"Old Macau Side," the original casinos before the Cotai Strip opened up to development. Photo by the author.
Shares of major gambling companies such as Las Vegas Sands (LVS 2.65%), Wynn Resorts (WYNN 3.41%), MGM Resorts International (MGM 4.08%), and Melco Crown (MPEL 2.53%) got a nice lift in late June, after the Chinese government announced easing restrictions on tourists going to the island of Macau, where each of these casinos has made incredible winnings over much of the past decade.
Even though the past decade has been so profitable, the past year has been extremely painful. The reports of illegal activity by some third-party operators and the resulting government crackdown on all high-net-worth visitors to Macau has created a tough operating climate there.
After months of continuous revenue and profit declines for most of these companies, is there an end in sight for this drop? Recent news from the Chinese government and stats on Macau's total gambling revenue give reason to be encouraged.
The chips are still down ... way down
While the small bump at the end of last month helped investors recoup some of their losses, it's not much consolation when shares of each of these companies are still way down over the past 12 months. Wynn Resorts, for example, has lost around 50% during that time.
Casino Stock 1-Year Performance, data by YCharts
Why the end might be in sight
With this recent good news about easing visitor restrictions, slowing losses, and new resorts to look forward to, the worst of this market drop may be over. Let's look at all three points.
1. Easing visitor restrictions. The mainland Chinese government set restrictions on Chinese citizens visiting Macau in 2014, limiting their stay to just five days, and only one time during a 60-day period. However, new restriction-easing measures just passed, allowing for those visitors to stay seven days instead, and decreasing the frequency restriction to once during a 30-day period.
The Chinese government is still strict on this matter, deciding that any citizen caught breaching this rule will be subject to harsher restrictions of just two-day stays, and even harsher penalties for further breaches. Still, easing restrictions shows that the mainland government is willing to back off its fight on gambling for the first time since July 2014, when the fight began. That will reduce the pressure on Macau.
2. Slowing losses. Gambling revenue declines for the past 12 months have been substantial for Macau in total, but there are signs that those losses may be easing. According to MacauNews, Macau's gross gambling revenue dropped in June by less than it did in May. In May, the figure was $2.54 billion, and in June it dropped 14.7% to about $2.17 billion. That's still a substantial drop, but it's less than the 20% sequential drop expected.
As for year-over-year comparisons, Macau's total gambling revenue in June was about 36% lower than in June 2014, only slightly better than the 37% year-over-year drop in May. However, it was a substantial improvement from the 49% year-over-year drop posted in February.
There's more nuance to these numbers than just easing losses. For one thing, the Chinese government started its anti-corruption campaign around April or May of 2014, so February 2014 (which included the Chinese New Year) was one of the best periods for gambling revenue in all of Macau's history. Thus, February 2015 looked much worse because it was compared with such a successful month last year, while June 2014 was already during the anti-corruption campaign.
Still, it shows that Macau could be approaching a bottom to the major drops, and that when revenue declines level off, we'll be left with high-performing companies at incredibly low valuations, with a lot of high-value property in Macau to still grow with as the government eases up on restrictions.
Construction on LVS's coming Parisian resort from late 2014. Photo by the author.
3. New resorts. Each of the major gambling companies operating in Macau has a new casino resort being built in Macau's up-and-coming Cotai Strip (on the other side of the island from the "old Macau side" pictured at the start of the article). Melco Crown's Studio City and Las Vegas Sands' The Parisian are set to open in early 2016, and Wynn's and MGM's new resorts are scheduled to open later in 2016.
Building the new resorts is risky, because they each represent huge investments in an area where gambling is in decline. Still, the exciting long-term potential of these resorts is that they're more than just casinos; they're each resorts with live shows, shopping, and more features and attractions than ever. This is a trend that the Chinese government has said it would like to see, to help Macau itself diversify as a family travel destination and not just an island of gambling. As the mass-market visitor base continues to grow, these new integrated resorts start to look more and more like a long-term win.
LVS remains the best bet on Macau's comeback
There's still a lot of risk with Macau, and there's no telling if the bottom really is approaching or if there are more losses in store. However, for the first time in a long time, we're seeing positive signs, and if things start to turn around in Macau, then suddenly there will be a few companies with huge potential, and at very cheap valuations. Of these, Las Vegas Sands continues to look like the best bet.
In terms of Macau presence, Las Vegas Sands already has by far the most hotel rooms, the greatest number of properties, and the most diversified visitor base in Macau. Competitors Wynn and MGM Resorts each have one major property there while LVS has four. Las Vegas Sands also has the best growth within Macau's mass-market segment, which has helped it remain more stable, as VIP gambling revenue declines have crushed Wynn Resorts, which has historically been much more dependent on that segment than LVS.
Finally, Las Vegas Sands has the best valuation, at a P/E of just 17, compared with Wynn at 23 times earnings (even after its huge stock price drop), MGM at 37 times earnings, and the industry average at 27 times earnings. And for icing on the cake, LVS offers a nearly 5% dividend yield.
