The Macau reopening is going well, as Macau’s March gambling revenue rose 247% year-over-year compared to the expected 205%, as tourists rush back to casinos following the extended lockdown in China. It’s the highest number since January 2020.

While the situation in Macau looks bullish, it's clear that the reopening trade there has plenty of meat on the bone, as Macau casino revenue is still down 51% compared to 2019, according to Bloomberg.

The Chinese government only initiated reopening plans back in December 2022, but it's been at a slow pace as the country looks to avoid prior mistakes which led to rolling lockdowns and a constant game of “red light, green light” with global markets.

So after three years of question marks, it looks like China is finally giving the “all-clear” signal. It dropped quarantine requirements for international travelers in January, and declared victory over COVID-19 in February. However it was only in mid-March that the nation fully reopened travel to all international travelers, accepting all types of visas, according to a March 13 announcement.

With travel just recently being reopened, most international travelers haven’t even begun to make plans to travel back to China yet. After three years of rolling lockdowns, it’s likely that travelers will wait to see how the reopening goes for a while before booking trips, leaving significant upside to the Macau reopening play.

Two US-listed stocks look best-positioned to play this theme, MGM Resorts (NYSE: MGM) and Wynn Resorts (NASDAQ: WYNN), both with considerable exposure to Macau casino revenue.

Will Macau Reclaim 2019 Levels?

Macau is like China’s version of Las Vegas, except it's a third of the size even though it produces three times the revenue. The region has been in rolling lockdowns since 2020 and hence the city’s gambling revenue went down the tube and is still down 51% compared to 2019 levels.

The city’s revenue dropped so much that Vegas overtook it last year:

Source: Financial Times

China’s crackdown on the practice of “junketing,” where operators are paid hefty commissions to bring high-rollers to Macau’s casinos, is of significant worry to investors because junket operators account for roughly of Macau gambling revenue. The second-largest junket operator was arrested last year, illustrating the depth of the crackdown.

While junketing has its shady elements (it’s often used for money laundering purposes), the crackdown is also part of a larger effort on the part of China to transition Macau away from a city that solely exists as a gambling hub. China is pushing the big six casino operators in the city to invest in other infrastructure like theme parks and entertainment venues, perhaps in an effort to make it a more multi-dimensional tourist destination like Las Vegas has become.

The big six casino operators agreed to invest $14.9 billion into Macau infrastructure, more than 90% of which will be on non-gambling projects. While it will undoubtedly help the city grow, the writing 

MGM Resorts

MGM Resorts (NYSE: MGM) has a significant foothold in Macau through MGM China, which it has a 55% stake in. MGM China is currently leading the charge in the Macau recovery. The Financial Times recently reported that MGM China grew the most throughout the period of rolling lockdowns in Macau, effectively using the period to steal market share.

MGM China went from 9.5% market share in 2019 to 13.7% at the end of 2022.

Despite the market share wins, MGM China’s gaming revenue is still only 23% of its 2019 number, which tells us that the Macau recovery is barely underway. 

However, MGM China’s Hong Kong-listed shares (reminder, US-listed MGM Resorts owns 55% of MGM China) are already adjusting to discount the future growth, almost reaching its pre-COVID 2019 levels. This raises the question of how much of the recovery is already priced into the stock.

The Counterpoint: Is The Market Too Quick To Assume a Full Recovery?

So to provide a counterpoint to the recovery thesis, the market is already discounting a return to 2019 profitability before it’s even happened. The pace of Macau’s recovery is an open question as well, as Las Vegas gaming revenue reclaimed its 2019 levels in March 2021, just a year following the start of lockdowns in the United States.

Given the years of rolling lockdowns and a traveler’s guessing game if China’s government will institute lockdowns in the middle of their trip, it’s not obvious that Macau will recover at nearly the same rate.