Over the past year, Macau has outperformed every other major gaming center and demand is still booming

The circumstances are a bit different in the United States, particularly in Las Vegas.

Over the past two years, trillions of dollars of American household wealth has melted away. Consumers are saving more and spending less. This belt-tightening may portend a prolonged period of sub-par top-line growth for U.S.-focused casino operators. The important feeder market of Southern California, the origin of nearly one-quarter of Las Vegas visitors, also happens to be one of the most troubled economies in the country. At press time, Nevada itself had the second-highest unemployment rate of all U.S. states at 13 percent.

To make matters worse, even as the demand outlook for Vegas remains cloudy, room inventory increased 6.1 percent in 2009 and is expected to increase another 2.7 percent this year, according to the Las Vegas Convention and Visitors Authority. Meanwhile, visitation - the demand side of the equation - was down 3.9 percent last year (through October).

The opposite is true in Macau. A favorable near-term supply-and-demand dynamic is one of the central underpinnings of my positive outlook for the market.

Some of the most ambitious developments are now being revived, but even under the most optimistic scenarios they aren’t expected to open until 2011 or 2012. Until then, I expect relatively benign growth in the number of gaming tables, especially compared to the brisk pace witnessed during the boom years, when the number of tables grew at an annualized rate of 56.8 percent and the number of casinos went from 11 to 33.

Longer-term, if the financing environment allows, the supply of hotel rooms, slot machines and gaming tables will once again rise with the development of the Cotai Strip.

But over the near term, while construction on Cotai might resume at a snail’s pace, there’s a dearth of planned property openings. On top of that, the Macau government is considering supply limitations and might cap the number of planned gaming tables to control growth.

At the same time, demand continues to be strong. In 2008, a year marked by worldwide financial calamity, gaming revenue in Macau was up 31 percent. While other markets around the world are still struggling, total gaming revenues this past August hit an all-time high. For the sake of comparison, that same month, gaming revenue on the Vegas Strip totaled about $450 million, and it, too, set a new record but of another variety: 20 consecutive months of declines.

All told, while many other gaming markets are still reeling, gaming revenues in Macau were expected to increase around 7 percent in 2009 to more than US$14.5 billion, implying fourth-quarter growth of nearly 40 percent. Even during the near collapse of the global economy, annual revenue growth, on a year-end basis, never turned negative. This year, growth is expected to resume its upward trajectory.

The demand is being driven by strong economic growth across all of Macau’s principal Asian feeder markets and by unrivaled population demographics. Of the nearly 16 million visitors to Macau through the third quarter, 50 percent arrived from mainland China, where an emergent middle class has contributed to its sizzling economy. Macau is the ultimate Chinese consumption play; its growth is largely tethered to the fastest-growing major economy in the world and its powerful consumer.

The surge in visitation over recent years has been supported by the Chinese government’s relaxation of travel restrictions. At the end of 2008 the so-called Individual Visit Scheme had expanded to cover 49 cities and more than 290 million Chinese citizens, representing about 22 percent of the most affluent people in China.

Limitations on travel are used like a dike by the government to regulate the flow of visitors; they can be relaxed to fertilize Macau’s economy or restricted to cool it off. Thus, one of the most compelling aspects of the Macau investment story is also its biggest risk factor: its reliance on China.

But limited supply over the near term and still-mushrooming demand, plus the future prospects of a more fully developed Cotai Strip and the visitors it will produce, make the Macau-oriented casino operators seem like a bet worth making.

USA Mutuals, based in Milwaukee, operates the Vice Fund (VICEX), a mutual fund that invests primarily in the gaming, alcohol, tobacco and defense and aerospace industries. For more information, visit usamutuals.com; or phone + 1 866 264 8783. Opinions expressed in this column are those of the author, are subject to change and should not be considered a recommendation to buy or sell any security.