Inside Asian Gaming

33 Ownership of casinos could provide further long-term revenue. Analysts at JPMorgan estimate that by 2011,more than half ShunTak’s annual earnings will come from its planned casinos at Harbour Mile and Cotai, though its margins are likely to be significantly lower than many other casino owners because it will rely on an SJM licence. year 2006, up 82.2% year-on-year. The company says it is working on extremely attractive margins amounting to 65% on the Nova City project. Coincidentally, the investment bank Nomura estimates com- pound annual growth rates in Shun Tak’s core earnings of 65% over the financial years 2007-09. Morgan Stanley estimates that by 2009, around 78% of STH’s in- come will derive from property as revenues frommajor projects such as One Central (the joint venture with Hongkong Land in which STH has a 51% stake) and further stages of Nova City are booked in. There are concerns though from UBS that this property- supported business model based on building and then selling off may be hard to sustain as undeveloped prime sites become scarcer in Macau. UBS says: “While 2008/09 profits will continue to be dominated by Macau projects, additional ‘hidden gems’on similar prime location and large scale as One Central and Harbour Mile may be harder to come by in future.” Morgan Stanley thinks one way around this is for the company to position itself as a developer-manager. Its report says:“Over 90% of the company’s property portfolio is development property, with the remaining 10% investment proper- ties. The latter number is likely to move up over time because the company is likely to keep several of the buildings currently under construction for long-term rental purposes,including the retail,office, hotel, and serviced apartments from the HK Land JV [One Central] and Harbour Mile sites. Shifting the property portfolio towards investment would pro- vide a steady rental revenue stream for future balance sheets, as well as offering potentially attractive leveraging power as property capital values increase. Morgan Stanley notes: “One of the main issues relating to STH’s balance sheet is its lack of leverage.We welcome the value enhancing practice of share buybacks (i.e., reduces cash and buys at discount to Net Asset Value (NAV),with STH having spent more on buybacks year- to-date than 05 and 06.” Strong connections JP Morgan says it is confident Shun Tak will find more property development opportunities in Macau because of the company’s links to STDM. “Given their strong Macau connection and ties with STDM, which is believed to be one of the biggest land owners in Macau, we believe Shun Tak should be able to replenish its land bank in Macau on an ongoing basis.” STH already had significant interests in the Hong Kong property market, but the growth rates currently available in the Macau market made investment there impossible to ignore. Shun Tak Income Statement Source: Company data, Morgan Stanley Research 2004 2005 2006 2007E 2008E 2009E Revenue Transportation 1,659 1,742 2,006 2,207 1,986 1,986 Property 1,901 501 302 443 184 7,227 Hospitality 161 289 325 357 413 529 Investments and others 135 118 162 153 143 208 Eliminations (18) (109) (176) (199) (172) (627) Total 3,838 2,541 2,618 2,962 2,555 9,324 Property Development Profit Source: JPMorgan estimates, company data. HK$ millions Hotels (Marriott at HK Airport, Nam Van, Westin, Mandarin at One Central and the old Mandarin) 88 Transportation (ferry, airline, and coaches) 300 Existing investment properties 62 New investment properties (Malls at One Central, Nam Van, and office building at Nam Van) 300 Nam Van casino 400 Cotai casino 650 Total 1,800 Property Development Profit Source and estimates: Morgan Stanley Research 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 HK$ millions 2006E 2007E 2008E 2009e 2010e Nova City Pokfulam Road Nam Van Stie One Central Shun Tak-Owned Casino Profit Split Source: Company data, Morgan Stanley Research Wager $100 $2.65 $1.46 $1.06 $0.13 $0.94 $0.51 35% 55% Win Rate 2.65% Shun Tak EBITDA (35%) Operating Expenses SJM 5% Tax 40% Morgan Stanley says the Harbour Mile casino is likely to cost HK$350 million and will be pitched to the mass market, with 180 tables. It says the presence of the adjacent shopping mall and hotel should help generate visitors. Analysts add they expect the tables to bring in annually 1.5 times the average mass table in Macau (the aver-