RealMoney Silver - Bet on More Macau Upside

Bet on More Macau Upside
By Charles L. Norton
RealMoney.com Contributor
3/26/2008 7:59 AM EDT

A combination of favorable supply-and-demand dynamics in Macau -- arguably the most constructive since the liberalization of its 40-year gaming monopoly -- and multiple contractions make the Macau-oriented casino operators like Wynn Resorts (WYNN) and Melco (MPEL) attractive right now.

In 2004, Las Vegas Sands (LVS) opened the first Western hotel in the special administrative region of China. Only two short years later, by the end of 2006, Macau gaming revenue surpassed the Las Vegas Strip, which was 65 years in the making. Macau gaming revenue is expected to top $18 billion by 2010.

Clearly, demand has surged in Macau -- with over 27 million visitors last year, mostly from mainland China and Hong Kong -- the result of a burgeoning economy and an easing of travel restrictions. The supply of hotel rooms, gaming tables and slot machines, too, has grown as a slew of properties opened in the only place in China where casinos are legal.

As the excitement of one of the great growth stories of the decade unfolded, the multiples of casino operators with Macau exposure expanded to dizzying heights.

Fast-forward to today. The current market mayhem has brought down the multiples of Macau-oriented casino companies. But one could argue that the Macau risk premium should actually be reduced, as the estimated $6 billion worth of projects in the past 18 months are now online, having moved from pie-in-the-sky projected numbers on a spreadsheet to real, cash-flow-generating properties.

More importantly, all is quiet on the Eastern front. That is, there are no major properties opening during 2008, keeping a practical lid on near-term supply. There is the Four Seasons Macao with its modest 130 table games and 225 slot machines, and perhaps some existing property expansion, but capacity growth for 2008 will likely be in the single digits, compared to what UBS sites as a 79% annualized growth rate in supply from 2003 to 2007.

At the same time, demand continues to be strong. For the first two months of 2008, visitor arrivals to Macau are up 13.9% over the same period of last year and gaming revenue is running about 60% higher. The vast majority of gaming revenue in Macau is so-called VIP play, which resembles Las Vegas high-rollers on steroids. These super-high-rollers are unlikely to curtail their jaunts to the gaming tables because of a general economic slowdown, particularly one that has yet to tame the fast-growing Chinese economy.

Limited supply and still-mushrooming, economically insensitive demand, combined with lowered valuations, make the Macau-oriented casino operators seem like a good bet.

At time of publication, Norton was long Las Vegas Sands and Wynn Resorts and long Melco calls, though positions may change at any time.

Charles L. Norton, CFA is a principal of GNI Capital, an equity long/short money management firm that provides investment management services to institutional clients including mutual fund sponsors, trust companies, investment advisory firms, corporate retirement plans and family offices. Mr. Norton is responsible for portfolio management and investment research for all of the company's managed assets, including the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). Previously, Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate long/short equity accounts. Prior to his experience on the buy side, he was an investment banking analyst at Smith Barney. He has a bachelor of science in management degree in finance from Tulane University's A.B. Freeman School of Business, and is a CFA charterholder. He is a member of the CFA Institute and the CFA Society of Dallas-Fort Worth. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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