The Parisian from Las Vegas Sands will be a big addition to the Cotai Strip. Image: Las Vegas Sands.
Macau has gotten a lot of bad headlines lately. Early this week the government announced gaming revenue figures for May and they declined 37% to $2.5 billion, continuing a long slide in the Chinese gaming enclave.
Analysts, executives, and investors are disappointed by the trend, which is understandable when the numbers look so negative. But is Macau really dead? Is gaming there in trouble? The answer may surprise you.
How bad is Macau?
The headlines would tell you that Macau is in real trouble and the chart below shows just how sharply gaming has declined in the past year. But the corruption crackdown in China has already spooked off most of those gamblers worried about moving money to Macau and in the last four months gaming has stabilized.
Data source: Macau Gaming Inspection and Coordination Bureau. Chart by author.
No one likes to see declines, but if we assume that gaming is going to stabilize at about $2.5 billion monthly that's still about five times as much as the Las Vegas Strip makes. Just think about that. Macau is making five times as much money as the Las Vegas Strip at the tables and we're calling it "disappointing."
Profits are still going to be plentiful
If Macau gaming does go back to what the industry saw in 2011 it may not be as bad as you might think. Las Vegas Sands (LVS +0.00%), Wynn Resorts (WYNN +1.66%), and Melco Crown (MPEL +1.64%) were all highly profitable in 2011 and they'll likely all make money in 2015, despite the bad year.
LVS Net Income (TTM) data by YCharts
Sometimes some perspective is needed in gaming and Macau is still a great market for gaming operators even if the comparisons from a year ago are troubling.
Building on a long-term plan
The other factor to consider in Macau is that the government is trying to build an entertainment destination, not just a gambling enclave. It will take time to convince tourists to spend money on nightclubs, shopping, and shows the way they do in Las Vegas, but if Macau can succeed it can diversify away from its reliance on high rollers.
As long as Macau's gaming revenue has stabilized at about a $30 billion annual run rate the region should be able to maintain profitability as it expands offerings from new resorts by Wynn, Las Vegas Sands, Melco Crown, and MGM Resorts (MGM +1.10%) as well as Galaxy and SJM, which aren't traded in the U.S. When these new offerings are built it could attract millions more visitors from around the world.
There are definitely concerns for Macau right now but sometimes perspective is needed. The region is still highly profitable and gaming revenue is still about five times that of the Las Vegas Strip. So, companies there are still on solid footing, even if revenue and profits decline year over year. Long-term, this is still as place that I'm going to stay invested because cash is still flowing in and Macau's best days as an entertainment destination are still ahead of it.
