Fancy a slice of Macao gaming action?
From Emerging Money
Macao released gaming revenues for the month of March early this morning. Government data showed a revenue increase of 24% year-over-year, coming roughly in-line with analyst expectations.
Analysts project annual growth in the former Portuguese enclave this year of anywhere between 11-25%. Some fear that a Chinese hard landing will affect gaming excursions later in the year. Unfortunately, by neither beating nor missing expectations, the March numbers afford the investor little new insight into the health of the Chinese consumer.
Investing in Macao is not as straightforward as it may seem. Traders must be cognizant of each casino group's junket operations, location in the Special Administrative Region, future concessions, and pending legal action before making a move.
As opposed to Las Vegas's thriving mass market, Macao casinos are dependent on high-rollers -- or whales as they're known in the gambling business -- to generate much of their profit. These whales represent roughly 80% of Macanese gaming revenue.
Wynn Resorts ( WYNN , quote ) has traditionally been the high-roller casino of choice, but recently, with the construction of their new casinos, Las Vegas Sands ( LVS , quote ), Melco Crown Entertainment ( MPEL , quote ), and Galaxy Entertainment have begun to steal market share.
Concerns over junket operations in Macao fester both because of their quasi-legality -- some are rumored to have links to the mafia -- and because of fears that a liquidity squeeze could impact junkets' access to cash. However, analysts at both JP Morgan and UOB Kay Hian feel that credit risk to junkets is overstated.
Investors must also be aware of the location of each company's casinos within Macao. Traditionally, the epicenter of gaming was on the Macao Peninsula, home to the legendary Casino Lisboa run by Sociedade de Jogos de Macau, as well as Wynn, MGM ( MGM , quote ) and Las Vegas Sands' first casinos in Asia.
However, as land grew scarce on the peninsula, casino firms looked for cheaper, larger tracts of land to build their sprawling resorts. They struck gold about five miles away with land on two less-densely populated islands. By reclaiming some land in between the islands of Coloane and Taipa, the Cotai Strip was born. Cotai features the newest resorts from Las Vegas Sands, such as the Venetian Macao and the brand new Cotai Central, Melco's City of Dreams, and the Galaxy's Galaxy Cotai Mega Resort. The novelty and size of these attractions has transplanted the heart of gaming in Macao from the peninsula to Cotai with casinos in Cotai gaining share at the expense of those on the peninsula as a result.
Because the government is trying to diminish the Special Administrative Region's dependence on gaming, Macao has been hesitant to issue new gambling concessions. Therefore, casino groups like MGM and Wynn are locked out of the lucrative Cotai market for at least a few more years.
Finally, certain U.S.-based casinos have been materially affected by allegations of inappropriate business dealings. Wynn is currently being sued by former board member Kazuo Okada for $800 million due to an unauthorized donation to a university in Macao. Similarly, Las Vegas Sands is dealing with a $375 million lawsuit pertaining to their acquisition of gaming concessions. It remains to be seen what the ramifications of these suits will be, but at least in the case of the former, concern over the lawsuit has resulted in some negative pressure on the stock.
For investors looking for exposure to Macao, Melco and Las Vegas Sands are best-of-breed. Melco offers a pure play on Macao, offers Cotai exposure, has a new casino coming online in the next few years, and has a reasonable forward P/E of 16.9. Las Vegas Sands owns multiple casinos in Macao, with the brand new Cotai Central opening this month, has a forward P/E of 18.7, and generates more than half its revenue from Macao. Although both stocks offer exciting growth, both have experienced massive runs in the past six months -- MPEL is up 65% and LVS up 50%. That being said, investors with a long-term perspective may want to wait for a pullback before jumping in.
On the other hand, Wynn and MGM offer less compelling plays on Macao. For Wynn, all of its exposure in Macao is on the peninsula where it's losing share to the Cotai casinos. The firm has to deal with the overhang of a massive lawsuit, it has no new casino offerings in Macao until at least 2015 , and yet the company trades with a forward P/E similar to that of LVS at 18.6. As for MGM, their Macao exposure is dwarfed by their U.S. presence, including the disastrous City Centre project in Las Vegas: the group owns only half of one casino in Macao. Simply put, for investors looking for Macao exposure, MGM isn't it.
In light of this information, traders may want to make a long/short play, by going long a stock with Cotai exposure like MPEL or LVS and shorting WYNN.
Disclosure: The author is net long LVS and immediate family are net long MPEL and WYNN.
Read more: http://community.nasdaq.com/News/2012-04/fancy-a-slice-of-macao-gaming-action.aspx?storyid=131285#ixzz1r0Yc7AaA
From Emerging Money
Macao released gaming revenues for the month of March early this morning. Government data showed a revenue increase of 24% year-over-year, coming roughly in-line with analyst expectations.
Analysts project annual growth in the former Portuguese enclave this year of anywhere between 11-25%. Some fear that a Chinese hard landing will affect gaming excursions later in the year. Unfortunately, by neither beating nor missing expectations, the March numbers afford the investor little new insight into the health of the Chinese consumer.
Investing in Macao is not as straightforward as it may seem. Traders must be cognizant of each casino group's junket operations, location in the Special Administrative Region, future concessions, and pending legal action before making a move.
As opposed to Las Vegas's thriving mass market, Macao casinos are dependent on high-rollers -- or whales as they're known in the gambling business -- to generate much of their profit. These whales represent roughly 80% of Macanese gaming revenue.
Wynn Resorts ( WYNN , quote ) has traditionally been the high-roller casino of choice, but recently, with the construction of their new casinos, Las Vegas Sands ( LVS , quote ), Melco Crown Entertainment ( MPEL , quote ), and Galaxy Entertainment have begun to steal market share.
Concerns over junket operations in Macao fester both because of their quasi-legality -- some are rumored to have links to the mafia -- and because of fears that a liquidity squeeze could impact junkets' access to cash. However, analysts at both JP Morgan and UOB Kay Hian feel that credit risk to junkets is overstated.
Investors must also be aware of the location of each company's casinos within Macao. Traditionally, the epicenter of gaming was on the Macao Peninsula, home to the legendary Casino Lisboa run by Sociedade de Jogos de Macau, as well as Wynn, MGM ( MGM , quote ) and Las Vegas Sands' first casinos in Asia.
However, as land grew scarce on the peninsula, casino firms looked for cheaper, larger tracts of land to build their sprawling resorts. They struck gold about five miles away with land on two less-densely populated islands. By reclaiming some land in between the islands of Coloane and Taipa, the Cotai Strip was born. Cotai features the newest resorts from Las Vegas Sands, such as the Venetian Macao and the brand new Cotai Central, Melco's City of Dreams, and the Galaxy's Galaxy Cotai Mega Resort. The novelty and size of these attractions has transplanted the heart of gaming in Macao from the peninsula to Cotai with casinos in Cotai gaining share at the expense of those on the peninsula as a result.
Because the government is trying to diminish the Special Administrative Region's dependence on gaming, Macao has been hesitant to issue new gambling concessions. Therefore, casino groups like MGM and Wynn are locked out of the lucrative Cotai market for at least a few more years.
Finally, certain U.S.-based casinos have been materially affected by allegations of inappropriate business dealings. Wynn is currently being sued by former board member Kazuo Okada for $800 million due to an unauthorized donation to a university in Macao. Similarly, Las Vegas Sands is dealing with a $375 million lawsuit pertaining to their acquisition of gaming concessions. It remains to be seen what the ramifications of these suits will be, but at least in the case of the former, concern over the lawsuit has resulted in some negative pressure on the stock.
For investors looking for exposure to Macao, Melco and Las Vegas Sands are best-of-breed. Melco offers a pure play on Macao, offers Cotai exposure, has a new casino coming online in the next few years, and has a reasonable forward P/E of 16.9. Las Vegas Sands owns multiple casinos in Macao, with the brand new Cotai Central opening this month, has a forward P/E of 18.7, and generates more than half its revenue from Macao. Although both stocks offer exciting growth, both have experienced massive runs in the past six months -- MPEL is up 65% and LVS up 50%. That being said, investors with a long-term perspective may want to wait for a pullback before jumping in.
On the other hand, Wynn and MGM offer less compelling plays on Macao. For Wynn, all of its exposure in Macao is on the peninsula where it's losing share to the Cotai casinos. The firm has to deal with the overhang of a massive lawsuit, it has no new casino offerings in Macao until at least 2015 , and yet the company trades with a forward P/E similar to that of LVS at 18.6. As for MGM, their Macao exposure is dwarfed by their U.S. presence, including the disastrous City Centre project in Las Vegas: the group owns only half of one casino in Macao. Simply put, for investors looking for Macao exposure, MGM isn't it.
In light of this information, traders may want to make a long/short play, by going long a stock with Cotai exposure like MPEL or LVS and shorting WYNN.
Disclosure: The author is net long LVS and immediate family are net long MPEL and WYNN.
Read more: http://community.nasdaq.com/News/2012-04/fancy-a-slice-of-macao-gaming-action.aspx?storyid=131285#ixzz1r0Yc7AaA
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