Lady Luck Relocates To Macau

Investor's Business Daily

While the U.S. and portions of the world economy are improving, casino operators face more head winds in early 2013 than they did a year ago.

Experts remain upbeat, particularly in the U.S., where the gaming industry is expanding as more states embrace their gambling options and number of facilities.

But fourth-quarter results so far show a heated brawl under way for market share in Macau, a special administrative district near Hong Kong and the only area of China that permits gambling.

Casino owners, based in the U.S. and elsewhere, continue to add capacity at a breakneck pace, in spite of signs that Macau's white-hot growth of the past several years has hit the brakes. The region's gross gambling revenue in 2012 rose 13.5% year-over-year, down from 42% growth the prior year.

China's economy last year experienced its slowest rate of growth in 13 years. This could mean increasing friction for Macau, if China's gambling enthusiasts get nervous about spending money on travel, slot machines and hotel rooms.

A leading concern: a decline in spending by VIP customers, who account for about 70% of Macau's total revenue.

"The VIP market has deteriorated slightly, and people are watching to see if there is something wrong with the nature of the way business is conducted," said Warwick Bartlett, chief executive of Global Betting & Gaming Consultants (GBGC), a U.K.-based researcher and consultant.

"They are also watchful of the Chinese economy," he added. "The VIP market comes from small- to medium-size businesspeople, and some are wondering whether these customers are being affected by the Chinese economy.

Change Of Luck

The two biggest casino operators — Las Vegas Sands (LVS) and Wynn Resorts (WYNN) — have battled earnings declines in recent quarters after years of steady and robust gains.

In the fourth quarter, Wynn Resorts reported a 25% drop in earnings, worse than the 19% slip expected by analysts. Revenue faltered 4%, while analysts had projected a 5% drop.

Still, Janney Montgomery Scott upgraded the stock to buy from neutral Friday and lifted its price target 46%, to 175, based on expectations for stronger growth in Macau.

Las Vegas Sands stormed ahead 7% Thursday, despite reporting a wider-than-expected decline in Q4 earnings. But it reported earnings up 52% and revenue up 48% for its majority-owned China subsidiary operating four casinos in Macau.

Penn National Gaming (PENN) swung wildly, up and down, after its Q4 report Thursday. Shares ended with a firm gain for the week, despite earnings that missed analyst consensus by 60%.

MGM Resorts International (MGM) and Caesars Entertainment (CZR) keep losing money amid heavy exposure to still-sluggish U.S. markets. MGM plans to release earnings on Feb. 20.

Despite the difficult end to 2012, all are expected to report improved bottom-line numbers in 2013. And all have seen their share prices rise in recent weeks.

That's mainly because there's a lot more good news than bad news for casino operators right now.

"These are global companies, and when you still see growth in Macau in the mid-teens, that creates optimism," said Amitabh Kapoor, an analyst at Gabelli & Co. "There is also a certain amount of comfort that the U.S. economy not going off the cliff.


IBD's gambling group includes a wide variety of casino stocks, from large international companies like Las Vegas Sands and Wynn to smaller outfits like Pinnacle Entertainment (PNK) and Isle of Capri (ISLE), which operate casinos in mostly Midwestern and Southeastern U.S. markets.

The casinos themselves also run the gamut. Some are sparkling behemoths with thousands of hotel rooms and a seemingly endless parade of shops, restaurants and entertainment spaces. Others are modest enterprises with a few dozen slot machines, a snack bar and free parking.

Gambling Meccas like Macau and the Vegas Strip tend to the glitzy side. To compete, smaller markets in the U.S. have to serve up a healthy portion of glitz as well.

"When a new state considers gaming, it wants establishments that not only have casinos but also restaurants, shopping and entertainment. These are typically multibillion-dollar facilities with a wide variety of entertainment options," said Holly Wetzel, vice president of communications at the American Gaming Association, an industry trade group.

Meanwhile, Wall Street has been betting pretty heavily on casino stocks. IBD's Leisure-Gaming/Equipment group, which also includes manufacturers of gear used in casinos, climbed to a No. 13 ranking on Friday among 197 industries tracked by IBD. The group started December ranked No. 125.

The advance began Nov. 16, a day after Hong Kong's Hang Seng index began climbing out of a brief pullback. The Hang Seng has since gained 12%, the Shanghai Composite is up 23% from a Dec. 3 low and attitudes toward spending in China appear to be warming.

The casinos group received an added boost Thursday, when lottery ticketing and systems maker Scientific Games (SGMS) announced it would buy WMS Industries (WMS) for around $1.5 billion. WMS (formerly Williams Manufacturing) is the leading maker of slot machines and other gaming equipment for the casino industry. The combination gives the company enough depth and breadth to form a solid platform for pursuing global gaming markets.

(Williams is familiar to anyone old enough to have grown up playing arcade pinball machines.)WMS spiked 51% on the news.

Optimism over the gaming market as a whole has helped push stocks higher, experts say. So has the fact that some casino operators have worked hard to strengthen their balance sheets after years of piling up debt.

"If you ask me why a stock is up, it's because the fundamentals are strong, it has cleaned up its balance sheet, and it benefits from global growth," analyst Kapoor said.


Macau is the undisputed heavyweight champ of the global casino industry with about $38 billion in gross gambling revenue last year, according to January data from the Macau government.

By comparison, Las Vegas is about a $6 billion market, which puts it in a tight race with Singapore for the world's No. 2 gaming center.

"Macau is where Las Vegas Sands, Wynn and, to some extent, MGM are focusing their growth," Kapoor said.

Some 70% of Sands' revenue during the 2012 fourth quarter came from its Macau operations. Wynn got about 70% of its Q3 revenue from Macau, while MGM's Macau unit accounted for nearly 30% of its business.

Although growth is slowing in Macau among VIP customers, China's vast number of middle-class gamblers has helped pick up the slack.

The mass market is appealing to casino operators because they don't have to pay VIP junket operators to lure middle-class customers. Junket operators act as middlemen for the casinos, luring high rollers with promises of free rooms, travel and other perks.

"The mass market is a more manageable business as far as the casinos are concerned," Bartlett said. "And there's a lot of potential for growth. Only 1% of the Chinese population has been to Macau, and a lot of people would like to go there.

In the U.S., the casino industry continues to bounce back slowly from the slump that began in 2008.

Preliminary data from the American Gaming Association show that gross gaming revenue for commercial U.S. casinos grew 5.5% to $32.3 billion during the first nine months of 2012. That compares to 3% growth during all of 2011. Full-year 2012 data were not available at press time.

"A lot of the growth is due to expansion in markets like Maryland and Pennsylvania," the AGA's Wetzel said. "More states want the revenue and the jobs available through the casino industry.

In November, Maryland voters approved a measure that would allow casinos in the state to offer table games such as blackjack and roulette, and also allow a casino to be built in Prince George's County — a cab ride from the nation's capital.

Massachusetts is in the process of deciding which casino companies get gaming licenses. Wetzel says it will likely be 2014 before the licenses are issued. MGM, Caesars and Penn are among the companies bidding.


Much will depend on how the economies shake out in China, Singapore and the U.S. Although China's economic growth is slowing, it's still pretty solid at around 7% to 8% in 2012, according to most estimates.

Singapore's growth also has slowed. The U.S. economy continues to crawl ahead at a sluggish pace, though there have been some positive signs of late.

"The American economy appears to be doing better," Bartlett said. "The latest job numbers were encouraging, and the housing market is picking up. These should help the prospects for casinos.

Macau should benefit from a fast-rail network being developed in China as well as a bridge that will connect Macau to Hong Kong, he says. Both projects will make it easier for customers to reach Macau's casinos.

Another potential growth driver is that other Asia/Pacific countries are eyeing the resort casino market.

"There's a willingness to consider gambling in other countries where there wasn't before," he said. "We expect South Korea, the Philippines and Japan to follow the lead of Macau and Singapore in building super resort casinos."

View Comments (0)