“We have to look at the casino stocks. Watching Las Vegas Sands over the last hour dropping and it dropped more than 6%. You know, in a blink of an eye, you can see a stock basically fall out of bed. That’s the kind of traders lingo they use here on the floor. But you see what happened to Las Vegas Sands. Tumbled down below $17. Then moves back up. Unbelievable. All on the news that the Macau Government met with the Chinese gambling centers, six casinos to review the size of the industry there and possibly restrict the number of casino tables. Then you see the casino stocks pull back, fall out of bed and now slowly clawing their way back.

If you had a position and then you could add more when it dips down. That’s what the traders are doing. I watched them do that. They get nervous and sell. This is the anxiety that the traders feel when they see it pull back. Buy more and get nervous and it’s very — it can be very, very nail-biting event.”– Fox Business Network 10/15/2009

It was an active day for casino operators, especially those with exposure to operations in Macau.  For those unfamiliar, American casino operators have gone “all-in” on the alreadyLVS lucrative gaming destination of Macau, China.  These casinos have spent a lot of money building a gambling headquarters for China similar to what Americans have in Las Vegas.  The two companies with the greatest exposure to this potentially massive market are Las Vegas Sands (LVS) and Wynn Resorts (WYNN).  Already the bets on China have started to pay off as Macau represented nearly 70% of LVS’s revenue in 2008.  The growth in this market has been phenomenal and has prompted LVS to further their expansion into Singapore and Pennsylvania.

Both of these casino stocks sold off sharply after news broke that the Chinese government was considering more strict regulations on the Macau gambling district.  Among the proposals would be strict age limitations and perhaps limiting the number of tables operating at a single time.  Regulation of this sort is clearly a threat to the profitability of these resorts, which frightened investors.  The casino operators have taken on massive amounts of debt in order to finance these hugely expensive projects, and any limitation on their ability to make money makes them more risky stocks.  This comes on the heels of a very successful WYNN IPO for Wynn Macau on the Hong Kong Stock Exchange, and earlier today Fitch lifted its view of WYNN’s credit to “positive”.  Las Vegas Sands is also planning an IPO for its Macau operations.

After the sharp sell-off, both stocks began to slowly climb back in afternoon trading and both finished only slightly negative.  Casinos, particularly in Las Vegas, have had a really tough go of it in the last two years, but the growth potential in Macau and other emerging markets has been a bright spot.  At Ockham, we continue to believe that both Wynn Resorts and Las Vegas Sands are slightly Undervalued at their current levels.  With that being said, there is substantial risk in an operation that has such high stakes tied to China.  Firms such as this have the huge upside that comes with a massive population that apparently loves to gamble, but also they are subject to the declarations of a communist government.  We are not sure whether these stocks will in fact face adverse regulation that dampens profits, but with the heavy debt burden, these stocks may be best suited for investors who are okay with rolling the dice.

Gambling Restrictions in Macau?