Iao Kun Group Holding Company (IKGH) posted a loss of 12 cents per share that compared unfavorably with the Zacks Consensus Estimate of earnings of 1 cent and year ago earnings of 20 cents per share. The significant downside reflects lower revenues and higher expenses.

Net revenues of $49.7 million declined 22% year over year and missed the Zacks Consensus Estimate of $61 million by 19%. The downside reflects decline in win rate, slower revenue growth of VIP baccarat compared to the overall growth of gaming revenue in Macau and the economic downturn and tightening of credit in mainland China, from where the majority of Iao Kun Group’sVIP gaming patrons reside. Share price of this gaming company plunged 7% following the dismal second quarter results.

Iao Kun Group is engaged in the promotion of five major luxury VIP gaming facilities in Macau, the largest market for gambling in the world. This exposes it to the sluggish economic conditions in the region. VIP gamblers in Macau are curtailing spending due to a cooling Chinese economy. Also, the slowdown can be attributed to a nationwide crackdown on corruption in China that has compelled Macau officials to impose restrictions on VIP gamblers to stop billions of dollars from being siphoned off illegally from mainland China to Macau.

Behind the Headline Numbers

Rolling Chip turnover for the reported quarter was $4.7 billion, up 5%. However, win rate declined 88 basis points (bps) on a year-over-year basis to 2.18%. Iao Kun Group’s Rolling Chip turnover was $11.0 billion for the first seven months of 2014, up 10% on a year over year basis.

Also, selling, general and administrative expenses were $7.3 million, up 16% year over year owing to higher costs. Costs increased as a result of additional VIP gaming rooms following the acquisition of the Oriental VIP Room as well as Iao Kun Group’s application to list on the Hong Kong Stock Exchange.

On Jun 26, 2014, the company had submitted a listing application form (Form A1) to the Hong Kong Stock Exchange to apply for the listing of, and permission to deal in, the shares on the Main Board of the Hong Kong Stock Exchange by way of introduction. In Jul 2014, the Hong Kong Stock Exchange completed an initial three-day review of the Form A1 application and accepted it for detailed inspection. (Read: Gambling Stock Roundup: Macau June Results, Caesars Acquisition & Penn National's Strive for Gaming License in Focus)

Guidance for 2014

The company continues to expect Rolling Chip turnover in the range of $17 billion to $19 billion for its five existing VIP rooms in Macau in 2014.

Our Take

A slowdown in gambling in Macau since May 2014 has dampened the company’s results. Given the current scenario, we expect the company to continue to experience pressure due to China’s crackdown on illegal money transfers, credit growth concerns and tighter restrictions on visas and an impending smoking ban in the casinos. Iao Kun Group Holding presently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better ranked stocks in the gaming sector include 500.com Limited (WBAI), Churchill Downs Inc. (CHDN) and MGM Resorts International (MGM). While 500.com sports a Zacks Rank #1 (Buy), Churchill Downs and MGM Resorts hold a Zacks Rank #2 (Buy).

Read the Full Research Report on MGM
Read the Full Research Report on CHDN
Read the Full Research Report on IKGH
Read the Full Research Report on WBAI


Zacks Investment Research