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New Macau casinos have luck of the draw in second expansion phase

MACAU, March 12 (Reuters) - Galaxy Entertainment Group Ltd and Melco Crown Entertainment Ltd look best placed to benefit from the next phase of Macau's development as the world's gambling capital adds eight more mega-casinos by 2017.

The expansion will take place in the Chinese territory's glitzy Cotai Strip and is expected to more than double Macau's annual gaming revenues to $115 billion in four years, according to research from U.S. brokerage Wells Fargo.

Cotai is an area of reclaimed land that is becoming a Las Vegas-style tourist hub with shopping centres, hotels and entertainment to complement the casinos.

U.S. billionaire Sheldon Adelson's Las Vegas Sands Corp was the strip's pioneer, setting up the Venetian casino there in 2007. Adelson's Hong Kong-listed Sands China Ltd is set to open its final casino planned for Macau at the end of 2015 in Cotai, but for Melco and Galaxy, their growth in the area is just beginning.

Galaxy and Melco's casinos will be the first properties to open in the second expansion phase starting early-2015.

That puts them ahead of peers like MGM China and Wynn Macau in the race for dealers and gaming tables, which are both in short supply. MGM and Wynn are also planning to open casinos in Cotai, but at a later date.

Galaxy, owned by Hong Kong construction tycoon Lui Che Woo, has the largest plot of land on Cotai and will still have half the area left to build on after its new resort opens next year.

Sands, in contrast, will use up the last of its Macau land for its Parisian complex, slated to open at the end of 2015.

"Sands has had a great run here with the last property to open...Clearly from the beginning of next year it is going to get tougher from a competitive standpoint," said Philip Tulk, who tracks gaming companies at Standard Chartered in Hong Kong.

DIMINISHING RETURNS

Macau, one of the world's fastest growing economies for the last three years, is the only place in China where citizens can legally gamble in casinos. Located on China's southern coast, Macau gaming revenues last year were nearly three times greater than Las Vegas, Australia and Singapore combined.

Some 29 million people visited the semi-autonomous zone in 2013, and new rail and bridge connections to Hong Kong and mainland China are expected to increase those numbers. New hotel rooms opening by 2017 will double current capacity.

The bulk of Macau's 35 existing casinos lie on the former Portuguese colony's tiny peninsula, whose skyline was dominated for years by the fluorescent, onion-shaped casino of SJM Holdings Ltd, owned by the family of Macau kingpin Stanley Ho. Lack of space led developers to reclaim land for Cotai.

SJM and Sands dominate the gambling scene in Macau, together accounting for nearly half of total gaming revenues that stood at $4.8 billion in February.

But competition is expected to heat up as other casino operators expand their portfolios, potentially crimping profits.

"I would not expect the share price performance to be comparable with last year but I would still foresee there would be a decent amount of growth," said Victor Yip, gaming analyst at UOB Kay Hian in Hong Kong.

With four Macau properties, Sands China raked in more revenue last year than all of the Las Vegas strip. Its shares have surged more than six-fold from their IPO price in 2009 and doubled since the last big casino opening in 2012.

While all operators in Macau are blessed with surging demand, analysts have become more selective as gaming revenue growth starts to mature.

Sands, which has more hotel rooms than the other gaming operators combined, remains a popular pick with 22 of 25 analysts awarding it a "buy" or "strong buy" rating, according to Thomson Reuters data

Galaxy is slightly less popular among analysts due to a more expensive valuation, with 20 of 26 giving it a "buy" or "strong buy" rating. Its shares, however, have surged more than 350 percent since their launch in 2011, valuing it at $40 billion.

Several factors, however, clouding the outlook for all casino operators in Macau. Slowing economic and credit growth in China may pinch high-rollers and there is uncertainty over gaming license renewals due in 2020.

The labour market in Macau is also tight. Analysts estimate new casinos opening in 2015-2017 will require 12,600 new dealers, yet only about 700 are available per year. Macau laws dictate only locals can work as dealers, and the government is under pressure from residents who regularly take to the streets to ensure these restrictions remain.

Macau's government has also not confirmed how many new tables it will allow in the next phase of expansion for the Cotai Strip.

Casino operators, however, appear unfazed for now by these concerns, focusing instead on Macau's massive potential.

"When we come to Macau, we see potential in gaming," Francis Lui, Galaxy's deputy chairman, told Reuters in an interview. "If you add entertainment with the gaming industry together you can certainly see a super industry."