What Will The New Year Bring For The Casino Industry?

The year-end gaming revenue numbers from the Macau, China, and Las Vegas markets indicate that the gaming industry finished the year strong in the two largest and most critical markets in the world for investors. However, now that 2017 is officially here, gaming investors are wondering whether that 2016 momentum will spill over into the New Year.

The U.S. Market

For Las Vegas-focused stocks such as Boyd Gaming Corporation BYD, Caesars Entertainment Corp CZR and Red Rock Resorts Inc RRR, the key issue in 2017 will be whether or not the U.S. economy remains on track under President-elect Donald Trump. Vegas’ slow-but-steady recovery since the financial crisis has mostly mirrored the slow-but-steady recovery in the U.S. economy under President Barack Obama. Trump has pledged to be a superstar for U.S. business by rewarding companies with domestic focus and dramatically slashing corporate tax rates. If he can accomplish those goals while maintaining solid U.S. GDP numbers, there’s no reason to think 2017 won’t be a good year for U.S. casino investors.

The Macau Market

The Macau market is much more of a wildcard for investors, with huge upside and a long list of risks. Most analysts seem to think that the Macau industry is a long-term opportunity for players MGM Resorts International MGM, Las Vegas Sands Corp. LVS, Wynn Resorts, Limited WYNN and Melco Crown Entertainment Ltd (ADR) MPEL.

“We view the Macau gaming industry as a secular growth story led by the accelerating paradigm shift from VIP to Mass driven by supply and infrastructure improvement,” Bernstein analyst Vitaly Umansky said earlier this month.

Land and Buildings pointed out that only about 1.5 percent of China’s population currently visits Macau compared to a 10 percent U.S. penetration rate for Las Vegas. Those numbers suggest a major long-term growth opportunity in Macau.

The least predictable element of the Macau story is the Chinese government. The government’s 2014 corruption crackdown in Macau was the underlying cause of the economy’s two-year recession that finally ended in Q4. However, the government offered yet another reminder of its role in Macau in December when it cut the limits on single ATM card transactions in Macau by 50 percent.

A New Frontier

Finally, the biggest 2017 news story when it comes to the gaming industry may be which companies make a move in Japan and how big of a bet they will place on the massive new gaming market there. Japan finally legalized casino gambling in December, opening the door for international operators to capitalize on a potentially $30 billion opening. It will likely be years before any Japan resorts open, but the major players will certainly not want to waste any time getting up and running as soon as possible. Investors should look for definitive Japan plans from all or most of the major Macau players sometime in early 2017.

Disclosure: The author is long MPEL.