Melco Resorts & Entertainment Ltd(ADR) (NASDAQ:MLCO) is a Hong Kong-based casino company that has major casinos in Macau and the Philippines.
With five properties in Macau and one in Manila, Melco’s strategy is certainly wholly focused on Asia at this point. And with good reason. For the past two decades, even the big casino firms in the U.S. have been after the “whales” (big money, high spending customers) from China.
Firms like Wynn Resorts Limited (NASDAQ:WYNN), Las Vegas Sands Corp (NYSE:LVS) and MGM Resorts International (NYSE:MGM) have been building a foothold in Macau as well, since not all Chinese whales swim to Vegas.
And since the recession, it has been slow on both sides of the Pacific. Add to that China’s crackdown on allowing yuan to leave China. These two issues have now resulted in a boom in Macau operations. Every month for the past year has seen significant growth in Macau’s operations.
This has buoyed the stocks of all the gaming firms that are publicly traded, but MLCO is unique for a couple of reasons. First is, MLCO is a Chinese company. What tends to happen in developing markets like China is, it first allows outside firms to show the Chinese how a company should operate in a given sector, and then it works to build out its own talent in the space.
This isn’t unique to China, but since China is such a big market it is worth understanding.
Ultimately, the bureaucracy will tend to favor local businesses over outsiders, encouraging local development, so that the money doesn’t leave the country.
Second, which also a key part of the first reason, MLCO’s operating license doesn’t expire until 2022, while its MGM’s license has to be renewed in 2020.
LVS and WYNN also have to renew in 2022, but given their U.S. status, when license renewals come up for MLCO’s competition, new terms may be put in place to make it tougher for them to compete against MLCO.
Or the commission could open up Macau to more developers. Or, worst-case scenario, licenses could be revoked and not renewed at all.
MLCO is the firm least likely to be targeted by any of these potential problems. MLCO stock is up 36% year-to-date, so its price-earnings ratio of 43 may seem high, but it’s not a high as it seems.
In June, Macau casino revenue was up 26% year-over-year. In May, they rose 24%. In April, 16%. For Las Vegas, those numbers are 16% in June, 3% in May and 1% in April. You get the point.
As long as China continues to get back on the growth track, Macau will be the destination of choice for the whales that used to head to Vegas. And given the modernization of Macau over the past decade or so, there’s less reason to spend 12.5 hours on a flight to sit down at a world class gaming table.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.