Casino stocks were the big winners this week

Macau exposure casino shares had a great week this week after China announced economic stimulus plans.

According to data provided by S&P Global Market Intelligence, shares of Melco Resorts & Entertainment (MLCO 3.77%) increased by 31.5%, Las Vegas sand (LVS 6.38%) increased by 22.2% and Wynn Resorts (WYNN 6.79%) up 21.9% this week. The three stocks are up 30.3%, 21.7% and 21.3%, respectively, since 2:00 PM ET on Friday.

Image source: Getty Images.

China’s stimulus plans

The Chinese government said this week it would implement “necessary fiscal spending” to get the country’s economy on track to meet its 5 percent GDP growth target. The plan is to reduce the reserves banks must hold, lower interest rates and provide loans to investors to buy stocks.

In total, the package could be more than $300 billion, but economists don’t think it will move the needle much for the Chinese economy.

Macau ignores questions about stimulus

Economists may not think the stimulus is enough to spur change, but that didn’t stop investors this week looking for some way to gain exposure to China’s growth potential. Macau clearly offers that.

Macau has seen steady growth over the past two years and stocks have been relatively undervalued. So far this year, Macau’s gaming revenue has grown by 33.4% and has grown by double digits every month.

Value of Macao stocks

Before this week’s blowout, each of these three stocks was trading at a very attractive multiple of enterprise value to EBITDA at or around 10x, and that hasn’t priced in all of Macau’s recent rally. It is likely that the market saw these stocks as values ​​if China’s economy grows and players have more money to spend in Macau.

MLCO EV to EBITDA data by YCharts

While China doesn’t drive all of Macau’s visits, as a special administrative region of China with 2.4 billion people within a five-hour flight of the gambling hotspot, it relies heavily on China for business.

When Chinese travel was halted amid concerns over COVID-19, Macau suffered, and this could be a continued reversal of that downward trend.

What is real and what is not?

It will take many months for any stimulus to flow through China and make its way to Macau. The biggest short-term impact would be taking profits on stocks that are rising this week and taking a short trip to Macau to celebrate. But these numbers will be small.

I think the long-term focus should be on what these stocks have traded at and what management is doing with those funds. There aren’t many new opportunities to grow in Macau or other parts of Asia, so companies like Las Vegas Sands and Wynn Resorts have pared debt and bought back shares with excess cash. Melco Resorts has done fewer of these buybacks, but is also looking to return cash to shareholders.

If earnings pick up, that would be great for stocks, but I think this week’s move will end up being noise in the long run. The bigger numbers will come next month when investors learn how earnings look and gauge how management is using its cash in the current market.