Macau gaming stocks like Las Vegas Sands (
LVS
,
quote
), Wynn Resorts (
WYNN
,
quote
), and Melco Crown Entertainment (
MPEL
,
quote
) have had a rough past few weeks, as these high-beta names fell
victim to the global risk-off trade over fears that a Chinese
slowdown would adversely impact casino operators in the former
Portuguese enclave.
[caption id="attachment_58932" align="alignright" width="300"
caption="Swimming pool at the Wynn Macau resort"]
[/caption]
This week, more bad news arrived as early reports on May's
gaming numbers
showed slowing growth in the extremely important
VIP segment
. Two-thirds of Macau gaming revenues come from high-rollers. This
is a much higher percentage than casinos in Las Vegas that rely
more heavily on mass-market gamblers.
Growth in rolling chip volume in the VIP segment, the metric
used to determine aggregate wagers placed, slowed to 13.3%. This
may not be an outlier either: rolling chip volume growth has
progressively slowed for the past year.
While this is reason for investors to raise a proverbial
eyebrow, it's not a compelling enough one to dump stocks that
depend on Macau gaming for the majority of their revenues.
The roughly 40% annual growth that Macau has experienced for the
past few years was simply not sustainable. As the gaming industry
in the Special Administrative Region becomes larger and larger,
such growth rates become increasingly difficult to maintain. While
Macau casinos may not enjoy the massive growth of previous
years, the sector is still growing and profitable.
While growth is projected to slow to between 15% and 20% this
year, gaming revenues continue to grow. This in spite of global
macroeconomic headwinds where logic might otherwise dictate that
discretionary spending on superfluous yet expensive hobbies like
gambling would decrease.
The primary concern for investors in Macau gaming stocks is
liquidity. The opaque junket operators that provide much of the
credit for "whales" have benefited from the easy money policies in
the mainland. As China tightens credit, it may become more
difficult for junkets to access the credit they need to operate
effectively. If it turns out that the Chinese banking sector's
loans
are as bad as some have hypothesized
, only then should investors re-evaluate their Macau gaming
hypothesis.
Going forward, casino stocks are in much better shape to ride
out a potentially prolonged global slowdown, as firms like LVS have
drastically improved their debt profile.
The takeaway for long-term investors is that the Macau gaming
stock growth story is still intact, but that 40% annualized growth
is probably a thing of the past. The best play here remains LVS,
who are better positioned in Macau
to take advantage of the shift in gaming to the Cotai
Strip
, and their Singapore property, the Marina Bay Sands, continues to
grow at a rapid clip.
Disclosure: Author is net long LVS. Immediate family is net
long LVS, WYNN, and MPEL
