3 Stocks For The Next Frontier Of Gambling
The opening of gaming resorts in Macau (China) in 2004 was a boon to casino stocks. By the first full year of operations, Macau casinos were reporting $6.2 billion in revenue and more than twice the gaming receipts of the Las Vegas Strip that year.
At its 2013 peak, Macau brought in $44.6 billion for the six companies with licenses to operate, dwarfing the $4.3 billion in gaming receipts for the entire state of Nevada.
#-ad_banner-#But measures by the Chinese government to slow currency outflows weighed on Macau in the two years through 2015, and casino stocks got hammered. With slow growth in the United States and falling revenue in Asia, investor sentiment fell to a point not seen since the 2008 crisis.
Now a new market is opening, one that could rival Macau as a top global gaming destination. Estimates put gaming receipts as high as $25 billion in the initial years — and that could be just the beginning.
On top of the upside from this new market, fundamentals are improving for the Macau market and for casino stocks themselves. Investor sentiment could be ready to come back to the industry in a big way.
Place Your Bets On The Land Of The Rising Sun
Japan authorized gambling last year and is now in public debate to establish the regulatory environment to approve gaming licenses by the end of 2019. Research firm CLSA estimates the upside as high as $25 billion in annual casino and resort sales, just under the sales at Macau casinos and nearly eight times the amount taken in annually by resorts on the Las Vegas Strip.
Eight public hearings have been scheduled through August on the structure, risks, and local benefits to allowing casino gaming. A government panel has been tasked with creating a framework for casino regulations, expected to be approved by the end of this year.
Gambling is already popular in Japan with legalized betting on horses, boat, and motorcycle races. Pachinko games alone generate nearly $27 billion a year in revenue. The government is expected to approve two or three gaming licenses initially.
Casino Stocks Are About To Get Lucky
Betting on casino stocks isn’t just rolling the dice on future gaming receipts in Japan. Revenue in the major gaming regions is looking higher and casino profits are on the uptrend.
Macau gaming receipts bottomed at $27.6 billion last year but have since surged higher on relaxed restrictions by the Chinese government. July 2017 revenue across non-restricted resorts jumped 29% from the year before, the 12th consecutive monthly increase in gaming receipts. Revenue from VIP players jumped 35% in the second quarter and is expected to continue to do well for the rest of the year.
Gaming revenues in Nevada were reported higher by 2.9% in the 2017 fiscal year ending June 30, four times higher than the 0.7% reported for 2016. Slot volume increased for the third consecutive year, something that hasn’t happened since the 2005-2007 period.
While gaming revenue from Japan is still years away, the outlook for the new market along with a rebound in Macau could be enough to bring investors back to casino stocks and push prices higher.
Casino Stocks Worth Taking A Chance On
Las Vegas Sands (NYSE: LVS) is more exposed to Asia than its peers, with 65% of its EBITDA from the region (30% in Singapore and 35% in China). The Sands owns one of only six licenses to operate a casino in China and one of the two licenses for Singapore gaming. This experience with execution in the region should help it land one of the licenses in Japan.
Lean years for Macau pushed Las Vegas Sands to focus on profitability, boosting its operating margin to 24.1% over the last four quarters from 20.8% in 2012. Free cash flow jumped to $3.3 billion in the trailing period versus just $1.9 billion in 2015. Shares pay an attractive yield of 4.7%, one of the highest in the industry.
Melco Resorts & Entertainment (Nasdaq: MLCO) also owns one of the few gaming licenses in China and also has a presence in the Philippines. Melco has scheduled to open a new 800-room resort, Morpheus, in Macau during the first half of 2018.
Operating profits bottomed at 2.5% of sales in 2015 on Macau weakness but have since rebounded to 10.4% over the last year. Free cash flow has more than tripled over that time, rising to $654 million on a trailing basis versus $213 million in 2015. In addition to offering a 1.7% dividend yield, the company has started aggressively buying back shares, with a repurchase of $806 million in 2016.
Wynn Resorts (Nasdaq: WYNN) has been hardest hit on the Macau weakness with the shares down 32% over the last three years. The company books 60% of EBITDA from China and approximately 40% from Las Vegas operations. Wynn is planning on opening another resort, Paradise Park, in Vegas next year and a casino in Boston in 2019.
Wynn pioneered non-gaming revenues in Las Vegas, boosting resort revenue seven-fold in the two decades since its 1989 opening of The Mirage. Casino operations account for just 36% of its Wynn Las Vegas property revenue. The luxury brand and focus on resort revenue help diversify the company from a pure-play casino bet. Shares trade for 2.5 times sales and pay a 1.5% yield.
Risks To Consider: It will be years until the opening of a Japanese gaming resort, and fear of a recession could weigh on gaming stocks in the interim.
Action To Take: Position for a recovery in gaming stocks on strengthening markets in Macau and Las Vegas along with the potential for investor sentiment around Japanese gaming.
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