crackdowns, growth in the region appears to be coming back. Wynn Resorts (NASDAQ:WYNN) and other casino operators are highlighted on this segment of the Industry Focus: Consumer Goods podcast, including a look at the newest resorts opened in the past year and what could still derail the budding recovery.
A full transcript follows the video.
This video was recorded on April 13, 2017.
Vincent Shen: Macau, which is the special administrative region in China, which also happens to be the most densely populated region in the world, has been the gambling capital for over a decade. But, following a government crackdown on corruption and money laundering in the region, plus an economic slowdown, Macau suffered huge declines to its gaming industry starting in 2014. For 26 months straight, their market reported declines year over year in gaming revenue. Macau peaked in 2013 at over $45 billion, and by 2016, it had shrunk 40% to about $28 billion. Is there a light coming over the horizon? What are investors seeing now, Seth, broadly, for this market?
Seth McNew: To put some of those numbers in perspective, you have to imagine that 2013 number, you're talking seven times as much gaming revenue as Las Vegas. Even though this last year, when they had faced so many months of decline, we're still talking three times as much revenue as Las Vegas. So, this is certainly a massive part of the gaming industry still, and now it looks like it's regrowing again. In March, we had total gaming revenue grow 18% over March of last year. It looks like this trend that we've seen since last August, that every month, it's getting a little bit better, is now really starting to show some pretty substantial growth.
Shen: There have officially been eight straight months of growth now. I think in the beginning of the year, people were still kind of skittish, not really sure if this was building out into something you could call a trend. But February and March saw revenue up about 18% year over year. So, it seems like that momentum is really picking up in their favor. But let's turn our attention now to the major casino operators, who are based in Macau, or have significant business there. Who do you want to start with, Seth?
McNew: There's really four operators that make sense for investors to be watching. The one that's been the best performing so far this year is definitely Wynn Resorts. Wynn had their new massive Wynn Palace resort open last August, which worked out well with the first month that Macau showed some positive signs of turning around, probably helped out by the new resort by Wynn. And in 2016, Wynn really posted some pretty substantial growth in earnings. If this resort works out pretty well for them in 2017, we should see that growth continue.
Shen: Yeah. For this company, Wynn, 64% or so of their revenue is based in this region. So, obviously, an important market for them. Really exciting with the newest resort that they opened last year. But they're not the only ones. Las Vegas Sands (NYSE:LVS), over half of their revenue also is based in this region, they opened the Parisian. What's going on with them?
McNew: That's true, Las Vegas Sands open their new resort as well, a couple months after Wynn. You're right, Las Vegas Sands is by far the dominating force in Macau right now. Wynn has doubled its own presence there, but with its two casinos, it still pretty much pales in comparison to Las Vegas Sands and its five casinos. The other thing is it has more hotel rooms than any other company by far. It has more gaming tables. So, especially as we're seeing this shift toward mass-market, you're wondering who's going to get that spillover and that increase in visitation. It's probably going to be these casinos that Las Vegas Sands holds.
Shen: Sure. For another company that is a really significant business here, based mostly here and in the Philippines, is Melco (NASDAQ:MLCO). They have gone through a bit of a shake-up recently. What's the story there?
McNew: Yeah, to say the least. They have their own little bit of drama lately. One of the partners, Crown, has divested itself from the company. They'll be rebranding to just Melco Resorts and Entertainment. Along with that, they'll have a little bit more control. It sounds like they're going to overhaul some of the properties, some of the uneven parts of the properties, changing up some of the feel of the hotel towers and whatnot. That could be really good for the company as they're shaking things up. That might be a good way for them to also bring in some new visitation that would otherwise go to some of these new resorts.
Shen: Sure. The last company we'll talk about here, they have a resort that's been delayed several times. I think it's slated at this point to maybe open later this year or even next year. Correct me if I'm wrong, Seth. That's MGM (NYSE:MGM). Their presence is not as significant as some of these other companies in terms of their business overall. About 20% of MGM's revenue is based in Macau. What's the story there with their Cotai Resort?
McNew: That resort has been pushed back a few times. The latest on their website right now says second half of 2017. So, we'll hope to see that open. I was just there a couple months ago, and the resort looks great. From the outside, it looks completely finished. I'm not sure what's taking so long. But, it looks like a beautiful resort. And yes, Macau right now makes up a relatively small portion of their overall revenue. But, you can understand that if things are pretty much stable in Las Vegas -- and that's their bread and butter -- by doubling their operations in Macau, it could be a pretty huge growth driver for them in 2017 and 2018.
Shen: Yeah, especially if the market there broadly is expanding and improving and this trend really does continue. A lot of these companies will be releasing their next bout of quarterly earnings in the next month or so. What do you think you'll be watching in the results, as these companies give updates on the situation in Macau, the status of their new resort openings, or the ones that are in process -- what do you think?
McNew: We probably can expect that Las Vegas Sands will be the first one to report. Not all of these companies have said when they're reporting Q1. But, when they do report, that will be interesting to see, what is happening with the mass market and VIP switch. Is it true that the mass market is rising enough to overtake what is being lost in that VIP segment? Also, we want to see things like hotel occupancy and average daily rate. Are those really growing consistently as much as is needed? Do we see increased visitation that's spurring on a really robust recovery in the overall gaming? Or is it maybe just increased gaming by per spend from player? Those are things that, that's interesting with the regulation there as well. Is the government going to increase regulation again because they're worried that gaming is getting out of control? Or is there a shift to mass-market entertainment that the government is really fond of?
Shen: On that note, on the regulation side, it's really important for anybody who's thinking about investing in these companies, or who is looking for exposure to the gaming site in Macau -- as prospects brighten here, are you concerned that Beijing officials ultimately come in and clamp down yet again to take the momentum out of this rally? Because, it was only in December that they instituted this new capital control regarding ATM withdrawals. Basically, they cut in half the amount of money that Chinese tourists could take out with their popular union pay cards. Just like that, a huge impact on the shares of the major casino operators we're talking about here -- Las Vegas Sands, after that was announced, was down 13% on the day. Wynn Resorts was down 11%. Melco was down 14%. That's always looming, is it not, this potential change where the officials in Beijing decide there's too much money going out of China and into areas like Macau and some of the resorts in Singapore as well, and they decide to crack down again?
McNew: Yeah, that's always a thing. Even if it's just one sentence from an official in Beijing talking about, they want to crack down on companies that are advertising gambling in mainland China, which is still illegal. That's what I'm saying: If the recovery is really about entertainment and hotels, and they're building some other stuff right outside of Macau, if that's truly the recovery, I think that will be really positive for the government. If it's really about gambling, maybe not so much.