The relentless stream of bad news out of China right now is hitting a broad swath of stocks, including Macau-exposed casino names. But those bearish bets are overblown—and the selloff may be an opportunity for investors.
Despite continued signs of a strong rebound in Macau, the recovery of shares in
Las Vegas Sands
(ticker LVS),
Wynn Resorts
(WYNN) and to an extent
MGM Resorts
(MGM), has stalled in recent months after an impressive start to the year.
The stocks have largely traded sideways since early June because for every piece of good news, there seems to be multiple bits of bad news from mainland China at every turn, and investors are placing more weight on the latter at the moment. All three stocks have fallen between 6% and 9% respectively in the past four trading sessions through Wednesday, matching the scale of losses seen across other Chinese equities.
But there’s no evidence, at least yet, to suggest that woes in the world’s second-largest economy are preventing its wealthy gamblers from visiting Macau and its casinos. The macro slowdown on the mainland should not have as much of a bearing on casinos as other names sensitive to consumer trends, like e-commerce group
Alibaba
(ticker: BABA), for instance. In fact, Macau had its highest daily visitor arrivals—139,000—since the pandemic began on Saturday, according to a government official.
The daily average so far in August is more than 100,000 visitors, compared with July’s 89,000 average. So much for a slowdown.
“If you have a longer time horizon, you should ignore the recent macro concerns that are coming out of China. There really has never been much correlation between macro trends in China and what happens in Macau,” Stifel Research analyst Steven Wieczynski told Barron’s.
“There could be some pressure but given the pent up demand and the fact these folks haven’t been able to gamble in a couple of years, we believe there won’t be much impact,” he added.
Wieczynski has Buy ratings on
Las Vegas Sands
and Wynn. He sees Sands stock reaching $78, implying a 44% upside to Thursday’s price, while he thinks Wynn can hit $150, an upside of 58%. The two companies are heavily exposed to Macau–the region accounted for more than 60% of Sands’ revenue prepandemic, and 70% of Wynn’s.
Macau Momentum
So it might be worth looking beyond China’s precarious economic picture, and considering the strength of the Macau recovery. Earnings season has shown that it is gathering pace, with few signs of trouble ahead.
That could make Macau casino stocks a haven as China’s economy slows. While government officials have reiterated the ambitious 5% annual gross-domestic product (GDP) growth target, a spate of economic data releases in recent weeks paint a gloomier picture. Retail sales and industrial production have faltered, and the country even slipped into deflation in July. Investors have understandably sold China names in turn, but they may be overlooking the fundamentals in Macau.
Galaxy Entertainment
(GXYYY), one of Macau’s six licensed casino operators, reported earnings Thursday. Its net revenue of 8.7 billion Hong Kong dollars ($1.1 billion) in the second quarter was 257% up on the same period in 2022, and a 23% jump from the first quarter.
Crucially, the company said the recovery in gaming revenue was continuing into the third quarter, noting that hotel occupancy was “effectively full.” Galaxy’s American depositary receipts rose 1.6% Thursday
Las Vegas Sands was just as optimistic last month as revenue from its Macau operations jumped 27% quarter-over-quarter to $1.63 billion, or 77% of 2019 levels. That’s pretty good going given that the second quarter was the first full quarter since the end of Covid restrictions.
Wynn Resorts
’ portfolio of Macau properties generated adjusted earnings before interest, taxes, depreciation and amortization of $246 million in the second quarter, recovering to 72% of pre-Covid levels and handily beating estimates of $225 million.
Vegas Variable
Less certain, however, is what China’s deteriorating economic landscape means for Las Vegas. The return of Chinese visitors hasn’t really begun yet—China only lifted a ban on group tours to the U.S. last week.
More than 200,000 Chinese tourists visited Las Vegas in 2019, which made China the seventh-largest country of origin for international arrivals to Vegas. Just 10,640 made the trip in 2022, according to preliminary data from the Las Vegas Convention and Visitors Authority.
They’ve been gone so long that their potential return isn’t really priced into the stocks, but a further delay to Chinese tourists coming back could limit some of the upside to U.S. casino stocks.
Wynn Las Vegas just reported its best ever second quarter hotel revenue. It’s not suffering from the slump in Chinese visitors at the moment but their return will be a boost once U.S. consumer demand inevitably softens.
Outlook Obstacle
Investors may have to weather more short-term losses if the market doesn’t catch on that the fundamentals look intact in Macau. What would help a faster rebound is clearer forward guidance from companies.
It’s a problem that has plagued other Chinese names with strong businesses. Tech powerhouses
Alibaba
and
JD.com
(JD) both recently posted big earnings beats, with standout profits exemplifying corporate efficiency that investors should reward. But both those stocks were punished post-results amid a lack of forward guidance (which is typical of their earnings releases).
Investors in Macau casino stocks shouldn’t be surprised if they face more busts before the odds turn in their favor.
Write to Callum Keown at [email protected], and Jack Denton at [email protected]
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