Melco Crown Entertainment Ltd (ADR) (MPEL), Las Vegas Sands Corp. (LVS): How Big Can Macau Get?

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In the past decade, Macau has grown from a seedy gambling monopoly to a gaming Mecca more than six times the size of the Las Vegas Strip. So it’s now reasonable to ask just how big Macau could get. Since Las Vegas Sands Corp. (NYSE:LVS) first opened Sands Macau in 2004, Macau has outgrown China itself by a wide margin, so a larger and larger percentage of China’s GDP is being spent on gambling. Long-term, this is a limit to Macau’s growth as well as the expansion of gaming around Asia.

Las Vegas Sands Corp. (NYSE:LVS)

A gambling habit gone crazy
Many people think there’s already too much gambling in the U.S., but China really puts us to shame. Macau’s gaming revenue as a percentage of China’s GDP is already nearly double the comparable figure in the United States:

Metric United States Macau/China
2012 Gaming Revenue (Growth) $37.3 billion (4.8%) $38.0 billion (13.5%)
2012 GDP (Growth) $15.7 trillion (4%) $8.3 trillion (7.8%)
Gaming as % of GDP 0.25% 0.46%

Sources: American Gaming Association and Macau Gaming Inspection and Coordination Bureau.

The fact that China spends roughly twice as much of its GDP on gaming as the U.S. does is important, because there’s a limit to how large this percentage can get. The Chinese government doesn’t want 2% or 3% of GDP going to Macau, particularly to the U.S. companies that operate there.

For companies operating in Macau, the overall growth of gaming is going to be the driver of profits going forward. So Macau’s gaming revenue will need to grow to 1% of China’s GDP, or maybe more, to justify the high price of gaming stocks right now.

More expansion is coming
As gaming has expanded, so have operators in Macau and surrounding areas. Las Vegas Sands Corp. (NYSE:LVS), Wynn Resorts, Limited (NASDAQ:WYNN), MGM Resorts International (NYSE:MGM), and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) are each spending billions to build on Cotai. If Macau gaming revenue doesn’t expand, these new resorts will pull revenue from existing properties and dilute results.

Another worry should be gaming expansion in Singapore, The Philippines, South Korea, and a number of other countries are looking into legalized gaming.

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