Macao's Casino Stocks Still Have a Lot to Lose As Coronavirus Spreads | The Motley Fool

Tuesday 3rd March 2020

Travis Hoium has been writing for fool.com since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things. Follow @TravisHoium

If there's one industry where investors may still be underestimating the impact of the coronavirus right now it's casino companies with exposure to Macao. Most of the region's revenue comes from travelers who visit from mainland China or through Hong Kong, two areas where the coronavirus has already led to a reduction in travel.

That fear led to a 15-day shutdown of Macao's hotels earlier this month, which was praised by most in the casino industry. But visitors may not return quickly, and it could be a huge drag on earnings and casino stocks throughout 2020.

Macao is a short boat ride to Hong Kong, so you can see it as a proxy for the impact of the coronavirus. In January, hotel occupancy was down 37.2% to 56.2%, and revenue per available room dropped 56% to HKD 561.85. In other words, demand dropped extremely rapidly even in the early days of the coronavirus outbreak.

If history is any guide, this may be the beginning of a correction in casino stocks.

The only remotely close comparison we have to the decline in casino demand today is the drop Macao casinos saw starting in 2014 when the Chinese government started to crackdown on corruption. Over the next two years, gambling revenue dropped 50%, and casino stocks did the same.

We don't yet know what the long-term impact of the coronavirus will be on gambling in Macao, but the drop could be significant. And these stocks may have further to fall as a result.

The one factor that's different from 2014 is that casino industry operations are much more stable than they were then. New casinos in Macao aren't coming online at the same pace as they were over the past decade, reducing the outflow of billions in cash to build resorts. EBITDA, a proxy for cash flow, has also stabilized over the last two years, and companies have begun using excess cash to pay down debt and pay dividends.

Payouts to investors may be affected if cash flow from Macao declines, but there's more capacity to absorb a crash in gambling revenue than there has been in the past.

I think there's still the possibility for a big decline in casino stocks and industry earnings if the coronavirus continues to impact travel, but time will tell if that fear continues globally.

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