Monday was an ugly day for stocks, and it was much uglier for some than for others. One of the hardest hit, Las Vegas Sands Corp (LVS), saw about a 5% drop in prices Monday as shareholders bailed one of the oldest and most volatile Vegas gambling houses.
LVS is in good company. Wynn Resorts (WYNN) and MGM Resorts (MGM) are down a similar amount. The reason for the drop is simple, and clearly explained in this article. The bottom line: China may be facing an economic crisis, which means casinos dependent upon Chinese gamblers for revenue.
The problem for investors is that it’s not easy to determine exactly how dependent these companies are on Chinese operations both for income and income growth. The assumption in the market has been that that number, whatever it is, is “a lot.” So a hit to China means a hit to these casinos, thus the steep drop today.
But an analyst’s job is to try to determine this information. It’s not easy, and no one will be 100% right, but an investor can get close to the truth through a careful study of the casino’s statements.
To get access to those statements, all you have to do is go to EDGAR. (If you don’t know what EDGAR is, I recommend reading this article). In the company’s latest 10-Q, we get an update on how dependent the company is on China:
We see that Chinese operations account for roughly half of the company’s total assets, but China accounts for 72% of net revenues. Thus the return on assets for the company’s Chinese operations is massive, especially when compared to the miserly and relatively unproductive Vegas market where Wynn started. To get a sense of just how lucrative Macau is, I recommend this article as a starting point.
Thus the implications of a drop-off in Chinese demand is huge for a stock like Wynn. “Huge” isn’t terribly scientific, so an investor should go further and answer a few questions before recommending a position on the stock. These questions include:
- Exactly how bad is China’s economy going to turn, and why?
- How will this impact Chinese gambling spending in the near term?
- How will a drop-off in Chinese gambling affect Wynn’s revenue from Macau operations?
- How will the value of Wynn’s Macau-based assets be impacted by the Chinese drop-off?
- When will the decline in Chinese gaming stop, and reverse? Or will it?
Answers to these questions will help investors determine whether WYNN is currently oversold, or if it remains too expensive and likely to fall further.