How Macau Can (and Will) Copy the Las Vegas Model

By Markets Fool.com

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Macau skyline. Photo by the author

2015 will be the worst year for Macau since the liberalization of its gaming industry just over a decade ago. As a result, companies like Las Vegas Sands , MGM Resorts International , and Wynn Resorts will continue to struggle. Yet even the most bearish estimates of a 30% decline in gaming revenue compared to 2014 would put Macau's total gaming revenue at around $31 billion, which is still more than 3 times as much as 2015 expected gaming revenue for Las Vegas.

However, what makes Las Vegas a more appealing option now is not gaming revenue, which only makes up about a third of the total Vegas visitor economy. Instead, its travel, resort, and convention revenue growth matters much more.

Macau is already starting at a higher total revenue base than Las Vegas. With the help of a vastly growing Chinese middle class with newfound leisure vacation abilities, if Macau can make the switch to a more diversified non-gaming economy, it could be more profitable for these companies (and their investors) than ever before.

Here's how Macau can, and will, make the switch.

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Macau's recent woes
After such an amazing 2013 and start to 2014, we couldn't have expected the major downturn that came to Macau's gaming economy in the past few quarters. The gaming revenue issues are primarily the result of a campaign China's president Xi Jinping has taken against corruption. This included high-ranking Chinese officials using government funds to gamble in Macau.

The campaign has taken a turn toward more broadly decreasing Chinese citizens' affinity for gambling, especially among the high net-worth gamers. This has driven down the VIP segment, which has historically made up most of Macau's gaming revenue base. This drop in high net worth player spending is behind the majority of recent gaming revenue issues in Macau.

The Las Vegas model
The Las Vegas gaming story has also been tumultuous. Let's not forget how the 2008recession in the U.S. caused gaming revenue in Las Vegas to drop 20% from 2008 to 2010. Investments there were also hammered at that time, similar to what's happening now in Macau. Now that things are starting to pick up in Las Vegas again, companies there have realized that gaming itself isn't a good stand-alone bet.

So, companies in Las Vegas are turning much of their focus to hotel, entertainment, dining, and convention revenue, which is driving most of the growth in Vegas now. In fact, gaming revenue now makes up less than a third of total visitor spending: the lowest percentage in Las Vegas' recorded history.

Why this model can (and must) work in Macau
Currently, gaming still makes up around 85% of Macau's travel economy. Because the VIP gaming segment there has been so drastically reduced, total gaming revenue is taking a nosedive. However, the future is not in VIP gaming, but instead mass-market travel, with more emphasis on non-gaming activities.

The mass-market segment of Macau visitors -- made up mostly of middle-class tourists who are coming from China and nearby areas -- is growing steadily: up nearly 20% year over year for the last few quarters. With the middle class exploding in China, leisure and travel is a booming industry in the region -- one that will continue to drive growth for Macau in the long term.

The economy there will diversify; in fact, it must, because the government is mandating it. The local government is drafting a five-year plan for Macau to continue to diversify into much more than gaming, with more tourist options. The government has said this will be a major part of the companies' relicensing process coming up in the next few years.

Gaming companies are wary of these changes -- and of the need to prove them in the new casinos they are building in Macau now.

The best bet on Macau's future
Las Vegas Sands is well ahead of this trend in Macau, and it continues to be the best bet in the industry going forward.

Las Vegas Sands' new integrated resort on Macau's Cotai strip, The Parisian,will be the first of these new resorts to open, with a target opening date of Chinese New Year (February) 2016. With more properties in Macau and far more hotel rooms than any of its competitors, LVS already looks like the best company to gain on the trend toward mass-market guests in Macau.

To top it off, Las Vegas Sands is the most profitable company in the industry, with 2014 total income up 23% year over year -- even in the face of a declining Macau, and when other companies are reporting declining income (Wynn), and even net losses (MGM).

The article How Macau Can (and Will) Copy the Las Vegas Model originally appeared on Fool.com.

Bradley Seth McNew owns shares of Las Vegas Sands. 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.