The Basics that Investors Should Know About Macau

Macau is under the control of the Chinese government, but like Hong Kong, is not quite the same as a region within Mainland China. For the companies that operate in Macau, especially international companies like Las Vegas Sands (NYSE: LVS  ) , MGM Resorts (NYSE: MGM  ) , and Wynn Resorts (NASDAQ: WYNN  ) , this is an important distinction, and is one that has helped to continue to drive profits for these companies. For Foolish investors who like to understand more about the environment these companies operate in, here is what you need to know.

"One Country, Two Systems"
Macau, as it is known today as part of China, is only 15 years old. Until 1999, the island was a territory of Portugal. Only a few short years ago, the island had been a port and military base for the Portuguese since the early 1500's. It was full of duck farms and boat yards, and was a haven for thrill-seeking pirates as late as the early 1900's. Sheldon Adelson, CEO of Las Vegas Sands, recounted his first days there saying "It was a swamp."


At one time a pirate-infested swamp, now Macau glistens and shimmers in its new wealth. Photo: ChinaTourAdvisors

However, that's not all that was on the island. It also contained a gambling and gaming industry that was already known around Southeast Asia. An article from the Baltimore Sun in 1997 described Macau gaming industry as "the casinos and showgirl revues that bring in the largest portion of the city's income."

When China retook control of Macau in December 1999, the government decided to take the same approach as it did with Hong Kong. It would leave the local rules and customs mostly alone, while providing the capital and opportunity for continued development. Macau is what's called a "Special Administrative Region," meaning that it's an antonymous region and is the only place in China where gambling is legal. While the island is still owned and controlled by the Chinese government, it falls into a legal system very different from that of mainland China.

Understanding how companies operate in this region, and how investors profit from them
While the big U.S. gaming companies like MGM Resorts and Wynn Resorts were focused on Las Vegas with new resorts and operations in the U.S. being developed in the early 2000's, over the last few years that focus has shifted 16 time zones East to the small island reclaimed by China. When China reclaimed control of Macau in 1999, it also abolished a long-standing gambling monopoly; this allowed U.S. companies to come and build.

As the only place in China that gambling is legal, Macau has exploded in terms of year-over-year revenue growth over the last decade. There are many reasons to believe that this trend will continue, including increased visitation from China's growing middle class and better transportation to and from the island. In 2013, year-over-year gaming revenue in Macau was nearly 19% and total revenue was 7 times as much as that of Las Vegas. 

This growth has been great for the U.S. companies invested here. Las Vegas Sands, for instance, has seen its share price rise as Asia continues to drive record profits for the company. To prove that Las Vegas Sands' investment in Asia has paid off, consider that 86% of the company's 2013 revenue came from Asia while only 14% came from it's Las Vegas properties.


Of LVS revenues, only 14% came from Las Vegas in 2013, the rest coming mostly Macau, with some from Singapore: Source: LVS 2013 reported earnings


These Asian profits helped the LVS share price to surge to over $80 at it's high earlier this year. Source: Yahoo!


Hengqin sits directly to the West of Macau, just a short bridge away. Photo: WikiTravel

Hengqin, Macau's special economic zone neighbor and the "Orlando of China"
Just to the west of Macau, separated by the Lotus Bridge, is Hengqin Island. In August 2009, the Chinese government deemed Hengqin part of a "Special Economic Zone." This is different from the "Special Administrative Region" of Macau. For Hengqin, this still means that residents and visitors must following the same laws as mainland, including no gambling. However, it does provide economic incentives and tax advantages for companies that are building here to boost the local tourism and entertainment industry. The theme parks and hotels in Hengqin will ultimately serve the Macau gaming market as the "Orlando of China."  

From Hengqin, travelers can drive over a bridge that links to Macau. Future plans include a bridge linking Hong Kong, Hengqin, and Macau, making transportation between the three areas very easy. Upon completion of the Hong Kong-Hengqin-Macau Bridge in 2016, Hengqin will become the only place in the Chinese mainland directly connected to both Hong Kong and Macau.

Takeaway for savvy investors
It's important that investors understand the companies they are investing in and the environments that those companies operate in. This is especially true in a place like Macau, where the recent history and often confusing political structure can make it tricky to understand and value companies in the region (at least for investors that are not willing to do the necessary due diligence.)

For investors who worry that growth in Macau may be over, consider that the island has only been part of China for 15 years; this makes it still very young. Additionally, the Chinese government is clearly interested in continuing to ramp up the local tourism industry with its special privileges given to Hengqin island. For these and many more reasons, I am bullish on the continued growth of Macau and the U.S. companies like Las Vegas Sands, MGM Resorts, and Wynn Resorts that operate there.

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