China ties make Macau good bet to beat Vegas

The world economy may be slumping, but don’t tell that to Macau—the former Portugese colony which is set to trump Las Vegas heading out of the worst global downturn since the Great Depression.

In the smoke-filled gambling halls of Macau’s MGM Mirage casino, hundreds of Chinese gamblers were crammed around tables flipping cards, playing roulette and rolling dice on a recent day, seemingly unaffected by the slowdown.

The ace up the sleeve of Macau, the world’s biggest gambling market, is this steady influx of risk-loving Chinese flocking to the only place in China where casinos are legal. Las Vegas, on the other hand, is saddled with a stagnant US economy and glut of new casinos preparing to enter the market.

“We’ve seen better-than-expected performance in the overall gaming market of Macau,” said Credit Suisse analyst Gabriel Chan. “Vegas is still suffering and will take a longer time to recover, but in Macau, we are beginning to see the light at the end of the tunnel.”

Macau, a special administrative region that is now under Chinese rule, will be more resilient than Las Vegas thanks to its proximity to China, which is propping up its economy with a massive four trillion yuan ($586-billion) stimulus package to offset a big drop in exports, analysts said.

Investors are also betting that a new Macau chief executive who takes office on July 26 will convince Beijing to relax visa restrictions on mainland tourists.
Curbs were imposed last October amid concerns about corruption and problem-gambling.

Executives from Macau’s top gaming companies have been cautiously optimistic to outright bullish on their prospects in recent interviews with Reuters, citing recent gains in Chinese tourist numbers.

Mainland Chinese accounted for 51% of Macau’s visitors in 2008, according to Macau’s Statistics and Census Service.

On a roll
The upbeat outlook has put Macau casino operators on a roll, making them some of the top-performing stocks in Hong Kong. Shares of Melco International Development have more than doubled in the past three months, Galaxy Entertainment has soared 80% and SJM Holdings has gained 64%.

Shares of their US peers have also rallied, but more on relief that the companies have staved off bankruptcy concerns. In the past three months, MGM Mirage has jumped 81%, Las Vegas Sands has nearly quadrupled, while Wynn Resorts has risen 44%.

On a 2009 enterprise value to earnings before interest, tax, depreciation and amortisation ratio (EV/EBITDA), Wynn now trades at about 15,5 times, versus 7,4 times for Galaxy and about 1,4 times for MGM, according to Macquarie Research.

Both gambling centres have reported year-on-year revenue declines in recent months, but Macau has fared slightly better with first-quarter revenues down 12,6% year-on-year compared with a 16,6% drop for the Las Vegas Strip.

Despite recent declines, Macau’s gaming revenue is likely to return to a growth track by September and post a 6,2% rise in 2010, BNP Paribas forecasts.

In contrast, the third quarter is expected to be still challenging for Las Vegas, with convention bookings likely to remain weak, Barclays Capital said. Las Vegas revenues are likely to remain depressed next year as operators have to contend with a stream of new casino openings..

“There will be a fairly dramatic increase in supply over the next couple of years ... at a time when Las Vegas is struggling to fill the rooms that it has right now,” said Susquehanna Financial analyst Robert LaFleur.

Luxury projects such as MGM Mirage’s massive CityCenter will start opening later this year, increasing by more than 10% the number of hotel rooms along the Vegas gambling corridor.

So far, Macau casinos—which mostly rely on day-trippers who arrive by ferry from Hong Kong or by road from mainland China—have largely avoided the deep discounts that are eroding profits for Las Vegas’s operators, analysts said.

Maturing market?
While Vegas has been a global gambling centre for decades, mega-casinos began opening in Macau barely five years ago and issues such as fee structures for tour operators and visas are still being ironed out.

But while Macau looks more promising than Vegas to most, some analysts warned increased competition means a return to explosive growth rates seen earlier this decade is unlikely.

Four new casinos will open within the next two years, with Melco Crown Entertainment’s City of Dreams set to open on June 1. In addition, Las Vegas Sands and Galaxy are in the process of building new mega-resorts that are temporarily on hold due to funding issues and slowing conditions in Macau.

“I do think there will be some sort of cannibalisation of revenues,” said JP Morgan analyst Billy Ng. “The competitive landscape is definitely worse than a few years ago and the opening of the City of Dreams will make it worse for sure.” - Reuters

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