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Macau Is Keeping Casino Stocks on a Hot Streak

9 August 2013 in Trading Ideas

Not every American business sector would find its top executives exclaiming, “Thank God for China!”

But not every American business sector is casino gambling.

Amid this not-entirely-new international flavor, the Chinese island of Macau is where it’s at – so much so that it’s now where longtime Las Vegas stalwarts like Wynn Resorts and Las Vegas Sands actually generate the majority of their overall revenue.

This has proved to be a salvation for these two companies – and their respective shareholders – as the performance gap between Macau and Las Vegas appears to be widening.

casino gambling motif It’s also been a driver for the Casino Gambling motif, which, as it happens, contains one-third of its portfolio of stocks in Wynn and Las Vegas Sands shares. The motif has gained 9.9% in the past month. During that same period, the S&P 500 has risen 3.6%. So far in 2013, the motif has increased 32.1%; the S&P 500 is up 17.5%.

Macau announced late last week that the 30 casinos on the island generated $3.69 billion of revenue in July, an increase of 20% from a year earlier.1 While that was largely in line with analysts’ estimates, it eclipsed fears by some that the month’s performance was deteriorating. As a result, the news seemed to buoy investors’ confidence, pushing up shares of Macau players like Wynn, Las Vegas Sands and MGM Resorts International.

Regardless of where those Macau numbers were going to come down, they were clearly going to be well above the recent performance of Las Vegas-based casinos. Last week, Nevada’s gaming board said total gaming revenue fell 4.8% in June from a year earlier, including a 10% decline for casinos on the Las Vegas Strip.

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Of course, the continuing growth surge in Macau isn’t a sure thing. Aside from global economic slowdown (and China’s, in particular), the island’s own monetary authority said in July that it expects gaming receipts to slow down in this year’s second half as high-stake gamblers will begin to contribute a smaller percentage of overall casino revenue.2

While Macau feeds off of its high-stakes gamblers (which generate two-thirds of overall revenue), the mass market is growing faster, as casinos add more entertainment and family shows to draw Chinese middle-class tourists. These customers gamble less money, but provide better margins by letting casinos avoid fees paid to middlemen to lure high-stakes gamblers.

On the other hand, some believe Las Vegas could see a boost in performance. Stern Agee analyst David Bain said in a client note last week that the housing recovery and a positive Las Vegas convention outlook point to Vegas Strip growth above expectations.

It is left for casino-stock investors to determine whether the combined numbers from Macau and Las Vegas will continue to justify an extended rally.

1James Detar, “Macau Keeps Wynn, Vegas Sands Hot Despite Nev. Dip,” Investors.com, Aug. 2, 2013, http://news.investors.com/business/080213-666180-nevada-june-gambling-revenue-down-5-percent-las-vegas-10-percent.htm?ven=yahoocp,yahoo, (accessed Aug. 6, 2013).

2Vinicy Chan, “Macau Gaming Receipts to See ‘Visible’ Slowdown in Second Half,” July 17, 2013, http://www.bloomberg.com/news/2013-07-17/macau-gaming-receipts-to-see-visible-slowdown-in-second-half.html, (accessed Aug. 6, 2013).