Entertainment venues in the U.S. have opened and are running full speed ahead, with very few exceptions. The COVID-19 pandemic has certainly impacted business, but we don't see lockdowns and restrictions that bring entire operations to a screeching halt anymore.
The same can't be said for China and Macao, where lockdowns are still a regular occurrence. Casinos in Macao are coming off another lockdown, and it'll likely take months to get back to a normal level of activity, but even the "normal" of the last few years is nowhere near the pre-pandemic levels of operations.
How the mighty have fallen
In 2019, Macao's casinos generated $36.5 billion in gambling revenue, and the region was an absolute cash machine for operators. The pandemic hit China and Macao in early 2020 and shut down casinos before most Americans had heard of COVID-19. The region hasn't recovered since.
In 2021, gambling revenue was just $10.8 billion, and through July of this year, revenue is down 46.4% from the same time a year ago. Macao's cash machine has become a money pit for casino operators.
A decline that never ends
You can see below how quickly revenue dropped for casino operators. Las Vegas Sands (LVS -1.67%) has the most exposure to Macao on an absolute basis, but Melco Resorts (MLCO 3.63%) generates nearly all of its revenue there. Wynn Resorts (WYNN -2.00%) used to generate most of its revenue in Macao, but with casinos in Las Vegas and Boston, it's the most diversified of these three companies and has fared the best over the last three years.
Earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a proxy for cash flow from casinos, has collapsed over this time as well. You can see below that Wynn is the only company generating significant EBITDA, and if the trends in Macao continue for the rest of the year, it's likely Las Vegas Sands and Melco Resorts will have negative EBITDA this year.
Will a recovery ever come?
The challenge for investors is predicting a recovery. If China opens up and Macao can welcome visitors from around Asia en masse, it could be a quick recovery in revenue, just like what we saw in Las Vegas in 2021 when The Strip generated record revenue. But China -- and by extension Macao -- isn't Las Vegas.
A zero-COVID policy continues to be in place and doesn't seem to be going anywhere at the moment. Even if the policy does change, it'll likely take many months for travel to open up and for people to be comfortable going to Macao. Given what we know today, I would error on the recovery taking longer than anyone expected.
For investors, that means Macao-centric companies are extremely high-risk at the moment. I wouldn't be buying Melco Resorts' or Las Vegas Sands' stock, given their exposure to Macao. Wynn Resorts has the diversity to survive the next few years, but without Macao, it won't thrive.
Macao was a gamble worth taking for casino companies when they built multibillion-dollar casinos there, but right now, the odds have turned, and this isn't a bet I would be taking.