Macro Growth Good For Macau Casino Operators

Includes: LVS, MLCO, WYNN
by: Mike Maher

Government figures out of Macau Tuesday continue to show rapid growth in the gambling enclave off the coast of China. October's gambling revenue was up 42% to 26.9 billion patacas ($3.4 billion), surpassing the record set in August thanks in part to China's Golden Week holiday. As revenue growth for the enclave continues its rapid expansion, it has outpaced the growth in some of the casino operators in Macau.

Melco Crown Entertainment Ltd (MPEL) is a pure play on Macau, with no exposure to mature markets like Las Vegas. The company reported record EBITDA and gambling volumes for the second quarter in late August, and given the strong macro results out of Macau, Melco Crown should be able to continue to post record volumes and earnings. At $11.10, shares of MPEL are down $5.05, or 31% from their 52-week high of $16.15. Since August 1, shares are down nearly 30%.

Wynn Resorts (NASDAQ:WYNN) owns and operates casinos in both Las Vegas through its 100% ownership in Wynn Las Vegas, and in Macau through its 72.29% ownership of Wynn Macau. In Wynn's Q3, it reported that Wynn Macau's net revenue were up 41.7% year over year, to $951.4 million. This translated into adjusted EBITDA of $296 million, an increase of 49.5% year over year. Trading at $128.61, WYNN is down $43.97, or 25% from its 52-week high of $172.58. Since August 1, shares are down about 12%

Las Vegas Sands (NYSE:LVS) owns and operates casinos in the US, Macau, and Singapore. Through its majority ownership of Sands China Ltd, LVS generates approximately 43% of its EBITDA from Macau, with adjusted EBITDA increasing to $388.3 million in the third quarter, up from $335 million in the year ago period. The company is expecting to open Sands Cotai Central in Q1 of 2012, which should provide a large lift to EBITDA next year. At $47.15, LVS is down $8.32, or 15%, from a 52-week high of $55.47. Since August 1, shares in LVS are down about 2%.

Given that Macau has seen record gambling revenue in 2 of the last 3 quarters, investors must surely be disappointed with the negative performance of these shares. Fears of a hard landing of the Chinese economy, as well as of a meltdown in the EU, have pushed shares of these casino operators down, even as the macro picture in Macau continues to show rapid growth and each company posts strong individual results. Given the growth trends of the industry, shares of all three of these companies have fallen too far off their 52-week highs. Look for each of the companies to rally into year end, as investors wake up to the fact that gambling revenue in Macau continues to grow.

Disclosure: I am long MPEL.