While Las Vegas once dominated international gaming, a host of other countries have risen to take its place, such as Macau, Singapore, and others. International expansion has helped U.S. companies like Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) post huge gains in recent years, while Hong Kong's Melco Crown (NASDAQ:MLCO) has been incredibly successful without any U.S. locations. Smart international expansion should be the deciding factor on which gaming company will be the most successful in years to come, but a bet on Russia is not your best bet. Instead, bet on this potential new market in Asia, which could be the second largest in the world.
Putin's potential plan for Crimea
International expansion has been a good bet for casino companies and host countries. However, this development still comes as a shock. Vladimir Putin is the same Russian president who has made more than a few waves over the last few years with strict policies on human-rights issues, threatening political actions in regard to neighboring regions, and a somewhat botched Olympic games in Sochi. He has now reversed his previous crusade against gambling by supporting gaming in Crimea.
Putin had previously lambasted the gaming industry on ethics and the problems it can bring to citizens and countries. However, after his crusade to establish control in Crimea, the Russian leader has been forced to find ways to make the controlled area economically significant, with a $1.5 billion budget deficit expected in 2014. Putin has now claimed that gaming might be that saving grace for Crimea.
Russian gaming could be a "growth market"? You must be kidding
For a "gaming growth market" to take hold, it needs a catalyst for tourist visits and a sizable market in close proximity, such as Macau with neighboring Mainland China.
As Andrew Gellatly, head of global research at the research group Gambling Compliance, has said, "You have nothing like that in Crimea." He also said that the peninsula has "no road connection at all" to the Russian mainland and it is too far for convenient travel from any major city. Putin has discussed plans for a bridge to connect the peninsula to the mainland, but that would be years away.
Gellatly dealt the final blow with the reminder that even those Russian elite gamers who would potentially make up the target audience for this will not want to play in Crimea. "Russian high rollers are more likely to gamble in London or Monaco than in one of the former Soviet republics."
Melco Crown is taking a position in Russia, a better one
Melco Crown, the Hong Kong-based company that is expanding in Macao and the Philippines, is seeking further international expansion. The company has invested in a consortium which is building a new casino in Vladivostok, Russia, and recent reports have claimed that Melco Crown recently raised its stake to 85%.
Vladivostok is on the Eastern coast of the country, far from Crimea and very close to China. This area has all of the gaming growth catalysts that Crimea lacks, such as accessibility, more stability, and proximity to China and other Asian countries. Still, with all of the opportunities present in this world, is Russia really where gaming companies and their investors should focus?
Where you should be betting: Hint, not Russia
While Macau and Singapore have been Asian growth drivers in the last few years and will continue to be in the coming years, Japan is the next industry-changing gaming hub that will drive profits. That is, if the government legalizes gaming there.
With its high average income and residents who already love gambling, analysts expect that Japan could have a $40 billion gaming industry by 2020. Now, everyone waits as a bill to legalize gaming sits to be heard by Japanese legislators. The allowance of casino building by companies like Las Vegas Sands and Wynn Resorts will be the next event that causes huge moves in the industry.
Wynn Resorts already gets 75% of its global revenue from Macau, but is now hoping to expand further with a bet on Japan. Speaking on his company's prospects for winning a bid in Japan, Wynn President Matt Maddox recently said:
Japan is known for hospitality, high quality and precision. The culture of almost perfection here fits very well with Wynn and its details-oriented focus. That would allow Wynn to be a strong contender in the Japanese market.
An even stronger bet than Wynn, however, is Las Vegas Sands. Its CEO Sheldon Adelson said, "We will spend whatever it takes...would I put in $10 billion? Yes." Sands has bet even more on Asia than Wynn has, with 88% of global revenue coming from Macau and Singapore. With its own expectations of winning a bid in South Korea soon, Sands is aggressively expanding in Asia, and Japan will be a great addition to this already industry-dominating company.
Foolish conclusion: Place your bets where you know money will be made
Betting on the Russian gaming market might be an alright idea, at least on the Eastern coast as Melco Crown is doing. However, with all of these other great options around Asia, why would you? For investors who seek the next big growth story, keep watching for the legalization coming in Japan. While Wynn and Melco Crown are both hoping to get spots in Japan, Las Vegas Sands is still probably the best bet for a winning bid when the legalization comes, as shown by its success in Singapore and its more aggressive Asian expansion history.
Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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