The Opportunity for Melco Crown
Dec 15th 2012 5:00PM
Updated Dec 15th 2012 5:10PM
Melco Crown has been one of the hottest stocks in gaming over the past two years. But the company is just starting its real expansion plans. Combine that with growth on the Cotai Strip, and the company's opportunity is enormous.
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From the U.S. it can be hard to understand the enormous opportunity for gaming companies in Macau. There are 1.3 billion people who live within a three-hour plane ride from Macau, and most of those people are Chinese, who historically have a strong appetite for gaming. This has driven Macau to become the world's biggest gaming market today.
In 2011, Macau casinos generated $33.6 billion in revenue, more than five and a half times the revenue generated on the Las Vegas Strip. Just six concession holders split this revenue because the Macau government wants to keep strict control over the gaming industry. This limits supply, which limits the Las Vegas-like problem of overbuilding in Macau. Once Las Vegas Sands' Cotai Central is complete next year, the supply of casinos will be set until around 2016, when a number of casinos may open up. Any growth in the meantime will go straight into the existing casinos without a significant increase in costs.
Limited supply is great for Melco Crown, but the company's real advantage lies in its casino's location. When the initial buildout of casinos took place in Macau, it happened on the Macau Peninsula, but when Macau decided to expand gaming it needed more space for its casinos. The land between Taipa Island and Coloane Island was reclaimed (or filled in) to create a blank canvas known as Cotai. This has become the hottest spot in gaming and is the driver of Melco Crown's growth.
Melco Crown's main resort, City of Dreams, sits on the north end of Cotai directly across from The Venetian Macau and directly next to the brand-new Sands Cotai Central. This allows City of Dreams to draw from thousands of hotel rooms within walking distance. As one of the first casinos built on Cotai, City of Dreams had a first-mover advantage, and as more casinos are built there, the location has become a critical mass. To get a feel for the difference between Macau's gaming regions, think of Cotai as the Las Vegas Strip and the Macau Peninsula as Downtown Las Vegas. Cotai is clearly the future.
The location of City of Dreams has helped Melco Crown grow into the profitable company it is today, and this one casino now dominates the company's results. Below is a graph showing City of Dreams' growth since it opened in 2009 and how far it now outpaces Melco's older casino, Altira.
This growth has slowed at City of Dreams as new resorts have been built nearby, but in the long term, the resort is positioned well to capture growth in Macau. The resort still provides upside, but the huge opportunity in the future lies in two new resorts management is working on.
On the south end of Cotai sits a development known as Studio City, a $2 billion project that has been on hold for years because of conflicts between the developers. Last year Melco Crown purchased a 60% stake in Studio City with a vision of building a casino/resort on the property. Macau's table game limitations won't allow for a resort today, but management is confident that it will get approval to add table games and construction will begin soon. Nothing is for certain, but this project is pure upside for Melco Crown if it is granted table games.
The other development Melco Crown recently added is a $1 billion resort and casino in the Philippine city of Manila. The company signed a memorandum of agreement with developer Belle Corp. in July and has been mum on details as it hammers out a final deal. The Philippines hopes Manila can become another gaming hot spot, like Macau and Singapore, and if it does, this will be a big addition for Melco Crown.
Melco Crown's envious position on Cotai along with two potentially game-changing developments provide big upside for investors who can buy at the right price. But like any other investment, there are a few key things investors need to keep an eye on in the fast-moving gaming market.
The article The Opportunity for Melco Crown originally appeared on Fool.com.Fool contributor Travis Hoium and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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