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Casinos Are Making Hay in Macau

18 October 2013 in Trading Ideas

As lawmakers of various US states dip their respective toes into certain types of online gambling, the sector’s global reach is proving yet again that putting bodies in casinos is still the No. 1 goal.

And, no, we’re not talking about Las Vegas. As we wrote here in August, the Chinese island of Macau is the world’s hottest gambling zone – so much so that Las Vegas stalwarts like Wynn Resorts and Las Vegas Sands generate most of their revenue from the region.

And little has happened in the last two months to suggest that casino stocks – or Macau gambling – are cooling off.

In the last month, the Casino Gambling motif (where, by the way, Wynn and Las Vegas Sands shares have a 37% weight) has increased 5.0%; during that same time frame, the S&P 500 is up 0.6%.

So far in 2013, the motif has risen 55.9%; the S&P 500 has grown 20.5%.

And Macau? A research report by Citi last week was bluntly bullish: All six casino operators in the area will gain from the unabated growth on the island’s gaming industry. And, where the previous growth driver was the VIP segment, it’s now the mass market segment that is driving growth – to the tune of 37% revenue growth of a year ago. Meanwhile, VIP operations are recovering, with revenue up 13% from last year.1

casino gambling motifBut if those kinds of numbers still don’t impress, take a look at some of Citi’s expectations for the newest of the new – Macau’s upstart gaming development zone called Cotai. The benefit there for casino operators, at least for now, is a limited supply of casinos and tables.

Citi expects big things for the Macau operations of Melco Crown (a 17% weighting in the Casino Gambling motif) and Las Vegas Sands’ Sands China unit specifically because of their operations in Cotai.

Citi projects that Cotai operators will grow their pretax earnings by 50% year over year, with Melco Crown seeing pretax profit growth of 42% and Sands China delivering 57% growth.

Oh, and if all that wasn’t enough, Macau casinos seemingly just got a big boost earlier this month from the weeklong Chinese Golden Week Holiday, which ended Oct. 7. The number of tourists from inland China visiting Macau rose 12.1% from a year earlier.2

Longer term, more competition in Macau — or a further slowdown in the Chinese economy – could start to weigh on growth. However, if upside earnings reports from casino companies this quarter cite a huge contribution from Macau, it would hardly qualify as surprising.

1Shuli Ren, “Macau Gaming: Growth Unabated, Melco Crown Citi’s Top Pick,” Barrons.com, Oct. 10, 2013, http://blogs.barrons.com/emergingmarketsdaily/2013/10/10/macau-gaming-growth-unabated-melco-crown-citis-top-pick/?mod=yahoobarrons, (accessed Oct. 16, 2013).

2James Detar, “Melco Stock Hits Record High Amid Expansion Plans,” Investor’s Business Daily, http://news.investors.com/101113-674767-melco-crown-making-money-hand-over-fist-in-macau.htm?ven=yahoocp&src=aurlled&ven=yahoo, (accessed Oct. 16, 2013).