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How Macao Could Save Las Vegas Casino Stocks

By Travis Hoium - Mar 24, 2020 at 7:39AM

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Macao's decline in business may not last as long as it does in Las Vegas.

Most U.S. casinos are going to be shut down for the foreseeable future, and when they reopen, it may be months, or even years before business returns to normal. The economy could be headed into a recession, which will result in less spending from both consumers and businesses. 

However, the casino shutdown is already over halfway around the world in Macao, and that could help some of the companies with operations in both Macao and Las Vegas weather the storm. Wynn Resorts (WYNN 12.05%), Las Vegas Sands (LVS 5.86%), and MGM Resorts (MGM 11.30%) can lean on Macao for both cash flow and knowledge about how to operate through the COVID-19 pandemic, and that could shine a ray of hope on these operators. 

Macao's skyline seen from the water at night

Image source: Getty Images.

Las Vegas is repeating history

On February 5, Macao's casinos shut down for 15 days as part of an effort to combat COVID-19. The result was an 87.8% decline in gambling revenue during the month of February, partly because resorts were slow even before the shutdown went into place. 

That sounds terrible, but there are at least some preliminary signs that travelers are starting to return in China. Marriott CEO Arne Sorenson said that his company is starting to see demand return in China, and that's about as positive a broad indication as we've seen that China may be the first to see travel recover from the COVID-19 pandemic. And that would be great news for casino stocks. 

If China, and Macao, can get the COVID-19 outbreak under control, it could lead to a return to a more normal local business flow in the coming months. And it's possible Las Vegas could be just a few months behind. 

Cash will keep flowing from Macao

Even if Macao's casino revenue drops significantly, resorts would likely still generate positive cash flow. That's because a resort's most expensive outlay is building the property itself. Once the real estate is built, fixed costs can be minimized to a certain extent. 

The best proxy we have is between 2014 and 2016, when gambling revenue fell 36.5% due to a corruption crackdown in China. Even with the big drop in revenue, EBITDA, a proxy for cash flow from resorts, remained positive. 

WYNN EBITDA (TTM) Chart

WYNN EBITDA (TTM) data by YCharts.

Investors should also pay attention to the fact that EBITDA margin remained fairly strong despite gambling revenue falling as much as 50% from its peak. Even if casinos need to absorb a 50% or 60% decline in gambling revenue for the next few months, they should generate positive cash flow from operations in Macao. And that could help keep resorts in Las Vegas afloat until they become cash flow positive again. 

Las Vegas leans on Macao

China's relatively quick reaction to COVID-19 could end up helping ease the economic impact on the virus there. And that may keep money flowing from the region into the coffers of Las Vegas Sands, Wynn Resorts, and MGM Resorts, keeping Las Vegas resorts afloat. 

In the U.S., it's hard to know when the shutdown of casinos will end, so any bright spot in operations would be welcome news for casino stock investors. 

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Stocks Mentioned

Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$58.29 (12.05%) $6.27
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$30.24 (11.30%) $3.07
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$33.43 (5.86%) $1.85
Marriott International, Inc. Stock Quote
Marriott International, Inc.
MAR
$139.39 (4.76%) $6.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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