Macau: The Time Of Easy Money Is Over

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Includes: LVS, WYNN
by: Daniel James

Summary

After a long period of explosive growth, Macau's gambling revenue is dwindling.

Several factors are contributing to this, including a government crackdown on corruption and a new smoking ban.

U.S. casino operators active in the area are likely to see more downside in the near future.

For years, it seemed as if the explosion of Macau gambling revenue would never stop. After overtaking Las Vegas as the world's gambling capital, the region solidified its position on the back of the burgeoning elite in mainland China and other high-growth areas in Asia. Now, this period of easy growth seems to have come to a rather abrupt end, as a government crackdown on corruption and a recent address by the island's chief executive have further darkened investor sentiment towards Macau gambling. What can we expect going forward?

Winds of change

The slowdown in Macau gaming revenue is nothing particularly new. However, recently presented estimates show just how grim things are looking. For the month, officials now expect revenue of some $2.5 billion, down 27% from the city's earlier projections. The update follows a 17% decline in the island's GDP in the fourth quarter, on top of a 2.6% decline in casino revenue - its first ever. This led to a scramble among analysts to lower their full-year outlook on the industry, ranging between declines of 8% to 21%.

The reality, however, is far worse. A few days ago, Macau's government announced it was forecasting a brutal 32% drop in gaming revenue for 2015, amid intensifying calls for Macau to diversify its economy away from casinos and focus more on other areas of tourism. The numbers follow a sustained crackdown on corruption in the area, as well as a smoking ban, higher labor costs, and a slowdown in the mainland economy, which has deterred high rollers and mass market players alike.

The government's rhetoric is ostensibly soothing. Macau's chief executive, Fernando Chui Sai-on, had the following to say about the region's new normal: "Effective measures will be taken in a timely manner to prevent the problem from expanding, thereby confronting and impacting other industries or sectors... In particular, efforts will be put on safeguarding employment stability of residents." The underlying message, however, is that the times of easy money are all but over for the people of Macau.

Casinos are now required to submit proposals for non-gaming elements in their entertainment program. At the same time, the economy as a whole is facing a push towards diversification. According to officials, this will take some 20-30 years, and the people of Macau had better hurry up.

Although the explosion in gaming revenue over the last few years was clearly unsustainable, few were prepared for the speed and intensity with which the economy "normalized". Analysts are struggling to keep up with the falling revenue projections, and as a result, gaming stocks with exposure to the area have been getting slammed.

Stocks affected

Two of the largest U.S. casino operators, Las Vegas Sands (NYSE:LVS) and Wynn (NASDAQ:WYNN), have both been feeling the pinch. Sands China (OTCPK:SCHYY), in its latest earnings release, reported a steep 16.2% drop in revenue. EBITDA also plunged, down nearly 15%, as net income fell 18.3% year-over-year. The decline was led by an 18% drop in casino revenue at the company's Sands Macao facility. Although management was pleased with the results against a poor backdrop, things look unlikely to improve anytime soon. Over the last year, the stock has shed some 28% of its value, largely as a result of the Macau slowdown.

Wynn, for its part, recently encouraged its Macau staff to take unpaid leave, as traffic was insufficient to justify the number of people working to serve them. Wynn has seen its Macau operations take an even greater hit than Sands China, with Q4 revenue down 32% and adjusted EBITDA down a whopping 35.5% year-over-year. The decline was led by the VIP segment, which saw table games' turnover tumble nearly 40%. Like Sands China, the company has seen its stock decline, down nearly 40% over the last year.

Conclusion

After years of incredible revenue growth, things are starting to look fairly grim for the world's number one gambling destination. A government crackdown on corruption and a concerted drive among officials to diversify the island's economy away from gambling are sending gaming revenues tumbling - and there is, as of yet, no end in sight as revenue projections are consistently revised downward. U.S. gambling companies exposed to Macau have suffered as a result. With no clear bottom in sight, it may be best to stay away from these names for now.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.