Surging Macau Revenue Drives Gaming Stocks Higher

By Travis

February 2017 was the best month for the Macau gaming industry since January 2015, which is saying something. The region has gone through a huge decline in revenue over the past three years, and while we're a long way from the peak of 2013 and early 2014, the industry is improving.

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The rising tide of gaming revenue is helping push gaming stocks higher across the board, with Wynn Resorts, Limited (NASDAQ: WYNN), Melco Crown Entertainment Ltd (NASDAQ: MPEL), Las Vegas Sands Corp. (NYSE: LVS), and MGM Resorts International (NYSE: MGM) all surging in trading this week. And the trend may just be getting started.

Image source: Wynn Resorts.

Where Macau's market is headed

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The chart below shows where gaming revenue has been in Macau each month since the start of 2015. The red line is a 3 month simple moving average that smooths out some of the lumps in the market.

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

What you see here is a market that was fairly flat from mid-2015 to mid-2016 when a significant uptick started taking place. Gaming revenue has steadily risen, and in February was over $2.8 billion.

This improvement comes at a point when multiple driving forces may be converging in Macau. New resorts from each of the companies I mentioned have either opened or will open soon, leading to new excitement around visiting the region. China's economy is also steadily improving, and the corruption crackdown that led to Macau's decline in 2014 is getting further in the rearview mirror. And infrastructure improvements around the region are being completed, making it easier for people to visit Macau on a short trip.

The VIP market is back

The other notable trend in Macau is that VIPs are flooding back into the region. These high rollers have typically been about two-thirds of Macau's gaming market, and they were disproportionately hit by the slowdown in comparison to mass market gamblers. But now that's changing, and VIPs are coming back to the tables.

This is notable for investors because Las Vegas Sands and Melco Crown, in particular, were built to serve the mass market, not VIPs. Wynn Resorts, on the other hand, was built to serve VIPs. If the market keeps experiencing VIP growth we will see that disproportionately help Wynn Resorts as players visit its casinos more than others.

The other advantage Wynn may have in this scenario is that it now has two resorts instead of one. Wynn Palace opened last year, and while it's not running at full speed due to construction around the property, it's still a big addition to the company's capacity and therefore earnings.

Where does Macau go from here?

Revenue has been rising for a while now, and for the time being it's safe to say it will continue. We just don't know at what pace or how long growth will last. But as long as the tide is rising it will be good for gaming stocks, continuing a bullish trend in the industry.

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Travis Hoium owns shares of Wynn Resorts. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.