Trends In The Casino Industry – A Shift From The Las Vegas Strip To East Asia

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The gaming at Las Vegas Strip peaked in 2007 with revenues of $6.83 billion. However, the figure declined to $5.55 billion in 2009. This can be attributed to the economic recession and consequent fall in consumer discretionary spending. The casino industry at the Strip was worst hit by the economic slowdown and it has still been unable to reach the pre-recession levels. Gaming in the region started to rebound since 2010 and the revenues grew to $6.50 billion in 2013. While this has led to a steady revenue growth for casino operators such as Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS) and MGM Resorts (NYSE:MGM), the industry is experiencing change. We wonder if the Strip can see any significant growth in the coming years as other states have legalized the casinos, providing gamblers with plenty of alternatives. On the other hand, Macau has seen a rapid growth in gaming over the past few years and we believe it will continue to drive growth for casino operators in the coming years. Also, Japan could offer a big opportunity for the casino operators to expand in East Asia. On that note, we discuss below these three markets from gaming prospective and how is Wynn is expanding its casino operations.

See our complete analysis of Wynn Resorts’ stock here

Slower Growth At The Las Vegas Strip Gaming Market

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Las Vegas Sands has two propertieson the Strip, The Venetian Las Vegas and The Palazzo.  The casinos have a combined gaming space of 225,000 square feet. The casino revenues from these properties have increased from $431 million in 2011 to $584 million in 2013. [1] Wynn Resorts also operates two properties in the region, Wynn Las Vegas Resort and Encore. These properties have 230 table games and 1,854 slot machines in 184,000 square feet of gaming area. The company’s Las Vegas casino revenues have increased from $534 million in 2010 to $683 million in 2013. [2]

Looking at MGM Resorts, it operates 15 owned resorts in the U.S. The company offers more than 22,000 slots and 1,000 gaming tables in the region (excluding the slots and tables in JVs). Like other casino operators, MGM has also seen similar growth over the past few years with revenues increasing from $2.48 billion in 2010 to $2.60 billion in 2013. [3]

However, the growth rate at the Las Vegas Strip has been much lower than the world’s largest gambling hub, Macau, which has seen gaming revenues increasing from $24 billion in 2010 to $44 billion in 2014. [4] Las Vegas Sands and MGM have also seen their Macau casino revenues double over the past few years.

There are various reasons why Las Vegas Strip witnessed a slow growth over the past few years. As  disposable income declined during the economic crisis, it hit the Strip harder. Meanwhile, other states legalized casinos, which further weighed over the casinos in Nevada. For instance, Pennsylvania legalized table games like poker and blackjack at casinos in a move to generate higher revenues. Similarly, the Delaware senate also passed a bill to allow table games. This had an adverse effect on the number of tourists visiting Las Vegas for gaming activities and we believe this trend will continue in the coming years. Thus, it does not make much sense for these three casino operators to expand in Nevada and accordingly they are bidding to build casinos in other states.

In September 2014, Wynn won the bid to build a casino resort just outside Boston. The company will build a $1.6 billion resort, which is expected to open in late 2017. Massachusetts Gaming Commission (MGC) picked Wynn over Mohegan Sun primarily due to better paying jobs and Wynn’s plan to clean up the former industrial land at the development site. This is the third gaming license issued by the MGC. Earlier, it approved MGM’s casino in Springfield, and a Penn National Gaming slots parlor near the Rhode Island border. Wynn plans to develop an integrated casino resort at the 37-acre site on the Mystic River. The resort will comprise of a 500 luxury-room hotel, 140,000 square feet of retail space, eight restaurants, a 12,000 square feet nightclub, a five star spa, 150 table games and 3,000 slot machines. [5]

This appears to be a good move by the company. Massachusetts is an important location as it is the third richest state in the U.S. with a per capita income that is $7,695 higher than the average U.S. per capita income. [6] Since spending on casinos depends on the disposable personal income of individuals, the resort will attract gamers and tourists from all parts of Massachusetts. Boston is the largest city in Massachusetts and it is well connected with other major cities in the state and region.  Wynn will generate more than $800 million in revenue and close to $250 million in annual EBITDA from this resort, according to our estimates.

Wynn expanding its operations outside the Las Vegas Strip will also help revive its domestic growth. We believe that Boston casino will help the company diversify its assets in the U.S.  The company will also benefit from the rise in domestic operations driven by continued growth in disposable personal income in the U.S.   Disposable personal income is on a rise and has moved from a little over $11,500 billion in January 2011 to over $13,150 billion in November 2014. [7] While Wynn will benefit from the casino operations in the region, the new resort will also be a large source of non-gaming revenues driven by the hotels, retail, food & beverage, entertainment and other activities — a trend seen in other casino properties in the U.S. For instance, MGM derives more than 60% of its U.S. revenues from the non-gaming sources.

East Asia Will Offer Gaming Growth For The Casino Operators

While the U.S. offers growth in non-gaming sources, it is important for the casino operators to expand internationally for gaming growth. Macau continues to be the most important gambling destination with a solid growth opportunity in the coming years. Accordingly, all major casino operators, including Wynn, Las Vegas Sands and MGM, are developing new properties to enhance their capacity in the region. Wynn is developing a new resort, Wynn Palace, in Cotai, Macau. The resort will feature 2,000 hotel rooms and 400 gaming tables. It is estimated to cost around $3.5 billion and shall be operational by 2016.

2014 has been tough for Macau as the anti-corruption crack down kept VIPs away from gaming tables and this led to a 2.60% drop in gaming revenues to $44 billion. It must be noted that this is the first full year drop in gaming revenues for Macau. Also, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounted for 80% of the local government revenues in 2013. [8] We wonder how long will it take for Macau to return to its normal gaming volumes. Some of the analysts at the street expect the growth to return in the second half of 2015. [9] However, a lot will depend on how far Chinese government goes with the ongoing crackdown on corruption.

While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run given that Macau is the only place in China where gambling is legal. Also, gambling in China is an accepted practice in the home as well as in social circles. China is seeing growth in the number of HNIs (high net worth individuals), but only a small portion of them visits Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. [10] As China continues to grow, more people will likely visit Macau for gaming activities and Wynn as well as other casino operators should thus continue to benefit from the rising demand as they did in the past.

While Macau saw a tough phase in 2014, Japan moved one step closer to legalizing casinos in the country. Wynn as well as Las Vegas Sands and MGM are also eyeing Japan. Casino operators have shown interest in developing casinos in Tokyo and Osaka. Wynn is willing to bet more than $4 billion on Japan casinos. According to a research by CLSA, Japan will generate $40 billion in annual gambling revenues. [11] If we consider the similar EBITDA margins as in Macau, this would translate into annual EBITDA of over $12 billion for the industry. It is noteworthy that around 9.6% of males and 1.6 % of females in Japan were found to be gambling addicts in a 2010 survey of over 4,000 respondents. This is much higher than 1.4% in the U.S. and 1% in U.K. [11] Also, high net worth individuals drive VIP gaming in casinos. According to a report by Research And Markets, high net worth individuals in Japan will grow by 7% to reach 2.34 million in 2018. [12] This indicates that Japan could be a very big market for gambling and it would thus make sense for casino operators such as Wynn to invest in Japan subject to casino legalization. Currently, Wynn and Las Vegas Sands have a cash balance of around $3 billion, which they can utilize into developing new casinos.

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Notes:
  1. Las Vegas Sands’ SEC Filings []
  2. Wynn Resorts’ SEC Filings []
  3. MGM Resorts’ SEC Filings []
  4. Gaming Inspection and Coordination Bureau, Macau []
  5. Wynn Gets The Nod To Build A $1.6 Billion Casino Resort Outside Boston, Trefis, Sep 18, 2014 []
  6. Massachusetts Per Capita Income, Department of Numbers []
  7. United States Disposable Personal Income, Trading Economics []
  8. Macau Gambling Revenue Suffers First Full-Year Fall, The Wall Street Journal, Jan 2, 2015 []
  9. Morgan Stanley sees 4 percent Macau GGR drop in 2015, Asian Gambling Brief, Jan 6, 2015 []
  10. Understanding the High Net Worth Market in China, Accenture []
  11. Pachinko problems loom large as Japan kicks off casino debate, Reuters, Jun 18, 2014 [] []
  12. Research and Markets: High Net Worth Trends in Japan 2014: The Number of Japanese HNWIs is Forecast to Grow by 7% to Reach 2,340,459 in 2018, Yahoo Finance, May 7, 2014 []