Play and Rest: Asian Casinos and Resorts

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Buying stock has similarities with gambling. Think about it, chance and luck are diminished with more information. Also, random occurrences may give way to important information. Here there are a few pointers about three companies involved in the resort and casino business: Las Vegas Sands (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), and Melco Crown Entertainment (NASDAQ: MPEL).

Viva Macau! Viva GDP!

Regarding gambling, the first thing that typically comes to mind is Las Vegas. But, investors must think Macau (China) when talking about Las Vegas Sands. China has experienced unprecedented growth, aiding the company to revert a negative revenue and free cash trend.  Additionally, the firm is said to hold a 20% and 50% share of the Chinese and Singaporean gambling market, respectively.

Sands created for itself an economic moat in Macau, holding one of six gambling licenses given out by Chinese authorities. Additionally, in Singapore, the firm holds one of two gambling licenses, and will operate in a competition-free market until 2018. With current market positioning and circulating rumors about gambling being legalized by other Asian countries, management will find new opportunities to replicate successful past experiences.

Since 2007, Sands has constructed three out of the seven casinos the firm operates in Asia. There are further plans to keep investing on capital in Asia, Europe, and the U.S. Analysts blame increasing debt for the halt of the Las Vegas and Madrid project, but GDP slowdown in Asia and the U.S. economic recession have played a part, too. At the moment, the most urgent need is to sustain cash flow in order to scare off any debt phantasm.

Remarkably, Sands opened new facilities, expanded geographically, keeps a 20% operating margin, and rewards shareholders. The current share price is closer to its 52-week high, but remains fairly priced. Yield stands at 2.62% and the dividend at $0.35 (specials dividends have also been paid). It is recommended to buy the stock because it is the most diverse and best-positioned company in the industry.

Volatile income people

Wynn is another resort and casino conglomerate riding on Macau’s economic performance. Holding another of the six licenses provided by Chinese authorities, the company cemented its premier brand aimed for VIP customers. Additionally, the firm operates two casino and resorts in Las Vegas.

Almost three-quarters of Wynn’s revenue is generated in the Asian market.  The competition there is tighter than before, as new players come to the table. Hence, the firm’s revenue has seen a small reduction, and the market is expected to clog within five years. Before land plots are full, the firm has started work at the Cotai Strip.

Like Sands, Wynn’s operations in the U.S. lagged behind, but in comparison, exposure is higher. However, the greatest threat is dependence on VIP customers, due to their volatility. On the management side, Steve Wynn has enough credentials, and the finances to show for it. Additionally, Wynn has a history of rewarding shareholders.

Revenue, cash flow, and net-income have risen during the last five years. Debt has considerably risen over the last year, in line with new projects, but the firm has previously shown a capacity to pay debt obligations. Most importantly, operating margin is one of the highest in the industry at 21.1 points. Share price is close to its 52-week high, so it is recommended to hold until the price drops more, or VIP customers return for another season.

Forward betting: losing is possible

Since June 2012, Melco’s shares have risen 60%. The casino and resort conglomerate owns one of six Chinese licenses, and has commenced work on the second of four new facilities in the Philippines. Due to its focus on the Asian market, the firm was not exposed to the U.S. market downturn. Further, it is important for revenue and cash flow to continue climbing to quiet debt alarms.

The product of a joint venture, aided by a later spin-off of its entertainment branch, Melco quickly gained an important share of the gambling market in Macau. The company has successfully stepped up to the table, but as market supply exceeds demand and competition tightens, the firm will be tested in the near future. So far, expansion in the Philippines is the short-term objective, while Macau’s market share is expected to hold up with the opening of Macau Studio City.

Concentration on the Asian market has helped Melco to better weather the U.S. economic downturn. Also, the new Macau strip is expected to benefit the firm. Gambling enthusiasts talk about a move from the peninsula to the strip, similar to Las Vegas’ move from downtown to the strip. If customers do, in fact, prefer the strip to the peninsula, Melco will be less affected.

Melco’s last stand is to divert some of the profits to shareholders. With five years of increasing revenue, net-income, cash flow, and a 20% operating margin, the company is financially solid. But, the firm does not make the cut because it depends heavily on the move from the peninsula to the strip. It is recommended to hold because the risk is too high to start a long-term investment.

Enjoying the game

In the end, all three companies depend on at least one catalyst. Melco depends on a power shift to the strip in Macau, and hopes for the U.S. to recover very slowly to keep competitors at bay. Wynn has also placed a bet on the strip to balance market share lost to Melco, and hopes to improve performance in Nevada. So, in my opinion, Sands prevails because of its clean sheet, market diversity, and shareholder rewarding policies. Plus, it holds the best potential for entering new markets.

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Damian Illia has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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