Why Macau’s Casinos Are Still The Best Bet For Wynn And Las Vegas Sands

Before the pandemic, Macau was the world’s most lucrative gaming market in the world. But after nearly two years of outbreaks and lockdowns, which largely closed the borders of the autonomous region belonging to China to visitors, gambling revenues for the last 10 months are still down 70% compared to pre-pandemic levels.

Macau casino stocks are down double digits since the start of the year, thanks to Macau’s zero-tolerance Covid-19 policy, uncertainty around the casino license renewal process and fears around a potential regulatory crackdown on the gambling industry.

On Monday, shares of Sands China Ltd., MGM China Holdings Ltd. and Wynn Macau Ltd., all subsidiaries of U.S.-based Las Vegas Sands Corp., MGM Resorts International and Wynn Resorts, fell more than 5% after news broke that 11 people were arrested on charges alleging illegal gambling and money laundering. (Alvin Chau, the founder of Suncity Group, the region’s largest junket known for bringing high rollers from mainland China to play at the city’s casinos, was one of those arrested.)

In comparison, companies with exposure to U.S. markets like Nevada, which reported its eighth consecutive month of more than $1 billion in gambling revenue in October, have seen their share prices jump between 30% and 90% since January.

Despite the long road to recovery for Macau, some analysts and casino operators see a tremendous upside in China’s special administrative district, which is the only place in China where casinos are legal.

Dan Wasiolek, an analyst at Morningstar, says Covid-19 restrictions preventing the free and easy travel of tourists from mainland China and Hong Kong, which together made up 85% of Macau’s visitors before the pandemic, is what’s hindering its gambling industry’s recovery. Once travel restrictions ease, demand will explode to fuel a similar recovery that Las Vegas has experienced.

“Is the future still Macau? I think it is,” says Wasiolek. “The near-term dynamics are not all that great but if you look forward, we're seeing an opportunity in the Macau-exposed names.”

For a company like Las Vegas Sands, which announced a deal to sell its assets in Sin City for $6.25 billion in March, Macau is not only responsible for 66% of the company’s profits, it’s the key to future growth.

Las Vegas Sands has invested a total of $15 billion across five properties in Macau since the company’s late founder Sheldon Adelson, who died January 2021, opened his first casino there in 2004. Recently, Sands has invested $2.2 billion to build a brand-new project on the Cotai Strip—the Londoner Macau, complete with a replica of the U.K. Parliament and "Big Ben."

During the company’s third quarter earnings call in October, Las Vegas Sands CEO Rob Goldstein said that once travel restrictions ease, he expects to see a “storm of activity” in Macau that will “mimic Las Vegas” and its fast recovery from the depths of the Covid-19-induced recession.

“The same will happen in Macau when the government decides to open those doors up,” said Goldstein. “The truth is, Vegas took about 30 minutes—once they open their doors up, it just recovers.”

When asked by an analyst whether Las Vegas Sands sees a scenario in which they do not operate casinos in Macau—a reference to the gambling license renewal process coming up in June 2022—Goldstein definitively stated: “I do not—I see no chance of that whatsoever.”

Next summer, gaming licenses will be up for renewal in Macau. Although there is a lot of noise and fear that current license holders won’t be able to bid, there is little risk that Las Vegas Sands, Wynn and MGM wouldn’t get their gaming licenses renewed, analysts say. Macau’s economy relies on gaming and Sands, Wynn and MGM are experienced operators.

“When you look at China and what the government is saying in their five year plans, they want Macau to succeed,” says Wasiolek. “If you want Macau to succeed, you want the best operators in the world—that's MGM, that's Las Vegas Sands, that’s Wynn. Who are you going to get to replace one of those licenses? There is really no one that's going to be able to operate at the capability and have the balance sheet to invest the way the government wants to continue to invest in this area. In a way, they need these guys still.”

In an investor note published by Stifel in November, analysts Steven Wieczynski and Jeffrey Stantial write that even though Macau’s recovery timeline is unknown, they continue to believe in the “long-term resiliency of the market” and that it’s “a matter of when, not if” the market returns to normal levels. Wieczynski and Stantial estimate that Macau’s gambling industry will recover in mid-2022. The pair also consider Las Vegas Sands and Wynn as a great buying opportunities.  

“At current levels, we view the risk/reward as too attractive to pass up,” Wieczynski and Stantial write.

In its most recent report on the gaming industry, Fitch Ratings estimates a full recovery in Macau between 2023-2024. In the meantime, the report warns that “near-term volatility will remain” due to China’s strict “zero Covid” policy and regulatory uncertainty around the rebidding process for gambling licenses in Macau.  

Colin Mansfield, the senior director of gaming, lodging and leisure at Fitch, believes there is a good chance that the current concession holders, including Wynn, Las Vegas Sands and MGM, will be able to renew their licenses to operate casinos in Macau. He says the concession process should be “pragmatic” but the lack of communication around the process from the Chinese government is taking a toll on stock prices.

“We peg the risk of an existing concessionaire not getting a renewed license as low,” says Mansfield.

Mansfield says all six companies with gambling licenses in Macau have been “good corporate citizens” that are large local employers, support local businesses that supply the casinos with goods and services, and pay hefty taxes.

The upside, says Mansfield, is a few years away but he sees it clearly.

“When you think about Macau and the fact that it's the closest destination for legalized gambling to mainland China, and you realize it only has about a 2% penetration rate into that country, you realize that's quite an opportunity,” says Mansfield. “When you think about Macau long term, there's a lot of untapped penetration.”

In China’s 14th five-year plan for national economic and social development, Macau makes a few appearances. One of China’s goals is to “maintain the long-term prosperity and stability of Hong Kong and Macau,” the report reads.

China is investing billions to improve the Guangdong-Hong Kong-Macau Greater Bay Area, build up the natural shoreline to stave off environmental catastrophe from climate change, build up Hengqin Island, add thousands of kilometers of interregional railways and 25,000 kilometers of new highways, including on the Beijing-Hong Kong-Macau expressway. In short, China is investing in Macau’s growth and sustainability.

“We are still believers in Macau in the long term,” says Mansfield. “Believing that visitation into Macau will never be the same again is completely opposite from what the government's long term objective is, which is be a tourism destination and attract more people.”