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Thursday, November 4, 2010

In AERL, Macau Pure Play

Macau, the Asian version of Las Vegas, has been booming. The results of booming gaming operations in Macau has boosted the earnings of LVS, MGM, and WYNN. The Wall Street Journal just has an article entitled "Macau Gambling Revenue Surges". Read Article

That is why I bought AERL in the low $7's, as it is a pure play on Macau gaming. AERL, formerly known as CS China Acquisition Corp., acquired AGRL on February 2, 2010. The principal business activities of AGRL’s wholly owned subsidiaries are to hold Profit Interest Agreements with its VIP room gaming promoters that provide AGRL with 100% of the profit streams from the operations of the VIP room gaming promoters. AGRL’s VIP room gaming promoters currently participate in the promotion of two major luxury VIP gaming facilities in Macau, China, the largest gaming market in the world. One of the VIP gaming rooms is located at the top-tier MGM Grand Macau Casino in downtown Macau that is operated by the MGM Grand Paradise S.A. The other Macau VIP gaming facility is located in the luxury 5-star hotel, the Star World Hotel & Casino in downtown Macau, which is operated by Galaxy Casino, S.A.

Recent acquisition of another VIP room:
On October 12, the Company announced it had entered into a non-binding Memorandum of Understanding to acquire another VIP gaming promoter, which operates in the Venetian Resort on the Cotai Strip and earns revenues based upon the fixed commission rate of 1.25%. Currently, the Company's VIP gaming rooms are located in Downtown Macau. The Company believes that this acquisition will offer an alternative for its current patrons and be accretive to both gross revenues and net earnings. As a result of this acquisition, the Company believes that approximately 90% of its revenues will be generated under the 1.25% fixed commission, which would further reduce monthly earnings volatility.

The numbers:

In latest earnings release, the Company said 2010 Net Income will be $36-$39 million based on the current rooms. Read Earnings Release

They have approximately 25-27m shares o/s after the recent exercise of approximately 14m warrants. Read Article The float should be 6-19m depending on how many of the warrant holders actually hold the stock for higher prices. For 2010, I estimate EPS will be approximately $1.40-$1.65. According to an article on SeekingAlpha Read Article, in 2011 with the new Venetian VIP room, AERL could do approximately $55m of net income (I am trying to verify that calculation), or over $2 EPS. That would put AERL at a forward P/E of 3-4 in a pure play hot sector. Assuming Macau stays hot and Chinese stocks remain in favor, I could see AERL targeting the $12-$20 range eventually.

No comments:

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