Invest in what people want, rather than what they actually need, and you can make money – and plenty of it. In recent years, I have done very well by investing in tobacco, confectionery, beverages (hard and soft) and fast food. What all these areas have in common is that they are fairly defensive, and they are all seeing massive growth in emerging markets.
I have been building up large gaming sector trades over the past 18 months. This has been a very profitable area already, but I still think we have a way to go, so it is not too late.
While Las Vegas is still an important market and is seeing a pick-up from the recessionary lows, my number one focus is Asia. Macau, which actually sees more volumes than Vegas, is now the most important global market, while the Marina Bay Sands has opened as the first casino resort in Singapore. It is already reporting excellent business, and there is the possibility of other Asian resorts following suit.
Genting, just outside Kuala Lumpur in Malaysia, also boasts a large resort casino. A staggering fact is that around one billion people are estimated to live within a three-hour flight from Macau, and about three billion within five hours. Also bear in mind that the Hong Kong to Macau bridge and tunnel project, due to finish in 2015, will make connections much easier.
While not wishing to stereotype, Asians do love to gamble and have traditionally been some of the best clients in Vegas casinos. Now they have their own Vegas, so they don’t need to travel to the US any more. The market also opens up to the new affluent Asian consumers with some of the best shopping, gaming, hotels and restaurants found within these new mega resorts such as the Venetian/Four Seasons, owned by Sands China.
The big players in the Macau market are SJM Holdings (HK:880), controlled by Stanley Ho, who until 2002 had the monopoly. Since then, the Macau government has granted six licences, which include Sands (HK:1928), Wynn (HK:1128), Galaxy World (HK:27) and Melco Crown (Nasdaq: MPEL). Both Sands and Wynn are spin-offs of the US parent companies, which still hold controlling stakes.
Significantly, the Asian gaming market is changing. In the past, the focus was on day trips involving hard gambling. Now, the trend towards one- and two-day stays is growing, and Macau is becoming a holiday/leisure destination, breaking away from a somewhat seedy past. Macau's October 2010 gambling revenue surged 50 per cent from a year earlier, setting a record of US$2.36 billion, and revenues have been trending up since mid-2009.
The easiest way is via the Market Vectors Gaming exchange-traded fund (NYSE: BJK), which holds positions in all the major players including Wynn, Sands, Genting (listed in Malaysia) and slot machine maker IGT. You can also spread bet some of the individual names or buy shares via an online broker. The ETF also has a holding in IG Group (LSE:IGG), parent of IG Index, which has benefited from overseas expansion, and in bookmaker Paddy Power (LSE:PAP), which is up 1,000 per cent over the past decade.
On the risk side, we could see some gaming sector volatility, especially after the recent large run-ups. In addition, the Chinese government can restrict visas to their citizens, as they did in 2008.
The government has tried to cool the market in the past and restricts the amount of currency that citizens can bring in. Casinos are also a target for money laundering, and China has strict rules requiring casinos to report suspect activity.
The Macau government has raised concerns about fast expansion and the strain on local infrastructure. However, all casino operators realise that they must give back to the community, and while this could affect profits in the short term, it should ensure long-term sustainability. Overall, the growth and returns outweigh the risks, and the easiest way to make money at a casino is to own one!
