Macau Casinos Are a Good Bet Now After Big Gaming Revenue Miss

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Shares of Macau casino operators Las Vegas Sands (NYSE: LVS), Melco Entertainment (NASDAQ: MLCO), and Wynn Resorts (NASDAQ: WYNN) took a hit recently after gaming regulators reported a smaller rise in revenues than expected.

Despite pushing non-gambling forms of entertainment at the behest of the Chinese government, VIP gamblers dominated once again and were apparently luckier than expected. Where analysts had expected casinos to report a 20% rise in revenues in December, it actually rose less than 15% as the high rollers took home more winnings than anticipated. After hitting new highs late in the month, the stocks of Sands, Melco, and Wynn have all shed 4% or more of their value.

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While there remains risks to Macau's continued growth, this shortfall doesn't mean the recovery is faltering and the drop in the stocks of these operators represents an opportunity, particularly if their shares continue to fall.

A hierarchy of risks

There are many reasons why the Macau recovery could stumble after 17 consecutive months of growth. The Chinese government only tolerates the vast wealth that flows into Macau, not actually embracing it, meaning it could crack down again on gambling as it did several years ago causing the gambling mecca's decline.

Several initiatives over the past two years have spooked investors, such as limiting the amount that may be withdrawn from an ATM at any one time, fingerprinting all foreigners entering the country, and banning smoking at gaming tables. If the government really put the brakes on in an attempt to stem capital outflows from the region, that would likely cripple the industry. But that hasn't been tried yet and the other programs have had little impact.

Macau had the highest revenue amounts last year that it's seen since 2014. Monthly gross revenue hit 265.7 billion patacas, the local Macau currency, or about $33 billion at current exchange rates. That's 19% more than it realized in 2016, the nadir of the decline, though, is still 26% below 2013 when Macau saw 360.7 billion patacas roll in.

A stacked deck

Yet the drop in casino share prices because of this one month miss seems foolhardy. Gaming revenues were still nearly 15% higher than the year before and if the disappointment was based on VIP gamblers hitting a hot streak, as some analysts suggest, then it's a silly reason to sell.

The odds always favor the house, and any short-term winning streak will completely revert to trend. The real risk is that it's the high rollers that continue to sustain Macau even after concerted efforts to boost more family-friendly entertainment and non-gaming streams of revenue.

Beijing wants Macau and the Cotai district to be more like Las Vegas, where gambling only accounts for around one-third of a casino's revenue. It had set a goal for the region to reportedly have non-gaming revenue account for 9% of the total by 2020, and though it's estimated casinos passed the threshold back in 2015, the preponderance of VIP gambling may not sit well.

Still a hot hand

Las Vegas Sands realizes almost 70% of its revenues from Macau, Wynn Resorts gets almost two-thirds of it, and domestic player Melco Entertainment naturally relies almost wholly on the region. In comparison, MGM Resorts generates only 20% of its total revenues from China.

Yet investors need to reset their expectations too. As the recovery matures, the ability to continue registering such impressive gains month after month becomes more difficult. Once Macau begins lapping those more difficult comparables as the recovery enters its third year, expect to see the percentage gains moderate.

Obviously, the big Macau casinos are among those with the most to lose if the recovery is stalling, but the fact that their stocks dropped simply because the house doesn't always win is a reason to consider buying into their shares.

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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.