Is Macau's Hot Hand About to Turn Cold?

By Rich Duprey Markets Fool.com

There's no doubt Macau is on a hot streak, racking up nine straight months of higher year-over-year gambling revenues, but there are signs the Chinese gambling enclave's hot hand may be about to turn cold.

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While Macau is on a roll, casino operators such asWynn Resorts (NASDAQ: WYNN), Las Vegas Sands (NYSE: LVS), and Melco Resorts & Entertainment (NASDAQ: MLCO), all of which heavily rely upon the gambling paradise for the majority of their revenues, are benefiting. But they could find their luck is about to change.

Image source: Getty Images.

Running the table

Gambling revenue jumped 16% in Macau in April to almost 20.2 billion patacas, the local currency, or about $2.5 billion. It's another indication that the gambling mecca is recovering from the crackdown on corruption and luxury that sent gambling revenues into a two-year-long tailspin.Having turned positive last August with the opening of Wynn's new Palace casino in the Cotai district, an event that seemed to lure VIP gamblers back to the gambling peninsula after they largely stayed away for 26 months, they peaked in February at almost 23 million patacas, or $2.9 billion.

And that's the first problem right there: February was the high point of the recovery. While the month is historically a bright spot, typically posting greater gambling revenues than either January or March, April is more of a mixed bag. During the region's recession, it was typically a month that reported lower revenue compared with the enclave's early boom years, when it tended to run higher than March.

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Another concern is that the rate of growth is now also ebbing. While still in double-digit territory at the moment, the increase last month was lower than in the previous two months. Certainly, it's not appreciably lower -- February and March were both around 18% higher than the year-ago period -- but it may indicate that the gains are about as good as they get.

Data source: Macau Gaming Inspection & Coordination Bureau. Chart by author.

The hurdles are about to get higher

Which brings up the third worry: the easy wins have already been made. March 2016 marked the low point when the percentage drop in year-over-year gambling revenue steadily improved, and now as we get into the summer months, we're approaching the period when the worst of Macau's decline was all but over. Going forward, the casinos may find it harder to achieve the kinds of gainsthey've enjoyed, andSands' revenue miss last quarter may indicate more struggles to come.It reported that revenue fell 1.4% to $646 million at the Venetian Macao while tumbling 15% at Sands Cotai Central.

Still, Wynn, Melco, andMGM Resortsall posted strong first-quarter results,Wynn said the opening of the Palace helped push net revenue 48% higher for the period, though there was still a little bit of cannibalization going on as the older Wynn Macau resort saw revenue fall 3.5% on a 2.9% decline in casino revenues.

Image source: Las Vegas Sands.

Similarly, Melco reported that its Studio City revenue jumped nearly $100 million to $278 million as rolling chip operations began last November and earnings tripled to $67.8 million. Melco had previously sworn off VIP gambling at the casino, but poor results persuaded it to introduce them, and they're starting to pay off.

VIP gamblers remain the key

And that brings up yet another concern. Because of China's crackdown on graft that sent Macau into a swoon, VIP gamblers have been skittish about gambling in the enclave. Only as the bulk of the investigations into junket operators recedes into the past have they come out of hiding, which, according to a research report by the Sanford C. Bernstein brokerage, coincides with the region's recovery.

This relationship between government investigations and VIPs willing to drop money at gambling tables could send Macau tumbling once more if Chinese officials begin cracking down again. Industry gambling site GGRAsia reports that Chinese officials confirmed they've begun auditing junket operators to test for their financial stability along with the "temporary deposits" they receive from VIPs, and analysts at Japanese brokerage Nomura say that could affect these high rollers from making additional deposits. It was the rapid increase in the level of deposits in recent months that drew the attention of regulators again.

An odds-on favorite still?

Most analysts are looking for Macau's gambling revenues to rise around 10% in 2017, even accounting for the cannibalization occurring at the new casinos that are opening. And there's also the fact that most of the VIP gambling volume is concentrated in the hands of just a few of the top junket operators who are considered financially sound, meaning the audits might not have as big of an impact as feared.

Yet the casino operators are going to be coming up against tough comparables this year, meaning future growth may not look as robust as it has, and it could turn Macau's current hot hand cold.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.