Operations in Macau over the last decade have been largely focused on the profits coming from VIPs, the high rollers of the gaming industry. However, new industry trends show that there will be more profit from focusing on the mass-market segment of gamblers. Macau casino companies are preparing to focus on this market segment to lead growth in 2014. Morgan Stanley reports estimates that in 2014, growth from mass-market gamblers will top 28% in Macau; this is compared to VIP gamer growth of just 13%. Macau casino operators such as Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), and Galaxy Entertainment are all seeking to capitalize on this trend early.
VIPs require perks, like helicopters from Hong Kong to Macau and more luxury rooms. Catering to these gamers has been an acceptable challenge for casino companies, and is one that has been worth the trouble because of the profits these high rollers can bring along in the form of heavy betting at the tables. However, profit growth is starting to decrease from these VIPs. Instead, bringing more and more mass-market gamers to the island will increase profits. Even if absolute profit per gamer is lower, higher margins on each gamer and more gamers overall means more overall profits.
A new bridge from Hong Kong to Macau, as well as the coming rail system linking separate parts of the island, means faster transportation to and around the island. This means more mass-market gamers will be able to reach the casinos. In a statement about mass-market gaming growth, Sands CEO Adelson said that "We believe the growth trend will be enhanced by infrastructure investments," commenting on how infrastructure development with the bridge and rail system will contributes to Macau's "evolution as the leading business and leisure destination in Asia."
Operators are already showing massive gains
One of the largest operators in Macau, Wynn Resorts, won big this month when the company reported 2013 year-end financial results. The company's fourth quarter profits increased by an astounding 92% year over year, led mainly by mass-market gaming growth in Macau. This segment of gamers in Macau increased 35% compared to VIP gaming which grew by 24%. Wynn is looking to continue this trend toward higher profits from the mass-market segment in the hopes of continuing its strong growth in 2014 and beyond.
Las Vegas Sands is also seeing the increasing profit potential from the mass market gaming segment as a means to continue strong growth in 2014. Fourth quarter net income for the company's Asian operations increased 40% over the same quarter in 2012, from $467 million to $655.6 million. This has been in large part because of an increase in total gamers, more than the net worth of each individual gamer. Adding shopping malls, theaters, and exhibition halls in the resorts and increasing the number of hotel rooms shows that Sands continues its commitment to appealing to more and more consumers instead of only the wealthiest.
Galaxy Entertainment, the third largest Macau casino operator, is another company leading the way in this trend. Not wanting to continue working with junket operators, the middlemen that help to get the high rollers from the mainland to Macau, Galaxy is shifting its focus toward the consumers that are happy to come to the island themselves. Paying their own way to the city, mainstream gamblers require fewer perks (which translates to lower costs.) These gamers also have higher profit margins than was originally assumed. The casino reports that the profit margin for mass-market gamblers is about three times that of VIPs. The percentage of revenue brought in by mass-market customers has increased in the last two years to now account for more than 50% of total revenues for Galaxy. Unfortunately for U.S.-based investors, this company is not listed in the U.S. However, U.S. investors still need to know this tough competitor vying for those mass market gamers.
Some analysts have recently begun to ask if Macau's growth will slow and if the investments in companies based there are over priced. While the companies operating in Macau have seen incredible growth recently, including Las Vegas Sands' share price increase of over 2,100% in the last five years, there is still room for more growth. Trends such as better and faster transportation led by infrastructure development, as well as added family attractions and hotel rooms, show that Macau is likely to continue growing rapidly in the years to come. As a result, it will become more of a mass-market travel destination. Even if VIP gaming profits start to slow, the mass-market gamers should easily make up for it and lead new growth in 2014 and beyond.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.