Sluggish Macau Market and Muted Earnings Hurt Gaming ETF


Major casinos witnessed a substantial pullback in the recent past thanks to a slowdown in Macau gambling business and analysts’ cut in revenue projection for Q3. Revenue figures provided by Macau’s Gaming Inspection and Coordination Bureau as well as Q2 results of renowned U.S.-based casinos such as MGM Resorts International (MGM), Wynn Resorts Ltd. (WYNN) and Las Vegas Sands Corp. (LVS) corroborated the fact.

Macau’s Gaming Inspection and Coordination Bureau recently revealed that total gross gaming revenue slipped 3.6% in July to $28.4 billion on a 3.7% decline in revenues in June. As a matter of fact, casino revenues plunged 11% in Q2 after posting a gain of 13% in Q1.

On the corporate earnings front, the sluggish trend seems clear. The growth momentum in Macau enjoyed by the companies in the recent past seems to be losing steam. For many companies, growth rate in the region was lower than in Las Vegas (read: Will Troubles in Macau Spoil Gaming ETF Investments?).

Not-So-Amazing Earnings

MGM Resorts posted second-quarter 2014 adjusted earnings of 21 cents per share on August 5 after the closing bell. Earnings surpassed the Zacks Consensus Estimate of 12 cents by 75% and were up considerably year over year.

Revenues were up 4% to $2.58 billon but fell short of the Zacks Consensus Estimate of $2.59 billion. Casino revenues from wholly-owned domestic resorts grew 6% while net revenue from China dipped 1%. Meanwhile, VIP gambling was a drag in China as well.  

MGM shares fell about 5.5% since it has released earnings.

On July 29, Wynn Resorts posted mixed second-quarter 2014 results. Adjusted earnings of $2.11 grew 40% and beat the Zacks Consensus Estimate by 1.4%. Revenues increased 6% to nearly $1.41 billion but missed the Zacks Consensus Estimate of $1.44 billion. Las Vegas operations increased 12.5% while Macau revenues were up just 3.2%. Table games turnover in the VIP segment declined 11.7%.

WYNN resorts fell 6.7% in last two days (as on August 7). Since reporting earnings, WYNN has declined more than 10% (see all the Consumer Discretionary ETFs here).

On July 16, Las Vegas Sands posted lower-than-expected second quarter 2014 results with both earnings and revenue missing the Zacks Consensus Estimate. Though adjusted earnings of 85 cents per share increased 30.8% year over year driven by an increase in revenues and margins, it missed our estimate by 4.5%.

Revenues increased 11.7% year over year to $3.62 billion but missed the Zacks Consensus Estimate of $3.81 billion. The miss was largely due to sluggish performance in the Macau market.

LVS stock was down about 7% within two days and it has has lost more than 9.5% since it reported earnings.

What’s Dragging Macau Down?

China's focus of shutting down illegal money transfers, overall economic slowdown, an awaiting smoking ban in casinos and the emergence of other gaming destinations like the Philippines are some of the headwinds faced by the region.

The Secretary for Economy and Finance Francis Tam expects Macau’s gaming revenue to expand in single digits this year as the industry is approaching a ‘stable’ stage after a prolonged period of fast-growth.

Foot traffic in Macau casinos was also adversely impacted by the football World Cup. The Chinese are big soccer fans and therefore the great soccer event kept them occupied with television and made them gamble less.

Nevertheless, since an end to the event on July 13 could not perk up gambling activity, we along with many analysts guess that there is more to it than meets the eye for the Macau slowdown (read: Inside the Recent China A Shares ETF Slump).

To reflect the situation, several analysts including Deutsche Bank slashed their third-quarter estimates for total Macau gaming revenue, which spurred sell-offs in casino stocks.

ETF Impact

This stock sell-off dampened investors’ mood related to the casino gaming ETF – Market Vectors Gaming ETF (BJK). All three companies mentioned above have found a place in the top 10 holdings of the fund with a considerable share. Las Vegas Sands and Sands China– together have about 15% exposure in BJK.

  MGM China holdings (about 6.10%) and MGM Resorts International (4.84%) constitute more than 10% of the fund combined. Wynn Macau (3.59%) and Wynn Resorts Ltd (5.95%) also account for more than 8% of BJK.  The fund’s top holding is Melco Crown Entertainment Ltd (7.38%), which lost over 5.6% on August 6.

BJK has lost 4.2% in the in focus trading sessions. Over the last one month, the fund has shed about 5.7% and on a year-to-date basis, it was down about 11%.

Bottom Line

Amid such a subdued investing environment, hopes still thrive for the Las Vegas division, which is steadily improving. Going forward, the region could emerge as the winner. Japan is also trying hard to get an approval for gambling, adding even more competition (read: Will the Gaming ETF Soar if Japan Approves Gambling?).

Investors should also not be hung up on Macau as the government is resorting to every possible avenue to revive the industry. If the industry can attain mid-to-high single-digit growth in the long term, it can still contribute nicely to the global level, given the resurgence of Las Vegas and possible emergence of several other gaming spots.  In any case, BJK holds a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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