U.S. casino operators will continue to rely on Asia growth

At least three of four of the major U.S. casino operators will continue to rely on Macau as their growth engine over the next five years, said Bernstein in a note on Tuesday.

These companies include Wynn Resorts, Las Vegas Sands, and to some extent, MGM Resorts.

“As we expand coverage into US stocks, it is important to consider that Macau matters significantly to the two largest gaming stocks in the US – LVS, and WYNN.”

“While MGM is highly US concentrated and relying on operating leverage improvement and financial engineering (via the MGP REIT), Macau (and its future growth potential) has an impact on MGM.”

“With Caesars, we see a lumbering giant trying to fine-tune its strategy in a US gaming market that is largely saturated and highly competitive, with some investors looking for corporate action to create returns.”

Looking ahead, Bernstein said it viewed Sands as a clear leader amongst U.S. operators, with a product offering well suited to the shift from VIP to mass seen in Macau.

Its Singapore property, Marina Bay Sands, represents the most profitable casino asset globally and serves as a stable cash cow.

“We favor the company on its attractive return of capital to shareholders (via continued dividend payouts and share buy-backs),” said Bernstein.

On Wynn Resorts, Bernstein said, “the paradigm shift from VIP to mass in the medium term will help boost Wynn’s profit margins as the company garners operating leverage.”

“We believe the current distressed valuation for Wynn is impacted by weak China macros and a cyclical slowdown in the Macau market (which is more than priced in), and hence represents an attractive entry point for long-term investors (who can stomach volatility).”

MGM Resorts on the other hand, with profit relying mainly on Las Vegas, may see constrained growth if it doesn’t expand into new markets.

Bernstein, however, noted that potential upside catalysts on the stock is a stronger-than-expected ramp up for MGM Cotai in Macau, and a stronger-than-expected growth in Vegas driven by increased convention visitation and RevPar increase.

For Caesars, Bernstein said long-term value is limited by execution overhand and lack of exposure to Asia growth, with its latest venture into Korea “of limited value”.

Bernstein admits that the company has the right strategy in Las Vegas, by renovating its existing properties to lift RevPar.

“However, Caesars inherently has assets that are relatively weaker than comparable competition,” said the brokerage.

Bernstein initiated coverage on these four operators last week.