Gambling stocks with exposure to Macao had a great start to the week this week on hopes that fewer travel restrictions from China and the rest of the world will be good for business in the long term. But it could still be a long road for operators like Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), and Melco Resorts & Entertainment (NASDAQ:MLCO), who generate most of their revenue in Macao.
Here's a look at what to expect this year and how a big drop in revenue could impact results in 2020.
The damage will be immense in Macao
There isn't a great proxy for revenue dropping 90% in a region like Macao, but the best approximation we can get is 2014 to 2016 when gambling revenue in Macao dropped over 50% from peak to trough. In that case the drop was driven by restrictions on Chinese gamblers in an effort to curb corruption in the region, and VIP players simply stayed home. You can see in the chart below that companies like Wynn Resorts and Las Vegas Sands had a drop in revenue of about 30% overall, which is for their entire operations including non-Macao resorts in the U.S. and Singapore.
That's the revenue side of the equation. If you look at cash flow over the same time as approximated by EBITDA, you can see the three companies still had positive EBITDA despite the sharp drop in revenue in 2015. Now, revenue is going to drop a lot more in 2020 than it did in 2015, but if the overall drop in gambling revenue in 2020 is 70% instead of 90%, it will greatly reduce the amount of cash burned in the region. The hope right now is that the restrictions being lifted on travel from China will start some of the cash flow into the region again, but we don't know exactly how much.
The other thing to watch over the rest of 2020 is the trend of gambling revenue in Macao. On his conference call after the first quarter, Las Vegas Sands CEO Sheldon Adelson said management expected gambling revenue to pick up throughout the summer into the fall and gain steam toward the end of 2020. If that's the case, this might be the start of a long-term growth trend on a month-to-month basis. But if revenue stagnates in the fall or winter because COVID-19 spreads in Asia, that could put the industry back at square one.
What this means in the U.S.
For companies with operations in both Macao and the U.S., the impact of Macao's gambling market opening up again could be significant. Companies are looking for cash flow in any place they can find it and Macao has typically been a much larger cash generator than the U.S. Macao could in effect subsidize the long-term recovery of U.S. operators.
The reality is that consumer discretionary stocks like gambling stocks are going to struggle in 2020, but there's beginning to be some light at the end of the tunnel. A return of gamblers from China is the start, and if a vaccine hits the market this fall, we could see a full recovery of gambling stocks as well.