Macau (Reuters) – As tiny Macau snatches Las Vegas‘ title as the world’s gaming capital, casino firms, retailers and hoteliers are building a huge new „neon alley“ entertainment center that may be one of their biggest gambles yet.

Analysts are certain of only one thing: Chinese are crazy about gambling. But whether they will bring their families and pass up a chance to get rich to go to the theater or to shop is a huge unknown, and not every operator in the former Portuguese colony is a sure investment bet.

Macau is on a roll, its nexus between local government and foreign investors even held up by the Chinese government as a model of „one country, two systems“ since it was handed back to Beijing in 1999.

It is the only place in China where casinos are legal, and raked in nearly USD 7 billion in gaming revenues in 2006, a leap of 23 percent from 2005.

The arrival of foreign casino firms such as Las Vegas Sands and Wynn Resorts has fueled a massive construction boom and jaw-dropping gains in share prices for the handful of companies which offer investors a piece of the action.

The city is in sniffing distance of surpassing all of Las Vegas, which made USD 7.1 billion in gaming revenue in the year to November. Six new casinos are to open this year alone, including the giant Venetian Macao by Las Vegas Sands, the brainchild of Sheldon Adelson, the world’s 14th richest man.

Some USD 24 billion has been earmarked for infrastructure and building the Cotai Strip — reclaimed land where casinos, hotels, malls, convention halls and theatres are springing up.

The hype around Macau shows no sign of abating, with Richard Branson’s Virgin Group talking with Australia’s Tabcorp Holdings Ltd. to jointly build a USD 3 billion casino.

Optimism reigned at a ground breaking ceremony in early January for Macao Studio City — a venture between eSun Holdings, a unit of Lai Sun Development, and a U.S. consortium.

As hip-hop music blared and guests donned hard hats and drank champagne, the chairman of U.S. mall firm Taubman Centers, touted the idea of „build it and they will come“.

„Las Vegas has proven that a supply driven strategy will be successful,“ said Robert Taubman, whose firm is a partner in the Macao Studio City retail, casino, film and entertainment complex.

But some analysts doubt Macau will transform overnight into a Las Vegas, which has in the last few decades reinvented itself to attract families and conventions as well as gamblers, providing lucrative new revenue streams.

Morgan Stanley’s Rob Hart, for example, is not keen on retail because of a spike in supply.

Macau is building 10 million square feet of retail space, five times more than the current level. Las Vegas Sands is adding nearly one tenth of the new supply at the Venetian Macao, due to open in mid-2007.

„Stay with the gaming plays and avoid the retail,“ said Hart, a Hong Kong-based gaming and property market strategist.

Because of their low emphasis on retail, Hart likes Galaxy Entertainment Group Ltd. and Melco International Development Ltd., whose joint venture with Australia’s Publishing and Broadcasting Ltd. — Melco PBL Entertainment (Macau) Ltd. — is building three casinos.

But Hart said Melco PBL‘s Crown Macau hotel-casino, due to open in April, could suffer because of its poor location.

Galaxy shares have risen nearly 50 percent in the past 12 months, while Melco paid off with a gain of 35 percent, and they are two of the poorest performing shares.

Wynn Resorts, which opened its first Macau casino in September, has jumped 72 percent in the last year, while Las Vegas Sands has surged almost 120 percent.

Delays?

Mary Ellen Olson, a credit analyst for Standard and Poor’s (S&P), believes Macau’s long-term future is strong. Some 100 million Chinese live within a three-hour drive, and 1 billion within a three-hour flight.

The southern Chinese city is only an hour’s ferry ride from Hong Kong, a former British territory returned to China in 1997 where casinos remain illegal.

But a massive supply of gaming tables and hotel rooms would depress profit margins in the near term, Olson said.

„When you have a look at the length of the (Cotai) strip, it’s hotel, hotel, hotel, hotel — all with casinos,“ she said.

Daily revenue per gaming table in Macau has already dropped to USD 12,000 this year from USD 22,382 in 2002, when a four-decade monopoly owned by casino mogul Stanley Ho expired and other players, including U.S. operators, were allowed in.

The average stay is still a shade less than 24 hours, with many gamblers leaning on tables through the night.

And questions linger over whether Macau can build the infrastructure needed to handle an expected doubling of visitor numbers to around 40 million a year by 2010.

A second ferry terminal has been put back to 2008, labor is scarce and building costs are climbing, raising the prospect of costly delays for many projects.

The huge debt Galaxy and Las Vegas Sands have taken on prompted S&P to issue credit warnings on the companies. And analysts say any hiccups could cause stock investors to rethink after a share price surge among Macau casino plays.

„Gaming investors are fickle and a soft quarter or missteps in Macau could change the view dramatically and the stocks could reverse,“ U.S.-based Morgan Stanley analyst Celeste Mellet Brown said in a research note.