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By Jason Jenkins

The end of November saw gains in shares of several major resort and casino companies as analysts boosted their ratings to reflect growing business in China’s Macau. In fact, it lead to gains of more than five percent in the S&P 500 Casinos & Gaming Sub Industry Index and the sector as a whole showed gains across the board.

But why?

Well, the island of Macau is located just 37 miles from Hong Kong. And it’s the only place in China with legalized gambling – featuring the largest casino market in the world.

This sort of opportunity enticed such major casino brands like Wynn Resorts (Nasdaq: WYNN), Las Vegas Sands (NYSE: LVS) and MGM Resorts (NYSE: MGM) to open hotel-casinos on the island between 2004 and 2007.

However, it hasn’t been too good of a year for the casino industry. Shares have taken part in all the volatility of 2011, but with good reason. A dip in Las Vegas revenue and analysts expectations of a pullback in Macau has significantly hit casino stock prices.

However, the climate changed…

The Government’s Secretary for the Economy and Finance in China announced on November 25 that Macau was projected to bring in over $10 billion in tax revenue next year. Apparently, this news indicates that Macau isn’t poised to slow down and there are other projections for 2012 expansion exceeding 20 percent.

“We detected a whiff of caution during our trip given the state of the global economy, particularly in Europe, and the potential for slowing Chinese gross domestic product growth,” Credit Suisse gaming analyst Joel Simkins told investors after returning from a research trip to Macau. “We believe business in Macau largely remains on trend.”

Plans for Hengqin Island

The emergence of Hengqin Island as a major seaside resort will be a dramatic boost for Macau and its casinos. The middle-class getaway is expected to secure more revenue from mass-market leisure travelers, while reducing reliance on high-rolling VIP customers.

“Having a significantly larger Chinese population base immediately adjacent to Macau should serve to drive mass-market gaming revenue,” said Grant Govertsen, Founder of Union Gaming Group, an independent research and advisory firm based in Macau and Las Vegas.

The Best Play

Most major resort and casino stocks move as a bloc. So you need to decide which companies are the best to pick out of the bunch.

They all benefited from November upgrades for Wynn coming from both Citigroup and KeyBanc Capital Markets. Dennis Forst of KeyBanc said that Macau should continue to drive revenue in explaining his rating upgrade of Wynn’s stock from “Hold” to “Buy.”

For this reason I think the discussion starts with Wynn. And here’s why:

  • Steve Wynn: Wynn has a golden track record, and sold off his casino assets to MGM Grand 11 years ago and became a billionaire. Then he opened Wynn Resorts and wanted to make sure he had the liquidity to frequently upgrade the resort to keep in step the ever-evolving Vegas landscape. He drew only 40 percent leverage to build the resort. Presently, Wynn Resorts has only $3 billion in debt on the books and that amount decreases every year.
  • Dividends: The big news is the announcement of a $5.00 special dividend. WYNN’s regular dividend of $2 a year continues, and the special dividend makes it a total of $29 in special dividends since 2006 (the only year a special was not declared was during the Credit Crisis year of 2008).

There’s also an isolated play on Wynn’s Macau holdings – Wynn Macau (OTC: WYNMF.PK). This is a very small volatile stock though, so it may be most wise for investors to stick to Wynn’s main stock.

Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.

Source: Casinos To Take Advantage Of Changing Chinese Landscape