The hits keep on coming for Macau and there is no end in sight. Or at least it was for more than a year. Now do we see light at the end of the tunnel or an oncoming train?

Hey, Macau. Are we there yet?

That, in their more arcane language, is the question many investors, obsessed by the dramatic decline in Macau’s casino industry, are asking.

We’re prepared to give our own answer now: Yes, the worst is over, or close to it.

The headline reports every Monday will continue to show double-digit revenue declines from the year before.

But gaming revenues have stabilized. Revenues in the first two weeks of September, for example, declined 27 percent, an improvement on August’s 35.5 percent drop, and the 40 percent-plus July plunge.

But average daily win in early September actually grew 1 percent from August. So, while month-to-month declines will resume as Macau heads into its slow season, most of the revenue damage has been done.

Indeed, Morgan Stanley analyst Praveen Choudhary says that even if all of the remaining VIP players fled Macau, the casinos’ combined EBITDA would fall just 23 percent.

That would raise enterprise value-to-EBITDA ratios for all the operators but SJM from 13 to 17 times. If all the junket play left but other VIP players stayed, the combined ratio would be 16 times. Those are rich prices, but not outrageously so.

And we know not all the VIP play will disappear. In fact, a case can be made that most of the VIP play that will be lost has been lost by now. Evidence of that might be the relatively modest reaction to the absconding of US$34 million by VIP room operator Dore.

The biggest risks now are on the cost side. The new mega resorts that each of the operators is opening on Cotai bring with them expensive operations. And employees have become increasingly assertive in wanting a big slice of the revenue pie, further adding to wage pressures.

Of course, casino companies have been reining in costs. Sands China has cut its workforce by 11 percent, and combined advertising expense is down 19 percent, Choudhary reported.

Finally, the recent 26 percent drop in Macau GDP appears to have scared the government, which doesn’t want to impose austerity budgets on its citizens. Talk now is about spurring visitation, rather than capping it. The move towards a 100 percent smoking ban has been stalled and might be stopped. Visits access from China is now easier after a long period of being made more difficult.

So what happens if we’ve entered a prolonged period of muddling where revenues are flat and expenses are difficult to hold down?

Part of the answer might have been revealed in the second quarter. Las Vegas Sands generated hold-adjusted property EBITDA in Macau of $526.5 million and Wynn Macau generated $173.4 million. Total property EBITDA for LVS was $1 billion, and for WYNN $295.4 million.

LVS is expected to generate somewhere near $4 billion a year in total EBITDA this year and next and Wynn more than $1 billion. That should allow the companies to maintain their dividends.

Meanwhile, each of the three U.S.-based casino operators has its own play on Macau.

LVS has its integrated resort model, which is least affected by the decline in VIP play and most likely to benefit from growing visitation. Singapore also gives LVS some geographic diversity, though that market, too, is affected by what happens in China.

Wynn is vulnerable because of its big VIP play, but it is also small enough that Wynn Palace could have an outsized positive impact when it opens next year.

MGM Resorts also has the potential for an outsize positive impact when MGM Cotai opens, and it has a big Las Vegas presence and no dividend to support.

The clearest picture of what Macau will look like over the next several years will begin to be filled in on October 27 when Melco Crown opens Studio City, in what promises to be a stunning resort targeting affluent Asian tourists as opposed to VIP gamblers.

If it fails to draw enough new visitors, as has been the case with Galaxy Phase II, muddling through might be the best operators can do.

If Studio City grows the market, the next round of prosperity could be just ahead, though probably never again at the brake-neck speed of 2013 ad 2014.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.