Casino operators in Macau, the world’s largest wagering market, have been a safer bet than other leisure stocks since the 2007-2009 global financial crisis. The key to keeping their edge may be middle-class tourists from China.
Gambling houses with operations in the Chinese enclave accounted for four of five best-performing hospitality stocks adjusted for price swings as markets rallied in the past four years, according to the BLOOMBERG RISKLESS RETURN RANKING. The biggest gainer, billionaire Sheldon Adelson’s Las Vegas Sands Corp. (LVS:US), soared more than 40-fold since the U.S. equity market reached a 12-year low on in March 2009, more than making up for the third-highest volatility.
Even with an expected slowdown in the growth of Macau gaming revenue in the second half of 2013, casino operators there are expected to outperform U.S.-focused companies, according to John Kempf, a New York-based analyst with RBC Capital Markets LLC. Macau’s annual visitors account for 1.3 percent of China’s population, an estimate he said may be overstated, while Las Vegas’ share of U.S. residents is 12 percent.
“Macau still has a lot of room to grow,” Kempf said in a telephone interview. Operators such as Las Vegas Sands are benefiting as they expand beyond VIP customers to the mass market, he said last week in a research report.
Galaxy Entertainment Group Ltd. (27), Hong Kong-based SJM Holdings Ltd. (880) and Las Vegas-based Wynn Resorts Ltd. (WYNN:US), which, like Las Vegas Sands, get at least the majority of their revenue from Macau, were also among the top-performing leisure stocks when adjusted for volatility. The comparison was based on 30 casino, cruise-line and hotel companies with market values greater than $5 billion.
Las Vegas Sands had a gain of 4,230 percent and returned a risk-adjusted 68 percent from March 9, 2009, through July 19. Hong Kong-based Galaxy Entertainment returned 59 percent, adjusted for swings, combining a 3,300 percent raw return with above-average volatility. Parsippany, New Jersey-based hotelier Wyndham Worldwide Corp., which ranked third with an adjusted return of 44 percent, was the only non-gambling stock in the top five.
Sands China Ltd., Wynn Macau Ltd. and MGM China Holdings Ltd., each of which had larger than average price swings, weren’t among the leaders in risk-adjusted return. They came public more recently so the stocks also didn’t benefit as much from the equity market’s bounce from its lowest point.
Bloomberg’s risk-adjusted returns, which aren’t annualized, are calculated by dividing total gains or losses by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses compared with a security whose price moves at a steady rate.
Travel-industry shares plunged in 2008 as the slumping economy snatched disposable income from consumers worldwide. Adelson, Las Vegas Sands’ chairman and chief executive officer, put up $1 billion of his family’s own money at an average cost of $5.76 a share to keep his company afloat, and the stock sunk below $2 a share as the market cratered. Shares of the Las Vegas-based company closed last week at $55.96.
China’s economy recovered more briskly than other parts of the world in the past four years. Macau, which gets more than 80 percent of its visitors from Hong Kong and mainland China, saw its casino revenue climb to $38.1 billion (304 billion patacas) last year from $10.4 billion in 2007.
The market just recorded its strongest quarter on record with gross gaming revenue of $10.8 billion in the period ended June 30, according to data compiled by Bloomberg. Most Macau-related gambling stocks have traded down in the past two months as investors focused on macroeconomic warning signals from China, ignoring the potential for positive earnings surprises, Kempf told clients.
Las Vegas Sands is scheduled to release earnings after today’s U.S. stock market close, with other operators reporting over the next several weeks.
Casino winnings in the U.S. haven’t returned to their 2007 peak of $37.5 billion, even after bouncing back from the global recession, as some mature markets such as New Jersey struggle, the American Gaming Association trade group said in May.
Betting receipts in Macau are expected to see a “visible” slowdown in the second half of this year as high-stakes gamblers contribute a smaller percentage of casino revenue, the city’s Monetary Authority said July 17. Macau revenue growth may drop to 11 percent in the second half from 15 percent in the first, said RBC Capital’s Kempf.
Casino stocks started declining in May after banks including Goldman Sachs Group Inc. and Barclays Plc pared growth projections for China’s economy to 7.4 percent, below the government’s 7.5 percent goal.
Fear of further credit tightening in China and the impact that would have on their wealthiest customers has contributed to the pullback in Macau-related casino stocks, Rachael Rothman, an analyst with Susquehanna Financial Group in New York, wrote last week in a report to clients.
Longer-term growth prospects are intact. All of Macau’s major casino concessionaires are building new properties, which could increase the capacity of table games and slot machines by 75 percent by 2018, according to Bloomberg Industries research.
Many are attempting to increase the market by catering to the growing ranks of middle-class gamblers. The Macau market, already producing seven times the revenue of the Las Vegas Strip, will expand further with seven casino resorts under construction to serve China’s mass market, according to Bloomberg Industries research.
The effects of slowing economic growth may be countered by the success junket operators are having in finding new well-heeled customers from regions farther away from Macau, suggesting “the VIP market remains well underpenetrated,” said RBC Capital’s Kempf.
Expanding the Chinese customer base could be a long-term boon to the operators, he said.
The recent stock pullback has created a buying opportunity, according to the analyst. He recommends Las Vegas Sands, Wynn Resorts, MGM Resorts Entertainment Ltd. and Melco Crown Entertainment Ltd., a Hong Kong-based company that develops casinos and entertainment-themed resorts in Asia.
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