Junket Crackdown May Be Headed to Macau: Melco Crown Entertainment Ltd (MPEL), Las Vegas Sands Corp. (LVS)

Today we should be celebrating another strong Macau earnings report from Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL). The company reported revenue growth of 9% to $1.1 billion and a very small increase in profit to $108.0 million in the quarter. Adjusted EBITDA was up 7%, a nice increase considering that the company hasn’t added any new resorts this year.

Melco’s resorts echo strong Cotai results from Las Vegas Sands Corp. (NYSE:LVS) and weak Macau Peninsula results from Wynn Resorts, Limited (NASDAQ:WYNN) . But the market isn’t focused on results today, it is focused on a potential crackdown in junket gaming in Macau.

Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL)

The reports from China
The Times of London reported that in February, Chinese law enforcement would begin cracking down on “Triad-linked ‘junket’ operators” who bring gamblers to Macau. Gambling in Macau through junket operators is a well-known way to launder large amounts of money out of China, and it has driven the high-end gaming growth in Macau. About 70% of gaming in Macau still comes from VIPs, usually with junkets, and a lot of this revenue could dry up if junkets are found to be Triad-linked or are involved with money laundering. The mass market is beginning to grow more quickly in the past year, but these VIP players still account for a large amount of the profits gaming companies earn.

The news has hit everyone in Macau today, but particularly junket Asia Entertainment & Resources Ltd. (NASDAQ:AERL). The company had a 26% reduction in rolling chip turnover in January and there’s now potential that law enforcement will be looking more closely at its junket business. It’s not a good day to be a junket in Macau.

The signs were there
When China’s new leadership was announced, there were rumors that cutting down on corruption would be a top priority. I said in November that this was a major risk for Macau gaming stocks going forward. It’s also another reason I thought gaming stocks were too hot to handle last week after a long run-up. Multiples on gaming companies have exploded after Macau reported 19.6% growth in gaming for December, but I thought this could be a temporary pop given the new leadership.

If reports are true and there will be a crackdown after the upcoming Chinese New Year, then gaming could pull back significantly. At least for now, investors are taking a cautious approach.

Another reason to sell
We don’t yet know if there will be a crackdown on junket play or if gaming revenue will slow down in 2013, but I think there’s reason to believe Macau stocks are too hot. Gaming growth slowed rapidly and now that enterprise value/EBITDA multiples are sky-high and potentially as much as 70% of revenue is under siege, it’s enough to make me cautious at the very least. Unlike Las Vegas, where non-gaming activity drives half of revenue, Macau still relies on gaming for a vast majority of revenue, particularly high rollers.

The two stocks that could be hurt the most are Wynn Resorts and MGM Resorts International (NYSE:MGM) because they have to rely on the Macau Peninsula for revenue, and Wynn has always relied on high rollers to drive results. The Cotai Strip, where Las Vegas Sands and Melco Crown are concentrated, has seen a big jump in mass market play, and while they would be hurt, Vegas would be somewhat insulated from a crackdown on junkets.

I haven’t bailed ship yet on my Wynn position, but this is making me think twice. The next few months will be extremely important for Macau and investors should pay particular attention to monthly gaming growth there. After the Chinese New Year, it may see pressure again.

The article Junket Crackdown May Be Headed to Macau originally appeared on Fool.com and is written by Travis Hoium.

Fool contributor Travis Hoium manages an account that owns shares of Wynn Resorts, Limited. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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