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 (MLCO 1.13%), Wynn Resorts (WYNN -1.78%), Las Vegas Sands (LVS -0.37%), and MGM Resorts International (MGM -0.33%), 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:

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.