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 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. 

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, Wynn Resorts , MGM Resorts , and Melco Crown 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. 

Foolish bottom line
So, how big can Macau get? I doubt China will allow Macau gaming revenue to grow larger than 1% of its overall GDP. That's just too large for any country. But Macau can double in size over the next decade, and China's economy will grow at the same time. That could bring gaming revenue to $100 billion, an incredible size and amazing opportunity for resort operators.

Macau's days of growing 40% annually are over, and with more supply hitting the market in 2016, investors should watch what they pay for gaming companies. With that said, Macau is still a huge opportunity that could grow around 10% annually for the next decade. Not bad for a small plot of land with little going for it other than games of chance.

Is Las Vegas Sands a buy?
For many companies, successfully capitalizing on a booming Chinese economy is like winning the jackpot. That's indeed the case for gaming company Las Vegas Sands, which made a big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our premium report on Las Vegas Sands. Be sure to claim your copy today by clicking here.

The article How Big Can Macau Get? originally appeared on Fool.com.

Fool contributor Travis Hoium manages an account that owns shares of Wynn Resorts. 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 don't 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Investor’s Toolbox

Improve your investing savvy with the right financial toolset.

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Add a Comment

*0 / 3000 Character Maximum