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The Future Is Now for MGM's Cotai Resort

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Every gaming company in Macau is trying to expand in the Cotai region, and MGM Resorts (NYSE: MGM  ) has finally received initial approval to do so. The company has accepted a Land Concession Contract from the Macau government to build a $2.5 billion resort in Macau, although it won't be official until the contract is published in the Official Gazette of Macau. Usually this is a formality, but this is Macau and it could take weeks or even months to become official. When it does become official, the company will commence construction. 

In the heart of Cotai
For decades, gaming in Macau was centered in the Macau Peninsula, and this is where MGM is currently located. But when Cotai was formed, it created a blank canvas for future megaresorts and was seen as the future of Macau. Galaxy, Las Vegas Sands (NYSE: LVS  ) , and Melco Crown (Nasdaq: MPEL  ) have all had a turn building in this area, and now MGM and Wynn Resorts (Nasdaq: WYNN  ) are getting a chance.

As you can see by the map below, Cotai has a few key advantages besides the fact that all of the resorts are new. It is located near the Macau Airport, a ferry terminal, and one of the two entry points from mainland China. This existing infrastructure along with high-speed rail to mainland China and a proposed new light transit system within Macau will ensure that gamblers will be able to get to Cotai to experience these resorts.

Galaxy recently completed a resort on Cotai and Wynn Resorts recently started construction on a resort next to MGM's location, which is directly next to Cotai Central and City of Dreams. The red-hatched area in the image above notes the location.

Cotai is an important space for MGM because it gives the company an increased footprint in the world's largest gaming market, one of the company's only growth drivers. This helps the company at a time when U.S. gaming has stagnated and over $13 billion of debt drags on the balance sheet. Macau has been one of the few bright spots in recent years.

You can think of Cotai as the Las Vegas Strip and the Macau Peninsula as Downtown Las Vegas in the future. The focus of growth is clearly on Cotai. 

This doesn't make MGM a buy, but it will help the company overcome debt problems in the future. For now, there are companies with far more exposure to Chinese gaming and other attractive markets the world over. 

One such company is Las Vegas Sands, which successfully capitalized on a boom by making a big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our brand-new premium report on Las Vegas Sands. We're providing a full year of analyst updates to go with it, so make sure to claim your copy today by clicking here.

Fool contributor Travis Hoium manages an account that owns shares of Melco Crown Entertainment and Wynn Resorts, Limited. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2012, at 1:36 PM, spokanimal wrote:

    Currently, every cotai resort is "adjacent" to Venetian.

    Wynn will be the first significant cotai resort that is not adjacent to either Venetian or Cotai Central.

    The only exception to this is a boutique casino by the name of Grand Waldo.

    The hotel-key-heavy emphasis behind cotai central was due to the need to accomodate Venetian's extensive, ancillary attractions.

    Prior to 2010, MICE and Arena events at Venetian required most attendees to be housed on the peninsula due to insufficient hotel capacity on cotai. The concept of "play where you stay" had a substantial negative impact on Venetian as the average event patron's primary propensity to gamble there was during short time periods immediately surrounding the event itself.

    Cotai Central changes that. In combination with other cotai resorts that are adjacent to Venetian (all of them), Sands is now able to better capture gaming dollars that flow as a sidebar to a substantial majority of ALL of the non-gaming activities that patrons... particularly mass-market patrons... might indulge in.

    While most analyses of Sands focus on the incremental business contributed by Cotai Central itself, the next 12 months are also likely to exhibit a substantial degree of EBITDA that flows from incremental business at Venetian...

    ... because the overhead at Venetian has been fully absorbed for years, and the resort's variable costs that stand between it's top and bottom lines represent the essence of what Sheldon Adelson has typically referred to as "critical mass".


  • Report this Comment On October 20, 2012, at 12:45 AM, 10HighSigns wrote:

    3Q earnings forecasts for Melco and LVS forecasted to be the big winners in Macau!

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