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Macau Momentum

From Google searches to increased revenues, the outlook for companies operating in the Asian gaming capital is looking up.

Macau Momentum

You can Google that.

That phrase has become a part of daily life.

Now, Googling apparently is part of the analysis that goes into predicting stock prices. At least that’s an inference drawn from the Morgan Stanley equity analytical team.

In a recent report, Thomas Allen and Praveen Choudhary and company used an increase in Google searches as part of the reason to reiterate their bullish call on Wynn Resorts and Wynn Macau.

Google searches for Wynn in Macau have increased by 94 percent and now surpass Galaxy Entertainment and Melco Crown properties, they noted.

And, while more Chinese use Baidu than Google, there has been a correlation between Google searches and casino performance, they said.

Of course, Google searches aren’t the only reason to be bullish on Wynn in Macau.

Another factor they cited, and one mentioned repeatedly by CEO Steve Wynn himself, is that Wynn properties usually start more slowly than other companies, then ramp up.

They cited Wynn Macau, which gained 3.7 percentage points of market share from its opening a decade ago into its second year.

If Wynn Palace matches Wynn Macau’s pattern, it would make for a nice bump in the stock price. Allen and Choudhary estimate that every one-half of a percentage point rise in share of mass-market adds $4 to $5 to the stock price and every half-point in VIP adds $1.70.

Allen put a buy rating and $119 target on WYNN, but thinks the stock could reach $201.

Macau Optimism

Optimism over Macau isn’t limited to Wynn Resorts or Morgan Stanley.

Bullishness has been growing generally as gaming revenues have risen.

Part of the optimism is a feeling that the Chinese government’s anti-corruption campaign has run its course and that VIP players who stayed away because of the stigmatization attached to visiting Macau are now returning.

Another example of a relaxed attitude by the national and Macanese governments might be the now-apparent willingness to allow smoking lounges in casinos. Further, competition from neighboring countries has clearly gotten the attention of the national and Macanese governments.

That was evident in the arrest of marketing executives of companies trying to attract players to their casinos in foreign countries, as happened with South Koreans in 2015 and Australians last year.

As is generally known now, it is illegal to market gambling on the Chinese mainland, which means representatives of foreign casinos try to sell their properties as vacation resorts. The Chinese government, however, gets to decide for itself when the line has been crossed to selling gambling, not amenities.

The point is the same as has been mentioned in this space several times; the Chinese government has made clear that it is not cracking down on Macau gambling just to allow foreign countries to poach its gamblers.

Gaming Concessions

The next test of whether there’s a more constructive government attitude towards Macau casinos will come with the negotiation of gaming concessions.

With the first concessions expiring in 2020, the government might want to start negotiating in the next year or so.

The guess as to what the government will negotiate ranges from the status quo to failing to renew one or two of the concessions.

Generally, it is believed that the government will renew concessions with all six operators, and will not increase the number of concessions. As part of this, it is thought each operator will get its own concession, doing away with the sub-concessions.

There is also a growing feeling that Macau might lower the gaming tax in response to the much lower taxes of neighboring countries that are luring casino developers.

No doubt, the government will make new demands on casino companies, but a lower gaming tax would surely send the message that China sees Macau’s gambling industry as a long-term asset.

U.S. Regional Casinos

U.S. regional casinos have been steadily improving their performance in recent years, and Penn National recently gave investors reason to cheer by upping its financial guidance for the first quarter.

PENN now expects to generate $222 million to $223 million in adjusted EBITDA in the quarter, compared to an earlier estimate of $209.3 million, and EBITDA after rental payments to Gaming & Leisure Properties of $110 million to $111 million vs. earlier guidance of $97.4 million.

The improvement is based on strong property performance across the company, CEO Tim Wilmott said. Further, Wilmott said, PENN’s pursuit of operating efficiencies bodes well for the balance of the year and for efforts to “increase cash flows, reduce leverage and return capital to shareholders.”

And, though Wilmott did not address the subject in the company news release, those results come despite the opening of MGM Resorts’ National Harbor casino near Washington, D.C., that is crimping revenues at PENN’s Hollywood Casino in the Washington exurb of Charles Town, West Virginia.

As might be expected, investors converted their cheers into a higher stock price as PENN jumped 11.63 percent on the announcement.

The two other biggest regional casino operators also benefited from PENN’s announcement as Boyd shares advanced 3.88 percent and Pinnacle 5.06 percent on a day the overall market declined.

The after-lease EBITDA growth of 13 percent to 14 percent comes on much more modest revenue growth of a little over 1 percent, which further emphasizes Wilmott’s point of operating efficiencies.

That also lends credence to optimism for PNK and BYD, where management continues to emphasize efficiencies and cost controls.

The question raised in recent quarters is about revenue growth under the assumption that higher cash flow based on operational efficiencies can be achieved for only so long.

The Penn National announcement suggests that point hasn’t yet arrived.

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