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Gaming Industry Overview
Gaming entities are dependent on the business cycle and consumer discretionary spending, as operating earnings can swing widely between good times and bad. While the United States economy appears to be on a recovery course, casinos are not reporting the same feel-good story. The U.S. market has undergone a tremendous shift. Once upon a time, consumers flocked to destination resorts in New Jersey and Las Vegas. Now, however, patrons are converging on regional gaming centers. Cognizant of tax-revenue potential, an increasing number of U.S. states have legalized various forms of gambling. What’s more, the recent recession occurred during the industry’s greatest expansion phase. Not only has much of this new supply yet to be absorbed by the market, but it has also left many local companies with hefty debt burdens.
New Jersey is failing to live up to its billing as the “Las Vegas of the East.” In spite of the fact that Atlantic City is located on oceanfront property, and in close proximity to an affluent consumer base, foot traffic to the once-booming locale continues to dwindle. The gaming market in Pennsylvania, though, is surging, with the local government establishing an environment conducive for growth. Concurrently, conditions in Las Vegas are slowly firming. A partial recovery is probable because of the destination’s premier convention, entertainment, and dining offerings. Its timing remains an issue, however. Many of the casinos in the area generate a considerable portion of business from patrons residing in states that continue to face certain economic hurdles. MGM Resorts (MGM) and Caesars Entertainment (CZR) are two operators whose material presence in the United States is proving detrimental.
The liberalization of gaming policies in China has allowed Macau to become the world’s biggest market (by revenue). Location is always important and nowhere is it more evident than in Macau. This hot spot has benefited from its close proximity to Hong Kong, Taiwan, Mainland China, Japan, South Korea, and other nearby countries where gaming is popular. Approximately one billion people are estimated to live within a three-hour flight to Macau.
Activity in Macau slowed in 2012, as economic activity in China and neighboring nations cooled. Weaker business conditions in the world’s most populous country restricted visitation. To make matters worse, new lending standards restricted the amount of credit extended to VIPs, an essential category. After expanding by 30%-40% each year for much of the last decade, gaming growth slowed in 2012, to $38 billion. With the recent implementation of fiscal and monetary catalysts, growth in the world’s most populous country should resume its upward trajectory. In fact, casinos set a monthly record in December, with revenue reaching $3.5 billion. Although the region will be hard pressed to repeat rates previously reported, a number of casinos we cover acknowledge that returns in this hotbed are probably going to remain superior to most other markets. This is being driven by rising visitation by China’s growing middle class. Most casinos in the hotbed had previously relied on affluent VIPs, with baccarat accounting for more than half of total revenue. But with surging volume, the mass market is growing in importance and profit.
In order to boost tourism, create jobs, and diversify an economy heavily dependent on high-tech manufacturing and financial services, Singapore overturned a decades-old ban on gambling nearly ten years ago. In 2010, two new casinos - one owned by Las Vegas Sands (LVS) and another by a Malaysian developer - opened their doors to much fanfare. Las Vegas Sands has proven skeptics wrong, with the Marina Bay Sands already becoming one of the most profitable resorts in the world. However, there is concern that new regulation implemented to restrict locals from visiting these casinos, together with moderating visitation from foreigners, will lead to slower growth in 2013.
After planting its flag in Macau and Singapore, Las Vegas Sands intends to expand into Europe. It recently chose Madrid, Spain as the preferred location of an integrated resort development. Management has yet to determine exact location, size, and financing arrangements. But, given a track record of developing ambitious projects, we expect the investment to range between $15 billion-$25 billion.
Unlike many peers, Melco Crown (MPEL) is solely focused on Macau. It recently secured approval to develop Studio City (its third casino resort), a venture in which the company has a 60% interest. Given this development, together with a planned $1.0 billion project in Manila, Philippines, Melco possesses one of the most vibrant pipelines in the sector. A key source of strength is the company’s success in the mass-market category, with crowds flocking to its gaming and non-gaming facilities.
With the recent legalization of gambling in various local jurisdictions, domestic resorts are facing an uphill battle attracting people traffic. Circumstances in international hotbeds are facing far rosier circumstances. In fact, companies with a toehold in Asian markets should continue to prosper. Las Vegas Sands and Melco Crown are two entities positioned to benefit.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.