Gaming and Gambling in China...

06/10/2005 12:00 am EST


Donald Straszheim

Chairman and CEO, Straszheim Global Advisors, LLC

Don Straszheim, a leading expert on investing in China, sees long-term opportunities in two related areasonline gaming in China and the development of casino gambling in Macau, which he calls 'the Vegas of Asia'. Here, he looks at some stock ideas in both areas.

"The9 Ltd. (NCTY NASDAQ) is an online game operator and developer in China. It is the second largest online gaming operator in China, behind Shanda Interactive. The online gaming market was $298 in 2004 and it is estimated to grow at a 35%+ annual rate, reaching $1.3 billion by 2010. And in my view, this figure looks conservative. In late February, NCTY announced its fourth quarter 2004 results. Despite increasing net income by 148% to $940,000 it missed the earnings per share consensus estimates by $0.01. Many tech stocks in China have fallen sharply. Nevertheless, we believe NCTY’s results are generally satisfactory and view this as a stock to accumulate over time. Their launch of a new online game in China, called World of Warcraft, is on track for 2005Q2. The hardware is in place, marketing has begun (with Coca Cola) and NCTY has started selling World of Warcraft client software. The product has been favorably received in Korea and elsewhere. Overall, online gaming in China should continue to enjoy explosive growth, and believe NCTY is well positioned to compete effectively in this market.

"Netease (NTES NASDAQ) provides online games, wireless value-added services, internet portal, and advertising to 'netizens'. Revenues and profits remain strong, with ongoing gains in e-commerce, online games, and other fee-based services. Online games are evolving and ‘cyber-products’ have become a new source of revenue for NTES. Meanwhile, online messaging systems are also generating revenue for its wireless value-added services. NTES has also been integrating its Internet portal to provide various services to Internet users such as online shopping, auction, information, and communication services. Despite the strong growth in the online sector for the past few years, China’s Internet user-ratio is still below 10%, or about 105 million of 1.3 billion. Therefore, sustainable strong growth is expected and we remain positive on the company’s outlook.

"Outside of online gaming in China, we would note that we are optimistic on gambling in the region a market that is developing in Macau, which is a ‘Special Administrative Region’ of the People's Republic of China. Macau is a small place, but is a poster-boy for economic development in China during the next decade. Macau VIP rooms, often run by other entities, generated $3.83 billion of gambling revenue in 2004, which represents 72% of the total revenue of all casinos in the city. We like the Macau story, which includes gambling, tourism, real estate development, hotels, infrastructure, restaurants, and shopping.

"Overall, we are very bullish on Macau as the 'Vegas of Asia'. In fact, we believe that Macau will pass Las Vegas in gambling revenue in 2005, reaching about $6 billion. And we see annual gains of 20-30%, maybe more, in the coming years. These are big numbers with great potential and we like this economic development story a lot. From an investment standpoint, we particularly like Sands (LVS NYSE, which has been operating since the summer of 2004, and Wynn Resorts (WYNN NASDAQ), which is expected to open in the summer of 2006. And while we are currently not recommending the stock, we note that MGM Grand recently broke ground in Macau and has discussed plans for a second casino. Overall, the developing ‘Cotai Strip’ is now planned to have 25 casinos and employ 120,000 people.  Both LVS and WYNN are down about one-third from their 52-week highs and both stocks look attractive to us from a long-term perspective."

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