CNBC pundit Jim Cramer has put the buy sign on Macau, specifically U.S. traded Wynn Resorts and MGM Resort International. “I believe that Macau can keep rebounding courtesy of this phenomenal global economic expansion, which means that Wynn Resorts might have room to run – and I’d always pick Wynn over Las Vegas Sands,” Cramer said, according to the CNBC website. “But if you want a domestic casino play with some overseas exposure, MGM has a lot going for it. You know what, though? I’m hard-pressed to pick between MGM and Wynn. They’re both that good.” Judge the record of Cramer, who I try my best to avoid when watching the network where I once worked, for yourself. But don’t let him make up your mind on Macau. Cramer’s enthusiasm from halfway around the world doesn’t necessarily mean it’s time to sell, but it does highlight the need for caution.
Macau has had an excellent run since its 26 months of consecutive casino revenue declines, a streak that ended coincident with Steve Wynn’s entry to Cotai with Wynn Palace in August 2016. Macau’s gaming revenue rose 19% last year after falling for three straight years, and share prices have taken great leaps forward. Morgan Stanley forecasts fourth-quarter Ebitda growth at 28% year on year for Macau casino stocks traded in Hong Kong – that is all except NASDAQ-listed Melco Resorts. Analyst Praveen Choudhary’s team expects Wynn Macau shares to lead that pack in gains. Only Wynn and Galaxy Entertainment are expected to post Ebitda expansion above Macau’s revenue growth rate.
But Macau’s recovery has many sides to it, not all of them good. The recovery can be seen as the fruit of some $13 billion in recent investment – the total will top $20 million with the addition of MGM Cotai, City of Dream’s Morpheus Tower and SJM’s Lisboa Palace opening in during the next 12 months or so. Initial returns on that investment, judged by incremental Ebitda, have barely broken 10%. That’s partially due to VIP gaming driving the recovery, a high-volume, low-profit segment that’s Wynn’s sweet spot; rival LVS dominates the higher margin mass gaming and non-gaming spaces. (Macau’s VIP market deserves a closer look when the final numbers for last year are available. Stay tuned.)
Sanford Bernstein Senior Analyst Vitaly Umansky sees Macau operators booking returns that are “a couple hundred basis points” above their cost of capital, results that leave other companies envious. But David Bonnet of gaming and property advisor Delta State Holdings warns that Macau casino investments “are not U.S. Treasury bonds” and require outsized returns to justify their inherent risks.
More on Forbes: Where Are Asia’s Casinos Headed In 2018?
MGM, one of Cramer’s picks, highlights just how outsized those risks can be. The company is finally due to make its entry into Macau’s dominant casino cluster when $3.3 billion MGM Cotai opens on January 29. That’s 26 months from the scheduled expiration of MGM’s gaming license in March 2020, and little is clear about what will happen when gaming concessions end. MGM Cotai underscores the observation from Las Vegas-based CDC Gaming Reports analyst Ken Adams that U.S. operators have underestimated the risks of Macau concession expiration.
It’s likely the Macau government will extend MGM’s license along with that of SJM Holdings, which sold MGM its subconcession, for two years to match the expiry date for other licensees, and deal with all concessions together. But the extension is not guaranteed, nor is the 22% annual return on investment needed to earn back MGM Cotai’s cost over that putative extended term.
Moreover, Macau has demonstrated it can be tough on concessionaires when it chooses. Authorities reneged on the customary handshake agreement with Sands China, the local arm of Sheldon Adelson’s LVS, on the grant of a prime Cotai development plot, even though Sands says it spent nearly $100 million on site preparation. The land remains unused seven years later, so it’s not as if the government had a compelling need to take it back.
MGM Cotai is rolling the dice in the way that doesn’t compare with opening a car plant in Alabama or even a casino in Las Vegas. On that basis alone, it seems pretty easy to pick between Wynn and MGM.