These 2 Casino Stocks Should Benefit Most From Macau's Rebound

Macau looked like it was heading for a significant slowdown in mid-2018, as gaming revenue missed analyst expectations for four straight months. But a stronger-than-forecast August might have put the worries to rest.

Macau -- which has become Asia's gaming capital -- posted its 25th consecutive month of gaming revenue growth in August, with the Macau Gaming Inspection and Coordination Bureau saying it hit 26.6 billion patacas, the local currency, or about $3.3 billion. That was a better than 17% gain from the year-ago figure and was up nearly 5% from July. But more notably, it was the highest amount seen since last October -- and the most revenue recorded in August since 2014, when nearly 29 billion patacas rolled in.

The hot streak cools

Wynn Resorts (NASDAQ: WYNN) is one of the bellwether casino operators in Macau, generating nearly three-quarters of its operating revenue there. It reported last month that revenue at Wynn Macau fell 15% in the second quarter as VIP bettors abandoned the older resort for its newer Wynn Palace in the Cotai district, which saw revenue rise 57% year over year. That has seemingly confirmed fears the new resort would cannibalize revenue of the existing one.

Similarly, revenue at Hong Kong-based Melco Resorts & Entertainment (NASDAQ: MLCO) was down 5% for the period as its City of Dreams resort suffered a 10.7% drop in net revenue.

Many analysts worried that the situation in Macau would only worsen as the year progressed because of the trade dispute between the U.S. and China. If China's economy slows, it could have a heavy impact on Macau, which relies on tourism. The August data, however, suggests it's not having the effect feared, and despite increased focus on mass market gaming, VIP wagering continues to carry the casinos.

VIP baccarat, a proxy for the betting tastes of high rollers, accounted for 56% of the revenue in various games in Macau over the first six months of 2018, the same as last year. But that was up from 51% in 2016 when Macau's recovery began.

Still a risky outlook

That could make the casinos' position more difficult as license renewals begin soon and Beijing remains committed to promoting mass-market tourism. But the casinos were several years ahead of schedule in hitting the targets for nongaming forms of entertainment as a percentage of revenue.

Complicating the situation is the looming launch of casino gaming in Japan, where legislation to legalize it was finally passed. Japan still has to decide which cities will get casino resorts and which casino companies will get a license. Once that all happens, the country could rival Macau for the title of the world's largest gaming market, siphoning off VIP bettors. Melco Resorts has called Japan "the most attractive, currently available integrated resort opportunity globally."

Is a rebound coming?

The August data comes as something of a reprieve, even though it hasn't helped shares of Wynn Resorts or Melco recover. Their stocks have been the hardest hit this year, down 20% and 25%, respectively. Not even Las Vegas Sands (NYSE: LVS), which also receives the lion's share of its revenue from Macau, has been treated so poorly -- its stock is down 12% year to date.

Wynn and Melco, however, may see their stocks rebound the most if the recovery continues. Right now, Wynn is at a crucial juncture, with gaming in Las Vegas soft and its license in Boston still under scrutiny. But because it derives 80% of its revenue from Macau, a few more months of good news could do it wonders, with the weakness in its stock a buying opportunity.

Las Vegas Sands generates nearly two-thirds of its revenue from Macau, but with substantial operations also in Singapore that have also seen tough times lately, Sands might still struggle even if Macau recovers.

Macau gaming revenue is running 17% higher in 2018 than it was at the same point last year, and August's stronger data suggests this year could be the region's best since 2014. And even though Typhoon Mangkhut forced Macau's casinos to close for around 30 hours, resulting in a $186 million loss of revenue, Wynn Resorts and Melco could still be dealt a winning hand.

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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.