Macau, the world's biggest gambling market, saw devastating declines at its casinos and resorts following a 2014 government crackdown that shook the city's foundations. However, March marked the eighth straight month of growth, spurring investors' hopes that a recovery may finally be taking hold.
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In this episode of Industry Focus: Consumer Goods, Vincent Shen and Fool.com contributor Seth McNew explain what investors need to know about the Macau gaming scene today. Listen in to find out about the main players, how each of them is recovering from the years-long downtrend, and how further government regulations could still stifle the recovery.
Also, the two share an update on the success of theNintendo(NASDAQOTH: NTDOY)Switch and developments in Japan that may soon create a booming new market for casino operators.
A full transcript follows the video.
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This video was recorded on April 13, 2017.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen,and it's Thursday, April 13. We are prerecording fornext Tuesday. Helping me with that is Fool.com contributor Seth McNew,who is calling in via Skype fromSan Francisco. Hey Seth!Welcome back!
Seth McNew: Hey!Thanks a lot, Vince! It's great to be back.
Shen: Lasttime you were on the show, we looked at developmentsin the video game industry. Injust the two weeks or so since we talked,there have been some updatesthat I wanted to discussbefore we dive into the main part of this episode. First,there was the Switch. This is the newest video game console fromNintendothat was originally unveiled last October, andmade its official debut onMarch 3. In its six weeks on the market,the Switchcontinues to fly off store shelves. If you goto the official Nintendo Switch product pageonline, they have links toretailpartners where you should technically be able to buyone of these consoles. I actually checked all six of them -- Best Buy,GameStop, Target, Wal-Mart, and Toys "R" Us. Can you guess, Seth,whether or not I was able to find a Switch available at those retail partners?
McNew: I would say probably not. If you're looking places likeeBay,you can definitely get one if you're willing to pay a little bit of a premium.
Shen: Yes,exactly.Amazonwas also one of the partners. It'savailable only from third-party sellers,not from Amazon themselves. They'recharging a premium, like you said,in the face of such high demand. So,buyers can expect to payat least $360, when the Switch's official MSRP is $299. I got curious,I did go to eBay to see what people had been willing topony up to get their hands on one of these consoles, andmore recent listings are similarly going for around$400. In the initial weeks after the release, when thefrenzy was really building upand people had to get their hands on one, there were some listings for the Switch console being sold for well over $1,000.
McNew: That's absurd.
Shen: Prettyincredible. All of this incredible hype bears out in salesfor the console in numbers that we've seen. There's a report from DIGITIMES that said,based on estimates from Nintendo'ssupply chain partners,the company could end up shipping as many as 20 million unitsin its first year. Looking out further, thepresident of Nintendo sees alifetime total for the console of potentially 110 million units, which would fareclipse the previous generation Wii U.
McNew: 110 million units, butwe don't know how long it's going to take for them to actuallyproduce that many. At this rate,it could be a few years before they're able to get that out.
Shen: Yeah. It'll takeseveral years for them to even get that number. Recently, theydoubled their shipping estimates from 8 [million] to 16 million.I think that's going up again to potentially this 20 million number that we're seeing. But ourbiggest concern last episode,in addition to their inability to meetsome of this demand,every store being sold out,there was also a concern about a relative lack oftop-tier game titles. Butwith these kinds of forecasts,I have to imagine at this point thedevelopers are getting pretty excited abouttapping into this corner of the console market. What do you think? Is that something, with thesekinds of numbers, that people, especially third-party developers, areperking up their ears and thinking to themselves, "It'stime to get in on this."
McNew: Yeah,I think so. You're right that when the Switchcame out it had such a leanamount of titles that came with it.They have already announced some pretty interesting new titles. Mario Kart is coming out this month,which is going to be a hit, I'm sure. Then,other games like Minecraft,Ubisofthas talked about Monopoly iscoming out soon. So, you'rehaving these very classic games like Pac-Man thatyou would expect for this kind of console,but you have some new franchises as well that arecoming out as well, somedifferent sports games. And then,I think it lends itself well to somecompetition. They talk about a Mario Kart competition. But,as we talked about last time I was here, with e-sports, this mobile gaming,it seems like such an easy way toget into that online competitive space. So,I would imagine a lot of third-party developers arepretty interested in that aspect.
Shen: I think Nintendo has also done its part with this specific console, a better job than they did with the Wii U, and that is making the platform more attractive to third-party developers.They'resupporting common game engines that make it easier tocreate the games and the titles for the console. Something that might be more important, you mentioned e-sports,but there's also this online gaming element. Thecompany has announced thatthere will be an online gaming platformfor the Switch that will launchlater this year. Initial testing has already started. Like itsbiggest competitors,Nintendo will actually start charging players foraccess to this service. That adds another income stream on one hand. On the other hand,I think game developers will be attracted,because you want a robustonline player base for additional opportunities to monetize their titles. Youlook atActivision Blizzard,Electronic Arts, they'remaking 60% to 75% of their salesdigitally, and it becomes very clearhow important getting this online platform rightwill be for Nintendo.
Moving on,also making waves in the space recently wasMicrosoft. The tech giant released someadditional details for its Project Scorpio. The official reveal will happenat the Electronic Entertainment Expo in June. But, the gist of it is,you get more powerful hardware, better graphics, 4K compatibility, andsupport for virtual realityheadsets. Aswe discussed a little bit on the last show, titles will becompatible across Xbox One, theXbox One S, and Scorpio, sogame developers will be in a very favorable position where they can work on one title and tap intobigger player bases than they have in the past.
Now, for our maindiscussion topic for this episode. It'sgaming-related, but we're talking about roulette and blackjack and baccarat kind of gaming.Macau,which isthe special administrative region in China, whichalso happens to be the most densely populated region in the world,has been the gambling capital for over a decade. But,following a government crackdown on corruption and money launderingin the region, plus aneconomic slowdown,Macau sufferedhuge declines to itsgaming industry starting in 2014. For26 months straight, theirmarket reported declines year over year in gaming revenue. Macau peaked in 2013 at over $45 billion, and by 2016,it had shrunk 40% to about $28 billion. Is there a lightcoming over the horizon? What are investors seeing now, Seth, broadly, for this market?
McNew: To putsome of those numbers in perspective,you have to imagine that 2013 number, you're talking seven timesas much gaming revenue as Las Vegas. Even though this last year,when they had faced so many months of decline, we'restill talking three times as much revenue as Las Vegas. So,this is certainly a massive part of the gaming industry still,and now it looks like it's regrowing again. In March, we had total gaming revenue grow 18% over March of last year. It looks like this trend that we've seen since last August, that every month, it's getting a little bit better, is nowreally starting to show some pretty substantial growth.
Shen: There have officially been eight straightmonths of growth now. I think in the beginning of the year,people were still kind of skittish,not really sure if this was building out into something you could call a trend. ButFebruary and March saw revenue up about18% year over year. So,it seems like that momentum is really picking up in their favor. Butlet's turn our attention now to the major casino operators, who are based in Macau, or havesignificant business there. Whodo you want to start with, Seth?
McNew: There's really fouroperators that make sense for investors to be watching. Theone that's been the best performing so far this yearis definitelyWynn Resorts(NASDAQ: WYNN). Wynnhad their new massive Wynn Palace resortopen last August, whichworked out well withthe first month that Macaushowed some positive signs of turning around,probably helped out by the new resort by Wynn. And in 2016, Wynnreally posted some pretty substantialgrowth in earnings. If this resort works outpretty well for them in 2017,we should see that growth continue.
Shen: Yeah. For this company, Wynn,64% or so of their revenue is based in this region. So,obviously, an important market for them. Really exciting with thenewest resort that they opened last year. But they're not the only ones.Las Vegas Sands(NYSE: LVS),over half of their revenue also is based in this region,they opened the Parisian. What's going on with them?
McNew: That's true,Las Vegas Sands open their new resort as well,a couple months after Wynn. You're right,Las Vegas Sands is by far thedominating force in Macau right now. Wynn hasdoubled its own presence there,but with its two casinos, it stillpretty much pales in comparison toLas Vegas Sands and its five casinos. The other thing is it has more hotel rooms thanany other company by far. It hasmore gaming tables. So,especially as we're seeing this shift toward mass-market, you'rewondering who's going to get that spillover and thatincrease in visitation. It'sprobably going to bethese casinos that Las Vegas Sands holds.
Shen: Sure. Foranother company that is areally significant business here,based mostly here and in the Philippines, isMelco (NASDAQ: MLCO). They have gone througha bit of a shake-up recently. What'sthe story there?
McNew: Yeah,to say the least. They have their own little bit of drama lately. One of the partners,Crown, has divested itself from the company. They'll be rebranding to just Melco Resorts and Entertainment. Along with that, they'll have a little bit more control. It sounds like they're going to overhaul some of the properties, some of the uneven parts of the property,changing up some of the feelof the hotel towers and whatnot. Thatcould be really good for the companyas they're shaking things up. That might be a good way for them toalso bring in some new visitationthat would otherwise go tosome of these new resorts.
Shen: Sure. Thelast company we'll talk about here, they have a resort that's been delayed several times. I think it's slated at this point tomaybe open later this year or even next year. Correct me if I'm wrong, Seth. That'sMGM(NYSE: MGM). Theirpresence is not as significantas some of these other companies in terms of their business overall. About 20% of MGM's revenue is based in Macau. What'sthe story there with their Cotai Resort?
McNew: That resorthas been pushed back a few times. The latest on theirwebsite right now sayssecond half of 2017. So, we'llhope to see that open.I was just there a couple months ago, and the resort looks great. From theoutside, it looks completely finished. I'm not sure what's taking so long. But,it looks like a beautiful resort. And yes,Macau right now makes up a relatively smallportion of their overall revenue. But, you can understand thatif things are pretty much stable in Las Vegas -- andthat's their bread and butter -- bydoubling their operations in Macau,it could be a pretty huge growth driver for them in 2017 and 2018.
Shen: Yeah,especially if the market there broadly is expanding andimproving and this trend really does continue.A lot of these companieswill be releasing their next bout ofquarterly earnings in the next month or so. What do you think you'll bewatching in the results,as these companies give updates on the situation in Macau, thestatus of their new resort openings,or the ones that are in process -- what do you think?
McNew: Weprobably can expect that Las Vegas Sandswill be the first one to report. Notall of these companies have said when they're reporting Q1. But,when they do report, that will be interesting to see,what is happening with the mass market and VIP switch. Is it true that the mass market is rising enough to overtakewhat is being lost in that VIP segment? Also,we want to see things like hotel occupancyand average daily rate. Are those really growingconsistently as much as is needed? Do we see increased visitation that'sspurring on a really robust recovery in the overall gaming? Oris it maybe just increased gaming byper spend from player? Those are things that,that's interesting with the regulation there as well. Isthe government going to increase regulation again because they're worried that gaming is getting out of control? Oris there a shift to mass-market entertainment that thegovernment is really fond of?
Shen: On that note,on the regulation side,it's really important for anybody who'sthinking about investing in these companies, or who islooking for exposure to the gaming site in Macau, asprospects brighten here,are you concerned that Beijing officials ultimately come in and clamp down yet again totake the momentum out of this rally? Because,it was only in December that theyinstituted this new capital controlregarding ATM withdrawals. Basically, they cut in half the amount of money that Chinese tourists could take out with theirpopular Union Pay cards. Just like that, a huge impact on the shares of the major casinooperators we're talking about here -- Las Vegas Sands, after that was announced, was down13% on the day.Wynn Resorts was down11%. Melco was down 14%. That's always looming, is it not,this potential change where theofficials in Beijingdecide there's too much money going out of China andinto areas like Macauand some of the resorts in Singapore as well,and they decide to crack down again?
McNew: Yeah,that's always a thing. Even if it's justone sentence from an official inBeijing talking about,they want to crack down on companies that areadvertising gambling in mainland China,which is still illegal. That's what I'm saying, if therecovery is really about entertainment and hotels, and they'rebuilding some other stuff right outside of Macau,if that's truly the recovery,I think that will be really positive for the government. If it's really about gambling,maybe not so much.
Shen: Sure. On the flip side of that, and to wrap upour discussion here, I'm sure the gaming industry isrevving its engine right now,anticipating the opportunities inJapan. We talked about this earlier this year, the fact thatthe government in Japanessentially approvedthe beginning of the process toopen some integrated resorts in that country. Some of the really bullishinitial forecasts put the size of theJapanese gaming market as high as $25 [billion] to $40 billion. That's based on the popularity of gambling-like games thatcurrently exist in the country. Some of the more conservativeestimates come in at around $5 [billion] to $10 billion.I think the entity thatultimately holds the key toexactly how lucrative and large the market becomes is,of course, the Japanese government. They'rein the process now of deciding therules and regulations for the industry -- where the resorts can open, how they'll operate. Do you thinkcompanies are overly optimistic, hoping for a way out of the volatility that can happen in Macau? Ultimately, how do you think things will shake out for Japan?
McNew: I don't know ifI would say overly optimistic. Even on the low side of those estimates,that's a really big bumpin the gaming industry,and also for something that's diversified.
Shen: Yeah,it's like a second Vegas,admittedly.
McNew: A second Vegas that'sin a new country, a country where you can expect somenew attention being paid to it because of the 2020 Olympics coming up. So,even if it's on the low end of that,I think every one of these companies should beexcited about trying to get a resort there.
Shen: Some of the comments thatmanagement and the leaders at these companies have made,to give you a sense of exactly how powerful and how excited they are for this opportunity -- for example, I haveSheldon Adelson,the Las Vegas Sands founder and CEO. He's called Japan "theultimate opportunity forhis business going forward", and he has aims to spend something like $10 billion in that market once things kick off. Then, there's alsoLawrence Ho, CEO at Melco, he'sbasically echoed that sentiment. He said, "Thisopportunity ispriceless, and we will spend whatever it takes to win." So, obviously, these leaders of these companies, the leaders of that industry, thebullishness that they are showing should giveinvestors an idea,once we have a better idea of what the regulations will shake out to, whether there are limitations,just as an example, in Singapore, as apermanent resident or citizen, they charge an entry fee,because they want to limit any negative effectsthat the gaming industry can have, or that these casinos can have. Inthat region, there has been some talk, somerumors that there might be something similar. So, whether this goes from $5 [billion] to $10 billion, or as big as $25 billion, as the moreoptimistic people hope it will be, it'sgoing to really depend on howsome of that regulation ultimately shakes out. Any other final thoughts, Seth, to wrap up?
McNew: Talkingabout Singapore, I don't know if you knew this but I actually lived and worked in Singaporefor some time. It was really interesting to be around the casinos there, and see how they're really marketedtoward visitors, they'remarketed toward these international people that are comingto stay in Singapore, and yet they are a crown jewelof the island. TheMarina Bay Sandsthere,it's on so many of the postcardsand the pictures of Singapore,because it's such an iconic piece of the total country. So,when you're looking atwhat company might want to license in Japan, the Prime MinisterShinzo Abe hasalready talked about, maybe the model in Singapore is what they need in Japan. So, youlook at Las Vegas Sands as,obviously, a leader in the market.
Shen: Yep,there you go. With that,I think it'll be a very interesting time tofollow this industry, follow these companiesover the next year or two, as the detailsbehind the development in Japan gets ironed out,and we get more information. But thanks again, Seth, for joining us today!
McNew: Absolutely, thank you!
Shen: Fools,remember that you can reach out to the Industry Focus team viaTwitter @MFIndustryFocus, or send any questions to firstname.lastname@example.org.People on the programmay own companies discussed on the show,and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell stocks based solely on what you hear during the program. Thanks for listening and Fool on!
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fools board of directors. LinkedIn is owned by Microsoft. Seth McNew owns shares of Las Vegas Sands. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, and eBay. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.