Casino Giants Now Hold All the Cards in Asian Expansion

When you take a step back and look at the gaming industry, you can see that there's been an incredible shift in power over the past two decades. When Steve Wynn built The Mirage in Las Vegas he was taking a massive risk and had to rely on junk bonds from Wall Street to finance his project.

But today, gaming companies not only have better balance sheets, they have the scale and cash flow to pick and choose expansion opportunities, both versus smaller competitors as well as in relation to markets where they operate. That shift in bargaining power should lead to strong returns for at least the next decade, even as gaming expands across Asia.

As countries like Japan look to open up gambling, they're looking for massive resorts like the $5.7 billion Marina Bay Sands that Las Vegas Sands built in Singapore. Image courtesy of Las Vegas Sands.

To the winner goes the spoils
Las Vegas Sands (LVS -8.66%), Wynn Resorts (WYNN -1.42%), and MGM Resorts (MGM 0.02%) were already industry powers when they entered Macau, but the region grew so fast and to such scale that they've become behemoths of the industry.

Below, I've provided a list of total assets and operating cash flows for six of the largest gaming companies in the U.S.

Source: SEC Filings

Note that Las Vegas Sands, Wynn, and MGM have considerably more in assets, but more importantly are generating much higher annual cash flow. The other company that can compete with the big names is Melco Crown (MLCO -2.66%), which is based in Asia and had $8.8 billion in assets and generated $1.3 billion in EBITDA last year.

Melco Crown's City of Dreams is just one of many mega resorts in Macau that spit off billions in cash to operators. Image courtesy of Melco Crown.

The reason this size and cash flow is important is because when new gaming markets open up they're not looking for small, regional casinos; they're looking for multibillion dollar tourist grabbing mega resorts. There are only a handful of companies in the world that can build those resorts, so it's essentially an oligopoly for the big players in gaming.

Japan is the market that will be hotly contested when regulations are written, but don't think that the competition will kill profits. Singapore was also hotly contested and cost $5.7 billion to build. But since the project opened in 2010, it's generated $4.9 billion in EBITDA, nearly paying for itself in just over three years.

The economics are just as good, if not better in Macau, and as cash builds these companies have the ability to build bigger and more elaborate projects.

Penn National's resort in St. Louis simply isn't the size and scope that new and profitable markets are looking for. Image courtesy of Penn National.

The companies that can win in the billion dollar gaming business
Small companies like Penn National, Pinnacle Entertainment, Boyd Gaming, and even Caesars Entertainment (which is primarily a regional gaming company) are going to have a hard time expanding beyond smaller, more regional resorts because of their smaller balance sheets and lower cash flow. They just can't build a $5 billion resort at the drop of a hat and today that's where the big profits are.

Las Vegas Sands, Wynn Resorts, Melco Crown, and even MGM Resorts have the size and know-how to pull off those projects. When you add in Galaxy, which operates in Macau, and Genting Group, which owns the other license in Singapore and is building in Las Vegas, I see six major competitors for the expansion of gaming around the globe and particularly in Japan. As Asia grows and gaming expands it's these companies that will slowly grow their footprints.

In my opinion, there's really no reason to look past these companies when looking at gaming stocks because the casino business has become about scale and they are the short list of companies that can still compete.