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.

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.

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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.

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