China Slowdown Creates an Opportunity in Gambling Stocks

Despite the U.S.-China trade war, the future of economic growth is still in Asia

By Will Healy, InvestorPlace Contributor

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Much of the recent decline in Chinese equities centers around gambling stocks. With China feeling the effects of a trade dispute, its stocks have fallen. Now, fears of fewer customers in Chinese casinos have reached a fever pitch. Although nobody knows what will happen with Chinese gambling stocks in the near term, investors have options to profit from this looming slowdown.

Macau in Focus Amid Chinese Stock Market Declines

The gambling situation in China parallels that of America in the latter 20th century when only Nevada and New Jersey permitted gambling. In China, gambling is only legal in Macau, the former Portuguese colony that now functions as a Special Administrative Region of China.

Even before China regained control in 1999, Macau’s economy depended heavily on gambling. Since China left its gambling laws in place, gamers flocked to Macau in droves. Today, Macau functions as the largest gambling hub in the world, greatly surpassing Las Vegas.

However, events across the Zhujiang (Pearl) River Estuary in Hong Kong have hurt its fortunes. Hong Kong’s Hang Seng Index has fallen more than 20% as worries about a trade war with the U.S. have sent stocks tumbling.

Gambling Stocks Have Fallen Hard

This negative wealth effect creates concerns in Macau that VIP customers will show less willingness to make large bets in its casinos. As a result, Galaxy Entertainment Group (OTCMKTS:GXYEF) has fallen by almost 25% since September 4th. Sands China (OTCMKTS:SCHYY) and Wynn Macau (OTCMKTS:WYNMF) have also fallen by more than 13% each.

In a recent article about Las Vegas Sands (NYSE:LVS), I argued that investors should consider LVS a Chinese equity as six of its 11 current casinos operate in Macau. Wynn Resorts (NASDAQ:WYNN) faces a similar situation as three of its six casinos also operate in Macau. Both of these stocks have fallen by slightly more than 10%. Even MGM Resorts (NYSE:MGM), which owns two casinos in Macau and partially owns four hotels in mainland China, has seen a similar decline.

Investors may prefer gambling stocks trading on the major U.S. exchanges or the pure-plays on the OTC market. Either way, they will have to decide whether this constitutes a buying opportunity now or if they should wait.

While some have called these stocks “falling knives,” I disagree. Yes, an economic slowdown means fewer high rollers. It also will likely mean diminished and possibly negative profits for a time. Still, in slower times, I doubt the Chinese government would discourage gambling when it brings economic activity. Also, economic booms and busts always follow a natural cycle. An economic spring will follow such a winter, probably leading to a recovery in gambling stocks.

What Should Investors Do About Chinese Gambling Stocks?

So, the question of what to do remains. Given the thin trading volumes of the OTC gambling stocks, I would wait to see upward momentum before buying those. However, of the gambling stocks on the major U.S. exchanges, I would choose LVS stock at this moment.

Like its peers, Las Vegas Sands stock trades well below its five-year average P/E ratio. It’s current forward P/E ratio is 17.3 — well below its five-year average of 22.2. A more significant factor involves LVS stock’s dividend. The current dividend has risen to $3 per share, a yield of about 4.9%. This has increased every year since 2014. While I cannot make guarantees, companies who increase dividends every year tend to keep that streak alive. Moreover, since few stocks offer dividend yields as high as 4.9%, these payouts create a considerable disincentive to sell.

Furthermore, LVS stock holds the largest stake in Macau of the major American gambling stocks. It also operates a casino in Singapore, and it wants to enter other Asian markets. Even if China sees a temporary slowdown, Asia will remain the world’s largest growth driver for years to come. Hence, a significant presence in the East bodes well for the future.

Final Thoughts on Chinese Gambling Stocks

Gambling stocks face a high level of uncertainty. Macau, the world’s largest gambling market, faces challenges as high rollers increasingly stay away amid a declining Hong Kong stock market.

As a result, gambling stocks have fallen below their average valuations. However, with a comparatively low P/E and a high dividend, LVS stock stands as the least risky play as investors decide whether they can find a buying opportunity in this sector. Whatever happens with gambling stocks in the near term, Asia holds the key to their long-term future. A trade dispute with the U.S. does not change that.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/china-slowdown-gambling-stocks/.

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