The island of Macau was once a gambling Mecca, especially for China’s VIP high rollers, many of whom were unafraid to bet and/or spend millions over the course of a weekend.
Today, you’d be hard pressed to find many VIP gamers living it up in the palatial Macau casinos. That’s not good for Macau, it’s not good for the many U.S.-based casinos operating on the island — and it is especially not good for anyone long casino stocks with big Macau exposure.
In fact, if you own casino stocks with Macau exposure such as Wynn Resorts (WYNN), MGM Resorts International (MGM), Las Vegas Sands (LVS) or Melco Crown Entertainment (MPEL), you probably don’t need me to remind you that you’ve been dealt a losing hand, particularly over the past year.
Now the question for shareholders has become: Is the party over for good in Macau?
To begin answering this, we need to ask what caused the Macau casino stock plunge in the first place.
The most obvious answer is the ongoing weakness in the Chinese economy that morphed into the disastrous mid-summer plunge in Chinese stocks. Even casual Chinese observers should now be familiar with the wreckage in Chinese stocks, particularly over the past several months.
That decline can be seen in the benchmark iShares China Large-Cap ETF (FXI), which is down nearly 22% over the past six months. That’s a big meltdown, but it’s nothing compared to the decline in LVS shares (-36%), MPEL (-40%) and especially WYNN shares, which are down nearly 55% since April.
In the case of WYNN, the Wynn Macau has seen its casino revenues decline for 15 consecutive months. That’s significant, because in 2014 Wynn Resorts generated a full 70% of its total $1.3 billion in operating income from its island nation operations.
The fact that casino revenue is down is a symptom of the overall pressure on the Chinese economy and Chinese stock market, but it’s not really the true cause of such an industry-specific decline.
The real root of the Macau decline is the crackdown on corruption by Chinese officials that has put the gaming industry, as well as the VIP high rollers that frequent Macau, under intense scrutiny.
One of the targets of Chinese President Xi Jinping’s anti-corruption campaign has been the migration of what many are calling “illicit capital” from the Mainland and into Macau.
By cracking down on a common practice known as “gifting,” which involves the giving of extremely expensive gifts (including junkets to Macau) to company executives, government officials and other powerful people in China by other powerful people in China, the Macau gaming boom has essentially turned to bust.
Just this week, one of China’s biggest gambling junket firms, Neptune Group, said it may have to wind down operations if the number of VIP gamers continues to fall.
Given the one-two punch of a struggling China economy and China stock market, as well as anti-corruption policies imposed by President Xi, it’s actually a surprise to me that casino stocks with Macau exposure aren’t doing even worse than they are right now.
Although policymakers in Beijing recently pledged to “support Macau’s economy in all aspects,” I suspect that anything short of a softening the crackdown on gifting may ultimately fail. Still, news of the pledged support did help WYNN shares spike nearly 12% in early Friday trade.
I’m an admitted bull when it comes to the long-term fortunes of the Chinese economy and Chinese stocks, but it’s becoming increasingly difficult to discount the reality that changes in China — both economic and political — will doom the once-jubilant party in Macau, and in casino stocks tied to her fortunes.
While I think it’s still too early to tell if the party is actually over for good, what we can say for sure is that all of the really important guests have gone home.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.