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High-Rolling Investments In Macau

By Bruce Vanderveen on December 3, 2013

Located a short 40 miles across the water from Hong Kong lies the former Portuguese colony of Macau. Never a model of propriety, the enclave has in recent years evolved into the world’s top gaming (a politically correct word for gambling) destination. Revenues are now over six times that of Las Vegas.

Macau is enriching the world’s top gaming companies and investors can go along for the ride. Here are the top companies and an exchange-traded fund (ETF) to consider.

Las Vegas Sands (NASDAQ: LVS) is a rising force in Asia. Back in 2002, Las Vegas Sands, led by feisty CEO Sheldon Adelson, had just secured the right to build a multi-billion dollar casino and entertainment complex on a muddy stretch of swampland south of Macau. It was a risky venture that few at the time thought would succeed.

The rest is history. Macau and the muddy swampland—which Adelson dubbed the Cotai Strip—paid off beyond everyone’s wildest dreams. Las Vegas Sands’ shares have increased a stunning 50 fold since post-2009 crisis lows, enriching both the company and its shareholders.

Las Vegas Sands owns the Sands Macau, the Sands Cotai Central, the Venetian Macau, and the Four Seasons Hotel Macau. The company anticipates opening the 3,000-room Parisian Macau in 2015.

Las Vegas Sands, which derives about 85 percent of its revenue from Asia, reigns as the undisputed king of international gaming. The company’s shares are up 54 percent year-to-date. Even after the huge gains since 2009, Zacks still rates the company a top buy.

Melco Crown Entertainment Limited (NASDAQ: MPEL) offers a pure play on Asian gaming. In Macau, Melco Crown owns the City of Dreams complex on the Cotai Strip, the Altira Macau hotel, the diverse Mocha Clubs (which offer gaming in a cafe-style setting), and the Hollywood-themed Studio City complex scheduled to open in 2015.

Melco’s shares are up 12 fold since 2009 and 130 percent year-to-date, as its City of Dreams resort complex has outperformed its competitors properties. In early November, all 13 analysts who followed Melco rated the company a “buy” and Zacks has a No 1 rating (Strong Buy) on it.

Wynn Resorts Ltd. (WYNN) has resorts and other properties in Las Vegas, but its crown jewel is the Wynn Macau with its casinos and hotel rooms. Hoping to add to the Wynn Macau’s success, Wynn Resorts plans on opening the 2,000-room Wynn Palace on the Cotai Strip in 2016. Wynn Resorts is also looking at other Asian countries for new resort sites.

Boosted by its Wynn Macau resort, Wynn’s earnings topped revenue and earnings growth estimates in the third quarter of 2013. Shares are now up 14 fold from 2009 lows and 35 percent year-to-date. Analysts are somewhat cautious about Wynn at this point, citing slow growth in Las Vegas and uncertainty with the Cotai project.

MGM Resorts International
(NYSE: MGM), the largest casino operator on the Las Vegas Strip, has a 51 percent interest in MGM China Holdings Limited (OTC: MCHVF). MGM China owns the MGM Macau and expects to soon open a second, even larger resort in 2016 on the Cotai Strip.

Even though MGM China has been profitable, MGM Resorts International currently is not because the Las Vegas properties have been a drag on earnings. The company’s stock, however, is up 7 fold from 2009 and 80 percent this year.

lMarket Vectors Gaming ETF (BJK) is a great alternative if you’re interested in investing in the gaming industry but apprehensive about picking individual companies. All of the above companies are represented in its top holdings. BJK’s top holding (8.7 percent) is China Sands (01928.HK), a company that may be difficult to for US investors to trade because it primarily trades on the Hong Kong exchange.

Reasons For Optimism

There are several reasons why Macau’s brightest days may lie ahead. Several new resorts are opening in the next few years and access—roads, rail, water, and air—are all being significantly upgraded to handle many more visitors.

Then there is this: Gambling is forbidden on mainland and China but the world’s most populous country is prospering like never before—and Macau is just a few short miles away.

Reasons For Caution

Can the Macau/Cotai Strip boom continue? Certainly. But as in gaming, risks are considerable.

For one thing, competition is increasing. Macau’s success has not gone unnoticed and several new Asian gaming resorts are popping up. Singapore, the Philippines, Australia, and possibly Japan all have or are considering gaming sites. Chinese government visitation regulations could be tightened on a whim and, since most of the Asian resort’s customers are Chinese, this would have disastrous consequences for Asian casino owners.

Other black clouds include a potential breakdown in China’s growth trajectory, geopolitical tension over disputed islands south of (and claimed by) Japan, and now the increasing popularity of online gambling.

For now, gaming stocks are on a roll, and with Macau’s November revenues—once again— beating expectations, the run may still have a long ways to go. Note that even with the fast climb in recent years, Las Vegas Sands shares are still well below 2007 highs, a time when the Macau boom was still in its infancy.

If Asian economies continue growing, the Macau win streak should forge ahead. The bottom line: When Asia does well, Macau and the international gaming companies should do well.

Bruce Vanderveen is a longtime investment analyst and writer.

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