By Keith Fitz-Gerald
As I’m sure we’ve all seen, the Dubai government – through its Dubai World investment subsidiary – is going to pony up $5.1 billion for a 9.5% stake in Kirk Kerkorian’s MGM Mirage (NYSE: MGM). Dubai is also reportedly interested in a 50% ownership position in MGM’s billion-dollar CityCenter development project. This stock, incidentally, has been a favorite of mine for some time, now. So it’s a deal that I’ll be watching closely.
It was definitely the business story of the day yesterday, headlining most of the key financial-news Web sites and dominating the talk on the top few air waves on the cable business news programs.
But was it the real story?
Most investors seemed to think so; they accepted the story at face value, and bid the shares up nearly 9%. MGM’s stock closed at $80.92, up $6.62 each.
I know better, however. There’s actually a much bigger end game being played out here. It’s a very different game than the one most investors see. And it’s a game that you definitely cannot afford to miss in the years ahead – at least, not if you want to do as I do and align your investment capital with the unstoppable global trends of our time.
And like so many other things in the global financial markets these days, one of the key trends at play here involves China.
Let me explain …
The Lowdown on Dubai
Following in the path of certain highly accomplished investors is not a new strategy, although we here at Money Morning have articulated a simple game plan that focuses on the very best international investors, including Warren Buffett and Jim Rogers [For a recent free research report detailing this strategy, click here].
You’ll prove yourself quite shrewd if you add Dubai to that list of the very best right now.
Dubai World, in case you are not familiar with it, is actually the state holding company for the Persian Gulf nation of Dubai, part of the United Arab Emirates.
Most investors think Dubai is some kind of oil-rich backwater. But in reality, Dubai World is just as sophisticated an investor as The Blackstone Group LP (NYSE: BX), Kohlberg Kravis Roberts & Co., or other well-known global private equity firms that have been in the news so often lately. In fact, probably more so. [Indeed, to read our recent investment report on Dubai, and its investment strategies, click here].
I say this because Dubai has a history of doing things for cash. They're simply not interested in the complex financial machinations of the global equity players at Canary Wharf or on Wall Street. Nor do they need them to make money. In fact, they abhor complicated deals.
Instead, Dubai World tends to invest only if and when they can acquire the truly tantalizing trifecta of high potential cash flows, low relative valuations and above-average returns.
This makes Dubai World worth watching – closely – particularly where individual investors are concerned.
I say this because Dubai tends to execute deals that have understandable operations and clearly delineated profit expectations. This means that an individual investor can clearly see what the so-called “smart money” – in this case, Dubai – is doing. And it also means that the investment thesis is simple enough for folks such as you and I to follow along and actually even emulate the profit strategy. Let’s be honest … that’s highly unlikely with a KKR, a Blackstone or a Kerkorian deal, where attempts to parallel – invest alongside – can only lead to frustration, and missed opportunities elsewhere.
MGM’s China Connection
The "why now" is actually easy to understand. On the heels of the past few weeks of trading, MGM is off its highs and looks very attractive at these levels.
As for why MGM, well, that's a bit more subtle.
I think Dubai chose MGM for reasons that have nothing to do with gambling. Instead, I believe the investment relates directly to the perceived value of MGM's multi-billion dollar plans as they relate to China. In other words, Dubai's interest in MGM is yet another example of the investment strategy I’ve perfected.
And the core premise is as simple as can be. If you can’t find a way to invest in China-based companies – or you feel that valuations have made such plays overly risky – then look for the next best thing: Invest in companies that will profit “because of China.”
Money Morning Managing Editor Bill Patalon and I jokingly refer to this as my “because of China” strategy. But the profits are no laughing matter. We all believe that China has a terrific future – as a country, and as an investment. But right now, the risk-reward ratio isn’t terrific. The long-term profit prospects are still good, but the valuations are very high, meaning the risks of near-term correction are somewhat high. That’s what makes the “because of China” strategy so attractive. You get the high profit returns of companies involved in the high-growth market, but there’s also some diversification. And because the firms are not actually “in” China, the share prices haven’t run up, meaning the valuations are still reasonable.
MGM is a great example. Admittedly, most investors have yet to focus on MGM with regard to China, so allow me to provide a brief background.
MGM has been pursuing China since 1994, and has plunked down more than a billion
dollars on Macau alone. MGM is set to develop several billion dollars worth of additional real estate projects in China and around the world through a joint venture with the Diaoyutai State Guesthouse of Beijing. This long list of projects begins with a series of non-gaming-oriented hotels in second-tier Chinese cities, where branding is in its infancy – meaning that one of MGM’s typically well-crafted marketing campaigns (customized for China’s culture, and for its emerging consumer constituency) will very likely have a massive and positive impact.
MGM is also working with the Mubudala Development Corp., in both Dubai and Abu Dhabi, on some similar luxury-level (non-gaming) projects. And that’s where the loop really closes.
The Strategy Comes Together
Remember at the start of this report, when I mentioned the importance of “unstoppable global trends?” Couple that with my “because of China” investment strategy, and you’ve got yourself one heck of a formula for a building a portfolio that will generate a sustained stream of long-term profits, and at very reasonable levels of risk. Here’s what I mean.
By making this purchase, what Dubai has really done is to “buy” a substantial chunk of MGM’s future cash flow. They have also guaranteed themselves a stake in the future development of China’s luxury travel market by, in essence, reaching back in time – from a marketing standpoint.
Right now, in those second-tier cities, there’s no hospitality/recreation market and no consumers – meaning there’s also been no need for any marketing. But that’s all going to change – and in a big way.
Incomes in China are soaring. At state-run companies alone, wages were up 21% in the first quarter over a year ago, as these fast-growing firms pay up in an attempt to overcome severe labor shortages and fill open positions. Wages at private-sector firms are likely rising at an even steeper rate. That’s going to create a consumer class, a group of folks just like you and I who have money to spend and leisure time to spend it.
By going into second-tier cities, which lack these amenities, MGM will build leisure-time destinations that have little in the way of competition. And they’ll launch the very first marketing campaigns to “tell the story” and to stoke consumer interest. For Dubai, this is like getting a second chance to invest in the U.S. consumer market – at mid-1800s prices!
That’s what I mean by reaching back into time and grabbing mind share when there is none: Dubai is getting in on the ground floor of some very powerful trends. It's a classic Asian business strategy and one that reflects a very sophisticated understanding of how Asian consumers think and act when it comes to their money.
At its most basic level, Dubai is hoping to grab a share of the ever-increasing power of the Chinese consumer at a time when China’s consumers have not yet formed opinions about branding or luxury travel experiences.
Given that Asian consumers in general – and Chinese consumers in particular – tend to be much more highly brand savvy than their European and American counterparts, this is an especially important strategy to execute at the present time, because:
- The market is literally ripe for the picking.
- Super-strong brand loyalties have not yet been established.
- The magnitude of this opportunity – given China’s huge population – is huge.
According to one report I saw recently, Chinese travelers have now eclipsed Americans and Europeans in their spending habits: They are dropping $900 a day at a time their counterparts in Europe and America are only spending $400 a day – and are cutting back.
How to Get Fair Share
So how should we play their hand? Obviously, one course of action is to consider purchasing MGM stock: If it’s good enough for the Dubai government – and for a whole host of other savvy institutional investors that I haven’t mentioned here today – then it’s certainly good enough for you.
The other thing you can do is to watch the news intently, and to selectively buy whatever Dubai is buying. The guys that run Dubai World are some of the savviest investors I have ever run across and their predisposition towards cash-rich deals makes them especially shrewd when it comes to identifying future returns.
Moreover, if this deal is any indication of things to come – as well as how Dubai perceives the evolution of the Chinese market in the coming years – future deals will include entertainment and financial properties, both of which will be necessary to process and support the legions of Chinese travelers newly savvy in the ways of worldwide luxury travel.
Track Dubai’s deals, and follow behind them when it makes sense. Over time, you’ll profit quite handsomely.
Contributing Editor Keith Fitz-Gerald, a brand-new addition to the Money Morning research team, is one of the world’s foremost experts on the Asian markets, especially China and Japan. A professional trader who works with wealthy investors and institutions, Fitz-Gerald is also a truly global investor: He and his family split their time between Portland, Oregon, and Kyoto, Japan.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.