Macau Leads the Way for Further Growth at These Casinos

It's not a new story, but Macau is still delivering double-digit sales growth. Can late-to-the-game investors get in on the action?

Michael Lewis
Michael Lewis
Apr 14, 2014 at 1:05PM
Consumer Goods

In the world of big gaming, the last few years of analyst and investor interest has centered heavily on the Asian gaming mecca of Macau -- now a location generating six to seven times the revenue that Las Vegas does. Industry giants such as Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) have already posted tremendous gains derived largely from the region, yet this growth story is far from over. Investors late to the game still have opportunities to win from Asia's exploding middle class and the rise of gambling in the East.

Good numbers
Macau continues to deliver double-digit sales growth for its participants. In some of the most recent data to come out of the region, March gambling revenue was up more than 13% year over year to $4.4 billion. To date, gambling in Macau has hauled in upward of $13 billion -- a 20% increase over 2013's early numbers. As has been the case for several periods in a row, analysts were pleasantly surprised with the higher-than-anticipated figures. The comparable year wasn't a low hurdle, either, as 2013 in total was a record year for Macau gaming revenue.

Wynn and Las Vegas Sands have different strategies for dominating the area, and both seem to be working just fine. Wynn's focus is on the premium experience and its VIP revenue has been tremendous. The existing Wynn property, built nearly 10 years ago, is the only one on the island with five-star ratings from top to bottom. The Wynn Palace, a $4 billion-plus resort set to open in early 2016, is set to be the next property to receive such acclaim.

Las Vegas Sands is the winner in pure volume. The company has three resorts on Macau, and while they aren't necessarily of the pristine quality that Wynn customers enjoy, they are catering perfectly to the immense demographic change occurring in China and surrounding regions. As the Chinese economy rapidly developed, the middle class was put on steroids. These days, there are more Chinese than ever with disposable income and the ability to travel. Las Vegas is a much, much further destination than the equally if not more impressive Macau.

Room to run?
Stifel Research recently pegged gross gaming revenue at a 15%-20% growth path for the next three to five years. Wynn and Las Vegas Sands are increasing their capacity in the area, and will undoubtedly see their share of the market's growth. The question for investors is whether valuation already has the growth baked in.

Wynn trades at nearly 24 times forward earnings and has an EV/EBITDA of 15 times. Las Vegas Sands has a much lower forward P/E: 17.4 times, and EV/EBITDA of 15 times. The earnings from continuing operations are valued the same, and neither are selling their growth for cheap. At the same time, neither appears particularly overvalued. In short, the stocks should still appeal to growth-hungry investors who aren't looking for bargains but instead major year-over-year gains. The market is certainly aware of both Wynn's and Las Vegas Sands' opportunities ahead, but these look to be efficiently priced stocks that can still deliver gains in the long run.