Macau has been one of the biggest drags on Crown Resorts Ltd (ASX: CWN) shares in the last 12 months.
In fact, while Crown's Australia-based resorts grew earnings strongly in the 2015 financial year, the Net Profit After Tax (NPAT) contribution from Macau, by way of the company's 34.3% holding in Melco Crown Entertainment Limited, dropped a massive 44.6%.
The drop mirrors a 34% pummelling of Macau gaming revenues in 2015 after a crack-down on corruption in China and other legislative changes. But this could be about to change for Crown Resorts.
Has Macau hit the bottom?
Official data from the Gaming Inspection and Coordination Bureau of Macau suggests the huge falls in gaming revenue are stabilising, with revenues levelling out over the last four months. We can see this in the below chart, which shows monthly gross gaming revenues, smoothed by a three-month average:
A second glimmer of hope for Crown Resorts in Macau is the recent opening of the new US$3.2 billion Studio City resort of which Melco Crown Entertainment (MCE) owns 60%. The new resort is targeting the mass gaming market, as opposed to the shrinking VIP market, and should start contributing to MCE's revenues over 2016.
Two risks to watch
An improved MCE result would likely renew optimism in Crown Resorts' share price, but there are two important risks to watch for.
The first is the current financial storm brooding over China's economy, a storm which may keep tourists away from Macau casinos. This is a plausible risk, but is likely a short term factor and goes against the forecasts of booming long-term outbound tourism growth over the next four years.
Another risk to watch for is casino gaming capacity, in the form of gaming tables and slot machines. Despite the fall in visitor demand, the number of gaming machines continued to rise in the third quarter of 2015. Growing capacity increases competition among resorts and can push up costs to win customers.
| Macau gaming capacity | 2014 | 2015 (3rd Qtr) | % Change |
| Gaming tables | 5,711 | 5,819 | 2% |
| Slot machines | 13,018 | 14,213 | 9% |
Source: Gaming Inspection and Coordination Bureau of Macau
Foolish takeaway
Melco Crown Entertainment represents a significant growth avenue for Crown Resorts. Because it is highly exposed to Macau a reversal of falling gaming revenues and a successful opening of the new Studio City resort would be a big boost to earnings confidence moving forward.
If Crown Resorts' Australian operations can continue to hold recent form as well, now could prove to be a great time to add Crown Resorts to your long-term portfolio at a knock down price.
