The gambling capital of the world, Macau, China, a region that brings in more than 5 times the gambling revenue of Las Vegas, has American casino investors at the edge of their seats. Within the most populous country in the world, Macau is the only place in which casinos are allowed and they are booming. Some of the largest US casinos bring in a majority of their income from Macau operations
Macau just released its strongest year-over-year growth figures all year for June causing US casino stocks like Wynn Resorts WYNN, MGM International MGM and Las Vegas Sands LVS to jump this week. So far this week WYNN is up 6.2%, LVS is up 5%, and MGM is up 0.8%, with these returns aligning with each companies’ Macau exposure.
WYNN is the most exposed to China with over 75% of its EBITDA being driven by Macau, followed by LVS which derives almost 60% of its EBITDA from Macau operations, and MGM is the least exposed with 24% of its EBITDA coming from this region. Macau is driving that majority of all three of these firms growth with this region’s total gambling revenue growing strong double-digit figures in the last 2 years.
Below is Macau’s year-over-year casino revenue growth by month. 2017 and ’18 both saw robust expansion while 2019 has seen a slowdown. The past 2 months Macau has experienced positive growth and these casinos are hoping this growth can continue.
The US-China trade war is impacting these highly exposed casinos indirectly. Gambling firms typically have a high betas because they generally do well when the overall populous is doing well. If the general population has extra discretionary spending as well as positive income outlook they feel much more comfortable gambling with a portion of it. This trade war has caused a bit of uncertainty about future income for the Chinese, leading gambling revenues in Macau to experience a deceleration.
Over the last 52-weeks the least exposed casino to China, MGM, has performed the best while the most exposed, WYNN, has performed the worst. This trend has reversed since the start of 2019 with WYNN seeing returns of over 35% as the Chinese gambling outlook continues to brighten.
LVS and WYNN are both trading at enterprise values that are 10x their forward EBITDA (EV/EBITDA), which is on the lower end of their 5-year trend with highs around 14x and lows around 8.5x.
Wynn Resorts is the most volatile of the three both because of its substantial amount of leverage combined with its excessive China exposure.
MGM, WYNN, and LVS all pay out a yield of 1.8%, 3%, and 5% in dividends annually. These dividend yields are a nice cushy fixed income for stocks that experience a considerable amount of volatility.
As the trade war subsides and China’s economy stabilizes, these China exposed casinos could show investors a sizable return.
LVS is the largest publicly traded casino in the world and is my casino pick. It has the international exposure to drive growth in the future but less leverage than WYNN. It is able to boast reasonable valuation multiples with both forward EV/EBITDA and P/E falling below the industry average and both multiples are sitting on the lower side of this firm’s 5-year trend. The massive 5% dividend yield that LVS hands out to investors annually gives me some peace of mind about jumping into such a volatile stock.
All of these stocks hold a significant amount of risk and I would limit exposure, but they have a place in a well-diversified portfolio.
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