For some time now, major casino operators such as Las Vegas Sands (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), and Melco Crown Entertainment (NASDAQ: MPEL) have been investing heavily in Macau, China's answer to Las Vegas. Indeed, it has proven to be a lucrative opportunity for these companies, as the growth of the gambling industry in the area has been enormous. Despite the intensive development going on in the region, some commentators still see more room to grow. What does this mean for casino operators?
Nomura recently came out with a research report on Macau, and it is decidedly optimistic. According to the Japanese firm, growth in the area might just be getting started. Already seven times the size of Las Vegas, projections indicate that the market size could almost double from $45 billion to $80 billion. The reasons for this are twofold.
Firstly, the Macau market is seen as being underpenetrated. According to Nomura, a market is mature when it reaches a penetration rate of around 25%. At the moment, the penetration rate is estimated at only 1.4%-2.3%. This means that visits could be roughly 12 times the 2013 figure before the market reaches maturity.
Secondly, in such immature growth markets, supply apparently drives growth. In other the words, the more casinos that are available, the more growth is to be expected. As such, investments in new Macau properties are likely to pay off big-time for companies developing their presence in the area. In any case, the potential for growth is far higher than in Las Vegas.
Still going strong
Let's take a look at the Macau performance from the three major US casino operators. Sands China, a fully owned subsidiary of Las Vegas Sands, delivered solid growth for its last report, although not quite as much as analysts had hoped. Net income soared 40% to reach around $655 million on a 28% increase in revenue. The company has been investing aggressively in expanding its product offerings and is also getting a boost in traffic due to large investments in tourist infrastructure in the area.
Wynn's Macau operations are also growing quickly. Wynn's Macau profit was up 32% for the fourth quarter, largely driven by margin improvements, as the company has been working on attracting more mass-market gamblers who pay in cash. Analysts seem bullish on the company's prospects to boost its market share in this segment, noting that the company should be completing its renovation of the Wynn Hotel soon.
Melco Crown operates two gambling resorts in Macau and is according to a Bloomberg survey of analysts the highest-rated casino stock in the area. Following the 'baccarat boom,' which fueled the area's 18% growth in gaming revenue over 2013, the company is working on constructing a third resort in Macau. Additionally, the Hong Kong-based company is looking to open a resort in the Philippines. Over the last six months or so, the stock has soared around 90%, putting it at its highest valuation since 2011.
The bottom line
Analysts certainly seem optimistic about Macau's prospects, if Nomura's recent note is anything to go by. Many commentators believe the area is looking forward to another profitable year, as underpenetration and increased supply should boost the top and bottom lines of casino operators.
Wynn and the Sands have both been investing heavily in the area and are slowly but surely switching to the more lucrative mass-market segment. Melco Crown is also working on expansion, so investors should be particularly bullish on the company's prospects going forward.
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