Macau Gaming Up 22% in One Year- Gambling Center of the Universe

September 5th, 2007 - By: Lee Anderson, J.D., M.L.S., Staff Analyst

Macau, China, is flying Under the Radar.

Part Two in Our Look at China

Where can you invest $240 Million USD and recoup that investment – after paying taxes – in just one year?

Which gambling mecca could be twice the size of Las Vegas by the end of the decade?

Where do five million visitors go each week?

Where will the number of hotel rooms double in the next five years?

Who has a GDP per capita on a level with Hong Kong and the U.K., but prices are a fraction of what they are in those markets?

Sometimes it is extremely difficult to understand how far China -- as an economic power -- has come and how quickly. Stock Guru is profiling one of the fastest of the fast growing cities: Macau.

Larry Summers the former head of Harvard University and former secretary of the treasury during the Clinton administration, put globalization and the Chinese economy in perspective recently:

Think about this: [In America] they called it the Industrial Revolution because it had never happened before that living standards in a country had increased fast enough that you would notice the difference from the beginning of your life to the end of your life. And all of a sudden, we had this revolution, with industry and growth, and so living standards might increase by as much as a factor of two over the course of a human life span.

If you look at the growth rates we`re seeing in Asia today and China, which increasingly … increase one hundred fold. That’s amazing and that’s what’s happening.

Macau, China, has breathtaking villas; it is home to what is widely considered the best food in the nation - it has spectacular ruins, museums and an intriguing history supported by fabulous ancient and modern architecture. But Macau is most noted for being the gambling mecca of the Orient and the premiere gambling destination in the world. Macau is China’s golden jewel of tourism.

Macau surpassed Las Vegas in 2006, when gaming revenues surged by 22% to $6.95billion. The government collects a 40% in tax on the daily take. Macau's coffers have swollen and its GDP has doubled. Research by JP Morgan suggests that it could be twice the size of Las Vegas, its American, rival by the end of the decade.

Macau is the most lucrative gambling territory on Earth. The gamblers are almost all Chinese, although the Japanese and Koreans are beginning to arrive.

Las Vegas billionaire, Sheldon Adelson, is well established in Macau. Adelson recouped his $240 million investment in the Sands, after paying taxes, within just one year. In 2002, the authorities allowed Adelson and his rival Steve Wynn to build a huge casino each - Wynn's bears his own name. A third franchise went to Ho. Now there are six operators, twenty-six casinos and 1,700 tables, which are raking in cash at seven times the rate in Las Vegas.

Investment is set to surge again. Later this year Adelson is due to open a $10billion complex, to include the Venetian Macao, a replica of his faux Italian resort in Las Vegas.

MGM is going into business with Pansy Ho, daughter of the octogenarian Stanley, after an awkward hearing with the Nevada Gaming Board. The Australian businessman James Packer is in a joint venture with Lawrence Ho, the old man's son.

Sir Richard Branson is reported to be planning a $3billion "family-friendly" resort, which could include yet another casino if he strikes a deal with one of the six operators.

Macau and Hong Kong are only 35 miles apart, each lying on opposite sides of the mouth of the Pearl River. Both are far more entrenched in Western culture and capitalism than the rest of China. And both are surrounded by the “real” China, vastly different entities that happen to share a common country.

Central Macau is home to over twenty-six casinos owned by familiar names such as Wynn, MGM Grand, the Venetian and the Sands.

The People's Republic purged gambling dens from their socialist state in 1949. Macau embraced gambling in 1999, when it was handed back to China. At that time it was a seedy, crumbling backwater rife with gang crime and a few dark casinos monopolized for four decades by the venerable Hong Kong tycoon Stanley Ho. Its streets were prey to rival triad gangsters who killed with abandon, and its few tourist attractions were dilapidated.

The new Macanese authorities -with a little help from Chinese intelligence officers and the People's Liberation Army (PLA) - transformed Macau.

When Ho's monopoly expired, they declined to renew it. Instead, the biggest names in American gambling were invited to come to Macao and a $20billion USD on casinos and hotel-building boom began.

The PLA sent in a small but symbolic garrison of 650 crack troops. Chinese police imprisoned and executed triad criminals often without due process.

The territory's chief executive, Edmund Ho, scion of a prominent local business dynasty but not related to Stanley Ho, has moved to secure foreign investment by enacting legal reforms.

Macao passed laws to establish the rights and duties of casino investors, to ban money laundering and legalized and regulated credit for gambling.

This last decision undermined a traditional triad racket.

Viewed from the gaming floor, it looks like a one-way bet. But this is China, where for thousands of years the concept of constantly changing fortune has governed political life and generated a fascination with gambling.

The Macau boom is largely due to the relaxation of restrictions on travel to the enclave by citizens of the People's Republic. That led to more than 22 million visitors last year.

Macau is famous for its casinos and its cleanliness. The historical sites in Macau have been immaculately restored including the ancient villas and churches – the most obvious reminder that this land was under European rule until 1999, in fact, when the Portuguese returned Macau to China after ruling it for 450 years.

Taipa City is located on the southern shore of the island and is connected to the mainland by two bridges and a causeway. It contains colonial baroque architecture which stands next to Buddhist and Taoist temples, while the entire city is dotted by lush parks and the occasional beach.

Macau is dominated by U.S. companies including Sheldon Adelson's Sands (NYSE: LVS) or Melco PBLl Entertainment (Nasdaq: MPEL). Both are casino development and gaming companies. Then there is Stanley Ho's Shun Tak Holdings (HKEX: 242), which had a monopoly on gambling and transportation for decades. Shun Tak still controls ferry service from Hong Kong and operates casinos, hotels and properties throughout Macau. For investors there are better ways to own piece of Macau than gaming in the big casinos and the risks are a whole lot better.

Pentony Enterprises believes in the growth of China but understands these companies exist on the other side of the globe. As in all investments three things matter:

1. Due Diligence
2. Due Diligence
3. Due Diligence