It's been a rough few months for gaming stocks with exposure to Macau. A crackdown on corruption in Mainland China is seen as a risk to VIP play, the Asian economy seems to be on rocky footing, and gaming play in Macau has slowed ever since May. As a result, there's been a big sell-off in gaming stocks with any exposure to Macau.
But is now the time to sell, or rather a buying opportunity for long-term investors?
This blip in Macau may last a while
While the headline numbers in Macau are frightening, they also need some context. For example, while VIP Baccarat play is on pace to be flat in 2014 and has taken a nosedive recently, mass market Baccarat play is on pace to be up 23%. This is a result of the pullback by VIP players due to the corruption crackdown and economic challenges.
Long-term, it's healthy for Macau to be less reliant on VIP players, especially through junkets. It's encouraging to see the mass market grow to become a bigger piece of the pie in Macau, it's just a rough transition from VIP driven gaming growth.
A rendering of The Parisian, Las Vegas Sands' newest resort in Macau due to be completed next year. Image source: Las Vegas Sands.
The other thing to consider is that Macau's mass market is a supply constrained market, meaning there are only a limited number of gaming tables for players to gamble at.
But six new resorts or additions are in the works and when they're completed it will increase supply -- particularly in the mass market -- and should bring in more gaming dollars. Since they only have one resort in Macau, MGM Resorts (MGM 0.90%) and Wynn Resorts (WYNN -1.16%) probably have to most to gain from the additional capacity but Las Vegas Sands (LVS -0.92%) and Melco Crown (MLCO -1.28%) will see a boost as well.
In short, the recent decline in gaming revenue isn't good, but it's not worth panicking over right now. The mass market is still going strong and it may be a positive to see less corruption in China, which often brings a negative reputation to the gaming in Macau.
Macau stocks were expensive
One of the biggest challenges gaming stocks have right now is the expectations that were built into their stock prices coming into 2014. Earlier this year, I highlighted valuation as one of the reasons to be cautious and the decline in Macau's gaming revenue has brought that home for investors.
Valuations have come down from enterprise value/EBITDA multiples of 15-18 times just six months ago to 9-12 times today. Multiples near 10 present less downside risk along with upside potential if gaming revenue picks up or new casinos generate additional revenue.
The value of gaming stocks really comes down to the performance of gaming in general in Macau. Long-term, I see a lot of potential but it could be a volatile year if VIP play continues to be weak and Macau adjusts to a mass market focus. But for investors buying now, they're pricing in some risk by getting lower valuations than we've seen in the last few years and even a dividend yield of 3.2% and 2.7% for Las Vegas Sands and Wynn Resorts respectively.
This isn't the time to run from Macau gaming stocks. If anything, it's time to buy.
