If they've had enough of well-known U.S. casino companies' China adventures, U.S. investors looking Far Eastward might check out lesser-known Chinese companies.
There are six licenses for Macau, China's only site for legalized gambling. Three from the U.S. and three from China (followed by market share data from Galaxy Entertainment Group market analysis):
U.S.-Based Licensees
Las Vegas Sands
Wynn Resorts
MGM Mirage
China-Based Licensees
SJM Holdings -- 31.5%
Galaxy Entertainment Group -- 12.0%
Melco Crown Entertainment
Shares of each China-based company have risen strongly over the past six months, although Galaxy and Melco Crown are in the red for the last 12 months. SJM is up modestly since going public last July.
Similarities and differences
There are some similarities between U.S. and China companies. Both are being hurt by the government's restrictions on visits to Macau and by the worldwide recession. Both contributed to a 12.8% drop in Macau gambling revenue for the first quarter versus the year-ago period.
But whereas U.S. companies have diversified portfolios of gambling operations, SJM and Melco Crown focus solely on Macau gambling. Galaxy offers gambling and construction materials in China.
Different degrees of transparency
Melco Crown is the easiest to evaluate. It must follow standard Securities and Exchange Commission reporting rules because its American depositary shares (ADSs) are listed on Nasdaq. Each depositary share is worth three ordinary shares traded on the Hong Kong Stock Exchange.
First-quarter revenue dropped 55% versus the year-ago period. The company lost $0.08 a share versus a $0.10 gain for the year-ago quarter.
Excluding the new City of Dreams, the company runs a large casino/hotel as well as small gambling clubs that are common in Macau. Melco Crown is controlled by two shareholders -- a Chinese company and an Australian company.
Although Melco Crown is the new kid on the Macau block, it has the best immediate growth potential thanks to the opening of City of Dreams, which CEO Lawrence Ho calls a "turning point" for his company.
Ho was more blunt in a recent interview with Bloomberg, saying that if this casino opens poorly, his company will be finished.
A more balanced portfolio
If you want to invest in Galaxy, you can contact a securities dealer registered with the Hong Kong Stock Exchange. Or you can buy over-the-counter shares in the U.S. for a Level 1 American depositary receipt (ADR).
Reporting requirements to the SEC and accounting requirements for a company issuing this type of share are less strict than a Nasdaq-listed company. Each Galaxy depositary share is worth 10 ordinary shares on the Hong Kong exchange. The over-the-counter symbol is GXYEY.
Galaxy manages four smaller casinos, and it owns and operates a large casino/hotel.
Revenue for 2008 was down 19.5% versus 2007, while unaudited first-quarter 2009 revenue slipped 4% from the year-ago quarter.
Like many of its peers, Galaxy has had to revise grand ambitions due to the weak economy as it builds a "mega resort" of hotels and casinos. Originally scheduled to open in mid-2009, the project's first phase has been pushed back to an unspecified time in 2010/2011 due to "prevailing market conditions." Galaxy needs this project to help it gain market share.
The biggest player
SJM Holdings, available to investors only via the Hong Kong Stock Exchange, remains the largest -- albeit shrinking in market share terms -- presence in Macau. SJM had a monopoly until China allowed competition in 2002.
SJM owns more properties than all competitors combined. Most properties are smaller venues that cater to Macau's heritage of mass market, day-trippers who aren't interested in Las Vegas-style gambling.
However, SJM hasn't escaped the weak world economy. Revenue in 2008 dropped 13% from 2007 while basic earnings per share fell 55%. But SJM is still building two casinos that are due to open this year.
Deja vu all over again
Where have we seen this scenario? Extravagant development plans. Massive construction. Feverish competition. Fears of overbuilding. Individual operators' revenue stalling or shrinking. It sounds like Las Vegas.
I'm guessing that China will be tougher on casino expansion than Las Vegas, Clark County, or Nevada. If China can manage growth by allowing Macau's infrastructure and services to accommodate the anticipated flood of gamblers, there should be plenty of opportunity for companies and investors.
But if you're an investor unnerved by the building behavior in Las Vegas, or if you just haven't warmed up to investing in a Communist country, Macau isn't for you.
If you're not willing to go "all in" by investing in a U.S.-based or China-based casino operator doing business in Macau, gambling technology companies are a better bet (forgive the pun). International Game Technology
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