Even as America begins reopening for business, ascertaining the root cause of the COVID-19 pandemic that literally shut down almost the entire world for two months could devolve into an escalating series of recriminations that fall heavily upon U.S. businesses.
Arguably those most at risk from the coronavirus blame game are the big three U.S. casinos doing business in Macao, whose licenses are due for renewal beginning in 2022.
A contagion ready to become a conflagration
There is no question where the pandemic began, but China has been pursuing a media offensive to deflect responsibility, even once suggesting the U.S. military was behind the outbreak.
The Trump administration is looking to hold China accountable for its actions that first hid, then downplayed the severity of the illness, allowing it to spread worldwide with devastating impact.
Among the possible actions that have been considered has been reneging on repaying the $1.1 trillion in debt China holds in U.S. Treasuries, though experts say the entire $18 trillion Treasuries market would be thrown into chaos.
While that might not be a tactic ultimately pursued, its discussion and the potential for some sort of retaliation indicate the likelihood there will be a response from Beijing. We've seen with the trade tariffs that were imposed (and are being considered again) how these tit-for-tat actions can quickly ripple outward. But a situation like the current crisis holds far greater implications.
A shoo-in for renewal?
Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN) have a lot to lose. Sands and Wynn, in particular, derive most of their revenue and profits from China, where the bulk of their operations are based.
Because they have invested tens of billions of dollars in their integrated resorts to help China build up Macao as the world's largest gambling market, it's never been considered a serious threat that the renewal of their concessions would ever in doubt.
It was seen as possible that Beijing might water down the value of the licenses they hold by issuing additional concessions to enable more domestic operators to participate in the market. But withholding approval for the next round of concession extensions was believed to be unlikely.
That might not be the case, though, if the U.S. begins sanctioning China in some fashion for its role in the COVID-19 pandemic. One concession renewal, or possibly all three for Sands, MGM, and Wynn, could be held hostage.
An expensive gamble
On the surface, Wynn is most at risk since it generates more than three-quarters of its EBITDA from Macao, and it has a 20% share of the VIP market. Morningstar says Wynn also generates as much as 30% of its Macao EBITDA from the VIP segment of the market, where high rollers are lured in with amenities and accommodations in exchange for dropping large amounts at the casino tables.
In contrast, Sands generates 59% of its total EBITDA from Macao, but with 30% of its casino win coming from the mass market and nongambers.
MGM Resorts has two integrated resorts in Macao, but most of its profits are derived from Las Vegas, where it is the biggest casino operator on the Strip. And it may have lucked out by winning a two-year extension to its concession earlier this year before the world caught on fire. It was supposed to be considered this year, but with the extension is now aligned with the others up for renewal in 2022.
Sands could become a target of any retribution from Beijing because of CEO Sheldon Adelson's close association with President Trump and the fundraising for his campaign.
Certainly a scorched-earth policy of denying renewals to all U.S. casinos is a possibility, and at least threatening to do so could be an effective cudgel to wield.
Can they dodge a bullet?
Macao's influence in the Asian casino market may fade over time as other markets grow. Japan is pursuing an integrated resort market (which Las Vegas Sands just bowed out of), and there are other smaller markets like the Philippines, Singapore, and Vietnam.
Reputation risk could also grow by remaining so dependent upon China, which is increasingly a contentious geopolitical adversary of the U.S.
Yet it's clear that as tensions grow between the two countries, Sands, MGM Resorts, and Wynn Resorts may find themselves in the crosshairs as the superpowers take aim at each other.