Macau Casinos May Face a Tough Year

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The revival of VIP gambling in the Chinese enclave helped Macau witness a 19% gain in gaming revenue from the year before, and because Wynn Resorts (NASDAQ: WYNN) generates 60% of its revenue from the region, it was able to overcome weakness in its Las Vegas operations and turn in fourth-quarter earnings and revenue that beat Wall Street forecasts.

That boded well for Las Vegas Sands (NYSE: LVS), which reported its own strong earnings results, as it also relies heavily on the gaming district. But as investors look ahead to what 2018 holds in store, there might be significant cause for concern.

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Will VIP gamblers scatter again?

Despite the Chinese government wanting mass-market, non-gaming income to comprise a larger percentage of casino revenue in Macau, it was the return of the high rollers that fueled the gaming industry's resurrection. But some analysts now think that bullish sentiment may dramatically slow in the coming year, which could impact resort operators.

Sanford Bernstein analysts forecast VIP revenue growth could decline later on this year, leading to only 8% growth for all of 2018, which suggests negligible growth, if any, in the back half of the year. Although that means Macau is still expanding and the analysts believe the long-term prognosis remains good, several policy prescriptions Beijing is preparing could negatively impact the region.

China, of course, remains concerned about the capital outflows from the country that originate in Macau. Its original crackdown, which sent the region into a downward spiral, was predicated on an attempt to curb such capital flight but ended up scaring off the VIP gamblers for two years. Last year was the first full year they showed up in significant numbers, resulting in the enclave's revival and the robust numbers Wynn just posted.

The drums in the deep

The casino operator said earnings nearly tripled to $1.40 per share, beating estimates of $1.36, while net sales jumped 30% to almost $1.7 billion. The primary reasons for the revenue increase were the gains made at its original Wynn Macau and the newer Wynn Palace. Sales at Wynn's Las Vegas properties fell 1.6%, hurt especially at the back end of the year after the mass shooting at MGM Resorts Mandalay Bay.

China has been slowing its real estate market following a two-year boom in which prices skyrocketed. According to Reuters, real estate directly affects 40 separate business sectors there, including gaming, which VIP gamblers use as collateral for loans taken out to bet with.

Beijing has been cracking down on all forms of risky lending, including payday lenders like Qudian, which Chinese students have increasingly used to buy more material goods.

The government is still worried about containing capital in the country and has imposed a number of policies including strict limits on the amount of money that can be transferred to overseas accounts, installation of facial recognition software at Macau ATMs, and limits on the amount that may be withdrawn from an ATM.

While VIPs likely have access to foreign sources of money, meaning the capital controls might not affect them directly, the increased scrutiny on the peninsula may spook them once more.

Shares of Wynn Resorts more than doubled over the past year, and the company recently announced it would be building a new hotel on property it bought last December, which is a vote of confidence for the city. But those plans may have just been shelved after the allegations of sexual misconduct against CEO Steve Wynn.

While the resort operators' investors obviously have a lot more to think about than what might happen in Macau later on this year, those who've placed bets alongside Las Vegas Sands or Melco Resorts & Entertainment may want to think about taking some money off the table.

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

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