How Macau Should Offset Huge Losses in Gaming Revenue

By Markets Fool.com

2014 is over, and for the gaming companies in Macau, it's a year they'd rather forget. China's gambling enclave saw revenue decline 2.6% for the year to $44 billion, highlighted by a 30.4% decline in December.

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A crackdown on corruption in China has taken a toll on VIP play, which once accounted for 70% of Macau's gaming revenue. 2015 will be a year of adjustment for the companies with casinos there.

The Parisian will be Las Vegas Sands' next resort in Macau. Source: Las Vegas Sands.

Why a slowdown isn't as bad as it seems
Gaming revenue may be down in Macau, but profits for Las Vegas Sands , Wynn Resorts , Melco Crown , and MGM Resorts won't be down for the year. That's because mass market play was up in 2014, and that segment is about four times higher margin than VIP play.

As long as that trend continues, profits should remain strong even if gaming overall declines again in 2015. And given the trends we've seen lately, 2015 will likely be a down year as well.

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Macau's next phase begins
What's key for the long-term health of Macau and the gaming companies is a transition from reliance on VIP gambling to the mass-market and non-gaming revenue. The transition has been under way for years, but it'll be in focus if VIP gaming continues to decline.

Wynn Palace is due to be completed early in 2016 and will be Wynn Resorts' first property in Cotai. Source: Wynn Resorts.

When Las Vegas Sands began building the Cotai Strip, it was this mass-market and non-gaming business CEO Sheldon Adelson had in mind. The Venetian Macau, Four Seasons Macau, Sands Cotai Central, and The Parisian form the heart of the region, and with nearly 9,300 hotel rooms in Macau, the company is drawing thousands of mass-market players each day.

Wynn Resorts and MGM will join the Cotai region in 2016 with resorts that are currently under construction. Like Las Vegas Sands, they've put a focus on mass-market and non-gaming activities, and they should reduce their reliance on VIP gaming as a result.

Can Macau grow on the back of the mass-market?
What will be interesting to see in coming years is if Macau is indeed a supply-constrained market, as many industry executives suggest. In theory, if supply is the constraint, new resorts shouldn't cannibalize older resorts, and Macau's revenue overall will rise as new resorts are completed.

But if Macau doesn't see an increase in demand as supply increases, then profits could be suppressed long term as properties fight for customers. This is a risk today, particularly with the downward trend in gaming overall.

Investors could be in for a rocky couple of years in Macau, but over the long term, this is still a highly profitable business. Expectations for growth may just have to be ratcheted down a notch or two. I'm staying long Macau gaming stocks, but I don't have dreams of double-digit growth in the near future. These are now cash flow stocks that pay solid dividends, and while that's a new place for gaming stocks to be, it isn't bad for investors who hold onto Macau gaming stocks for the long term.

The article How Macau Should Offset Huge Losses in Gaming Revenue originally appeared on Fool.com.

Travis Hoiummanages an account that owns shares of Wynn Resorts, Limited. 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.