The New Train To Profits For Macau Gaming Investors

Meaningful expansion of the transportation system in the Macau region will drive profits for gaming companies in Macau over the next five years.

Apr 13, 2014 at 8:00AM

Las Vegas Sands (NYSE:LVS) executives have pointed to five trends that will lead to continued growth in Macau over the next five years. The third trend on the list, the rapidly developing transportation infrastructure in the region, is gearing up to provide customer and profit growth for casino companies in the area like Las Vegas Sands, MGM International (NYSE:MGM), Melco Crown Entertainment (NASDAQ:MPEL), and Wynn Resorts (NASDAQ:WYNN).

Images
Source: Las Vegas Sands 2013 10K presentation.

Two new transportation developments are coming to Macau, making it easier to get gamblers to get to casinos on the island. A full bridge between Hong Kong and Macau, and eventually Shenzhen and Macau, will help gamblers get onto the island faster and with less hassle. Additionally, the completion of the high-speed light rail system within Macau will link the different parts of the island, making it easier for gamblers to get from the airport to the main parts of the island, and on to the different casinos. These infrastructure developments, expected to be completed by 2015 and 2016, are the third reason investors should stay bullish on rising revenues in Macau. 

More gamblers means more profit
Many VIP gamblers arrange to have a helicopter fly them to their Macau destination. However, casinos are now switching focus to mass market gamers. Mass market gamblers getting to the Macau casinos have two options. The first option is to fly directly into Macau's international airport. The other option is to fly to the Hong Kong airport and take a ferry to Macau. Much of Macau's business comes from Hong Kong, Chinese citizens, or those visiting Hong Kong on business. For them, the main transportation to the island is to take the ferry from the Hong Kong port to Macau. The ferry ride, while beautiful, is one hour long on a relatively small, swaying vessel.With the new bridge, gamers will be able to get from Hong Kong to the Macau casinos within 20 minutes by taxi.

As was shown in the previous article of this series, Las Vegas Sands has shown to be the company most apt to benefit from the growth of mass market gamers, the segment that this new bridge from Hong Kong to Macau will serve. Compare this mass market growth to a company like MGM International(NYSE:MGM), which has gained the lowest in mass market revenues over the last four years at about one fourth of that of Sands.

Macao Mass Market Table Revenue By Operator

Macau Rail System Via Wikicommons

The map shows the extensive plans to have the rail cover the entire island. Photo:Wikicommons

How to bet on the better rail transportation
When the first phase is complete, 21 stations will connect the main areas of Macau, including the airport, the main entry points in the north part of the island, and the main gambling areas of Taipa and the Cotai strip. This first phase has a planned opening date in 2015. The second phase will add links to the Western Harbor, and together with the first stretch of rail will be able to transport 8,000 passengers per hour. Long-term planned increases to the line will lead to a capacity of 14,200 passengers per hour by 2020.

Future plans for the rail system are even more exciting. The rail is planned to eventually connect the Guangzhou-Zhuhai (cities on the mainland) intercity rail system. By linking these two systems, passengers will be able to get from mainland China to Macau with little more hassle than getting on a long subway ride, even though they will likely have to deal with exit and entry customs somewhere along the way.

Melco Crown Entertainment (NASDAQ:MPEL)is one company set to benefit from the rail system. City of Dreams, Melco's main resort in Macau, was one of the region's top performers in 2013. Melco Crown is now opening its new resort on the Cotai Strip called Studio City mid-2015, a cinematic themed resort that Citigroup analysts have said is the best positioned resort on the strip. Studio City will have one of only a couple of casino stops on the new Macau Light Rail system.

Wynn Resorts (NASDAQ:WYNN)is also a bet on the new rail system, with the current construction of a brand-new $4 billion resort on the Cotai strip as well. This new resort, expected to be complete in 2016, a year ahead of original estimates, will be floral themed and feature dancing fountains on an artificial lake like that at the Bellagio in Las Vegas. The Macau rail will have a stop at the front of this new resort as well.

Foolish takeaway
For investors that feel that Macau may be too difficult of a commute for mass market gamers, and thus growth will slow when VIP gamers start to decline, infrastructure developments such as the rail system and Hong Kong to Macau bridge should be bullish signs that more growth is still to come. Betting on the bridge and rail system means betting on the casinos that are gaining the most from mass market consumers, such as Las Vegas Sands, and betting on casinos with stops on the rail system, such as Melco Crown and Wynn Resorts.

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