The luck of casino giants Wynn Resorts (WYNN) and Las Vegas Sands (LVS) looks set to change for the better soon, driven by regulatory changes affecting the Chinese region of Macau, which accounts for a majority of both companies’ revenue.
Given these changes and the stocks’ reasonable valuations, investors should buy WYNN stock and LVS stock.
In the first quarter of 2015, Wynn’s Macau casinos accounted for more than $700 million, or about 65% of its $1.1 billion in total revenue. However, that Macau figure was 38% lower year-over-year. Similarly, Las Vegas Sands’ Macau properties generated $1.83 billion, or 60% of its total revenue, but the revenue at most of its Macau properties tumbled at least 30% in the first quarter versus the same period a year earlier.
Macau’s casinos have been slumping for the past year. China’s anti-corruption push has been causing high-stakes gamblers to avoid the region — the only place in the country where gambling is legal. The region’s gross gaming revenue, or GGR, tumbled 36% in June, bringing its year-to-date decline to 37%, according to Bloomberg. Macau’s GGR reached its lowest level in more than four years last month, added the news service, which noted that some weakness in the Chinese economy may also have played a role in the casinos’ difficulties.
But recently, it looks like the Chinese government has been changing its stance toward Macau.
On June 30, China announced that it was relaxing visa restrictions that had prevented high rollers from coming to the region. Casino operators should benefit from the move, Bloomberg quoted CICC analysts Chris Kwai and Haofei Chen as saying.
Also more upbeat on Macau casinos after the change was UBS, which wrote that it was more optimistic on Macau stocks following the policy update. In the wake of the change, which will enable visitors from mainland China to stay in the province longer and visit more frequently, UBS is no longer cautious on the sector, Theflyonthewall reported. The firm expects Macau’s GGR to gradually rise by 10% versus second-quarter levels and predicted that the sector’s GGR would increase by 7% in 2016 compared to 2015, the website added.
Investors in Macau casino owners, including investors in WYNN stock and LVS stock, got more good news about the government on Monday.
According to Macaubusiness.com, Macau may let casinos continue to permit smoking on portions of their premises if they provide “scientific proof that smoking rooms protected employees and patrons from harm done by tobacco smoke.” The government’s statement comes as the region’s legislature is considering a bill that would ban smoking in casinos. So it looks as though Macau’s casinos are getting a reprieve from a smoking ban that may have made smokers less likely to visit casinos.
Shares of Macau casino owners, including Wynn stock, appeared to get a lift from the news, as they rose by around 4% on Monday, beating the S&P’s 1.1% advance. Wynn stock advanced 3.8%.
What makes WYNN stock and LVS stock more attractive than their peers are their combination of large exposure to Macau and very reasonable valuations. As mentioned earlier, Wynn and Macau get about 60% and 65%, respectively, of their revenue from Macau. And both companies are planning to increase their exposure to the region, as Wynn and Las Vegas Sands both intend to launch major new facilities in the region next year.
Wynn stock trades at 22 times analysts’ consensus 2016 profit estimates, while LVS stock has a forward-looking price-to-earnings ratio of 20.5.
Given analysts’ generally pessimistic outlook on Macau casinos in the wake of the region’s recent dismal GGR results, the outlook for both companies is probably way too low.
The other two Macau stocks that trade on major U.S. exchanges, Melco Crown (MPEL) and MGM Resorts (MGM), are not as attractive. Melco Crown, with a P/E ratio of 24.5 based on the 2016 consensus estimate, has a significantly higher valuation. Meanwhile, only $630 million of MGM’s revenue came from China in the first quarter, versus $1.6 billion form the U.S.
China’s government appears to be ready to boost Macau casinos, making Wynn stock and LVS stock very attractive at current levels.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
