Put It All on Red

It has been an ugly few days for shares of casino companies: Wynn Resorts stock has dropped more than 18% in just the past three days, Las Vegas Sands has lost some 13%, and MGM Resorts International is off almost 5%.

Wynn, MGM, and Las Vegas Sands—as the latter's name suggests—are some of the biggest casino operators on the Las Vegas strip with properties like the Wynn Las Vegas, Bellagio, and the Venetian.

But they each generate a sizable portion of their revenues from Macau in normal times—more than half for Wynn and Las Vegas Sands, which, despite its name, is actually in the process of getting out of Las Vegas. That's in favor of a greater focus on Asia, especially Macau. The Chinese autonomous region is the world’s biggest casino gambling market.

Given recent regulatory crackdowns on Chinese technology, education, and videogaming companies, the recent announcement of a review of oversight of casino operations by the Macau government came as unwelcoming news for the group.

Here's Barron's Lawrence Strauss writing today:

All of this comes at a time when Macau, hit hard by the pandemic, has been struggling to rebound to pre-Covid levels and faces strict travel restrictions. And longer term, the Chinese authorities have been cracking down on VIP customers in Macau to guard against money laundering and other illicit activities, forcing casino operators to cater more to premium mass affluent customers, as they are known.

There are effectively six Macau casino concessions—including those held by affiliates of Wynn Resorts, Las Vegas Sands, and MGM, which has a significant but smaller presence there relative to the other two. Those agreements, up for renewal next June, date to the early 2000s when Macau began to develop as a gambling center.

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'We know very little actually about what will ultimately happen,' says Jason Ader, CEO of SpringOwl Asset Management and a director of Las Vegas Sands from 2009 to 2017, referring to Macau.

J.P. Morgan this week downgraded its ratings on Wynn and Las Vegas Sands to Neutral, citing the 'uncertainty and opacity surrounding Macau and China policy.'

In a press release, the Macau government said, among other things, that it has begun a 45-day 'consultation period' about the law that applies to casino operations in Macau. The Macau government said in part that by revising the law, it expects to 'strengthen supervision' of the holders of those casino concessions.

'The fear of the unknown, in this instance, is the dominant narrative,' Deutsche Bank analyst Carlo Santarelli wrote in a note dated Sept. 15.

The worst-case scenario for Wynn, MGM, and Las Vegas Sands would be booting foreign ownership of casinos from Macau entirely. That risk has investors selling first and asking questions later.

But Lawrence sees that path as extreme and unlikely. Read on for where he sees opportunity in the casino industry now.