Weekly Casino Notes: Anti Corruption Crackdown To Intensify In Macau

The past week was eventful for casino operators after news broke from China and Macau that the ongoing anti-corruption crackdown is to intensify in the coming months. This led to a wave of selling in casino stocks and most of them hit their 52-week lows. The data for first two weeks of December also came in worse than what the street was expecting. December may turn out to be the worst month for Macau gaming revenues, with a decline expected to be as high as 30%. This can partly be attributed to China’s President Xi Jinping’s visit to Macau between December 19th and 20th for the 15th anniversary of Macau’s return to China. Earlier, China’s president visited Macau in December 2009 and this led to a 7% drop in gaming revenues over the previous month as VIPs stayed away from Macau during the President’s visit. ^[1] On that note, we discuss below some key developments around this story.

Las Vegas Sands

Las Vegas Sands (NYSE:LVS) stock reacted to the Macau news and it declined 6% in the first three days of the week and made a fresh 52-week low of 49.82. However, the stock has recovered 4% since then. Looking at the year-to-date movement of Las Vegas Sands’ stock, it has declined 31% amid continued weakness in Macau. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials is hurting the VIP business of Macau casinos. Moreover, the government imposed visa transit restrictions, which has shortened the duration of visitors’ stay in Macau to five days, and imposed greater penalties for non-compliance. A new smoking ban in casinos is also hurting the casino operators, as it has reduced the playing time. However, it must be noted that Las Vegas Sands largely relies on mass-market gaming and it has scaled up its mass-gaming operations in the region. VIP gaming accounted for only 16% of Macau profits while mass-market gaming contribution was around 53% during the third quarter (also see – Las Vegas Sands VIP Operations Hurt As Macau Gaming Continues To Slide For The Sixth Consecutive Month).

On a separate note, Las Vegas Sands selected longtime company executive Rob Goldstein as president and chief operating officer, replacing Mike Leven. Rob has been with the company since 1995 and was most recently heading the global gaming operations. ^[2]

We estimate gross revenues of about $18 billion for Las Vegas Sands in 2014, with EPS of $3.54, which is in line with the market consensus of $3.31-$3.98, compiled by Thomson Reuters. We currently have a $74 price estimate for Las Vegas Sands, which is more than 35% ahead of the current market price.

Wynn Resorts

Wynn Resorts (NASDAQ:WYNN), like other casino operators, is facing the headwinds from a decline in Macau gambling. As compared to Las Vegas Sands, Wynn has a much higher exposure to VIP gaming in the region. We estimate that VIP gaming accounts for more than 35% of Wynn’s stock value. Wynn’s stock price also declined 6% in the first three days of the week but recovered in yesterday’s session. The stock made a fresh 52-week low of 133.58 on Wednesday.

Wynn’s stock price has corrected by more than 20% since the company last reported its earnings in October. The gaming revenues in the world’s largest gambling hub dropped by 20% for the month of November, reflecting the sixth consecutive monthly decline in Macau gaming. ^[3] With the November decline, casino revenues are now flat as compared to the prior year and are poised to post the first ever yearly decline. The first two weeks data for December gaming revenues has come in much lower at 753 million Macau pataca, down from the average daily run rate of 809 million pataca in November. ^[1] The decline in December could be far worse around 30% and this has led to a wave of selling in casino stocks.

We estimate gross revenues of over $7 billion for Wynn Resorts in 2014, with EPS of $8.54, which is in line with the market consensus of $7.26-$8.60, compiled by Thomson Reuters. We currently have a $186 price estimate for Wynn Resorts, which is more than 25% ahead of the current market price.

MGM Resorts

Unlike Las Vegas Sands and Wynn Resorts, MGM Resorts (NYSE:MGM) derives majority of its value from its U.S. operations. The company has a wide presence on the Las Vegas Strip and generates a significant portion of its revenues from non-gaming sources. However, the stock also tumbled after Macau news about anti-corruption wave to intensify broke out and hit a fresh 52-week low of 17.25 on Wednesday. However, it saw smart recovery in yesterday’s trade and was up 8% to close at 19.40.

On a separate note, a settlement was announced in Perini lawsuit over a construction defect case involving CityCenter’s Harmon Hotel. MGM said that it will pay a total of $173 million to resolve the lawsuit, with $20 million going to CityCenter and $153 million to Perini. ^[4]

We estimate gross revenues of about $11 billion for MGM Resorts in 2014, with EPS of $0.54, which is in line with the market consensus of $0.40-$0.62, compiled by Thomson Reuters. We currently have a $24 price estimate for MGM Resorts, which is approximately 10% ahead of the current market price.

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1. Macau: Analysts Now Talk About 30% Decline In December, Barrons, Dec 15, 2014 [↩] [↩]
2. LAS VEGAS SANDS NAMES ROBERT G. GOLDSTEIN AS PRESIDENT AND CHIEF OPERATING OFFICER, Las Vegas Sands’ Press Release, Dec 11, 2014 [↩]
3. Macau November gambling revenue falls 20 pct, sixth drop in row, Reuters, Dec 1, 2014 [↩]
4. MGM Resorts’ SEC Filings [↩]