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 fourth point in the list, that Hengqin Island will contribute to Macau's growth in tourism, should help investors feel comfortable that Macau still has room to continue expanding.
Macau is a relatively small island, and even with the government "reclaiming" land by filling in waterways to add landmass to the island, Macau is still running out of room to continue to add anything more than casinos. That strain will be eased by Hengqin Island.
Three signs of an increasingly overcrowded Macau
1) All of the four major casino companies in Macau, including Las Vegas Sands, Melco Crown (NASDAQ:MLCO), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN) have new casino resorts coming online in 2015 or 2016, and they are all feeling the squeeze of the island's small borders. Las Vegas Sands will be the first to have its new casino, The Parisian, open on the Cotai Strip in summer 2015. Sands has seen steady increases to its other Macau casinos, and this new casino will likely be the start to a frenzy of new travelers coming to see the new Cotai resorts.
2) The industry in Macau is switching focus from VIP gamers to mass-market gamers, and providing for more and more of them. Operations in Macau over the last decade have been largely focused on the profits coming from VIPs, the high rollers of the gaming industry. But new industry trends show that there will be more profit from focusing on the mass-market segment of gamblers. Macau casino companies have seen gains from this segment in the last few years already, and 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, compared to VIP gamer growth of just 13%.
3) From Hengqin, travelers can drive over a bridge that links to Macau. But future plans include a bridge linking Hong Kong, Hengqin, and Macau, making transportation between the three areas very easy. Upon completion of the Hong Kong-Hengqin-Macau Bridge in 2016, Hengqin will become the only place in Chinese mainland directly connected to both Hong Kong and Macau. Additionally, Chinese developers are planning to extend intercity railways from the larger mainland city of Guangzhou to Hengqin Island by 2016, which is expected to then link to Macau in the future. Trains on the current Guangzhou-Zhuhai railway have been running since January 2013.
Betting on a fix for the overcrowded resort island
Las Vegas Sands China President Edward Tracy has said, "Hengqin is the game changer for Macau." As Citigroup analysts noted, Hengqin Island is a long-term play, and its prospects are underappreciated. But with the only place in China where gambling is allowed rapidly running out of space, Hengqin's supporting role seems to be a sure bet.
Just to the west of Macau, separated by the Lotus Bridge, is Hengqin Island. Gambling is not legal in Hengqin since the region is still part of the mainland where gambling is forbidden. But the area should prove to be a great spillover for guests and tourists who are gambling just across the bridge in Cotai. Macau only has 28,000 hotel rooms but has an average daily visitor count of 77,000, according to Citigroup analysts.
According to its government website, Hengqin Island has about 28 kilometers of open land available to develop. The island itself is actually much bigger, though about two-thirds is reserved for preservation efforts. While visitors can't gamble in Hengqin, they have other entertainment options for the whole family, such as Chimelong theme park with its 1,888-room resort. This is the first of 10 proposed similar resorts planned in an effort to turn the island into "the Orlando of China."
Investors' Foolish takeaway
Will lack of space be the start of declining growth in Macau in the next few years? As Macau continues to be a bet on mass market gamers, with more and more middle class Chinese citizens traveling to the island, more space will be needed to accommodate those visitors, and add more leisure attractions. Fortunately, Hengqin Island is positioning itself to be just the resource needed for allowing Macau to continue expanding and the resulting growth should be a boost to Macau casino companies like Las Vegas Sands. Foolish investors should keep their eyes on this developing area and continue to research how they can profit from it.