Shares of gambling companies such as Las Vegas Sands,Wynn Resorts,andMGM Resorts Internationalhave each lost around a third of their value since last April. Investors have lowered their confidence in these companies because ofmajor issues in Macau in the past few quarters.
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The Chinese government's crackdown on corruption and increasing regulation of high-net-worth Chinese and their gambling activities in Macau has led to a dramatic decline in VIP gambling. Casinos are feeling the pain sinceMacau makes up a significant portion of these companies' revenue bases -- as much as 75% for Wynn Resorts last summer.
So far, the problem has been contained to Macau, and growth in gambling companies' operations in Las Vegas have slightly countered the losses in the past few quarters. However, VIP Chinese gamblers are a significant portion of Las Vegas' consumer base as well, which has helped fuel Las Vegas' total growth in the past few years.
So will the same thing that has crushed Macau hurt Las Vegas as well?
Source: Las Vegas Convention and Visitors Authority.
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VIP Chinese gamblers in Las Vegas
The Las Vegas Convention and Visitors Authority actively recruits Chinese gamblers, with offices both on Mainland China and in Hong Kong. Growth in this segment shows how successful this courting has been, with a record number of Chinese visitors to Las Vegas in 2013 (the most recent year of available statistics), up 39% year over year to 263,000.
According to research from McKinsey, growth in China's middle class is spurring domestic travel, but international travel seems to still be reserved mostly for high-net-worth Chinese citizens -- the VIP segment. So we can assume at least a large portion of these Chinese visitors to Las Vegas are of the same caliber as the group that's causing the issues in Macau now.
But high-net-worth Chinese citizens are not only a large and growing segment of visitors and gamblers in Las Vegas. Increasingly, they're also investors. Using what's called an EB-5 visa program -- which allows special investments by foreigners in economically depressed areas, which Las Vegas has been deemed since the recession in 2008 -- wealthy Chinese citizens havealso been key sourcesoffunding for new growth in Las Vegas. Of the visas granted, 85% have gone to Chinese citizens, according toGlobal Market Advisors partner Andrew Klebanow.
"Some of the biggest Las Vegas developments over the past five years have tapped the EB-5 program for hundreds of millions of dollars," Klebanow said, as reported to ChinaUSFocus.com
The declining VIP segment in Macau
Macau's recent issues started with lowered revenue from the VIP segment of gamblers there. China's president, Xi Jinping, is increasing regulations on "junket operators" -- companies that bring high-net-worth players to Macau -- in response to illicit activity that these companies reported in the past year. Many of these companies are finding that the new rules make their work less profitable, and as a result -- or because they were forced to because of involvement in the illicit activity -- about 16% of such operators have shut down in the past year. That's why the VIP segment has provided much less revenue to gambling companies there than it did in 2013.
So will President Xi continue to follow the VIP gambling money out of Macau and start to regulate these players and investors who are taking money out of his country? If that happens, will Las Vegas feel a similar squeeze? After all, the current new regulations effectively dropped what was expected to be major year-over-year gambling revenue growth in Macau in 2014 to year-over-year decreases in revenue.
Vegas won't feel it as much as Macau, but it's worth watching
Well, while the Chinese high-net-worth segment does make up a substantial sub-segment for Las Vegas, it still accounts for less than 10% of total Las Vegas visitors in 2013. During the same time, more than two-thirds of Macau's total gambling revenue came from the VIP segment. So while Las Vegas would still feel the loss, it wouldn't crush Las Vegas as it has Macau.
Another reason Las Vegas is probably OK is that -- much as Macau is finally doing now -- it's focusing more on mass-market (i.e., middle class) gamers and non-gambling revenues such as entertainment and hotel revenue. In 2014, gambling accounted for just more than one-third of the total revenue for the major casinos on the Las Vegas Strip. That's the lowest percentage of total revenue that gambling has accounted for in Las Vegas' recent history.The biggest increases in percentage of overall revenuefor the main casinos on the Las Vegas Strip come from other segments such as dining, hotel rooms, and entertainment, as well as from business and convention use.
However, Las Vegas is only now coming out of its income woes after the recession in 2008. While the companies there are showing growth again, and the economy looks to be revving back up, it could still be fragile. The economy there is still growing at low rates, and a drop in a somewhat substantial segment such as Chinese gamblers could still cause that growth to slow even more. For investors continuing to bet on these companies, most of which operate in Macau and Las Vegas, keep watching what's happening with this Chinese VIP segment.
The article Is Las Vegas Vulnerable to The Same Problem That's Crushing Macau? originally appeared on Fool.com.
Bradley Seth McNew owns shares of Las Vegas Sands. 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.
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