Wager on Casinos' Comeback

Labor and promotional expenses are rising to handle the increased supply of new casinos coming on board this year. Melco PBL(MPEL) opened its Crown Macau casino, which will cater to high-rolling gamblers, over the weekend. Las Vegas Sands and MGM will open new casinos later this year.

There also are concerns that Macau's current infrastructure cannot handle the new supply. The government is in the process of updating and expanding ferry terminals and bridges on the island.

"People are focused on margins and new supply, but are forgetting that the top line is so strong," Chammas says.

Bank of America analyst Jay Cogan projected in a recent report that gaming revenue in Macau will total $18 billion in 2010, up from $6.85 billion last year.

In the first quarter, gambling revenue in the region jumped 45% from a year earlier.

That first-quarter growth exceeded even the most bullish of expectations, Chammas says. 'There is no reason to believe that this growth rate is going to abate over the coming year," he explains. "If that is the case, we could be approaching a $10 billion market by year-end. With scarce opportunity to get into this market, that bodes well for the story."

As supply increases, margins for the next two years may come under pressure. But after 2010, Chammas expects that supply may become more constrained, and at that point, margin expansion yields another growth-kicker from 2010 to beyond.

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