Why Casino Stocks Are Hurt More Than Most By China's Woes

The past year has dealt gaming stocks more bad hands than I can count. A crackdown on corruption in Mainland China hit VIP play starting last summer, China's slowing economy is hurting demand in the mass market, and now a devalued yuan is making China's currency seem less valuable to U.S.-traded companies.

Across the board, gaming stocks are down, but those with the most exposure to Macau are being hurt most. And the pain may not stop anytime soon.

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Corruption crackdown hurt Macau The first bad thing that happened to Macau was in 2014 when the Chinese government began cracking down on corruption. That's a vague commitment, but the impact was that potentially illegal money stopped (or was curtailed) flowing through Macau's casinos, which long-term is probably a good thing. The downside is that it also made many legitimate business owners reconsider making regular trips to Macau, exacerbating a decline in gaming revenue.

VIP play in Macau sank as players who once didn't think twice about losing a hundred thousand dollars or more at a casino suddenly stayed away. For Wynn Resorts , which caters to high end gamblers, the impact was intense. Las Vegas Sands and Melco Crown at least had strong mass market businesses to fall back on, but even that wasn't enough to save profits.

But this may be only the beginning of Macau's problems.

Macau's casinos aren't nearly as busy as they once were. Image: Las Vegas Sands.

Business slowdown would be worse What would make the current downturn into an outright crisis would be a decline in China's economic environment. Business owners have long dominated high-end play, and if their profits dried up so could gaming.

The mass market has also benefited greatly from a booming economy and increasing wealth in China. A recession could hurt that narrative.

Even China's recent stock market rout could hurt Macau's gaming revenue. Millions of middle class Chinese threw their money into the stock market in the hopes of making it rich, but they may now be left with huge losses as stocks collapse.

Currency could hurt Macau's casinosAs China moves to devalue the yuan it has a strange impact on gaming companies in Macau. The Macanese pataca is pegged to the Hong Kong dollar, but many visitors are still coming from Mainland China with the yuan. As the yuan drops in value it gives them less buying power, and even if they spend the same number of yuan as they did a year ago it will appear to be less in U.S. dollars.

Sometimes the strong dollar has negative side effects, and right now the strong dollar and weak yuan are working against gaming stocks.

Is now the time to run? There are many challenges ahead for Macau's gaming industry. China has a huge impact on the market there, and any continued weakness in the economy would be bad news.

But less direct impacts like a crackdown on corruption and changing values of currency can also hit investors where it hurts. Right now, all of these factors are working against gaming companies, and until the tide turns these stocks will be losing bets for investors.

The article Why Casino Stocks Are Hurt More Than Most By China's Woes originally appeared on Fool.com.

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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