How to Place Your Chips for a Bet on Macau

Macau is the hottest gaming market in the world right now. The region's gambling revenue surged 40% in February and 13% in March versus the same month last year. The hysteria is good news for Melco Crown Entertainment (NASDAQ: MPEL  ) , Wynn Resorts (NASDAQ: WYNN  ) , Las Vegas Sands (NYSE: LVS  ) , and MGM Resorts International (NYSE: MGM  ) , each of which derives a substantial portion of revenue from Macau. Finding out which casino to invest in is a tricky task. Read on to discover the best way to profit from Macau's success.

Casinos' gamble on Macau pays off
Melco Crown, Wynn, Las Vegas Sands, and MGM Resorts are each privileged to have one of just six licenses to operate in Macau. The other two licenses belong to Chinese-backed enterprises. Each of the four companies has varying exposure to Macau, but all are set to benefit tremendously from its growth.

Source: SEC Filings.

Melco Crown has the highest exposure to Macau, as all of its revenue is derived from its two casinos in Macau, City of Dreams and Altira Macau, and its non-casino operation, Mocha Clubs. The company has an enviable position with a casino on the Cotai Strip. It plans to open a second Cotai Strip casino, dubbed Studio City, in mid-2015. Given its privileged position in the market, Melco Crown's long-term outlook is as good as that of Macau.

Wynn and Las Vegas Sands maintain roughly equal exposure to Macau. Wynn derives 72% of its revenue from the region, while Las Vegas Sands derives about 65% of its revenue from Macau. Wynn's U.S. operations face significant competition that will only grow as more states legalize online gambling.

Las Vegas Sands operates four casinos in Macau. Part of an early bet on the region, the investment paid off tremendously; Las Vegas Sands owns multiple casinos on the Cotai Strip, anchored by the Venetian Macao. While Wynn caters to the VIP crowd, Las Vegas Sands appeals to the mass market. Its focus on this segment puts it in a position to reap market share gains in the years ahead.

Finally, MGM Resorts is in the late stages of a miraculous turnaround. Still saddled with debt from its brush with bankruptcy, the company has 7.5 times more debt than it generated in EBITDA in 2013. MGM Resorts' relatively small Macau exposure, with just over one-third of its revenue derived from the region, has caused it to lag its peers over the last few years. However, management is focused on increasing its Macau exposure and deleveraging its balance sheet -- the two things it needs to do to catch up.

Which casino is the best bet?
Casino stock prices got out of hand earlier this year as insane Macau growth led to speculative valuations. Although far from being in the bargain bin, casino stocks have pulled back to a range that could be attractive for Macau bulls.

Here's a quick look at current market valuations for Melco Crown, Wynn, Las Vegas Sands, and MGM Resorts:

 Company

EV/EBITDA 

P/FCF 

Melco Crown

20

17

Wynn

15

18

Las Vegas Sands

15

18

MGM Resorts

15

16

If you just look at valuations, all four casinos seem priced about the same. Although MGM Resorts trades at a slightly lower multiple of free cash flow than the others, its high debt load penalizes its market price. The enterprise value-to-earnings before interest, taxes, depreciation, and amortization ratio, or EV/EBITDA ratio, shows that MGM Resorts is priced in line with Wynn and Las Vegas Sands after debt is taken into account.

Even with all four companies trading at similar valuations, however, Las Vegas Sands stands out as the best pick. Las Vegas Sands not only derives most of its revenue from Macau's Cotai Strip, it caters to the highly profitable and fast-growing mass market. On the other hand, Wynn is positioned better for the VIP crowd, which is not growing as quickly. MGM Resorts has a much smaller exposure to Macau and is going through a deleveraging that could hinder shareholder returns. Finally, Melco Crown could be a good bet on Macau with its high exposure to the region, but it has fewer properties and less capital than Las Vegas Sands. As a result, investors looking to go all in on Macau should consider placing their chips with Las Vegas Sands.

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Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On April 22, 2014, at 6:49 PM, spokanimal wrote:

    A couple of things:

    First, Melco's "Studio City" development does not have a gaming license. Although Larry Ho (the CEO) expresses confidence that he will get one, you never know with the Macau govt.

    One need only to recall that Sands was promised the right to build on Cotai sites 7 and 8. In fact, Sands sunk over $100 million into site preparation there. Then, the govt. rescinded and took the sites away from Sands, even though the prior CEO of Macau SAR had promised the sites to them.

    Secondly, because Las Vegas Sands has, by far, the most cash, that company is best positioned to get the best site in Japan once they look at proposals there and award gaming licenses. Sands has stated they would spend upwards of $10 billion on a resort there.

    Finally, remember that MGM and Wynn are proposing smaller, "off strip" resorts on Cotai, whereas Sand's under-construction "Parisian" resort is on Center Strip, will have over 3,000 hotel rooms, and will open 6 to 12 months ahead of the other 2.

    Spokanimal

  • Report this Comment On April 22, 2014, at 7:03 PM, eh wrote:

    Anyone knows the status for the new Macau cotai casinos for :

    MGM

    LVS

    WYNN

    MPEL

    what phase of construction each is in. I've read there's going to be a glut of casinos in Macau but I don't think it'll affect the bottom line. Because one thing I've learned in life is people love the vices.

    buy now while it's low and invest it in for the long run in a Roth IRA account. listen but don't get scared of any newsletters or downturns.

    The stock market is still a gamble like these stocks above but its an educated and experient choice.

  • Report this Comment On April 22, 2014, at 9:25 PM, berg80 wrote:

    I've seen these current EV/EBITDA valuation comparisons before. Unfortunately they ignore what matters most, the future. Projected EBITDA growth rates for MPEL in 2015 and 2016 are +27%/+43% which are the highest of US-listed peers. However, MPEL’s 2015-16 EV/EBITDA, after adjusting for project ownership including the new COD Manila casino opening later this year, MSC Macau opening in mid 2015, but not including the Tower 5 addition to COD Macau slated for a 2016 opening is 11.1x and 7.9x, is BY FAR the lowest of its peers. MPEL also offers the most catalysts over the next 15 months relative to peers. MPEL pays a dividend that will increase with adjusted net income and will likely approve a buyback program by the time it reports Q1 results.

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