Casino Stocks Tumble on Credit Growth Concerns - Analyst Blog

Casino stocks have been in the limelight of late due to one issue or the other. Share prices of leading U.S.-based casino operators such as Wynn Resorts Ltd. WYNN, Las Vegas Sands Corp. LVS, MGM Resorts International MGM and Melco Crown Entertainment Limited MPEL tumbled on credit growth concerns in China, which are expected to result in lower VIP bets. These casino operators earn the majority of their revenues from Macau, the only city in China where gambling is legal.

Credit growth is one of the driving forces behind the gaming industry. A decline in credit growth rate limits prospects for economic expansion. Tight money supply would impact spending on casino gaming as visitors will have less money in hand to gamble. As per media reports, though China banks have issued more new loans in the month of March than February, outstanding bank loans have grown at the slowest pace on a yearly basis since 2005.

As a matter of fact, M2, a measure of broad money supply, missed economist expectations. Total social financing, the broadest measure of lending in China, has also expanded at a slow pace compared to the year-ago period. This tightening of credit can be seen as a measure to discourage excessive borrowing to curb the rise in property prices.  

As per a few analysts, credit slowdown is still on track and credit data is not as bad as M2 growth indicates. However, according to Wells Fargo & Company WFC, credit growth concerns are not yet over and it expects VIP growth to decelerate over the next six months. We believe that this would hurt the profitability of these casino companies.

Meanwhile, China's economy grew at the slowest pace in the first quarter of 2014 in the past one and a half years, which has compelled the government to take a few actions to stabilize the world's second-largest economy. This increases the concerns of the gaming companies.

Macau, one of the world's fastest growing-economies for the last three years, has been a treasure trove for gaming operators who earn the majority of their revenues from here. Despite credit concerns and China's sluggish economy, these casino operators are busy expanding their share of hotel rooms in Macau to accommodate the increasing number of visitors. Though there are no casino openings scheduled for this year, Wynn Resorts, MGM Resorts and Las Vegas Sands are all set to make multibillion dollar openings by 2016. The development of facilities for entertainment, retail and convention centers would give visitors an added reason to visit Macau.  Meanwhile, improving infrastructure will shorten the journey to Macau from the Chinese mainland and drive visitation.

While Wynn Resorts sports a Zacks Rank #1 (Strong Buy), Las Vegas Sands, MGM Resorts and Melco Crown Entertainment carry a Zacks Rank #2 (Buy).