Forget a Vegas Recovery, It's All About Macau

On Jan. 6, MGM Resorts International (MGM -0.33%) was upgraded to "buy" from "neutral" at Citigroup and given a $29 price target. The main thesis of the analyst report was that MGM Resorts can provide investors with exposure to the ongoing Las Vegas recovery.

US economy expansion
Economists continue to project an improving economy, which bodes well for domestic casino operators such as MGM. Economists at Fitch are projecting GDP growth of 2.4% in 2014 and 3.1% in 2015. This is important because there is a strong correlation between US GDP growth and the share price performance of MGM Resorts. When US real GDP growth bottomed out, MGM Resorts' share price significantly outperformed the S&P 500 index in the following year.

MGM Resorts' Las Vegas hotel revenue has been improving consistently over the last three years due to a stronger visitation rate and a solid recovery in the convention business.

According to the Las Vegas Convention and Visitors Authority, Vegas is back, baby! The LVCVA has no official 2014 forecast, but the organization is optimistic that 2014 will follow the strength of 2012 and 2013.

In 2012 Las Vegas received 39.7 million visitors who came to enjoy the nightlife, attend a work convention, or just soak up the sun and place a bet or two at the tables or slot machines. 2013 is expected to top these numbers, with 2014 expected to continue the trend, according to Kevin Bagger, senior director of strategic research and analytics at LVCVA.

Macau is a gambling destination, not a tourist destination
David G. Shwartz, director of the Center for Gaming Research at the University of Nevada, said, "[T]he [Vegas] Strip is absolutely packed, downtown is packed. People are here. But they aren't spending as much as they used to." 

According to The New York Times, only 36% of the money collected on the Vegas strip is gambling-related. For anyone who has been living under a rock the past few years, Macau has clearly overtaken Las Vegas as the world's largest gambling hub.

Gaming revenue from the six casino operators in the Macau region rose 18.6% to $45.2 billion in 2013. By comparison, the Vegas Strip generated $5.8 billion from January to November (December data has yet to be officially released)

The Wall Street Journal described the Macau region as "a haven of hardcore gamblers who prefer tea to cocktails, a bowl of noodles to a five-course meal and a quick change of underwear to a night in a luxurious hotel room. Most Macau gamblers would rather play baccarat for 24 hours straight than sip a martini in a dinner jacket." Even Cirque du Soleil closed its operations in Macau in 2012 after more than three years of lackluster ticket sales.

Macau is a pure gambling destination that still has room to grow. Analysts at Deutsche Bank forecast that gambling revenue will grow by 20% in 2014. Longer term, total gaming revenue will increase to $77 billion by 2017 and $80 billion to $100 billion by 2020.

Investors have several options to gain exposure to the ongoing Macau growth story.

Las Vegas Sands (LVS -0.37%) is one of the better-known casino operators in the region. Run by legendary billionaire Sheldon Adelson, Las Vegas Sands currently operates four properties in the region. Its next project, Sands Cotai, set to open in 2015. MGM Resorts, on the other hand, has one property with a second, MGM Cotai, slated to open in 2016 or 2017.

Analysts at Citi might have surprised some when it named Melco Crown Entertainment (MLCO 1.13%) as its top global pick. According to the analysts, the company's property Studio City, which is set to open in 2015, is the best located casino in Cotai, adjacent to the Lotus Bridge border. The casino will be the first and most prominent casino that visitors see when they first arrive.

The analysts also favor Melco Crown as a top pick because of its valuation, as shares are trading at ~12 times their 2015 estimated EV/EBITDA. "In our view, Melco Crown's share price is still not fully reflecting potential value enhancement from its Studio City," the analysts wrote.

Melco Crown is the only casino operator that is strictly exposed to Asian properties. Besides Studio City, Melco Crown's Manila project is set to open in mid-2014.

Final thoughts
Foolish investors who want exposure to a strictly Asian gaming operator should invest in Melco Crown. Las Vegas Sands offers a great combination of Asian exposure, particularly in Macau with its soon-to-be five properties, but still maintains some roots in Las Vegas. MGM Resorts is unlikely to be a major player in Macau until its second property opens and has less exposure to the Macau gaming market than its peers. Not that an investment in MGM would be considered bad, but investors need to understand that other names provide better exposure to the international markets.