Betting on Asia's 'Las Vegas'

 | Mar 05, 2012 | 1:00 PM EST  | Comments
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wynn

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lvs

If you follow U.S. based gaming giants Wynn Resorts (WYNN) and Las Vegas Sands (LVS), you already know that Macau is now the world's largest gambling destination -- it overtook the Las Vegas strip in terms of revenues in 2006. While Las Vegas still is struggling to get back on its feet in the aftermath of the Great Recession, gambling revenue in Macau rose a whopping 42% to a record $33.47 billion 2011. After a standing start only a decade ago, Macau now generates nearly 5x the revenue of the entire Las Vegas strip.

Unlike Las Vegas, Macau has been relatively insulated from global economic woes, thanks to the patronage of affluent Chinese gamblers. But investors turned more cautious about 2012, expecting slowdown in Macau's growth from 42% in 2011 to 11%-20% in 2012.

However, recent figures show that they may have unduly pessimistic. Macau's government announced last week that gambling revenue in jumped 22.3%, year-over-year, in February to 24.3 billion patacas ($3.04 billion). While that isn't the 40%-plus of yore, it seems the slowdown in Macau's relentless growth has not been as severe as expected.

My favorite way to profit from the "Asia's Las Vegas" story is through Nasdaq-listed but Chinese-owned Melco Crown Entertainment Limit (MPEL), which is the only pure play on the Macau growth story. Unlike U.S. casino operators Wynn and Las Vegas Sands, 100% of Melco Crown's revenues are derived from Macau. Melco is also controlled by Lawrence Ho, a son of local tycoon Stanley Ho, and part of one of the region's most powerful families. That makes Melco a local player with a leader who knows the rules of the game in a rough-and-tumble business environment.

The one cloud hanging over Melco stock has been at the same time its greatest opportunity. In June 2011, Melco acquired a 60% interest in Macau Studio City, which, due to its location, is shaping up to be the premier gaming spot in Macau when it opens in three years. The casino will be located right next to the Lotus Bridge immigration station, making it the first and most visible casino on "the strip."

Melco stock was hit hard last year on fears that existing shareholders will be diluted to finance this expensive development. But with roughly $1 billion of cash in the bank, and the possibility of debt financing, the company's management has assured investors that Macau Studio City won't be funded at the direct expense of current shareholders.

Melco's recent better-than-expected financial results also confirmed the company's success in the Macau marketplace. Fourth-quarter net income rose to $107.5 million, or $0.20 an American depositary receipt (ADR), up from $16.3 million, or $0.03, a year earlier. That was more than double the consensus forecasts of $47.8 million.

Even as U.S. markets took a breather last week, Melco has been moving up sharply. It gained 7.55% last week, jumping 2.9% on Friday on double its daily average volume. With Citigroup putting $21 price target on Melco -- a whopping 57% upside from its current levels -- there is plenty of profit left in this stock.

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