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It's the "Las Vegas of Asia." Sitting at the mouth of the Pearl River Delta -- about an hour's ferry ride from Hong Kong on the south end of mainland China, the former Portuguese colony of Macau is the only place in China where gambling is legal. And in the past decade, it has developed into one of the world's biggest gambling destinations.
In 2013, gaming revenue in Macau hit $45 billion -- nearly seven times larger than Las Vegas.
Many of the large casino players, like Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS), were among the first companies to secure a gambling license in Macau, opening their first casinos there in 2006. Their timing couldn't have been better either as gaming revenues soared.
And you can see, shares of those stocks climbed right along with those revenues:
There was just one problem... it wasn't only gambling that took place in Macau.
The Wild West of the 21st Century
Signs began to creep up in 2014 that China's economy was not growing as fast as it once was, and the government enacted tighter regulations and cracked down on corruption in Macau, which was rampant.
With lax rules and regulations and an embarrassing amount of cash being tossed around, Macau became a massive pipeline for moving money out of China in order to beat the government's strict currency controls.
To sidestep the currency laws, people could simply go to a store, buy an expensive piece of merchandise using a bank card, and then immediately sell the item back to the retailer minus a commission. The retailer would then give you cash. All the while, you haven't even touched or moved the piece of merchandise.
This was what was happening all over the place in Macau.
And on the gambling side of things, there was an informal and unregulated financial system known as junkets.
Junket operators -- who typically had ties to organized crime -- would lure clientele to Macau, lend them money to bet with, and later handle the often messy business of debt collection. At one point, junkets accounted for nearly two-thirds, or roughly $30 billion, of Macau's casino revenue.
After Cracking Down, Things are Finally Starting To Look Up
Once China began cracking down, this stemmed the flow of high-rollers into Macau. It also didn't help that China's economic growth as a whole was slowing down. As a result, gaming revenue quickly began to drop -- along with shares of casino stocks.
However, it seems Macau has found its bottom. After 26 consecutive months of year-over-year declines, August saw a 1.1% increase in monthly gross revenue. This was followed by a 7.4% year-over-year increase in September and an 8.8% increase in October.
This doesn't mean we will see a return to the heydays of pre-2014, but it's already done wonders for casino stocks. In fact, since the beginning of the year, casino stocks have easily outpaced the broader market.
How You Can Profit From the Comeback
Investors who are looking to capitalize on this uptick could certainly buy Macau-focused casino stocks like Las Vegas Sands or Wynn Resorts. They're likely to do well in the long run, especially if gaming revenues in Macau continue to pick up. But personally, I think these plays are a little bit on the risky side -- they're simply too volatile and unpredictable for my taste.
Instead, I recently recommended another casino stock to readers of my premium investing service, Maximum Profit. This pick has the same big-play upside of the other casino stocks most closely associated with Macau, but with less of the downside risk.
I found this stock by using a simple two-digit numerical code -- one that's led my readers to gains like 82% in 48 days… 118% in 86 days… and 266% in 12 months. If you'd like to learn more about this mysterious code and how to put it to work for you, simply follow this link.
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