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How Overseas Gambling Will Continue to Grow Beyond 2014

Wynn (NASDAQ: WYNN  ) appears to be one of the best investments in the casino space. That's not because of its great Las Vegas presence, but rather it's because of Wynn's position overseas. Macau, the gaming capital of the world, has been a growth machine for Wynn and the other major casino operators who had the foresight to invest there. Now, the real story for Wynn is the Cotai Strip. This area of Macau is expected to see growth like what the Macau region has become known for over the last half decade.

Over 70% of Wynn's revenue comes from Macau. This comes as the company owns over 70% of Wynn Macau, Limited. Wynn Macau operates two luxury casino hotels in Macau. Wynn is currently building a casino on the Cotai Strip that is expected to cost $4 billion. The casino is expected to come online in 2016. 

Macau's still firing on all cylinders
Macau remains the only place in China where gambling is legalized. As a result, millions of Chinese residents and tourists enter the region every year. Casinos in the area have already been seeing positive results in 2014. Analysts note that revenue in just the first week of the year was up over 5.5% year-over-year. 

Another thing with big potential to help drive more traffic to Macau is the almost $10 billion bridge that's being built to connect Macau and Hong Kong. This will open just in time for Wynn's Cotai Strip casino opening in 2016. The bridge will cut the commute between the two from four hours to forty-five minutes. 

Why Wynn is the best bet
Wynn has proved resilient as it has grown revenue every year for the last eight years. The other big positive for Wynn is a rebound in the U.S. economy, which should bring more traffic to Las Vegas. Wynn has a solid position in Vegas, with two major hotels/casinos.

Las Vegas Sands (NYSE: LVS  ) is one of Wynn's biggest competitors, with a couple of Vegas casinos and a number of Macau locations. Also, Las Vegas Sands has locations in Singapore and Pennsylvania. Speaking of markets outside of Vegas and Macau, Wynn is looking to break into higher-end U.S. markets where room rates are higher. A couple of potential targets could be Boston or Florida.

Melco Crown Entertainment (NASDAQ: MPEL  )  has been one of Macau's biggest success stories, and shares have risen over 135% in the last twelve months as a result. Melco has been one of the most successful casino operators because it's the most levered to Macau. Melco also has a less-levered balance sheet than Wynn and Las Vegas Sands. Analysts still expect Melco to be one of the best casino stocks in terms of earnings growth, with EPS projected to grow at an annualized 41% rate over the next five years.

Wynn pays a near-2% dividend yield. Meanwhile, Melco doesn't pay a dividend and Las Vegas Sands yields 1.7%. However, one of the most beautiful things about Wynn is its special dividends. At the end of 2011 Wynn paid out $5 per share in special dividends and in 2012 it paid out $7.50.

Bottom line
Wynn appears to be a very solid pick in the casino industry. It's a great play on Vegas and the "new" Vegas, Macau. It also happens to be cheaper than Las Vegas Sands and Melco on an enterprise value-to-earnings before interest, taxes and depreciation basis and an enterprise-to-sales basis, and it pays the highest dividend yield. No analysts have a sell rating on the stock, and 16 of the 25 analysts following the stock have a buy rating. Buy Wynn for more upside in the near term.

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  • Report this Comment On January 16, 2014, at 11:48 AM, spokanimal wrote:

    Interesting that you would favor Wynn over Las Vegas Sands...

    ... and unbelievably, begin your rationale with excitement over the "Cotai Strip".

    Las Vegas Sands ALREADY dominates the "Cotai Strip" with 9,000 hotel rooms in 5 resorts, with 4 casinos, on 3 separate sites. In Macau, Sands controls more hotel rooms than all of the other 5 gaming concessionaires COMBINED.

    Further, Sands is building yet another, 3,000 room resort on the Central Cotai Strip named "Parisian", complete with half-scale Eiffel Tower and oppulant Casino.

    Wynn, on the other hand, is building it's resort on an "off-strip" site on Cotai, with an initial hotel inventory of 2,000 rooms, or 2/3 the number of rooms of Parisian alone. The resort will be completed the better part of a year AFTER Parisian is complete, and almost a full DECADE after Sands first opened Venetian at the center of the cotai strip.

    Every resort that exists on cotai today is adjacent to the Venetian... and by late this decade, every resort on Cotai will be adjacent to at least 1, sands resort. Wynn's arena, at 10,000 seats, will be just 2/3 the size of Venetian's 15,000 seat arena, and Venetian will still operate, by far, the most extensive Convention and Exposition facilities in Macau.

    Your commentary on Wynn's ability to grow in Vegas is about on Par with Las Vegas Sand's presence there, with one major exception...

    ... Sands has the 2nd largest convention and exposition facility in all of Vegas, while Wynn's capacity with MICE facilities is far more limited.

    The recent CES show is evidence of how important that will be as the economy improves, and gaming continues to be less of a source of total revenue in Vegas.

    Meanwhile, if there is any model on earth that the Japanese are planning to emulate when they legalize gambling there, they are pretty emphatic that it will be Las Vegas Sand's current model at their massive Singapore resort, which is widely regarded as the most profitable gaming resort on earth.

    Finally, while Wynn is now talking about phase 2 of the off-strip, Wynn cotai resort (diamond), little is being said of Sand's construction of the Cotai mall at the former site of the tropical gardens, or the St. Regis resort tower at "Cotai Central"...

    ... which, as it's name implies, is at the center of the "Cotai Strip".

    Nice job with your article, Marshall, but obviously, you've picked the WRONG GAMING COMPANY.


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Marshall Hargrave

Serial entrepreneur, startup junkie, registered investment adviser

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