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Visa Restriction and Credit Card Spending

Recent Developments

The latest development, which is considered to be nothing more than speculation up till now, is that China's province of Guangdong may be tightening the issuance of visas to Macau. This will not be the first time that China has imposed restrictions on its citizens traveling to Macau, as a similar event was witnessed in 2009, when Guangdong imposed restrictions on the number of visits that its residents could make to Macau in a certain time frame. That event had resulted in stocks dipping by 6-8% on October 15, 2009.

"Recent weaknesses in the Macau gaming revenue and visitation growth could be partially explained by visa restrictions and reduction in the China UnionPay limits, highlighted by the Macau Daily," an analyst at Wells Fargo & Co. explained.

Another development that caused stock prices for casinos to react negatively was that China UnionPay, as per reports, has restricted the amount that can be spent overseas on credit cards. This will decrease per client revenue of mainland China.

Stocks of Wynn Macau ltd. (NASDAQ:WYNN) [HK:1128], Sand China ltd. (NYSE:LVS) [HK:1928] and MGM China Holdings (NYSE:MGM) [HK:2282] were down 2.8%, 5.8% and 4.8% respectively at the end of their Asian trading sessions.

The reported gambling revenue of the six casino operators for the month of May increased by 7.3% year over year to reach 26.1 billion Patacas ($3.3 billion), as per the Gaming Inspection and Coordination Bureau. This has been the lowest increase in the city's gambling revenue since July 2009. It is being speculated that these developments may have caused a slowdown in revenue growth for the Gaming Industry in Macau.

Both the aforementioned developments will have a significant impact on the revenue and profitability of casino operators in Macau, as the city's casino operators earn a significant portion of their revenue from visitors coming in from mainland China.

The number of visitors from mainland China in 2011 was approximately 16 million, and it is speculated that they contributed about 41% of the revenue growth for casinos last year.

Background

Macau is the largest gaming city in the world. Because of the magnitude of this market, it has the edge of being the only city in China that offers legal gambling.

According to estimates, more than 1 billion people live within a three-hour flight from Macau, and more than 3 billion people live within a five-hour flight from Macau.

Macau has experienced meaningful growth in the number of tourists it receives over the years, and in 2011, it had a total of about 28 million visitors, of which 16 million were estimated from mainland China.

Recent Stock Price Performance

  • Las Vegas Sands saw its stock price decrease by 3.94% on Friday and is down 3.6% YTD
  • MGM Resorts International witnessed its stock price decrease by 4.55% on Friday and is down 5.6% YTD
  • Wynn Resorts witnessed its stock price decrease by 1.22% on Friday and is down 10.5% YTD

Financials and Outlook

All the companies mentioned above have invested in Macau to benefit from the strong market dynamic of increased potential consumption spending in emerging markets.

As can be seen below, these companies have significant dependence on their operations in Macau for revenue generation, with Wynn Resorts having the highest dependence, followed by Las Vegas Sands and lastly MGM Resorts International .

If the aforementioned developments materialize, they will adversely affect all three companies due to lower revenue generation and high debt obligations.

We are of the opinion that WYNN Resorts will be affected the most due to its highest dependence on revenue from Macau and based on recent reports that it has been given approval to build another casino in Macau. Valuations for casinos can contract as the market starts to build up negative expectations from the Macau region, which for last few years has been the key growth driver for these stocks.

LVS

MGM

WYNN

%age of revenues from Macau

50%

30%

72%

Net Profit Margin

20%

-

16%

Debt/Equity

127.8

221

154

Total revenue 2011

$ 9.4 billion

$7.9 billion

$5.2 billion

Market Share 1Q2012

18%

10%

12%

Dividend yield

2.33

-

1.96

P/E

15.67

-

17.14

P/B

4.01

0.84

6.11

P/S

3.75

0.65

1.95

Source: Gambling In Macau To Suffer In Future?