Asia's Sinful Profit Opportunity

What happens in Vegas, stays in Vegas.

That's a motto that you hope holds true if you've ever visited Sin City. But it's not all that accurate anymore.  

It's not that word of your mischievous capers is leaking out. Instead, the idea of building glamorous hotels around a gambling theme is no longer confined to Las Vegas. Halfway around the world, what happens in Vegas is now happening in Macau, too.

Playing its cards right
Like just about everything else that revolves around China's growth story, Macau is building its gambling empire bigger and faster than what seems imaginable. Exploding wealth in China has ignited a spike in tourism as more and more Chinese can afford to travel. Today, Macau towers over Las Vegas -- in revenue terms, it overtook Vegas in 2006 -- and has developed into Asia's most wealthy territory.

Now a richer country with a more "developed world" mind-set, China is hot on gambling. Look no further for indication than Asian online gaming company GigaMedia (NASDAQ:GIGM), which recently reported that its Everest Poker site grew 56% year over year. 

But the plush hotels of Macau have swayed the Chinese from their computer screens; many are now flocking there armed with new wealth and gambling skills. In 2007, Macau attracted 22.7% more visitors, most from mainland China. Not surprisingly, Macau has had to develop at a rapid clip to keep up with demand. 

Last year, the strip added a handful of new resorts, helping to boost the number of gaming tables by 58% and more than doubling the number of slot machines. These eye-popping statistics haven't gone unnoticed, as megaresort chains such as MGM Mirage (NYSE:MGM) and Las Vegas Sands (NYSE:LVS) have been plowing billions of dollars into Macau development.

With gambling revenue in Nevada slowing to a near halt last year, these resorts are battling for the precious space on the Macau strip to tap the riches of the estimated 120,000 Chinese that visit Macau each weekend. This past quarter, Wynn Resorts' (NASDAQ:WYNN) earnings before interest and depreciation dropped 28% for its Las Vegas operations. Its Macau property, however, grew that same figure by 30%. 

Back to the future
The past several years of growth are mind-blowing, but investors can't capitalize on what's happened in the past. However, according to some experts, it looks as though we've only gotten a taste of what's yet to come from Macau.

A recent Deloitte study suggested that with more than 90 million Chinese living within a four-hour drive of Macau, the number of people able to afford a trip to the casinos could grow by an astonishing 55% in just the next two years. That means a great deal of new rooms, gaming tables, and slot machines will be needed to keep up with the surging demand.

Of course, this kind of expansion doesn't come without its share of problems. Since the deregulation of the gaming industry in 2001, the government has watched Macau's rampant growth story attract massive amounts of resources that would typically be devoted to other parts of the economy. Three-quarters of the Macau government's revenues stem from gaming, and that astounding growth has captured the attention of regulators. 

In April, the government put a hold on granting new licenses and will stop approving land for new casinos, moves designed to help tame the raging growth that's affecting the economy outside the gaming sector.

Those measures not only reinforce the reality that Macau is one heck of a growth story, but they will also allow current operators with newly opened resorts -- such as Melco PBL Entertainment's (NASDAQ:MPEL) Crown Macau -- to improve margins, strengthen their place in the market, and complete in-progress projects that already have licenses without worrying about increasing competition. Further, it should encourage established resorts to divert more attention to increasing retail and convention operations, which currently make up only 20% of revenues, compared to 60% in Las Vegas.

Growth to bet on
By the end of 2006, China had 345,000 millionaires (in dollar terms), and the figure continues to grow. Still, that's minuscule compared to the overall Chinese population of 1.3 billion, and it suggests that there's a significant amount of future wealth to come as the country continues to emerge into a developed nation. With 55% of Macau's visitors coming from the mainland, it's no surprise that Morgan Stanley projects gaming revenue to grow by more than 20% annually in the next two years.

With Macau growing at breakneck speeds, a lot has changed since the Global Gains team toured the country last year. And they've headed back to get a firsthand look at all that has developed since and discover ways to exploit this growth story. 

Just enter your email address below to get the team's updates from Macau (as well as China, Vietnam, Indonesia, and Singapore), or sign up for a free trial to gain access to the team's best findings.