Macau's Troubles May Signal a New Reality for Casinos

Source: Melco Crown.

Macau has been a strange market for gaming operators since it opened up to U.S. casino companies. It's been a growth machine, but as much as two-thirds of gaming play was done at private VIP tables through companies known as junkets, which provide loans for gambling used by players.

The recent theft of around $13 million in money from a junket operating in Wynn Macau was the second major theft and has reportedly shut down much of the junket market there. Instead of being able to borrow money from investors at a rate of 1% to 2%, junkets have seen funding dry up and VIP play at casinos is going with it.

On the surface, that seems devastating for Macau. Gaming revenue has already dropped 36.5% from a year ago, and that number could continue to tumble as the year goes on. So, how could such a drop in revenue be good for gaming in Macau? The answer lies in the long-term vision of the region.

Wynn Palace will bring a focus on non-gaming activities. Source: Wynn Resorts.

Beyond VIP gambling There are a number of reasons Macau would like to move beyond VIP gambling. The first is that VIP gaming is such a big opportunity for casinos that it takes away from potential diversification like restaurants, shopping, and entertainment. Las Vegas gets over half of its revenue from non-gaming sources, even at high-end resorts like Wynn Resorts and Las Vegas Sands , so there'd be a big opportunity there if the VIP market wasn't taking so much attention.

For casinos, this could actually be a positive in the long term. Sheldon Adelson at Las Vegas Sands has long said that mass-market gambling is four times as profitable as VIP play based on each dollar bet because of all of the junket costs, perks, and rebates VIP players demand. So, a higher percentage of mass-market play overall may be a good thing for casinos.

You can see below that mass-market play is becoming a bigger percentage of overall gambling in Macau. That's more sustainable, and more profitable, for casinos long term.

Source: Macau Gaming Inspection and Coordination Bureau.

The transition to the mass market may be tough for gaming companies, especially companies like Wynn Resorts and Melco Crown , that have relied on VIPs to drive revenue growth, but long term, this could be a positive for the region's stability.

Beyond the casino The other component that needs to grow in Macau is non-gaming revenue. Slowly, non-gaming activities have become a focus in Macau, but they're still dwarfed by gambling. This presents a huge opportunity for gaming companies to attract customers looking for entertainment, not just to gamble.

Look at the revenue of Las Vegas Sands' two Venetian Properties. Las Vegas generates far more in revenue from non-gaming sources, and Macau is still focused on gaming.

Source: Las Vegas Sands earnings report.Note: Venetian Las Vegas sold its mall for $776 million in 2004.

The same is true for Wynn Resorts and Melco Crown, which depend on gaming revenue in their resorts, but that is changing as Wynn completes Wynn Palace and Melco Crown readies Studio City. Non-gaming revenue could play a bigger role for casino companies, and that would be good for the long-term health of the industry.

Moving beyond the high rollers in Macau There's no question that VIP play in Macau has been a disappointment in 2015, and that trend will likely continue well into 2016. But the opportunity for gaming companies -- and Macau itself -- to turn its attention from high rollers to becoming an entertainment hub may actually be a big opportunity for the region.

Mass-market players are higher margin for casinos, and that should make the hit to the bottom line a little softer than a lot of investors expect. With over a billion people within a short train ride or flight to Macau, and no competition for gaming dollars in China, I still think the future for gaming stocks is bright, even if the ride will be bumpy for investors.

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Travis Hoium owns shares of Wynn Resorts, Limited. 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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