Gambling in Macau, the Las Vegas of China or the “Monte Carlo of the Orient,” continues to fall, with September likely marking the fourth consecutive month of declines. According to some estimates, the gaming revenue drop in September will be in the double-digits. There are several issues plaguing Macau and driving uncertainty for many of the operators. Casino City Times perhaps said it best in their piece: Macau mired in cold streak:
The mainland Chinese government is on an anti-corruption crusade, which has frightened off some high-end customers. Meanwhile, new visa restrictions implemented by Beijing have slowed visitation from neighboring provinces.
A smoking ban on mass-market gaming floors will be implemented Oct. 6, adding uncertainty to revenue trends.
Also in October, the National Congress of the Communist Party of China will host its national meeting in Beijing. The event, held once every five years, could include some discussion of Macau or legal gaming in general.
Macau casino watchers are also wringing their hands over a PBS Frontline/New York Times investigative report to appear Tuesday. Four years in the making, the report explores Macau’s VIP junket business, which international law enforcement authorities consider influenced by organized crime triads.
To us, we believe such issues are transient. The gaming industry in China still has a long runway for growth. The country is simply minting millionaires. The latest reading is that China created 40,000 new millionaires in 2013, bringing the total to over one million. The Alibaba (BABA) initial public offering also created thousands of new ones in the country this past week. Though the long term appears bright (or, at least, less uncertain), it wouldn’t be unreasonable to assume that Macau gaming revenues could continue to fall for at least the next few months due to the aforementioned uncertainties.
For this reason and consistent with the Valuentum Buying Index methodology, we’d wait for a bottoming pattern in gaming stock prices before growing interested in evaluating any for the Best Ideas portfolio. Some of the largest operators in China are becoming more and more attractive from a valuation standpoint, but we demand both valuation and pricing support for any new idea. The stocks of industry constituents are indeed lacking pricing support at the moment, but we’re paying particularly close attention to Las Vegas Sands (LVS) for a potential entry point. The firm has the largest asset base in Macau and meaningful long-term growth opportunities in every aspect of the market there. View its landing page >>
Gaming: BYD, BYI, CHDN, DDE, LVS, MGM, PENN, PNK, WYNN
Appendix: Chart of Las Vegas Sands
