The Best Bet in Macau Is Casino Operator Melco

More recently, however, Melco's hand has improved. It's found ways to grab more customers, and has a huge new casino on tap. The Chinese government is now limiting new competition, aiding all the local houses. Meanwhile, shares of the Sands and Wynn are getting pounded by fears about a weak U.S. economy.

Bargain hunters have begun to take note. "This is a very interesting story, and one worth beginning to start revisiting," says Philip Ehrmann, an Asia specialist and long-term Macau skeptic at Jupiter Asset Management in London. Others say that Melco's stock, which has risen from a low of 8.2 to 13 recently, could top its recent high of 19, about a 50% gain, and even go well beyond that in the next few years.

Melco's ups and downs mirror those of other casinos in Macau. In 2006, gaming revenues at the former Portuguese colony outstripped those of Las Vegas as lavish new casinos attracted China's newly rich. The Sands casino made back its investment in its first year, and there are high hopes for its Venetian Macau.

But a spate of openings began to pressure results: Macau currently lets six companies operate 29 casinos. Last week, the Sands announced it lost money in its first quarter, hurt by competition from MGM Mirage (MGM) and from the loss of high rollers to rivals like Melco's Crown Macau, which grew out of Melco's partnership with Australia's Crown Ltd. (CWN.Australia), run by casino impresario James Packer.

The company came public in the U.S. last summer, and is 38% owned by Melco International Development (0200.Hong Kong), in which Lawrence Ho has a big stake.

Melco didn't get off to a fast start. It opened Crown Macau in a remote corner called Taipa Island, where it snagged just 1% of the market, unlike the stellar performances of the local Wynn or Sands resorts, or the market-dominating Sociedade de Jogos de Macau run by Ho père. But Ho fils quickly boosted his numbers by striking a controversial deal with A-Max Holdings (959.Hong Kong), a company that represents 10 junket operators that are paid commissions to bring in high rollers, or VIPs. To qualify for VIP status, a gambler must plunk down at least HK$1 million ($128,000) at the tables per visit.

The arrangement sacrificed some margin: "We really adjusted," recalls Ho, who was educated in Canada.

As he explains: "Slots have the highest Ebitda [earnings before interest, taxes, depreciation, and amortization] margins — about 40%. For mass [market], it's 30%. But for VIP, it's in the high single-digits." Still, that's offset by volume.