Positive Macau Gross Gaming Revenue Trends Set To Continue

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Includes: LVS, MGM, MPEL, WYNMF, WYNMY, WYNN
by: Elephant Analytics

Summary

September recorded strong results with +7.4% gross gaming revenue growth.

October appears to have gotten off to a good start with +8% Golden Week visitation growth.

There appears to be a high chance that October's gross gaming revenue results will be positive, with mid-to-high single digits growth a good possibility.

Recent casino openings appear to have contributed to incremental gross gaming revenues, a change from the apparent results of the 2015 openings.

The improved Macau outlook is mainly priced into the stocks though, and continued Macau growth should lead to steady share price increases rather than the high paced September rally.

Macau's gross gaming revenues for September 2016 came in at 18.4 billion MOP ($2.30 billion USD), an increase of +7.4% versus September 2015. This was significantly better than expected, as mid-September views averaged out to a low-single digit gain for the month, and forecasts generally were revised downward towards the end of the month.

October's Golden Week visitor numbers looked strong with 8% year-over-year growth, which should translate into positive numbers for the whole of October. It does appear that Macau is recovering, although I do not expected the year-over-year gross gaming revenue growth rates to continue their 4% to 6% improvement each month. Mid-to-high single digit growth rates should be considered good though.

Future Growth Rates

There may be some temptation to assume that the large improvement in year-over-year growth rates from June to September will continue. Each month during that timeframe has shown around a 4% to 6% improvement in year-over-year growth rates. However, it is unlikely that October will end up at +12% and very unlikely that November will end up at something like +17%.

August and September benefited from the catalysts of the major new casino openings of the Wynn Palace and Parisian Macau. However, the next major casino to open (MGM Cotai) won't be until Q2 2017. Recent months have also benefited from a stabilized-to-improving Macau (independent of new openings) combined with potentially favorable hold rates.

Absent any new casino openings for now, mid-to-high single digits growth should be considered quite solid and indicative of a gradually improving Macau.

Year-over-year growth

June

-8.5%

July

-4.5%

August

1.1%

September

7.4%

Click to enlarge

Incremental Business

Although it is still fairly early on, the numbers would appear to indicate that the Parisian Macau and the Wynn Palace have had a solid positive effect on overall Macau gaming revenue. In addition to stealing market share from other casinos, these properties appear to be contributing incremental gross gaming revenues as well. This result appears to be in line with the more optimistic viewpoints of the effect of new casino openings, and much better for Macau than the Studio City and Galaxy Phase 2 openings, which only appeared to create a marginal amount of incremental gross gaming revenues (although any incremental effect may have been outweighed by negative Macau trends at the time).

Golden Week And October

Macau government information indicates that tourist visitation was quite strong for Golden Week, with 8% year-over-year growth to 1.15 million tourists. The average hotel occupancy rate was 92.3%, up 5.1% from 2015, although there was a slight (-1.2%) decline in average room rates.

In 2015, the Golden Week visitor count was up 2.7% year over year, while October's overall visitor count was down 0.6% year over year. Golden Week accounted for approximately 41% of October's total visitor count, so October 2015's visitor count (excluding Golden Week) was down approximately 2.7% year over year.

Given the strong Golden Week visitation, October 2016's total visitor count should be solidly positive year over year. The view on October's gross gaming revenues appears generally positive as well, with Wells Fargo currently estimating year-over-year growth at +3% to +8%.

Stocks Have Priced In Macau Improvement

Macau casino stocks have largely priced in the improvement in Macau's outlook during the past few months. Las Vegas Sands (NYSE:LVS) is up 41% since late June, while Melco Crown (NASDAQ:MPEL) is up 36%, MGM Resorts (NYSE:MGM) is up 23% and Wynn Resorts (NASDAQ:WYNN) is up 11%.

If Macau continues to show mid-to-high single digits growth in future months, there is still some room for share price appreciation. However, the pace of any share price appreciation is likely going to slow considerably from the 30% to 40% appreciation shown by some casino stocks. This is also demonstrated by the relatively modest response by the Macau casino stocks to the +7.4% growth in September, compared to the strong and sustained rally once gross gaming revenues turned modestly positive for August.

Conclusion

The overall outlook for Macau looks fairly good now with two positive gross gaming revenue months in a row and October off to a good start according to visitation numbers and channel checks. However, much of this improved outlook is now priced into the casino stocks after strong stock performances during September. If Macau continues to show gross gaming revenue recovery, share prices should show steady improvement as well. However, the pace of this improvement is likely to be much slower than the rapid rally that we saw in September.

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Disclosure: I am/we are long WYNMF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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