Listen to this post
For years, there has been no short seller more prominent than Jim Chanos.
The legend behind financial firm Kynikos Associates can make any corporate executive shake if he announces a short position in (or a bet against) their company.
Chanos made his name on Wall Street by famously shorting Enron before its 2001 bankruptcy. He famously took a large short position in Chinese coffee company Luckin Coffee in 2020, right before shares collapsed by 70% due to financial fraud.
He also took big gains after Wirecard AG collapsed last year and shares dropped 96% in a month because the company was found to be missing $2.3 billion in cash balances on trust accounts.
Now Chanos has drawn a line in the sand on a famous U.S. gaming and resort company.
The reason: He’s very bearish about what’s next for gambling companies in China.
Today, I want to explain why Chanos is shorting Wynn Resorts (WYNN) and give you a much better pick if you’re bullish about the gaming industry.
Why Chanos Shorted Wynn
Chanos recently announced a big short position in Wynn Resorts. He has long warned about the danger of the company’s overreliance on the Chinese gambling center of Macau.
Macau is a former Portuguese colony nicknamed “The Las Vegas of Asia.”.
Gambling is illegal in China. But since Macau exists as a special administrative region, it has operated under different laws since China took over in 1999.
Most people don’t realize that the region generates way more money than Las Vegas. In fact, Macau earned more gaming revenue than the entire state of Nevada back in 2010. That year, the region generated more than $189.6 billion in revenue, according to Statista.
By 2013, that figure hit an all-time high of $361.87 billion.
In 2019, Macau’s gross gaming and gambling revenue hit $293.21 billion. By comparison, Las Vegas casinos generated $6.59 billion for the 2019 fiscal year, according to the Nevada Gaming Control Board.
However, Macau experienced an epic COVID-19 crash that drove total revenues down to $61.05 billion for 2020.
Despite Wynn Resorts having a number of properties across Las Vegas, it is extremely reliant on its Macau properties. In 2019, Wynn generated $805.05 million in operating income from its Macau properties, and just $123.3 million from its Las Vegas communities.
According to the company’s 10-K for fiscal 2019, Macau properties represented roughly 70% of the company’s total revenue
In a world where COVID-19 continues to batter the hospitality industry, Wynn investors should naturally be concerned. However, there are other risks outside of Macau’s sharp downturn in gaming revenue.
As Chanos notes, Wynn and other casino operators in China will see their existing licenses expire in June 2022. China is rewriting the existing laws surrounding gambling and will require reapplication, according to Chanos. His concern is that the Chinese government may crack down on casinos as part of the continuing social movement driven by President Xi Jinping.
Chanos believes that the market has failed to recognize the associated risks. If China forces limits on Wynn and other operators — or straight-up bans their presence as a continued effort to drive out Western influence — the stock could see a dramatic sell-off. Chanos believes that Wynn stock should be trading in the $40s given these risks.
Wynn Resorts is in TradeSmith’s Health Indicator Yellow Zone and is threatening to hit its trailing stop of $79.48. If Chanos is right, investors will likely be happy to follow the rules of TradeSmith, exit the position, and wait for a future upswing once the stock finds its bottom.
Eye This Gambling Stock Instead
If you’re looking for a more stable business than Wynn, now might be the time to revisit the broader U.S. gambling market. With the Federal Reserve potentially making moves on interest rates and China potentially cracking down on its own tourism and gaming industry, where might we find a company that could benefit?
We’re looking at the real estate industry, particularly the companies that have triple-net leases built into their contracts and can weather higher interest rates and higher inflation. That brings us to VICI Properties (VICI), an income-generating machine in the gaming space and a stock that is currently in TradeSmith’s Green Zone.
VICI Properties recently announced plans to purchase MGM Growth Properties. The deal will make VICI the largest publicly traded owner of casino properties in North America. Here’s how the company’s business model works.
In 2017, VICI became a real estate operator that emerged from the bankruptcy of Caesars Entertainment. The leading shareholders behind Caesars were two prominent private equity firms called TPG Capital and Apollo Global Management. They split off the real estate holdings from the gaming operations. The new company, VICI, would generate its income by collecting rent from the casino operators.
So, today, VICI Partners owns Caesars’ real estate and collects rent from all the vendors on the properties. But it’s not just limited to Las Vegas. As of August, VICI controlled 43% of the casino and gambling REIT sector with a market capitalization of $16.31 billion. It owns properties rented by Caesars Entertainment, Penn National Gaming, and Century Casinos.
Since the company generates more than 90% of its cash flow from the property assets, it can avoid a first round of corporate tax payments and pass cash flow directly to shareholders in the REIT. As a result, shareholders enjoy a hefty dividend of 4.87% in addition to a strong growth trajectory from VICI’s ability to hold long-term leases and acquire new properties.
REITs are very attractive alternative investments that trade on the public market. I’ll be talking about REITs, closed-end funds, and a variety of other alternative investments for the duration of the week.