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In the following excerpt from our deep-dive into casino operators and online sports betting, the Motley Fool Industry Focus: Consumer Goods podcast team discusses the relative health of the Las Vegas market, and crucial regulatory issues in the world's largest physical gambling market, Macau.
We also break down the impending granting of new casino licenses in Japan, and even the nascent casino market in Vietnam. No need to bring your passport for this global gaming discussion; simply watch this video!
A full transcript follows the video.
This video was recorded on Jan. 15, 2019.
Nick Sciple: Let's talk a little bit about Las Vegas. That's another market that folks think is going to be influenced by the sports betting change. Obviously, for the longest time, you could only gamble on sports in Las Vegas by federal statute. Now, as it opens up more nationwide, is less traffic going to move out to Vegas? Vegas had 38 million visitors last year. What are your thoughts on that trend and what's going on in Vegas generally?
Asit Sharma: I think Vegas has done much in the past decade or so to get ahead of a potential trend like this, although I'm not sure that 10 years ago, this was on their radar screen. As a destination, it's really changed the way it markets itself. It's gone after corporate business in a huge way. Also, Las Vegas has presented itself as a family-oriented destination. You don't necessarily have to treat Las Vegas as Sin City; you can go there just for a fun weekend. If you like to gamble, you can gamble. If you just like to stroll around what I think of as food-tray architecture with a drink in your hand, you can do that. It's a fun place. I've been once and enjoyed my time there. Gambled a little bit, was there for a conference.
I think that the flow of traffic into Las Vegas won't necessarily be impacted. It's a very adaptable city, as well. Nick, you tweeted out for questions on the show yesterday. Actually, a friend of mine who's an avid listener, Brandon Stokes, who supplies me with millennial stock ideas -- I've mentioned that before -- he asked about e-sports in this whole equation of legalized sports betting. He pointed out that MGM actually has an arena for e-sports betting, which I was able to briefly look at before the show. There you go -- there's one way that the location of Las Vegas can compete with evolving trends and technologies.
My thought is, probably, there's the potential for a little bit of a dip in traffic near term, but that resolves over time as it plays to traditional strengths. It's not going to lose huge traffic anytime soon. What do you think?
Sciple: I agree with you, Asit. Vegas is one of the most popular convention destinations in the United States, and it continues to be so. It had a little bit of a weaker year this year, but it's expecting things to come on strong next year. About one-sixth of Vegas' annual visitors come via convention attendance.
Another thing to think about is, there's new attractions coming there. Next year, the Raiders are coming to Vegas. That's going to increase some traffic. If you want to go to a road game for your favorite football team, Vegas is going to be one of the top destinations you like to go see your team play. You saw the same thing happen this past year with the Golden Knights. You have tons of folks come down to Vegas to see their team play. That's going to be an attraction, as well.
One thing to mention, when we're talking about Vegas, who are we talking about? Really, the two main players in Vegas are going to be MGM and Caesars. They own about half the Strip. There are some other smaller players there as well. Las Vegas Sands we mentioned earlier. They're predominantly located in Macau, but they do have a couple of casinos in Vegas. Same thing with Wynn.
As we're talking about Las Vegas Sands and Wynn, let's talk about Macau and what's going on there. You mentioned Vegas is the biggest gambling market in the U.S. domestically, but Macau is the largest in the world. It's the only place in China where folks are allowed to gamble, and about 70% of their visitors came from China, at least according to data back in October. There are 41 casinos there, several different Chinese operators. Major U.S. companies are Las Vegas Sands, as I mentioned, Wynn Resorts and MGM Resorts.
What are your thoughts about what's going on there in Macau and that market in general? It's the largest market in the world. It's most certainly the largest market in Asia. It's been a place where folks have flocked in because there's not a lot of other alternatives.
Sharma: An example of a great long-term market. It's ideally situated. Here you go again, regulation has ensured that Macau has its own built-in cash cow because there's so few places to gamble in Asia. Looking at some stats, you mentioned the Chinese market, 70% of Macau visitors came from China in October. Visitors grew 15.3% year over year. I find it fascinating that, even though we've got more international players now, it's still dominated by SJM, a Chinese company which has 20 casinos.
As this trade discussion has really turned hot over the last six months, turned from a trade discussion into a full-blown trade war, you have to really factor that in when you look at the Macau market going forward. We have several casinos with concessions expirations coming up in 2020. SJM Holdings is up for renewal. MGM China is up for renewal. In 2022, we've got Galaxy Entertainment, Wynn Macau, Melco Resorts and Sands China. We talked a little bit about this before the show in our back-and-forth, our notes. Nick, you had mentioned that a very well-known short-seller, James Chanos, is short on the American players in Macau, and this has something to do with the regulation. Can you give us a brief overview of his opinion of Las Vegas Sands and Wynn and betting on them in China?
Sciple: Sure. I'll give you his thesis, and then add a little editorial of my own. Chanos' opinion here is that over the long term, we've seen the U.S. casino operators in China trade at a premium to their Chinese counterparts. But his position is that with the kind of trade tensions we've had between the U.S. and China, those companies should at least not be trading at a premium to those Chinese operators. The risk to them is that if China were to decide to pull their concessions at any time, their business falls apart. If you can't offer your key service to that market, which is gambling, then you don't really have a business. The companies that he is short are Wynn and Las Vegas Sands. Politically, it might make sense to them to retaliate against U.S. operators if trade tensions were to continue. As I mentioned earlier, Sheldon Adelson is the top dog at Las Vegas Sands Corporation. He's a heavy donor to the Trump Administration and to Republican politicians in general. You layer on top of, there's trade tensions in the U.S. and China, and the head of one of these companies that it is very heavily involved in Macau and that has concessions coming up is also heavily connected to the administration which China would be retaliating against, it doesn't shock me that those sorts of things would come to pass. What do you think, Asit?
Sharma: There's a reason that these companies trade at a premium to their Chinese counterparts, and that's because, if you're centered in Macau, that's your only real operation. You have a concentrated market. Primarily Chinese economy, but other South Asian economies, if they start to decelerate, let's say, in a global recession, if you're only based in Macau, then you're going to get hit proportionately harder. Some of these other international companies, U.S. companies in particular, are a little bit more diversified. So, there are some underlying reasons why, historically, the U.S. companies have traded at a discount.
I think, personal opinion, that at the end of the day, the trade disputes will have to resolve because China and the U.S. are just too important to each other not to resolve them. In Macau, my expectation is that Las Vegas Sands and Wynn are going to have their licenses renewed. I wouldn't be short these two companies just for this reason, for their operations in Macau. But, I think it is an interesting thesis. It's certainly a risk. And who knows? Jim Chanos may be right and make a pool of money off it.
One last thing I'll say about Macau is the outlook for 2019. Because of all this uncertainty, JPMorgan analysts predict that gross gaming revenue is going to increase by only single-digits this year. Macau, if you look around the world, it's the go-go place for gambling. It's got high revenue increases almost every year, in the double-digits. So, we're going to have a relatively slower year in 2019. But, the same analysts, among others, expect that after we get past this period of renewals, and even sooner, the growth is going to pick up again.
Sciple: I want to follow up on what you're saying about Jim Chanos. It's always dangerous when your investment thesis hinges upon government action of any kind, whether you have to have a law passed or some policy change. Building a thesis around that sort of thing is a very high-level type of bet to make. There are a lot of various outcomes. I wouldn't recommend anybody take a position in any company or any market that is dependent solely upon a government intervention to make that thesis come true. We'll see how it plays out for Mr. Chanos. He's a very sophisticated investor. But, for our listeners, typically at least for me, that's a no-go type of thesis on a business.
One last thing before we start talking about these major U.S. casino operators on the back side of the show, we mentioned how Macau has been for the longest time the center of the Asian gaming market. There are some signs that we might have some new markets opening up over in that region. In 2019, Japan is expected to approve three new casino licenses. We've seen several operators circling around them, trying to go after those licenses. Among them, you see Las Vegas Sands, you're also seeing Caesars circle for that. Caesars doesn't have any presence in Macau, so there is a little bit of a want for them to get some exposure over there. And then, we're starting to see some pushes for casinos in Vietnam. Las Vegas Sands had some interest over there. What are your thoughts on those markets as opportunities for casino operators, as well as any second-order effects they might have when it comes to Macau?
Sharma: Primarily, Japan is the market to look at. The population there is extremely hard-working, as everyone knows, and the Japanese love their diversions, whether it's, in the youth, dressing up in crazy ways, or playing Pachinko. You pointed out to me, five million Japanese people are addicted to Pachinko, this pinball-like game. I've had the opportunity to go to Japan, and I've seen these Pachinko parlors. They're incredible. Very noisy, frenetic. But you can see how that's maybe a relaxing enterprise after you spent like a 12- or 15-hour workday.
I think that there's a huge potential there both because Japan is one of the wealthiest countries in the world, has a very dense population. And as I've said, that population is always looking for an outlet. It's an extremely attractive market for any of the major players and the ones, as you mentioned, like Caesars who aren't in Macau. I think that's the one to look at. Vietnam, I'm also very interested in.
As for the effects for Macau, I think that as time goes on, as we've seen with the greater Chinese economy, there will be some loss of revenue as other players and other countries come in, and their regulations change, and they allow more gambling. But, to do that, you do need to have a relatively wealthy investment base. You need capital to make it happen. It won't be overnight. Macau long term, like Las Vegas, will have staying power. It has a first-mover advantage in that region.
I'm keeping my eye on Japan. I just think that's a fascinating market. It's going to be highly regulated. These changes won't happen overnight. The Japanese will be very careful in how their population responds to gambling, and also how they regulate foreign countries coming in.
Any thoughts from you on how Japan or Vietnam might affect Macau?
Sciple: I think, obviously, when you have different alternatives, it's going to reduce the amount of need for someone to go out of their way to travel to Macau, particularly among the Japanese market. I don't have any data on what segment of the market in Macau comes from Japan, but I wouldn't be surprised if it's a meaningful amount.
To give a little bit of extra color on what you're talking about with Japan from an opportunity perspective, some estimates have the Japan casino market at being $15.8 billion a year. Compare that to Nevada, it's $11.1 billion. That's a significant market. You also mentioned efforts to keep under wraps how big casinos can get, and the societal problems that can come along. There have been talks on putting caps on how many visits a Japanese citizen can give to a casino in a month, limiting the size of the casino to only 3% of the total area of the resort, really confining how much gaming space you can have, and then putting a 30% tax on gaming. It's a huge opportunity that all these casino operators want to get a bite out of, but it's still to be determined how big that opportunity is going to be. And again, as we mentioned for sports betting, that's all going to come down to what the exact regulations look like and how these operators can navigate them.