1 Bet You Can Make On China's Exploding Middle Class

Expected to double in 6 years, China's middle class is sure to increase revenues in Macau.

Apr 10, 2014 at 9:40AM

Las Vegas Sands (NYSE:LVS) executives have pointed to five trends that will lead to continued growth in Macau over the next five years.

Images
Trend One of Five. Source: Las Vegas Sands 2013 10K presentation.

The first trend is a rising middle class in China, and the resulting rising discretionary income which will mean more money spent on leisure travel and gaming. Because of this, companies in Macau have switched their focus from VIP gamers to Mass Market consumers. This has already helped to spur growth in 2013, and will continue to boost growth over the next few years. Macau casino operators such as Las Vegas Sands, Wynn Resorts (NASDAQ:WYNN), MGM Resorts (NYSE:MGM), and Melco Crown (NASDAQ:MPEL) are all seeking to capitalize on this trend by building more casinos with more accommodations at the mid-price range and adding more mass market gaming tables.

Plenty of room for more growth
The rise in per capita income of China's growing middle class has been continuing to drive growth in the tourism and entertainment industry in China and the surrounding areas. This has already been one reason that revenues have exploded in Macau over the last few years, with gaming on the island pulling in more than $45 billion in 2013.

According to research and analysis by Mckinsey group, the growth isn't over; not by a long shot. In a report, the group predicts that by 2022, more than 75% of China's urban consumers will earn between $9,000 and $34,000 a year. Compare that to the 4% of the total Chinese population who fell within that range in the year 2000.

Magnitude Of Chinas Middle Class Growth Is Transforming The Nation
The magnitude of China's middle-class growth is transforming the nation. Graphic: Mckinsey

Why you should bet on the rising Chinese middle class
This new middle class comprised of nearly 200 million consumers in 2012, or 15% of urban consumption. However, the group of Mckinsey analysts say that by 2022, their share of urban consumer demand should more than double, to 35%. By that time, this group will be almost three times as numerous as the baby-boomer population which has been driving U.S. consumption for the past few decades.

The profitable consumers in this rising middle class are the current teenagers and people in their early 20s, born after the mid-1980s and raised in a period of relative abundance compared to that of their parents. Their parents, suffering through years of shortage and uncertainty, focused on saving and building economic security. Thanks to economic reform and China's government opening up to the world, saving is declining and discretionary spending is rising. These consumers are ready to show their independence through consumption.

Profiting with the shift from VIP high rollers to mass market consumers
Gaming companies in Macau have been largely focused VIP gamers in the past and 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 over the next few years. Morgan Stanley reports estimates that in 2014, growth from mass-market gamblers will top 28% in Macau, compared to VIP gamer growth of just 13% during the same time. Which company is doing it best, though?

One company is gaining the most from the mass market switch
One of the largest operators in Macau, Wynn Resorts, won big last month when the company reported 2013 year-end financial results with fourth quarter profits up 92% year over year; this was 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%. MGM also showed great profits with this new switch to mass market consumers, posting net revenue of $926 million in the fourth quarter of 2013, a 27% increase over the fourth quarter of 2012.

However, Las Vegas Sands has proven to capture the most revenue from this segment. Over the last four years, Sands has taken more than twice as much revenue from mass market gamers in Macau than Melco Crown and more than three times as much as Wynn Resorts, according to the company's 2013 year end results. 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.

Macao Mass Market Table Revenue By Operator
Photo: Las Vegas Sands 2013 10Q presentation

Lvs Macau Mass Table Revenue
Photo: Las Vegas Sands 2013 10Q presentation

Foolish takeaway
After a few years of incredible growth coming from Macau's gaming industry, is there any growth left for investors to gain from in the years to come? A rising middle class in China and the shift in focus from VIP gamers to mass market gamers would say so. Investors should stay bullish on Macau and the gaming operators winning from this trend, especially the biggest winner on this trend, Las Vegas Sands.

3 stocks poised to be multi-baggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers