The Chinese economy is growing much faster than the U.S. China reported GDP growth of 6.9% in 2017 and 6.8% in the first quarter of 2018. Consulting firm McKinsey estimates that by 2022, 76% of China’s urban population will be “middle class.” Compared to the U.S., Chinese savings rates are high (households save nearly 40% of their incomes, compared to almost zero in the United States) and debt levels are low. Chinese consumer consumption is growing 9% annually, and at $6.5 trillion/year, it trails only the U.S. and is well in front of Japan, Germany, the U.K. and France.
With a massive and growing number of people who can now afford once unobtainable luxuries like vacations, the gaming industry in China has been surging.
The Chinese island of Macau, technically a “special administrative region” – meaning it is protected by the Chinese government but runs its own autonomous government - is China’s only site for legal casino gambling. Though gambling has existed in Macau since the 1800’s, a 2002 order relaxed a 40-year old monopoly license, paving the way for foreign casino operators to enter the market.
By 2007, gaming revenues on Macau had eclipsed those of Las Vegas.
MGM Resorts international (MGM - Free Report) , Wynn Resorts (WYNN - Free Report) and Las Vegas Sands (LVS - Free Report) have all established vast resort and gambling complexes on the island. All three beat the Zacks Consensus Estimate for Q1 2018 earnings.
MGM, with a large portfolio of U.S. properties, generated 18% of its first quarter profits in China, with $151M out of a total of $807M coming from the region. With earnings estimates rising, MGM Resorts is a Zacks Rank #2 (Buy).
Wynn Resorts’ first quarter earnings were $564M, with $210M of the total, or 37% coming from Macau. Posting earnings of $2.30/share in Q1 – a surprise of 17% over the estimate of $1.96/share – Wynn is clearly a significant player in the Asian gaming landscape. Currently a Zacks Rank #3 (Hold), analyst expectations for 2018 are on the rise, and the consensus now stands at $8.40/share, up from $7.84/share just 30 days ago and a 54% increase over the $5.46/share they earned in 2017.
The most pure China play in the gaming industry is Las Vegas Sands. While reporting a big earnings beat last week ($1.04/share vs an expected $0.86/share), LVS earned 56% of its net profits from its 6 Macau properties. With another 36% coming from its Singapore Marina Bay Sands resort, just over 10% of Las Vegas Sands profits come from U.S resorts, with the balance coming from the Asia-Pacific region.
With 6 analyst upward revisions for 2018 in the past 7 days, LVS is a Zacks Ranks #1 (Strong Buy). Even in a strong sector, LVS stock has outperformed, with a total return of 29% over the past year versus the gaming industry average of 18%.
LVS also pays a 4.2% dividend - considerably higher than MGM and WYNN at 1.5% and 1%, respectively.
Amid uncertainty about the potential effect of trade wars, Gaming companies with significant Chinese exposure are a smart way to bet on China’s continued economic expansion while avoiding the political impacts on traditional industrials.