The largest casinos got an early Christmas present last month after China renewed their licenses in Macao for another 10 years. 

While the likelihood of being denied renewal was small after they had invested billions of dollars in the gambling mecca and spent billions more on developing nongaming activities at the behest of Beijing, it was still a risk that hung over them like a cloud. 

Casino chips stacked on money.

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Macao regulators had been criticized for the way the original concessions were awarded, and there was talk of changing the system and having more local operators involved, instead of the big U.S.-based casinos. And with relations between the U.S. and China having deteriorated over the past few years, it remained a possibility Las Vegas Sands (LVS -2.33%), MGM Resorts (MGM -3.16%), and Wynn Resorts (WYNN -1.46%), if not frozen out, would at least operate at reduced capacity.

But Macao's casino industry has been wrecked by the pandemic, and regulators likely figured they needed the deep-pocketed players as much as the casinos needed the licenses. That doesn't mean the cards aren't stacked against them, and investors might want to put the odds in their favor by choosing a casino stock carefully.

Casino revenue plunges in China

Macao casinos are hurting. Through the first 11 months of 2022, they have generated just 38 billion patacas, the local Macao currency, or the equivalent of just $374 million. To put that in perspective, casinos generated 60 billion patacas in 2020 despite casino closures and limited travel visas issued. 

Gross gaming revenue is down 51% compared to last year, and there is not much hope it will markedly improve for the foreseeable future.

As Beijing's zero-tolerance policies toward COVID turned more extreme this year with massive lockdowns across the country where people weren't even allowed out to buy food or have it delivered, China's economy has plummeted. Industrial output rose a meager 2.2%, retail sales fell 5.9%, and auto production was down 9.9% from last year. 

What this means for casinos is that even though the government is easing up on its draconian restrictions, if the economy is in recession, people may not want to gamble even if they can.

A risky bet on regrowth

That doesn't bode well for Las Vegas Sands, which went all-in on the Asian gambling market when it sold all of its Las Vegas properties in 2021. CEO Robert Goldstein said at the time, "Asia remains the backbone of this company and our developments in Macao and Singapore are the center of our attention."

Person holding casino chips.

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It's fortunate Sands does have operations in Singapore, as that's what is keeping the company afloat. The casino operator reported $1 billion in revenue in the third quarter. Visits to Singapore increased as the government relaxed its own travel restrictions, allowing Sands to see its net losses from continuing operations shrink to $380 million from $594 million. It was only able to generate $251 million from its China business. 

In 2019, Las Vegas Sands generated $13.7 billion in revenue ($8.8 billion of which came from Macao, or 64% of the total) with profits of $3.3 billion.

Wynn Resorts was even more dependent on Macao, with 70% of revenue coming from its casinos there, or $4.6 billion worth. So far in 2022, Wynn Macau has generated $234 million in Macao. That's million.

The odds-on favorite

Arguably the best-positioned casino stock is MGM Resorts, which has always been more of a U.S.-based operator, generating 70% of its revenue from its Las Vegas and regional casinos.

It is one of the biggest operators of casinos on the Las Vegas Strip with 10 casinos, but the loss of the near-$3 billion it made in Macao three years ago is still a tough pill to swallow. It's made about $500 million there year to date.

Fortunately, the Strip has been strong, and MGM saw record revenue and adjusted EBITDAR, which is a proxy for cash flow from resorts. Even without the contribution from Macao, MGM's $3.4 billion in third-quarter revenue is greater than the total revenue it reported in 2019. 

Any recovery China makes will only pad MGM Resorts' bottom line, and investors might just want to take the odds that it will be the industry's long-term winning bet.