U.S. based investors have seen the massive profits earned in Macau over the last five years, and they have gained from the U.S. gaming companies operating there. Las Vegas Sands (LVS -1.52%) which takes 86% of its revenue from Asia and has seen share price growth of nearly 3500% over the last five years, is one example.
The continually expanding Macau skyline. Photo: ChinaTourAdvisors.com
However, Sands and other U.S. companies such as Wynn Resorts (WYNN -1.00%) and MGM Resorts International (MGM -1.37%) are only some of the players in the Asian gaming industry. Asian-founded companies in the area include Genting, the operator of Resort World casinos and the company that takes 67% of the gaming revenue in Singapore. Unfortunately, most Asian-founded companies are locally listed, such as Genting, and not easily accessible to U.S. based investors.
Luckily, there is one pure Asian gaming play that U.S. based investors can get in on. Melco Crown (MLCO 1.87%) is the operator of some of the hottest casinos in Macau including City of Dreams, Studio City, and other big names. Melco Crown listed on the NASDAQ exchange in 2006, where it was the fourth-largest IPO that year. Additionally, the company listed on the Hong Kong stock exchange in 2011.
Citi's top gaming stock for 2014
Within its very bullish report on the global gaming market in 2014, Hong Kong-based Citi (part of Citigroup) analysts upgraded their ratings on MGM and Wynn due to the growth that will come from mass-market gamers in Macau and other bullish growth drivers. However, there is one company the group has singled out as a top performer, Melco Crown. The analysts believe the investor community has not realized the importance of the company in Macau, nor its international opportunities in other Asian markets, such as Japan and the Philippines. Additionally, Studio City, Melco Crown's newest Macau property, is said by the Citi analysts to be the best-located casino on the Cotai strip.
High valuations shown by growing price to earnings multiples among the well-known names such as Sands and Wynn have been a theme in 2013 as gaming companies' share prices continue to rise. Currently, Melco Crown is still not cheap in comparison with these competitors. With a P/E multiple of 37, it is more expensive than Sands at a multiple of 29, and Wynn at a multiple of 31. However, the Citi analysts provide a 2015 estimate that would result in Melco Crown trading at 12 times its EV/EBITDA multiple, which would be the lowest of the group going by their similar estimates for Sands and Wynn. Citi has set a price target of $54.50 for Melco Crown.
Growing outside of Macau
Melco Crown has been one of the companies that has led the charge on growing the gaming industry in the Philippines. The company is planning to have its City of Dreams Manila open later this year. The casino resort will be one of the biggest in the country, boasting incredible live entertainment and one of the top night clubs in all of Asia.
The City of Dreams Manila resort. Photo: CityofDreams.com.ph
The legalization of gaming in Japan is likely to be the biggest topic and the biggest growth driver for casino companies in the near future. Currently casinos are banned in Japan but legislation to allow them, which analysts expect to pass easily, will be voted on in the coming few months. These analysts also expect that Japan will beat out Singapore to be the second-highest profit-generating gaming center in Asia behind Macau.
Melco Crown is a serious contender for a spot in Japan and the casino has been aggressive by meeting with Japanese officials early and often. Being more than a casino and appealing to families were the key points that were considered by the Singaporean government during casino selection. This is one reason why Genting partnered with Universal Studios of Comcast to attach a family friendly theme park to its casino resort. This is likely to be a deciding factor in Japan as well, as part of the legislation debate has centered around whether or not the industry will be able to maintain a level of integrity, instead of turning seedy as has been the case with other gambling-style industries within Japan.
The live acrobatic show, House of Dancing Water in Melco Crown's City of Dreams Macau. Photo: HouseofDancingWater.com
The City of Dreams resort in Macau brings entertainment to a new level. World-renowned live acrobatic and dance shows housed in the Macau casino, such as the beautiful House of Dancing Water, have made this property a destination for vacationers, even those who are not gambling. A similar non-gaming experience could be replicated in a Japanese casino, and this could be the deciding factor that persuades the Japanese government that the casino is family friendly. An analyst at Barrons notes that "the House of Dancing Water show is a well known and respected brand and has given MPEL some brand equity in Japan."
Foolish Takeaway
The big American companies in the global gaming industry have certainly gained from the massive growth in Asian gaming in the last five years. However, these companies are diversified in Las Vegas and around the United States as well. For investors looking for a pure play on Asian growth, but who need a stock listed in the U.S., Melco Crown is the only viable option. With bullish signs such as other Asian prospects, this company looks like a good pick for long-term growth in the region.
