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Gaming Guru

Howard Stutz
 

Macau: Cash cow for Nevada gaming companies

4 December 2012

By Howard Stutz

LAS VEGAS -- Despite a slowing Asian economy and changes in the Chinese government, Macau casinos continue to churn out record gaming figures, a fact for which investors in three Nevada gaming companies are forever thankful.

With a month left in 2012, most gaming analysts expect Macau to post an annual gaming revenue increase between 8 percent and 12 percent beyond 2011's record haul of $33.5 billion.

Clearly, Macau wasn't going to match 2011's 42 percent revenue increase over 2010's results. But 2012 did provide the highest single-month revenue figure in the gambling market's history - $3.5 billion in October.

For investors in Wynn Resorts, Limited, Las Vegas Sands Corp. and MGM Resorts International, the monthly gaming revenue figures released by Macau's Gaming Inspection and Coordination Bureau continue to bring welcome results.

Nomura Securities gaming analyst Harry Curtis, who is based in New York, favors Las Vegas Sands over Wynn and MGM Resorts.

The company opened the initial phase of the Sands Cotai Central in April with a 600-room Conrad Hotel and a 1,200-room Holiday Inn, along with casinos, retail, dining, convention space and other amenities. A 4,000-room Sheraton is expected to open next March.

Curtis said Las Vegas Sands' new Macau resorts help attract additional mass-market customers while the Sands Macau and Venetian Macau continue to feed off high-end play.

"[Las Vegas Sands] has the most underutilized mass capacity in Macau among the large-cap names under our coverage," Curtis told investors. "We believe that as long as Las Vegas Sands' mass growth rate paces in line with or ahead of the market, investors will react positively to the stock."

Las Vegas Sands is hoping the Macau government allows the company to build another resort on Cotai, but the company is behind the curve.

In May, the government gave the go-ahead for Wynn Resorts to begin building a $4 billion Cotai resort. In November, MGM Resorts was given permission for a $2.5 billion Cotai project and Hong Kong-based SJM was approved for its Cotai casino at a cost to be determined.

The three projects probably won't be open well before 2015 at the earliest, with Wynn's the first in line. That means Macau will experience little gaming growth for several years.

The slowing in expansion comes at a time when Chinese data seems to indicate the economic environment may be stabilizing. November manufacturing numbers grew and China's leading economic index showed a slight increase.

"However, we note Macau visitor arrivals continue to decelerate, down 1.2 percent, year over year in October," Wells Fargo Securities gaming analyst Cameron McKnight told investors.

Meanwhile, new Chinese government leadership transition was quietly implemented in Beijing during November, with current Vice President Xi Jinping expected to be elevated to president.

For the casino industry, speculation is brewing on what the change could mean for gaming in Macau, a Special Administrative Region of China and the only location in the country where casinos are legal.

The previous leadership seemed predisposed to let Macau's expansive gaming revenue growth continue unabated.

At times, however, Chinese leaders slowed the gaming revenues by imposing visa restrictions on the Mainland Chinese residents, limiting the number of times they can visit Macau over a four-week period.

The visa restrictions, however, never really lasted long and gaming revenue growth continued.

Many analysts believe the new government will continue the policies of the previous leadership.

One change that took place at the end of November was the limiting of slot machine parlors in residential areas, which could lead to the closing of more than half of the area's tiny casinos.

"The operators are to be given one year to conform to this new policy," Union Gaming Group principal Grant Govertsen, who is based in Macau, told the firm's clients in a research note.

"We believe it is likely that [Macau Secretariat for Economy and Finance Francis Tam] will soon announce the official list of offending slot parlor locations."

The closures, Govertsen said, might rate as just a small blip on the bottom lines of SJM and Hong Kong-based Melco, which operate the locations.

Macau casinos will face another challenge in January when the government enacts a mandate that 50 percent of the region's casino floors ban smoking.

"Las Vegas Sands could be the least affected," Curtis said. "We believe it has more underutilized smoking tables relative to the other large-cap names under our coverage."