An armada of resort casinos rising above China's gambling haven of Macau has christened significant new capacity. Wynn Resorts (WYNN) launched its $4.2 billion, 1,700-room Wynn Palace on Aug. 22. And the 3,000-room Parisian Macau, Las Vegas Sands' (LVS) nearly $3 billion project, set sail on Sept. 13.
Last year, Melco Crown Entertainment (MPEL) opened its $3.2 billion Hollywood-themed Studio City resort in Macau in October (as well as the $1.3 billion City of Dreams resort in Manilla, the Philippines, in March). And in Q2 of next year, MGM Resorts International (MGM) is set to float its second property in Macau, the MGM Cotai.
As a result, Macau appears poised for a rebound. Gambling revenue in the administrative district's gaming industry rose 1.1% in August, to $2.4 billion, following the Wynn Palace opening. The gain beat analyst expectations and marked the former Portuguese colony's first revenue increase in 26 months. In September, revenue rose for a second straight month, jumping 7.4%, to $2.3 billion, buoyed by Sands' Parisian.
The new bright lights began to push back the two-year shadow cast by China's regulatory crackdown on corruption and money laundering in its only legal gambling region. The sweep had led to scores of arrests and had narrowed access to capital on the island. The efforts further suppressed gambling traffic already thinned by China's economic slowdown.
In mid-October, just as Macau was embracing its new momentum, news seeped out that authorities detained 18 employees of Australia's Crown Resorts, joint-venture owner of Melco Crown.
When the stock market opened Monday, casino stocks sold off hard in early trade. They quickly rebounded, with Wynn, MGM Resorts International and Melco Crown all up for the week by Friday, with Las Vegas Sands showing only a very thin loss.
That left Melco up 38% and Las Vegas Sands up 39% from their July lows. MGM traded 62% over its February nadir. Wynn remained mired in a more difficult chart: rebounding from support at its 40-week line and putting in place a possible bottom to a four-week pullback.
As a result, IBD's Leisure-Gaming/Equipment group on Friday ranked a solid No. 36 among the 197 industry groups tracked by IBD, up from No. 120 eight weeks ago.
IBD'S TAKE: Research shows as much as 50% of a leading stock's performance is linked to the strength of its industry group and broader sector, which makes the study of industry groups central to CAN SLIM investing.
The question for investors: Is Macau really set for a rebound, or was its revenue bump temporary, simply linked to the new openings? And, set against that picture, what is the overall status for casino and gaming stocks?
A Shake-Up Amid The Crackdown
Wynn shares took a brief bump Sept. 29 on news of the sudden exit at the end of September of Wynn Macau executive Gamal Aziz, who had managed the launch of the Palace. Some analysts read the exit as an indication of problems in the ramp-up of the new casino. A Sept. 30 note from Nomura analyst Harry Curtis speculated that "the all-important mass segment at Palace has been slow to develop."
A statement from Wynn said Aziz had been hired specifically to launch the facility and was set to move on. Wynn shares recovered within four sessions and pushed on to their Oct. 10 peak before starting their current pullback.
Days later, the arrests of Crown's employees fanned fears that regulators were set to scare off more of Macau's business. Reuters reported that China's foreign ministry detained the group on suspicions of gambling crimes. Several operators of junkets who arrange travel and lend cash to VIP visitors able to bet six-figure sums reportedly said they had canceled meetings with prospective clients after the arrests. A gaming consultant quoted by Bloomberg said, "We expect the direct VIP and premium mass market will dive over the next several months."
Most equity analysts were less dire. Macau has seen multiple arrests during the crackdown. The Crown "detainments" appeared to be more of the same, and the focus of the current investigation appears to be Crown's efforts to siphon high-rolling players away from Macau to Australia.
The status of China's economic recovery will also be crucial to Macau's bounce. Progress in the country's conversion from a high-growth, export-driven economy to a consumer-driven, more services-oriented environment is uncertain. A year ago, stock markets in Hong Kong and Shanghai sold off aggressively for six months through January, sapping personal wealth from many Macau clients. Stocks have recovered tentatively and a housing market boom has helped underwrite some gambling habits.
The resulting views on where Macau is headed are scattered all over the map. A Sept. 14 report from JPMorgan, following the Parisian opening, said the cost of attracting clientele remained high, the bulk of revenue improvement was being driven by VIP traffic and the mass-market rebound hoped for by investors had not yet materialized.
"We'd like to get more positive on the Macau names," wrote analyst Joseph Greff, "but do not see a turn in fundamentals, and the valuations here do not look appealing."
Sands Parisian is designed with a focus on China's mass-market gamblers who spend less but arrive in larger numbers. Wynn Macau, on the other hand, reportedly booked 60% of its casino revenue in the first half of this year from VIP visitors, and the Palace has reportedly set aside a full 15% of its 400 gaming tables for VIPs. MGM Cotai, set to open next year, is aiming all of its gaming capacity at mass market play.
A Goldman Sachs report after China's Golden Week holiday, ended Oct. 7, said visitations to Macau rose 8% in September, setting daily traffic records midway through Golden Week of more than 190,000 visitors a day. Hotel occupancy for the month rose 5% to 92% of capacity, despite the addition of more than 6,000 rooms this year. Occupancy at five-star hotels increased 5.5% to more than 94% of capacity.
Goldman's findings contrasted JPMorgan's in that sales of midprice consumer goods inside casinos rose 10% to 20% vs. a year earlier. Sales of high-ticket items — jewelry and high-end fashion — remained flat.
Morgan Stanley says some high-roller traffic has shifted toward the Philippines, where it expects VIP traffic to grow 20% this year. It has an overweight rating on MGM and a 32 price target. It rates Las Vegas Sands and Melco Crown neutral. Its earnings estimates in the Macau group are generally below consensus, which it views as "pretty aggressive."
Morgan Stanley rates Wynn Resorts overweight with a 119 price target. Deutsche Bank calls it a neutral with a price target at 100.
Red, White & Blue Chips
MGM expanded its stake in its MGM China subsidiary to 58%, from 51%, through a $325 million deal with Macau gambling heiress Pansy Ho. Ho receives, among other things as part of the deal, a $175 million share of MGM International.
Closer to home, MGM is on the verge of opening its National Harbor resort just south of Washington, D.C., on Dec. 8. JPMorgan is modeling net revenue of $720 million from the property in 2017, with $180 million in earnings (before interest, taxes, depreciation and amortization). That compares with a 2017 EBITDA estimate of $480 million from Macau and $1.74 billion from MGM's Las Vegas properties.
Las Vegas, while only a fraction the size of Macau, has been less volatile recently.
Macau's gaming take had slumped 58% from February 2014 to $1.99 billion in June this year. By comparison, Nevada's Las Vegas/Clark County revenue was $724.3 million in August, down 7% year-over-year and 24% below its February 2013 high.
Bases, Breakouts, Earnings Rebounds
MGM and Wynn are the healthiest of the big casino plays in terms of earnings per share. MGM's consensus views call for a 5% EPS gain this year and a 65% increase in 2017.
Chartwise, the stock cleared a 25.10 buy point in a cup-with-handle base early in September. The stock's current pullback placed shares back in a buying range above that marker. They are also technically buyable on a rebound from support at the stock's 50-day moving average. But volume on that rebound has been light, indicating that institutions are not supporting the move. MGM on Friday was trading about 9% below its March 2014 high.
Estimates for Wynn places earnings growth this year at 8% and at 26% in 2017. Its stock is the most challenged in the group, however, and pulled back for a test of support at its 200-day line after failed breakouts from two bases in a row.
Las Vegas Sands earnings are projected to slip 14% this year, before rebounding 10% for 2017. Its shares broke out past a 52.95 buy point in a cup-with-handle base on Sept. 1. It rose 13%, then pulled back to its current test of support of at its 10-week line. The stock was still extended 9% on Friday.
Melco Crown is currently below a 17.18 buy point in a first-stage cup-with-handle base. Analysts expect a 32% earnings slip for 2016, rebounding to a 23% advance for 2017.
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