Macao is a ghost town. The only place where it's legal to gamble in China has been shut down for two weeks as government officials try to gain control of the coronavirus outbreak that has killed more than 900 people so far.
The casino industry was already reeling from a slowdown in business that saw gambling revenue decline last year for the first time since the recovery began there in 2016. And after the first coronavirus cases were reported at the end of last year, visits to Macao plummeted.
Officials ordered casinos to close beginning Feb. 5 and stay shut for a 15-day period, though it's possible it could be longer if the virus cannot be contained. While the first quarter was already shaping up as dismal for the gambling houses, with visits plummeting and gambling revenue tumbling 11% in January, now it's looking to be absolute devastation.
Casinos likely to tap out in the first quarter
The timing of the virus outbreak couldn't be worse for the casino industry. The Chinese Lunar New Year holiday that began on Jan. 25 is a key period for the gambling industry because it can account for as much as 5.5% of the industry's annual gross gambling revenue.
Macao generated 292.5 billion patacas last year, or about $36.5 billion at current exchange rates, meaning the New Year holiday would account for some $2 billion. Casino operators like Las Vegas Sands (NYSE:LVS), Melco Resorts & Entertainment (NASDAQ:MLCO), and Wynn Resorts (NASDAQ:WYNN), which derive most of their revenue and profits from Macao, will see results shredded in the first quarter, if not for longer.
The impact will run deep
The industry closure is only the second time since it began operating in 2002 that it has shut down. In 2018, casinos closed their doors for 33 hours during Typhoon Mangkhut.
To understand the extent of the damage this current closure will have, closing the industry for a day and half during the typhoon cost casinos $186 million in revenue, suggesting this shutdown could create losses of nearly $1.7 billion. It would also be on top of the losses suffered during the Lunar New Year, and if the industry remains closed longer, the losses could be staggering.
Sanford C. Bernstein analysts forecast the two-week closure will cut first-quarter revenue in half, and if the casinos needs to be shut for the entire quarter, full-year revenue will plunge by as much as 70%.
Casinos are also being ordered to provide lodging for their employees so they don't have to risk traveling and becoming infected, and there will be substantial pressure to continue paying their employees throughout the shutdown.
Although hotels and restaurants can remain open during the crisis, Las Vegas Sands says occupancy rates at its 13,000 rooms are running at only 5% to 10%, and it has received permission to close some of them.
Discounting the severity of the decline is dangerous
Although casino stocks have been impacted by the news, it would appear investors are discounting the likelihood of a shutdown lasting longer than two weeks.
While Melco Resorts is feeling the effects most (undoubtedly because it generates some 75% of its revenue from Macao), Wynn Resorts, which realizes about three quarters of its adjusted profits from the region, has seen its stock fall by half the rate of Melco. And Sands seems barely touched at all.
It seems reasonable to expect the worst is not over yet for both healthcare workers trying to get a handle on the novel coronavirus or the casino industry trying to counter what was already looking like a weak year.
Yet now might not be the time to jump into the stocks. Beyond the uncertainty of how this affects casinos, the full impact of the virus on the Chinese economy as a whole is unknown. And even after the crisis has passed, it may be awhile before the industry can coax people back.