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Casino Stocks in Focus, Macau Gambling Revenues Dip in January

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Macau, which is the world’s largest gambling hub, witnessed decline in casino gross gaming revenue (GGR) in January for the first time in more than two-and-a-half years. Gambling revenues from the region  declined 5% in the month. Slowdown in China and the trade war between Beijing and Washington impacted casino operators in Macau.

Gambling revenues from Macau decreased to 24.9 billion patacas ($3 billion) in January from 26.3 billion patacas a year ago. The downside can be attributed to smoking ban that came into effect on Jan 1 and not so encouraging environment ahead of Chinese New Year holiday. However, the decline was within analysts’ expectation of flat to down 12%.

Decline in gambling revenues from Macau is likely to impact companies such as MGM Resorts International (MGM - Free Report) , Melco Resorts & Entertainment Limited (MLCO - Free Report) , Wynn Resorts, Limited (WYNN - Free Report) and Las Vegas Sands Corp. (LVS - Free Report) . This is because these companies generate majority of their revenues from Macau.

A tough operating environment in Macau had weighed on casino stocks from June 2014 to most part of 2016. In fact, the crackdown on corruption in China compelled Macau officials to impose restrictions on high rollers to stop billions of dollars from being siphoned off illegally from mainland China to Macau. As a result, footfall declined at the local casinos leading to a persistent decrease in gaming revenues. A slowdown in China, tighter visa policies, political unrest and a smoking ban on mass market gaming floors compounded the woes.

What Lies Ahead for Casino Operators?

In 2018, gambling revenues from Macau increased 14% to 302.85 billion patacas ($37.6 billion). Analysts expect the improvement to be moderate in 2019. Speculations over another crackdown on capital outflows by China have kept investors on the edge. Flagging China property price impacted the high-end VIP segment.

However, the opening of the world's longest sea-crossing bridge and tunnel in the prior year, which connects Macau to Hong Kong as well as mainland China's Pearl River Delta, is likely to prove beneficial to casino operators. In an effort to drive growth, companies have also been focusing on diversifying to non-gaming activities.

Moreover, legalization of sports betting outside Nevada has given the industry a new lease of life. The Supreme Court overturned the Professional and Amateur Sports Protection Act (“PASPA”) that banned sports betting outside Nevada. The scope for casino operators will grow as, illegally, the activity is valued at billions of dollars annually in the United States. Sports betting has been legalized in Delaware, Mississippi, New Jersey, New Mexico and West Virginia. In the coming months, Pennsylvania and Rhode Island are also likely to tread the same path.

Further, improving tourism in Las Vegas, and rising demand for gaming and leisure will continue to boost the industry. Most of the companies are opting for alternative avenues to expand customer base and business. With continued innovation and rampant use of smartphones as well as other electronic devices, online gambling is fast gaining popularity and is positioned for long-term growth.

In the past three months, the industry has gained 3.4% compared with the S&P 500's 0.2% increase.

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