Chinese President Xi Jinping has cracked down on corruption in recent years, removing high-ranking officials from office in provinces all around the country and seeking out the misuse of public money. Early last year, he set his sights on Macau with its exclusive VIP clientele, which included many mainland government officials and other wealthy Chinese citizens.
Macau brought incredible profits to companies like Las Vegas Sands(NYSE:LVS), Wynn Resorts(NASDAQ:WYNN), and MGM Resorts(NYSE:MGM)over the past 10 years -- by far more profits than the U.S. gaming industry -- but the recent government scrutiny has rocked the industry, especially the VIP segment. As a result, each of these companies have lost about a third of their stock value since April 2014.
Now, the Chinese government is taking this strong stance against gambling for all its citizens, anywhere in the world. Effects are spreading beyond Macau to other regional gambling hubs such as Singapore and even Las Vegas, where Chinese visitors make up significant traffic.
President Xi and his war on gambling
Xi has tightened oversight in two ways. First, he is heavily regulating visas for departing Chinese with increased scrutiny for anyone traveling to Macau, Singapore, or Las Vegas. Next, he has made it illegal for casinos to advertise anywhere in China -- everything from automated text messages sent to mainland Chinese cell phones to advertisements set up by the Las Vegas Convention and Visitors Authority are off limits.
From Macau to Las Vegas
The effects of this gambling crackdown have stretched to Las Vegas where a record 263,000 Chinese tourists flocked to Las Vegas in 2012 (the most recent year of available statistics), up 39% over the previous year. That number is likely to drop this year -- casinos are already tightening their belts as revenue from their baccarat tables, the most popular game among Chinese gamblers, declines. Additionally, Chinese investors have made up a large part the recent funding growth in Vegas.
But as investors, it is not the hit to the Las Vegas economy that should concern us. Rather, it is the fact that all the top casino operators in Las Vegas -- MGM Resorts, Wynn Resorts, and Las Vegas Sands -- also have major stakes in Macau. So while you can be bearish on Macau and bullish on the Strip, your choices for U.S. growth are still reeling from the weakness abroad.
Is there any hope?
When President Xi visited Macau in February, he urged the local government to help the area diversify away from gambling and into other forms of entertainment and leisure. That is exactly what some of the companies are doing with new integrated resorts that feature more entertainment, dining, shopping, and other non-gambling options for guests. These companies are increasing their bets on the mass market to restore growth, moving away from the VIP segment. The mass market segment grew nearly 20% year-over-year during the most recent quarter.
These major players were also the ones to help Vegas diversify away from gambling, so that slots and tables only make up one-third of revenue. As such, there is hope in Macau that the economy will pivot to entertainment and mass market visitors.
Be prepared for a tough first quarter when earnings are reported in April and May due to particularly difficult year-over-year comparisons. The first quarter of 2014 was a record-setting period for these companies. But stay hopeful, Las Vegas investors, recovery efforts in both markets are already underway.
Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.