Can you name the gamblingcapital of the world?
If your answer is "Las Vegas," you're wrong.
Macau is the world's leading destination for betting, having
passed Vegas back in 2006 interms of gamblingrevenue .
This 11-square-mile special administrative region of China is
a self-governed casino destination along China's southern coast.
Lastyear , gambling accounted for 50% of Macau'sGDP and 84% of
its fiscalrevenues .
So what's the best way to play this intriguing and rapidly
Melco Crown Entertainment (Nasdaq: MPEL)
is the absolute best pure play on the Macau gaming market,
generating 100% of its revenue from the region.
Other major casino operators have a presence in Macau,
Las Vegas Sands (
MGM Resorts (
Wynn Resorts (Nasdaq: WYNN)
, but their revenues are diluted by their exposure to Las Vegas
and other U.S. markets. Vegas Sands gets 52% ofEBITDA (earnings
before interest,taxes ,depreciation andamortization ) from Macau,
while MGM receives 33% and Wynn earns 74%.
Why Does Macau Matter?
Macau is already generating more than six times as much gambling
revenue as Vegas. The Macau GDP growth rate ishead and shoulders
above the U.S., and itsunemployment rate is at multi-year lows.
Macau's GDP expanded at an impressive 10.8% during the first
quarter, and its unemployment rate fell to a record-low 1.8% in
May. Putting these numbers in perspective, U.S. GDP grew 1.8% in
the first quarter, and the unemployment rate in May was 7.5%.
People continue to visit Macau in droves. During the first
five months of this year, visitor arrivals increased 3%year over
year . What's most impressive is that more than 60% of visitors
are from mainland China and nearly 25% are from Hong Kong. The
long-haul visitors, from the likes of the U.S. and Canada, make
up a much smaller portion of Macau's total visitors.
The trend in the U.S. toward legalization of gambling gives
Melco another advantage over its U.S.-based competitors. Melco's
Asian focus insulates it from the rapidly changing U.S. online
gambling market, which could well stealmarket share from casino
operators. Nearly three-quarters of U.S. states currently allow
online betting on games that require a minimum degree of "skill,"
and a bill was introduced in Congress this month that would pave
the way for states to legalize online poker.
The other big headwind that U.S.-based casino operators face
is the spread of casinos. Twenty years ago, only six states had
commercially operated casinos; today, 20 states have commercial
||Macau is already generating more than six times as much
gambling revenue as Vegas. During the first five
months of this year, visitor arrivals increased 3% year
Melco Crown's Prospects In Asia
For American gamblers, Macau is more of a planned destination
trip than a weekend getaway, like a quick trip to Vegas. As a
result, any impact from legalized online gambling or the
emergence of casinos across the U.S.will affect Melco much less
than it would, say, Las Vegas Sands or Wynn.
The majority of Macau's visitors are from mainland China.
Enter China's rapidly rising middle class, which is already
larger than the entire U.S. population and will likely be the key
driver of Macau's growth. Back in 2000, only 4% of China's
households were considered middle class. That number had soared
to 66% by last year.
Melco is also looking to be the industry leader in Manila, the
capital of the Philippines, with plans to build one of the first
casinos in the area next year. There will be an all-Asian lineup
in Manila , where the four casinos scheduled to be completed next
year are the work of China-based companies and Asian
Up until now the majority of the casinos in the Philippines
have been run by the government. This is about to change, as
Melco and other operators look to further tap the fast-growing
Asian gambling market. The Filipino market is expected to attract
both China's high rollers and Asia's rising middle
The Philippines' annual revenues could easily reach $3 billion
by the end of 2015, which would be closing in on the Vegas Strip
and Singapore markets, which both bring in about $6 billion in
gambling revenue a year.
Although Melco's share price has soared 125% during the past
12 months, it is still trading at only 13.5 times operatingcash
flow , which is in line with Las Vegas Sands and well below
Wynn's 23.4 times.
Action to take -->
The beautiful thing about casinos is that they operate in a
highly insulated and regulated industry. As well, the business is
capital-intensive -- Melco's Philippines casino is expected to
cost more than $1 billion.
Melco Crown is the best way to invest in the fast-growing
Asian gambling industry and rising middle class. While legalized
gambling in the U.S. will in all likelihood have a meaningful
impact on U.S.-based casino operators, I fail to see how it will
have a much of an effect on Melco's overseas casinos.