Why is Macau market important for LVS and Wynn?

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Despite recent measures by China’s government, Macau continues to remain the world’s largest casino market. The corruption crackdown that started in early 2015 has affected casino activity and as a result, major players such as Las Vegas Sands (LVS), MGM Resorts International and Wynn resorts saw their revenues decline over the past five or so quarters. They have responded by diversifying their business by investing in non-gaming segments and shifting focus from VIP gaming to Mass market gaming. We analyse the exposure of these three companies to the global casino market in general, and Macau, Las Vegas and Singapore in particular. We find that Macau continues to remain the key trigger that’s likely to drive investor sentiment. However, the impact will be more visible for Wynn and Las Vegas Sands.

How Big is the Global Gambling & Casino Gaming Industry?

The global gambling & casino industry revenues were estimated to be about $183 billion in 2015, and grew at an average annual rate of 9.3% between 2009 and 2015. Gambling and casino industry sales includes total revenues from casino games including Baccarat, Slot machines, Roulette, Black Jack and others. Macau, Las Vegas and Singapore together account for nearly 25% of the global market, with Macau being the largest casino market in the world. The region accounted for nearly 17% of global revenue in 2015 despite 34% decline in its gross gaming revenues during the year.

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Macau’s gross gaming revenues declined in 2015 because of Chinese government’s corruption crackdown and slowdown in the region’s economy. VIP gaming in Macau was affected severely due to the corruption crackdown as Junket operators were targeted resulting in fall of junket tables by one third in 2015 itself.

 

Where the casino industry is heading?

Global casino industry has grown nearly 9.3% in the last 5 years primarily due to rapid growth of Macau’s VIP gaming and steady growth in Las Vegas.

Macau’s GGR (gross gaming revenue) witnessed 87% growth between 2010 and 2015 before declining by 34% in 2015 due to corruption crackdown by the government and slowdown of Chinese economy. However, the region’s GGR witnessed growth in August 2016 after falling continuously for the last 27 months. Las Vegas gaming industry is on the rise and is considered a bright spot in global casino industry as its overall revenues declined by just 0.6% year to date as of August 2016 despite the weakness of its baccarat and exposure to Asian gaming.

Going forward, we expect the overall casino industry to grow at a CAGR of about 8% for the next 5 years because of the following reasons:

  • Asian casino markets are likely to grow after the expected revival of the Chinese economy and Japan’s government’s legislation of land-based casinos. Additionally, we believe that the markets hit their low in the last 2 years.  With the opening of new casinos in Cotai strip, Macau’s gross gaming revenues are likely to go up starting in 2017. Las Vegas Sands (NYSE: LVS) opened their new casino on Cotai strip on  September 13th, with an impressive footfall. MGM resorts and SJM holdings have also announced the pending opening of their new casinos in Macau in second quarters of 2017 and 2018, respectively.
  • With no major casino opening in Las Vegas Strip till 2019, casino operators will be able to take advantage of increased convention attendance, airline capacity and domestic gaming to drive their revenues. Going forward, the openings of the $4 billion Resorts World Las Vegas and Crown’s Alon Las Vegas in 2019 are likely to boost region’s gross gaming revenues.

 

How this impacts LVS, MGM and Wynn?

We note that LVS has higher direct exposure to casino and gaming revenues compared to MGM and Wynn. We also find that Wynn resorts is highly exposed to Macau market, while MGM has large dependence on Las Vegas strip.  

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LVS – Overall, we forecast LVS’s casino and gaming revenues to grow at 6% annually over the next 5 years, keeping in mind the industry trajectory, its new casino in Cotai strip and its focus on more diversified revenues (i.e., the shift of focus from VIP gaming to mass market gaming, in its Asia operations).

Wynn Wynn has also opened its new casino in Macau which is likely to have positive impact on its declining revenues. With Wynn’s improved table allocation strategy is likely to contribute towards its sustainable growth.  And it has helped it outperform the Macau casino industry growth in Q2’16. Because the Wynn Palace only opened in Q3’16 and the Macau market continued its decline through much of 2016, we do not expect significant overall revenue growth for Wynn in 2016.  We expect it to grow by CAGR of about 10% thereafter, however.

MGM has delayed the opening of its Macau casino.  However, it will not be impacted severely as about 75% of its overall revenues come from Las Vegas Casino and hotel operations.   These units have performed better thus far in 2016, compared to other markets.

We think the greatest amount of uncertainty lies with the future of Macau casino industry. We currently forecast the region’s gross gaming revenues to grow at a CAGR of 8% for the next 5 years. However, the growth rate could double, with a revival of Chinese economy, increased revenues from non-gambling revenues, and growth of premium mass market gaming. And it it does,  our price estimate for LVS and Wynn has an upside potential of about 20%. Additionally, the impact on MGM’s value will be less than 10%.

 

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Las Vegas Sands, Wynn Resorts and MGM Resorts International.

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