Gaming stocks hit the jackpot

Crown (ASX: CWN) is extending their footprint into Asia with its “City of Dreams” casino and luxury hotel brand name to be placed on the new casino facilities being developed in Manila, in the Philippines. The $1.3 billion hotel and casino project is a joint venture between Melco Crown Entertainment (MCE) and the Belle Corporation, and is planned for opening in mid-2014.

MCE, itself a joint venture between James Packer’s Crown and  Stanley Ho’s Melco International Development, currently operates the Macau “City of Dreams” casino complex, and wants to create an international casino and resort brand.

Outside of Macau, the “Las Vegas” of Asia, other countries are wanting to develop tourist attraction sites, and level of business that could be generated is very attractive in itself. To understand the potential, consider that Las Vegas pulls in about $10 billion of business a year. Just Macau alone is projected this year to have about $42 billion in gaming turnover in 2013.

The Manila casino and hotel, to be built in the Entertainment City district of the city, will be one of at least four casinos that is planned for development there. Development partner Belle Corporation is the company of Henry Sy, the richest man in the Philippines.

Just recently the gaming commission that regulates the Manila casinos gave permission to increase the number of gaming tables to 365 from 242 and electronic gaming tables from 1,450 to 1,680, in addition to 1,680 slot machines.

Now here is where an investor can go off in two directions. You could follow the hotel and casino business by buying Crown shares, or buy into the companies that make the game machines. One of the biggest suppliers of machines in Macau is Aristocrat Leisure (ASX: ALL), which controls 50%-60% market share there.

In Macau alone, the number of machines is expected to double, adding 8,000 over the next five years, and the company wants to defend its market share from other competitors. Its share price has gone up from about $3 to $4.80 since Oct 2012, and currently has a price-earnings (PE) ratio of 57. Another new Manila casino, the Solaire Casino, got about half of its 1,200 machines from Aristocrat.

Ainsworth Game Technology (ASX: AGI) is also a growing player, snaring 10% of the Macau slot machine market, and it will be looking for more opportunities to increase its share there and in all the other proposed new casino destinations. Its net profit margin is 27.44% and its return on equity is 25.54%. It has a PE ratio of 26, and its share price has risen from about $2 to $4.30 in the past year.

Foolish takeaway

When you find a promising business, it always pays to go that one step further to see which other companies are suppling or servicing the first company, and how they make their money. If Crown is successful in growing its casino brand across Asia, it’s likely the companies that are servicing it now will have further service contracts.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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