For anyone looking to invest in the casino industry, the Chinese city of Macau has been — and will likely continue to be — the opportunity of a lifetime.

When looking to invest in Macau gaming, many investors gravitate toward U.S.-based operators such as Las Vegas Sands (NYSE: LVS), Wynn Resorts (Nasdaq: WYNN), Melco Crown (Nasdaq: MPEL) and MGM Resorts (NYSE: MGM).#-ad_banner-#

However, one of the big issues that investors miss is that the China gaming market is much different than in the U.S. The real money is made from VIP gaming rooms that cater to high-roller Chinese gamblers — also known as “whales” — and not from five-star hotels, dining or shopping, as in Las Vegas. VIP gaming accounts for nearly 70% of all casino revenues in Macau.

More than 65% of Macau’s visitors are from mainland China, and the average stay is only a day. Many of those visitors are there only to gamble — they couldn’t care less about the other attractions.

The lion’s share of the action takes place in the VIP gaming rooms, which represent one of the best and most underrated investment opportunities when it comes to investing in Macau. Enter one of Macau’s top VIP room operators, Asia Entertainment & Resources (Nasdaq: AERL).

A Very Powerful Catalyst
Asia Entertainment is one of the only VIP room operators that trades on the U.S. market, but because it operates in the misunderstood Macau gambling industry, it gets little respect. AERL is an underfollowed, underappreciated stock, trading at a very low forward price-to-earnings (P/E) ratio of 3.3 and enterprise value/EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of 5.2.

	Flickr/Lablascovegmenu
	Many of Macau’s visitors are there only to gamble — they couldn’t care less about the other attractions.

As a result, Asia Entertainment plans to list on the Hong Kong Stock Exchange during the first half of 2014. This is potentially a huge catalyst for the stock. The move will open the door to new investors, mainly more knowledgeable investors, which better understand companies that operate in Macau. The stock could see 100% and 150% upside within the next year as these more sophisticated investors come to market.

The Macau Chasm
Asia Entertainment operates VIP game rooms. So the company sets up VIP gaming rooms with casino operators (such as Las Vegas Sands, among others) to promote VIP gaming. Asia Entertainment’s VIP gaming room promoters currently operate in five properties in Macau.

There’s chasm between how investors think Macau operates and how this special administrative regional actually does operate. In Macau, it’s a network of agents and collaborators who are tied to VIP gaming promoters, all of which are providing top-notch services to the VIP player. As a VIP promoter, Asia Entertainment is a key go-between for the casino and the high rollers it desperately needs.

The real takeaway is that Asia Entertainment, as the VIP room operator, gets paid directly from the casinos. The company has no responsibility to collect debts from players — that’s the agents’ job — so the risk of not getting paid is nil, contrary to what many investors believe.

Macau Gaming Market: Still On Fire
The growth of Macau’s gaming market has been phenomenal. In August, casinos in Macau took in $3.8 billion from gamblers, 18% more than the same month last year. August’s take was the second-highest monthly amount ever, eclipsed only by the $3.92 billion take in March of this year. Gaming revenues are up 16% this year from 2012.

The other big positive is that China’s middle class is rapidly growing. The percentage of Chinese middle-class households is up from 4% in 2000 to 66% in 2012. There has also been a rise of the Chinese “upper” middle class, which has more discretionary money for gambling. McKinsey estimates that by 2022, the upper middle class will account for 54% of urban households. (Remember that two-thirds of Macau’s visitors are from China.)

And VIP gaming accounts for nearly 70% of all casino revenues in Macau, a huge positive for Asia Entertainment. The VIP gaming room market remains highly fragmented and there are plenty of opportunities for Asia Entertainment to grow through acquisitions and the opening of new VIP rooms at more casinos.

Limited Downside
Asia Entertainment has a very solid balance sheet and pays investors a 4% dividend yield, representing only a 25% payout of earnings. Its current assets are 1.5 times its total liabilities, and the company has total cage capital of $300 million (consisting of markers receivable of $260.1 million and cash, cash chips and non-negotiable chips of $39.8 million). That’s virtually $5 per share in cash, and the stock trades for less than $4. The company has no debt to worry about, and book value is nearly $4.60.

	© 2013 ASIA ENTERTAINMENT & RESOURCES LTD
	Asia Entertainment added the Galaxy Macau to its portfolio of resorts in 2011.

One of the other real beauties of Asia Entertainment, beyond the fundamental mispricing and fact that its liquidation value is greater than its market value, is that the company is still growing. It has a proven ability to grow within the Macau market (just this summer it added the VIP room at Le Royal Arc Casino), and management has over 20 years of experience in the Macau VIP market.

The company has over 1,600 agents spread across Asia to bring VIP players to its VIP rooms. Its business model is easily scalable: It requires little physical property, and the company has no capital expenditures — just 17 full-time employees.

As far as the upside, with the help of a dual listing and continued Macau gambling success, the stock should trade at a more appropriate 10 times earnings and 10.5 times enterprise value/EBITDA, which puts the stock’s fair value between $8.50 and $9.

The eventual Hong Kong listing should help the company attain that more appropriate valuation. Because Hong Kong does not permit shareholder loans in its listings, Asia Entertainment recently completed a rights offering to transform a $60 million shareholder loan into permanent capital.

Management and insiders are gearing up for the listing, having recently purchased $14.9 million worth of stock at $4.50 a share and $19.3 million at $3. Those purchases included a 24-month lockup.

Risks to Consider: Company-specific risks include the possibility that Asia Entertainment could be kicked out of a casino (or casinos) or that a slowdown in the Macau gaming market would also strain its business.

Action to Take –> Buy this misunderstood stock with upside to $9. The company is a misunderstood gem in Macau gaming, and one that has limited downside. The company has a very solid balance sheet and pays investors a 4% dividend yield.

P.S. Macau has been very profitable for investors. And if you’re looking for more bold investment ideas, you should read our latest report, “The Hottest Investment Opportunities For 2014.” In it, you’ll read about how Apple could become the largest bank in America and how technological breakthroughs are taking over the operating room. Click here to learn more.