With just a passing glance at last week’s research notes from HSBC, investors with a stake in Macau’s gaming industry would have been worried.
The bank’s research arm lowered its 2013 gambling revenue estimates for the world’s new Las Vegas following disappointing numbers in January and February. The updated outlook noted that the all-important VIP segment’s revenue would likely suffer before recovering around the middle of the year, once the government makes this year’s appointments.
As is all too often the case, though, things were darkest before dawn, spooking traders out of a casino trade at the exact wrong time. It turns out that Macau’s gambling revenue isn’t suffering as much as January’s and February’s numbers suggest.
Based on March’s revenue to-date, gambling in Macau is on the rebound, and then some. RBC Capital Markets reported this week that, as of March 17, Macau’s gaming revenue has increased 34% year-over-year.
Nomura even went on to say that this year’s current consensus revenue growth estimate of 11% to 12% might actually be on the low side, as demand for gaming actually outpaces supply for the next couple of years.
What gives? What prompted this 180?
At least part of it might stem from the Chinese New Year celebration. Unlike the United States’ New Year’s celebration, in China they celebrate for 15 days. This year’s celebration began on Feb. 10, which might explain February’s gambling lull. China’s populace might have been holding back on entertainment, opting to wait for the New Year celebration itself.
But wouldn’t casinos actually do more business while most of the country is taking time to frolic? That’s a dangerous assumption. Chinese consumers might have opted for something besides traveling to Macau. Or, maybe they specifically used time off to make a casino road trip.
That’s the problem … we don’t really know.
Either way, March’s numbers have been very good so far, which bodes well for the rest of the year.
Ways to Play
One doesn’t have to look too hard to find a company tapping into Macau’s gambling growth; most of the major names in Las Vegas also have a presence in the Chinese enclave. Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN) all have a stake in the Macau explosion.
All three would be fine ways to go, as each can leverage their name and deep pockets to continue drawing a crowd. But, at three years old, China’s gambling industry is starting to develop nuances that give each stock its own unique upside.
Take the Cotai region of Macau, for instance. It’s about 10 miles away from what would be considered “the strip,” and has only started developing. Its proximity to the new Guangzhou-Gongbei Railway, however, means more of China’s lower-stake gamblers can make their way to Cotai’s casinos.
Don’t underestimate the lower-stake gamblers, either. High-rollers might have built Macau’s gambling industry, but there’s been a shift in the kind of customer that’s driving Macau gambling revenue. Now that VIP visits are down, low-stakes gamblers drive more than a third of the industry’s revenue. And they’re actually more profitable.
That’s good news for Melco Crown Entertainment (NASDAQ:MPEL), which still is cultivating its 60% stake in Cotai’s Studio City. It’s investing another $350 million in the property, and if the capital expenditure pays off like other Cotai-centric investments, Melco Crown shareholders have a lot to look forward to in 2014.
Another budding nuance stemming from Macau is the migration of the gambling business all the way out to the Philippines — a charge being partially led by Melco Crown.
Though billionaire Enrique “Ricky” Razon was the first to set up shop in the Philippines, Melco Crown is currently building a new casino near Razon’s Solaire. Being first in the area — or second in the case of Melco — positions the company well in this new market. And if Manila Bay’s gambling success is half as strong as Macau’s, casino revenue will be twice as strong as it is in Las Vegas.
Macau’s gambling industry might be changing, but it isn’t going anywhere. Just pick and choose your spots.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.