In March, I was traveling around Asia with my 22-year old son, Ryan. We got to the Hong Kong Port to catch a boat to Macau, when we stopped in our tracks … the line was huge! Even though they had high-speed ferries leaving every 15 minutes, we ended up waiting for two hours!
The 50-minute boat ride was spectacular … dozens of sampans filled with Chinese fisherman in traditional coolie hats … freighters with cargo containers stacked to the sky … a dense urban jungle of huge condominium towers, many still under construction, hugging the Hong Kong shoreline.
But upon arriving in Macau, we were greeted by yet another ugly picture … more lines! Twisting snakes of people were waiting to clear customs. Heck, I’ve seen shorter queues at Disney World’s most popular rides. Fortunately, they had a separate line for non-Chinese visitors, so Ryan and I were able to avoid much of the madness.
As I quickly found out, these gigantic crowds were the first sign of one of the best investment stories I’ve ever seen. More on that in a moment. First, let’s look at why all these people are heading to Macau …
From a Trading Port
To a Tourist Trap
Because it juts out into the South China Sea, Macau has a rich history as an Asian trading hub. The Portuguese first arrived there in 1554, and over time they established it as the dominant port of trade between China and Europe. For roughly the next 400 years, Macau was one of the wealthiest and most important cities in all of Asia.
That changed in 1841 when the British settled in Hong Kong, which had the advantage of deeper-water harbors. Soon, Hong Kong became the major commercial center and Macau’s prosperity slid.
Then, on December 20, 1999, Portugal transferred Macau over to China. The Chinese now let the island operate as a special administrative region, giving it a unique set of rules and quasi-independence. That’s helping to restore Macau to its glorious past in a new millennium.
Macau has a unique mixture of Chinese and Portuguese cultures. To this day, it looks more European than Asian. And its popularity with tourists is absolutely exploding — an estimated 18 million visited Macau last year. The majority (55%) came from mainland China, but many more visited from Hong Kong (30%) and Taiwan (9%).
These tourists are flocking to Macau not because of its history or picturesque seaside location. They’re coming to GAMBLE.
Macau has become the Las Vegas of China. It is the only city in the region with fully legalized gambling. And gambling is deeply engrained in Asian culture. Plus, Macau is within a five-hour flight of three billion people — nearly half the world’s population. To put this into perspective, Las Vegas is the same distance from only 450 million people!
Growth: A Safe Bet
In Macau’s Casinos
Inside Macau’s Sands casino, it felt like all three billion of those people had picked the same day to visit. The casino ballroom was so crowded, it took me ten minutes just to travel 50 feet from the top of the escalator to the bathroom. The last time I was in a mob that thick was at a Paul McCartney and Wings concert in 1976!
At the baccarat tables, the scene was even more frantic. Throngs of gamblers, four or five deep, were calling out bets. Customers were waiting up to half an hour just to get a seat.
And once they sat down, boy, did they gamble! I saw table after table filled with boisterous high rollers routinely making $100,000 bets. These “whales” account for about 80% of Macau’s gambling revenues.
But in Macau, even regular people have to ante up if they want to play. In Vegas, you can find $1 tables; in Macau, the betting starts twelve times as high. This is probably why Macau’s average daily take per table is around $18,000, better than five times the average in Las Vegas!
Macau casinos pulled in a staggering $5 billion in gaming profits last year. And house winnings at Macau’s 19 casinos are poised to exceed $6 billion this year, overtaking Las Vegas’ more than 200 casinos for the heavyweight title —(xx dash styles should be consistent)) the world’s champion gambling destination. Think about that: more profits with one-tenth the casinos. And Macau’s profits could easily double over the next five years!
My favorite way to play this trend?
Buying What I Know
Peter Lynch, a monumental figure of the investment world, has always been an advocate of buying companies and trends that we witness with our own two eyes. Based on what I saw at the Sands Macao Casino, I think Las Vegas Sands (NYSE: LVS) is one great way to participate in Macau’s gambling boom.
The Sands Macao opened in 2004. In its first year, it generated $340 million in operating profit. Last year, that number jumped to $900 million. But that’s just the beginning …
LVS will be launching the Venetian Macao Casino Resort in 2007, and aims to open six additional Macau properties on the Cotai Strip, a 1.8-mile piece of reclaimed land between two of Macau’s main islands.
The company has a sweet strategy when it comes to the Cotai Strip: It will offset much of the $5 billion development costs by selling off retail space. I think this might generate enough advance sales to recoup almost all the development costs. In other words, LVS should end up with a profit-gushing casino for free.
Roughly 12,000 hotel rooms will open on the Cotai Strip by 2009, including luxury chains like the Four Seasons, St. Regis, Shangri-La, and the Mandarin Oriental. There will also be a high-end shopping mall packed with stores like Louis Vuitton, Tiffany, Gucci, Cartier, and Prada. In short, Macau will soon have all the glitz, glamour, and excitement of Las Vegas … but with far better profit margins.
Speaking of Las Vegas, LVS is best known for its Venetian Resort Hotel Casino, which opened in 1999. The Venetian has become one of Las Vegas’ top attractions, enjoying an average occupancy rate of 98% with an average room rate of $225 a night. Compare that with the rest of Vegas, which has an average occupancy of 89% at $100 a night.
In addition, LVS owns the Sands Expo Center, one of the largest convention facilities in the U.S. It’s also on schedule to open the Palazzo Resort Hotel Casino, a sister property to The Venetian, in the summer of 2007. The Palazzo will have more than 3,000 rooms, 1,700 slot machines, and 100 table games. That’ll probably produce yet another mountain of profits.
PLUS, just last week, LVS was granted the license to operate the first casino in Singapore: The Marina Bay Sands. It will sit on a 50—acre waterfront site next to the financial district, and will include an art and science museum, one million square feet of retail space, a waterfront promenade, and a convention center. It’s expected to open in 2009.
The best part: The Singapore government has thrown in some amazing benefits, including a dirt-cheap 15% tax rate and the promise not to allow any additional casinos in the country for at least ten years! Imagine the profits this gambling monopoly will generate.
Bottom line: The combination of Macau, Las Vegas, and Singapore is the sweetest recipe for gambling profits I have ever seen.
LVS isn’t just all hype and promise, either. In the first quarter of 2006, the company reported profits of $110 million, or $0.31 a share. In the same quarter a year earlier, LVS earned $7.1 million, or $0.02 a share. Talk about growth!
All this doesn’t mean you should rush out and buy LVS today, especially since it skyrocketed last week on the Singapore news. You might be better off waiting for a correction before jumping on board.
And there will certainly be some bumps along the way as Las Vegas Sands deals with financing the Singapore project. I suspect the company might issue additional stock to raise money, and that could put short-term pressure on the shares.
However, I expect the stock to soar in the long run.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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