Despite Road Bumps, Chinese Casinos Will Still Rebound

Even though Macau gaming revenues grew a lower-than-expected 3% in January, a recovery for the casinos there is still in the works. Shares of major U.S.-listed casino and resort companies that have businesses in Macau fell Wednesday on the news, but such declines merely present an opportunity to buy the stocks at a discount.

Things haven't been very stable for Macau over the past few years, as gambling revenue fell for the third straight year in 2016. A prolonged anticorruption campaign by China and stalling economic growth in the region challenged the long-term stability of Macau-based casinos.

Since taking power in 2012, Chinese President Xi Jinping has tasked the Central Commission for Discipline Inspection with investigating the Chinese Communist Party for corruption. In 2015 the government charged more than 280,000 people with illegally acquiring public money according to CCDI deputy Wu Yuliang. The crackdown has severely cut into the number of VIP patrons going to Macau casinos since there are now severe punishments for gambling with public money.

Despite the weaker-than-expected January revenue (which included Chinese New Year this year), we expect that things will eventually take a turn for the better for the casinos.

After MGM Resorts International's  (MGM) second delay in the opening of its Cotai casino, the casino is finally expected to open in the second half of 2017. Investors are expecting the new casino to boost MGM's results. MGM's operations in China make up 20% of the company's total revenue.

In the short term, the delay is good news for MGM's competitor Melco Crown (MPEL)  , a Hong Kong-based company that generates 89% of its revenue from Macau.

Until January's numbers came out, gaming revenue trends had been reliable over the past few months for the two companies, indicating a turnaround is in store. Since casinos derive a bulk of their profits from gaming, solid growth trajectory in gaming revenue quickly translates into growing profits.

In August 2016 gambling revenue ended a two-year decline in monthly revenue numbers. In September Macau casinos saw a 7.4% year-over-year increase in sales, followed by an 8.8% gain in October, a 14.4% increase in November, and an 8% uptick in December.

Overnight visits have also improved, with December seeing a 16% increase to more than 1.5 million people. These are strong turnaround numbers, and investors can start feeling confident in Macau casino stocks again. Experts at JPMorgan say that casino bookings are high this year.

Finally, there's been a fundamental shift in approach. Casinos are now focused on the mass market as opposed to relying on fewer top-tier clients only. Because of China's crackdown on corruption, a sustainable middle-class tourist sector will be crucial to maintain growing sales.

Wynn Resorts' (WYNN) new casino in Macau is steadily attracting crowds. The company derives 60% of its revenue from its operations in Macau. Experts forecast Macau's gaming revenue growth to peak at 15% in 2019, helped by an explosion in China's travelling middle-class population and the opening of the Hong Kong-Zhuhai-Macau Bridge. These factors will all combine to help sustain the billion-dollar investments by American firms in Macau.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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