Sands, Wynn to Win if HK Dollar Rallies

The recent strength of the Hong Kong dollar has some industry watchers saying the currency's peg to the U.S. dollar has a chance of being broken this year. If so, an even stronger Hong Kong dollar would provide immediate boosts to U.S. casino operators like Las Vegas Sands LVS and Wynn Resorts WYNN, which are paid in the currency at their Macau casinos.

This phenomenon is why some institutional investors are calling such casino stocks "hidden currency plays." The other reason is the possibility that the Chinese government will eventually freely float its own currency and allow it to be used for gambling in Macau -- which would also benefit U.S. casino owners.

In essence, both the Hong Kong and Chinese currencies are considered to be too cheap vs. the weak U.S. dollar. If either appreciated rapidly and the U.S. casino owners were paid in that currency, then the companies would benefit from very profitable currency conversion rates back into U.S. dollars.

Inflation May Prompt Revaluation

Lehman Brothers said in early April that there is a 10% chance that the Hong Kong dollar's 24-year old fixed exchange rate to the U.S. dollar will break in the next year because it is fueling inflation, according to Bloomberg. Nomura Holdings echoed a similar tone, without actually providing a probability, in a separate Bloomberg report in March.

Inflation in Hong Kong rose to a 6.3% rate in February, up from 3.2% in January. Since the Hong Kong dollar is pegged to the U.S. dollar, which remains very weak, Hong Kong is facing very high import costs that are fueling inflation.

In Macau, the only region of China where gambling is legal, casino operators are generally paid in Hong Kong dollars or the Macao pataca, which is linked to the Hong Kong currency. Neither Las Vegas Sands nor Wynn hedge against currency fluctuations, according to their 10-K filings. In 2007, Macau's gambling revenue increased 46% to $10.6 billion (U.S. dollars).

However, not everyone is convinced the peg between the Hong Kong and U.S. dollars has any chance of being broken soon, including Meg Browne, senior currency strategist with Brown Brothers Harriman.

The reason? "Hong Kong inflation has been higher in the past," she says. Over the past 20 years, the inflation rate hit highs of 13% in 1991 and 10% in the 1994 to 1995 period. All along, the peg has remained in place."

Specifically, the Hong Kong dollar is allowed to trade in the fixed range of $7.75 to $7.85 per U.S. dollar.

Even if the peg is not broken anytime soon, investors in Las Vegas Sands and Wynn Resorts are being given free options on the possibility of eventually cashing in on such a revaluation of the Hong Kong dollar.

Factoring In a Freer-Floating Renminbi

The other hidden currency story within both stocks relates to what the Chinese government eventually decides to do with its own currency, the renminbi.

Macau casino operators are prohibited from accepting wagers in the renminbi, and there are also currently restrictions in place on the export of renminbi from mainland China to Macau.