A great way to profit from the expanding middle class in emerging markets is by investing in gambling in Asia. The region is home to increasingly affluent consumers who are bitten by the gaming bug. Indeed, casino gambling is close to an obsession among the Chinese.
China’s love of gaming deals a strong hand to Melco Crown Entertainment (MPEL), which is based in Hong Kong and owns and operates a string of casinos and resorts in Macau in southeast China. Macau is now the biggest gaming market in the world, putting Melco in the sector’s sweet spot. The company also enjoys a monopoly in Macau because it provides the only gambling venues approved by the Middle Kingdom’s strict regulators.
Gamblers in the region are enjoying more disposable income as global economic growth accelerates (albeit fitfully). The International Monetary Fund forecasts global growth of 3.6% in 2014 and 3.9% in 2015, compared to 3% in 2013. Emerging markets, which represent approximately 75% of the worldwide economy, are expected to expand by 4.9% this year, compared to 4.7% in 2013.
Melco opened a gargantuan casino dubbed “City of Dreams” in 2009. Another ambitious casino complex, “Macau Studio City,” is on the drawing boards with completion slated for mid-2015. The company also possesses coveted properties along the popular Cotai Strip. The barriers to entry in these markets are extremely high, which cushions Melco from competition and gives it the latitude to tap expansion opportunities at its own pace and as it sees fit.
Rise of the Low Rollers
It makes sense for Melco not to rush its expansion. The company disappointed investors in its most recent earnings report posted on Nov. 6. Melco reported third-quarter 2014 revenue of $1.12 billion, a dip from revenue of $1.25 billion in the same quarter a year ago. Adjusted diluted earnings per American depositary share in the quarter came in at 24 cents, compared to 34 cents in the year-ago quarter.
However, investors need to maintain perspective. Melco’s year-over-year drop in earnings and revenue stemmed from decreased activity among VIP “high rollers,” whereas “mass market table games” continued their upward trajectory. Mass market table games revenue in the third quarter jumped 24% compared to the previous year’s quarter, as ordinary gamblers continued to flock to Melco’s establishments.
This dynamic — big bettors increasingly supplanted by “low rollers” — should continue in future quarters and put Melco on a surer footing with fewer cyclical ups and downs in operating performance.
Meanwhile, Melco’s stock is an eye-popping bargain: it now trades at a trailing 12-month price-to-earnings (P/E) ratio of 17.4, compared to a trailing P/E of 193.8 for its sector of resorts and casinos.
Melco is uniquely positioned to profit over the long haul, as increasing numbers of Chinese citizens get fatter wallets and eagerly mimic the habits — both good and bad — of their counterparts in the West.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
