2 High-Rolling Stocks in the Monte Carlo of the Orient

Rudy Martin

Everyone wants to hit it big. Whether they buy lottery tickets in a frenzy, like we recently saw when the Powerball jackpot reached $600 million, or whether they pack tour buses and airplanes to Atlantic City and Las Vegas, it’s hard to resist the allure of games of chance.

Of course, most of us know that making big bets can set us up for big losses. But we don’t have to miss out on the potential payoffs that the cash-flush casinos offer.

After all, when the “house” nearly always wins, there’s no sense betting against it when you can instead bet on it!

However, forget about AC and Vegas if you really want to roll with the big-money players. That’s because you’ll find a fast-expanding number of them are living, working and certainly playing overseas.

Casinos are bending over backward to cater to the newest wave of elite players, but you can gain VIP access to these new "big spenders" through a pair of stocks with direct exposure to the world’s biggest gaming center.

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‘The Monte Carlo of the Orient’

On the Mediterranean coast, Monte Carlo still exists as a refined venue where Europe’s fading elite can promenade in their haute-couture threads and deposit some chips on red or black.

And here in the U.S., except for a few bumps from the sluggish U.S. economic recovery, Las Vegas is still hot as a great place for extravagant floor shows, gigantic conventions and a home for a significant percentage of the world’s slot machines.

But for pure, big-time intensive casino gambling, the center of the world is now on an island off the south coast of China. The former Portuguese colony of Macau is currently home to five of the world’s 10 largest casinos, including the two biggest of them all.

Macau provides serious big-energy, high-roller, mega-money, macro-profit gaming like nowhere else on earth. And for Asians and other global consumers looking to cement their status as having “made it big,” Macau offers an attractive outlet to relax and play in luxury surroundings.

However, Macau is not just for the affluent anymore. Its guest list has expanded significantly because of the …

New Middle Class Flocking to Macau

Despite the absence of a few percentage points from China’s double-digit GDP growth rate of a few years ago, the world’s most-populous nation is turning out more than enough new affluent and middle-class citizens to fill the places around Macau’s abundant supply of gaming tables.

Total casino revenue for Macau’s gaming palaces is expected to enjoy a percentage gain in the mid-teens this year, according to Robert Drake, chief financial officer of Hong Kong-based Galaxy Entertainment Group Ltd., which operates major casinos in Macau.

Those increased revenues would follow up on a 14% gain in 2012 for the only location in China where casino gambling is legal.

The total revenue from Macau’s gaming industry is expected to exceed $40 billion this year.

Another Hong Kong-domiciled operator of Macau gambling venues, JM Holdings Ltd., estimates that gaming revenue on the island will double from current levels within six to seven years.

And there are plenty of establishments cropping up to become a part of this big-revenue business.

These Companies are Betting on Winning in Macau

U.S.-based titans Las Vegas Sands (LVS), MGM Resorts (MGM) and especially Wynn Resorts (WYNN) have established solid presences in Macau.

Steve Wynn’s 275,000 square feet of casino footage there generated $3.67 billion in revenue in 2012, handily eclipsing the $1.49 billion in revenue from his firm’s 186,000 square feet of Las Vegas casino space.

A pair of intriguing Nasdaq-listed, Hong Kong-domiciled firms are worth considering for those interested in “pure plays” on Macau gaming.

Asia Entertainment & Resources Ltd. (AERL) is small ($168 million market cap) and speculative as an investment. Although it’s just a $4-and-change stock right now, its business focuses on the largest and most-interesting niche of Macau’s gaming market: the big-spending, high-rolling VIP segment.

Galaxy Entertainment recently noted that action has been picking up from the high-stakes VIP set. VIPs are essentially the backbone of Macau’s gaming wealth, reportedly accounting for roughly two-thirds of the island’s gaming revenue.

VIP revenue will expand by a “high-single-digit” percentage this year, according to a Galaxy estimate.

AERL affiliates operates VIP gaming facilities at MGM Grand Hotel and Casino in downtown Macau, the Venetian Resort Hotel-Casino (which, at 546,000 square feet and with 3,000 gaming machines and 870 gaming tables, is ranked by some sources as the world’s biggest casino), in addition to other casinos on the island.

Although this small company is speculative, it has a low price-to-earnings ratio and stands to benefit from its tight focus on the richest segment of the world’s biggest gambling market.

Another entertainment-resort operator in Macau is Melco Crown Entertainment Ltd. (MPEL), which develops, owns and operates facilities covering more than 600,000 square feet of space on the island

An MPEL-integrated development, called City of Dreams, includes 420,000 square feet of casino space in a complex that includes brands such as Grand Hyatt and Hard Rock, among others.

What does that mean in dollar terms? As Lawrence Ho, co-chair and CEO of Melco, noted in his comments on the company’s first-quarter results:

“City of Dreams, our flagship integrated casino resort, has reinforced its position as the dominant premium mass market property in Macau, delivering 35% year-over-year growth in gaming revenues in the high-margin mass table games segment during the first quarter.

“City of Dreams’ mass market tables were again the most-productive mass market tables of all major properties in Macau,” Ho said.

Incorporated in late 2004, MPEL seems to be moving in the right direction. From a penny-per-share deficit in 2010, it improved to a 16 cents-per-share profit in 2011 and then jumped 39% to a net of 25 cents per share in fiscal 2012 (ended Dec. 31).

The stock has gained about 43% in the last six months …

In the latest year MPEL earned a respectable $417.2 million after taxes on revenue of $4.1 billion.

Net revenue for the first quarter of 2013, ended March 31, was $1.145 billion, representing an increase of approximately 11% from the comparable period in 2012.

With headquarters geographically close to their Macau operations and corporate managements culturally similar to their primary source of customers, both AERL and MPEL are well-positioned to profit from Asia’s rapidly expanding affluent and middle-class populations with ever-more discretionary income for leisure activities such as gambling.

Best wishes,

Rudy

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