What happened 

Casino stocks with exposure to Macao took a nosedive on Tuesday after a few announcements from the government. One was that COVID-19 cases are on the rise in the Chinese province of Fujian and that could result in fewer visitors to Macao. More concerning is potential government restrictions on gambling in the region, which could turn gambling stocks from steady growth stocks to risky bets overnight. 

The impact was swift on the stock market. Shares of Wynn Resorts (WYNN 0.47%) fell as much as 13.8%, Las Vegas Sands (LVS -0.11%) dropped 13.9%, and Melco Resorts & Entertainment (MLCO -1.66%) was off 9.1% at one point. The stocks are down 11%, 10.4%, and 6.4% at 3:15 p.m. EDT. The drop has even swept up MGM Resorts International (MGM 0.35%), which fell as much as 5.5% today. 

Macao's skyline at night.

Image source: Getty Images.

So what

COVID-19 breaking out in the Fujian province may be a big short-term news item for Macao, but in the long term the real concern for investors should be the government's potential regulations. Macau's government is opening a public consultation period from Sept. 15 to Oct. 29 in order to get input on what rules gambling concession holders should have to live by.

All six concessions expire in June 2022, which the market seems be assuming will be extended. But the rules for concessions may not be the same as they are today. The government is contemplating going from six gaming concessions to two, adding additional oversight, and even putting limits on dividends paid by Macao's gambling companies.

To be clear, there weren't any new rules announced and we don't know what the final proposal will be, but investors clearly don't like what they're hearing today. Not only is there uncertainty about concessions, we also don't know what potential regulations might be put in place that might limit revenue in Macao or how future expansion might be impacted. 

Now what

The next few months will be critical for gambling companies in Macao. They all need concessions to be extended at favorable terms, especially given a down market because of COVID-19, so any new restrictions could sink these stocks. 

Las Vegas Sands has a lot to lose because it sold all of its U.S. operations in order to bet on Asia, and Macao specifically. Melco Resorts started in Macao and still relies on the region for most of its revenue. Wynn Resorts operates two casinos in Macao and also has a lot to lose if Macao's gambling business declines. 

MGM is the one outlier in this group because a majority of its revenue still comes from U.S. gambling operations and it only owns a little over half of its Macao operations. So, out of these four stocks, MGM Resorts has the lowest operational risk coming from Macao. 

Stay tuned to news from Macao for indications about what the rules will look like. We've seen crackdowns on businesses in China, and if that spreads to Macao it could lead to a crash in Macao's gambling stocks.