Will the Chinese Economic Slowdown Spread to the Casinos of Macau?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lying on the western side of the Pearl River Delta, bordering the Guangdong providence to the north, and facing the South China Sea to the east and south is the one of the two special administrative regions of the People’s Republic of China, Macau, also referred to as Macao.
Formerly a Portuguese colony, Macau was governed by Portugal from the mid-16th century until 1999, when control of the territory was transferred to China. Today, China is responsible for the territory’s defense and foreign affairs, while Macau maintains its own legal system, police force, monetary system, customs policy, and immigration policy.
What is the importance of this 11.39 square mile region? The territory is one of the most important tourism and gambling centers of the world. In terms of revenue, Macau is the world’s biggest gambling market. To put the Macau market into perspective, compare it to the Las Vegas Strip. Macau'sgross gaming revenue in 2012 was 5.5 times the gross gaming revenue generated on the Las Vegas Strip, while growth experienced in 2012 by the Macau market was roughly 10 times the rate on the Las Vegas Strip. Nearly every major international casino and gambling company possesses substantial exposure to Macau. Thus, with the overall Chinese economy sputtering, fears have arisen that the economic slowdown in China will spread to Macau.
Thus far, these fears have been proven to be unfounded, as revenue for the region in the month of June rose more than projections displayed. The report by Reuters detailing Macau’s economic success depicts gambling revenue in Macau rising 21.1% in June year over year, maintained by a steady flow of wealthy mainland gamblers. Analyst projections foresaw year over year growth only topping 18%-21%. June revenue came in at $3.54 billion, according to government data.
This caliber of growth came as a great surprise to many analysts as China’s overall economy is grinding to levels not seen since 2009 in terms of growth. Casino and gambling stocks reacted positively to the reports and rose in trading on July 1, the day on which the data was released.
What happens in Macau should not just be of concern to Chinese investors, as nearly every major international casino or gambling company possesses substantial exposure to what happens in this former Portuguese territory. Four major international publically traded companies of particular concern are Las Vegas Sands (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), Melco Crown Entertainment (NASDAQ: MPEL), and MGM Resorts (NYSE: MGM).
Las Vegas Sands derived $5.79 billion in revenue from its 4 operations in Macau in 2012, representing 51.98% of total company revenue, exemplifying the importance of Macau to the company. Wynn generated $3.67 billion in revenue from its Macau operations, which represents 71.26% of overall company revenue. Melco Crown Entertainment is nearly entirely reliant on the Macau market for revenue generation, although it is in the process of branching out into the Philippines. MGM Resorts produced $2.81 billion in revenue from its MGM China segment, including its Macau operations, which represents 30.67% of overall company revenue.
Macau generated a record $38 billion in gross gaming revenue in 2012, an increase of 13.5% from the prior year. Looking into the future, analyst projections anticipate double digit annual growth to continue in terms of gross gaming revenue, a key metric crucial to the industry. However, the growth experienced in Macau is heavily dependent on the Chinese economy, as in 2012 60.2% of all visitors to Macau were Chinese, a statistic which grew from 57.7% the year before. The close relationship between the health of the Chinese economy and that of Macau is displayed through the charts below depicting the rate of annual GDP growth in the regions.
Thus, given the market conditions present in Macau, which if any of these four prominent gambling and gaming companies with significant exposure to Macau are overall strong investments?
Las Vegas Sands’ top line growth is projected to sustain in the mid-single digits through 2015, with revenue increasing from 2012’s $11.13 billion to $15.4 billion by 2015. The bottom line for the company is expected to grow in the double digits through 2015, with net income rising from 2012’s $1.52 billion to 2015’s anticipated $2.94 billion. The company presently holds a price to earnings ratio of 27.49, and pays out a dividend yielding 2.64%. Overall, Las Vegas Sands earns 4 out of 5 stars, and is a strong investment in Macau as well as improving market conditions in the United States.
Wynn’s top line is projected to rise from 2012’s $5.15 billion to 2015’s expected $6.00 billion, representing consistent annual low single digit growth. Net income for the company is anticipated to rise from $502 million in 2012 to the expected $821 million by 2015, representing annual double digit growth. Presently, the company holds a price to earnings ratio of 22.68, and pays out a dividend yielding 3.16%. In total, Wynn earns 3 out of 5 stars, and is not a screaming buy or sell at current levels.
Melco Crown Entertainment’s top line growth is predicted to sustain in the 10%-12% range annually through 2015, with revenue increasing from 2011’s $3.83 billion to $6.01 billion by 2015. The bottom line for the company is expected to grow in the 25%-27.5% range annually through 2015, with net income rising from 2011’s $295 million to 2015’s anticipated $777 million. The company presently holds a price to earnings ratio of 34.20, and does not pay out a dividend. Overall, Melco earns 4 out of 5 stars, and is a strong investment in Macau and its explosive growth.
MGM’s top line is projected to rise from 2012’s $9.16 billion to 2015’s expected $10.35 billion, representing consistent annual low single digit growth. Net income for the company is anticipated to rise from -$1.76 billion in 2012 to the expected $137 million by 2015. Presently, the company holds a negative price to earnings ratio, and does not pay out a dividend. In total, MGM earns 1 out of 5 stars, and is an unattractive play on this particular market as a result of its weak fundamentals.
The Foolish Bottom Line
In the gambling and gaming industry, Macau possesses supreme importance as the world’s largest market. The Chinese economy is weakening, however the growth in the country is still the some of the fastest in the world, potentially allowing the Macau economy to sustain its trend of fast-paced growth.
Among the major companies with exposure to the Macau market, Las Vegas Sands and Melco Crown Entertainment appear to present the most compelling opportunities. All in all, investors will have to closely monitor the Chinese economy to get a gauge on the Macau market, however sustained double digit growth is a potential reality for the region, and investors should carefully position themselves in fundamentally strong names with exposure to the Macau market to capitalize over the long-term.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!