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Is Macau's Hold on China's Gambling in Question?

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Right now, Macau is the only place in China where gambling is legal. This fact has provided the insulation Macau has needed to become a $38-billion-per-year gambling hub. It provides the growth that has driven Las Vegas Sands (NYSE: LVS  ) , Wynn Resorts (NASDAQ: WYNN  ) , and Melco Crown (NASDAQ: MPEL  ) over the past few years, leaving domestic gaming rivals in the dust.

But throughout history, when one jurisdiction finds gaming to be successful, other jurisdictions see the allure to add their own games. Since China controls gaming, unlike states in the U.S., there isn't the same threat faced by Las Vegas, but it's nothing to sneeze at when $38 billion is at stake. That's why games of chance popping up in Hainan, China, with rumors that the government is "testing" gambling there is noteworthy to say the least.

What's going on in Hainan
The city of Sanya, Hainan, sits on the southern end of an island off the southern tip of mainland China. The city is known for having phenomenal weather year round, with some calling it the "Oriental Hawaii." This is where the possibility of expanded gaming in China lies.

In December, a resort called Mangrove Tree Resort World opened a casino bar called Jesters, which took bets of tickets that could be converted to iPads or other goods. Think of it like an adult version of Chuck E. Cheese. It's not exactly gambling but at the same time it is gambling, so it's something Macau should take seriously.

Real estate mogul Zhang Baoquan owns Mangrove Tree Resort World and he says the casino is a test that the government is watching and so are companies. MGM Resorts  (NYSE: MGM  ) has a resort there and Caesars Entertainment  (NASDAQ: CZR  ) is set to open one in 2014. If gaming is approved, they could be first in line for a seat at the table.

Before you go selling companies related to Macau, you should know that gaming is still a long way from a reality in Hainan at this point. After Reuters wrote about the Jesters casino, Chinese authorities shut it down, saying it was approved to be "entertainment in nature, but inside the bar there are some games and they've gone beyond the scope of the regulations." For now, Macau is safe. But what if gaming is approved on Hainan Island?  

Macau's advantages
If Hainan is competing with Macau, it's important to look at the advantages each area has. Macau, largely reliant on VIP gaming until recent growth in mass play, has a far larger population mass to draw from, with Hong Kong and Guangzhou a short distance away. Growing infrastructure in Guangzhou is responsible for a lot of the growth in mass-market play, and this trend should improve as roads and mass transit are added in the area.

On the VIP side, the dirty little secret of Macau -- money laundering -- would also not likely vacate Macau for Hainan. Hong Kong is close by Macau and this is often pointed to as a key step for wealthy Chinese to bring more than is normally allowed outside of China each year. For the most part, Macau is safe from giant disruptions, especially before major infrastructure and resorts are built, which could take a decade -- assuming gaming is allowed at all. But gaming so close to home would definitely have a negative impact on Macau.

Macau's challenge
Anything new is a challenge to Macau, especially if it comes from within China's borders. Considering the proximity to mainland China, Hainan would be a greater threat to Macau than Vietnam, Japan, or even Singapore.

There's also the weather to consider. Macau is often covered in smog and hot or rainy weather is part of the seasonality of the area. If you were to choose a vacation spot based on weather alone, Hainan would win hands down. This would bring vacationers or mass-market players looking for entertainment with a side of gambling, much like what Las Vegas has become.

Time to sell Macau
Hainan is a long way from challenging Macau in any meaningful way, but it's worth keeping an eye on. If the region were allowed to add gambling, it could suck growth out of Macau, particularly in the mass-market segment. But we're years from that happening.

I would actually be more concerned about new gaming regions like Japan, Korea, Vietnam, and the Philippines for the time being. These new gaming regions, along with Singapore, spread the gambling dollars in Asia, which makes it less profitable for everyone. Look at what happened with gambling in the U.S. as it became ubiquitous: Companies saw profits decline.

We'll keep an eye on any developments, but for now I wouldn't be selling Macau's gaming stocks because of the threat from Hainan and certainly don't see this as a reason to buy MGM or Caesars. That may change in the future, but for now Macau is still the only place to be for gambling in China.

The biggest player in Macau
For many companies, successfully capitalizing on a booming Chinese economy is like winning the jackpot. That's indeed the case for gaming company Las Vegas Sands, which made 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 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.


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