"What Happens in Macau..."

03/24/2006 12:00 am EST


Robert Hsu

Editor, China Strategy and Asia Edge

"What happens in Macau stays in Macau," quips Robert Hsu, editor of The China Reportone of the most exciting newsletters to hit the advisory scene in years. Here, he offers a US-based play on the "Las Vegas of the Orient."

"I rarely indulge in casino gambling, but many Chinese gamble heavily. According to my casino industry sources, over half of all ‘whales’ (high rollers who routinely drop over $100,000 a night) are ethnic Chinese. Macau is uniquely positioned as the only legalized gambling city in the Chinese-speaking world. Macau reverted to Chinese control in 1999, and the new government, in the spirit of free enterprise, opened up competition in 2000 by issuing two new casino licenses to international bidders.

"One of the winners was Las Vegas Sands (LVS NYSE), the holding company of the Venetian resort in Nevada. (The other was Wynn, the namesake company of casino industry legend Steve Wynn.) In winning the licenses, LVS and Wynn now have rights to sublicense their licenses to other casino operators for a piece of the action a huge advantage in this growing area. Las Vegas Sands made the first move by investing $265 million to build the Sands Casino in Macau. It opened in May of 2004, and LVS recouped its entire investment in less than a year.

"Last year, Macau's gaming revenues matched those of Las Vegas and should surpass them this year. The Sands Macau now makes more money than the company's flagship $1.8 billion Venetian Casino, one of the top three money-making properties in Las Vegas. And this is just the beginning. Perhaps the most ambitious project in hotel history, LVS is seeking to create an Asian version of the Las Vegas Strip called the Cotai Strip.

"Anchored by the 3,000-suite Venetian Macau, which will open in summer of 2007, the Cotai Strip will feature a row of international luxury hotel/casinos including Shangri La, Four Seasons, Intercontinental, and Sheraton. And LVS will manage the casino operations of all the hotels for a share of the profits. In addition, LVS seeks to replicate its success in Las Vegas by building a huge world-class convention center. Considering that over one billion people live within a two-hour flight to Macau, the potential is truly staggering.

"The company's China operations make LVS the most valuable casino company in the world. The stock trades at a 100% premium to other gaming operators without a significant China presence, but I think that premium is well-deserved. The stock has incredible momentum powering it upward, and Macau will become a major beneficiary of China's economic emergence. By becoming the biggest player in Macau, LVS stands to reign as the most profitable gaming operator in the world in two years.

"The good news is that I think we can get LVS at a terrific price because Sheldon Adelson wants to sell 55 million shares of the stock in a secondary offering. Although the offering represents nearly 15% of the company's outstanding shares, it is only 23% of Adelson's holdings. I believe it is just an estate planning strategy for the 72-year-old billionaire to cash in some chips and diversify his portfolio. Because more shares will become available on the market, LVS might be under pressure over the next two months, and we want to use any temporary weakness as a buying opportunity."

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