Inside Asian Gaming

INSIDE ASIAN GAMING | July 2008 38 Market Outlook B acked by a large feeder market with rising incomes, we believe Macau has the potential to become the Las Vegas of Asia. We forecast a 23% compound annual growth rate for gaming revenues over the next few years, from US$10.4bn in 2007 to US$28.8bn by 2012F. This is at the high end of consensus. The Street seems to be consistently underestimating the depth of this potential market. Our view was reinforced recently as 1Q08 revenues jumped 62% year-on-year. We are less concerned about industry supply than market share competition. While we forecast gaming supply to be 2x the current level by 2010, we view most of the new supply as high-quality productswhichwill help expand themarket rather than cannibalizing existing properties. With a pipeline of large-scale destination resorts, we believe the visitor and revenue mix will see a gradual shift from VIP to mass. In our view, the share of revenue from VIPs will gradually decline, from 67% in 2007 to 62% by 2012F. We see a strong correlation between VIP growth and the Chinese equity markets. Hence, this segment is likely to be more cyclical and sensitive to policy risks. In support of mass market growth We believe growth in the mass market should accelerate to a 22% CAGR over 2008-12F, driven by four main factors: • Visitation growth -The relaxation of visa restrictions for individual travellers from China has been the key driver of visitation. Since the Individual Visitor Scheme (IVS) was launched in 2003, coverage has expanded to 49 cities (population net of 314m), accounting for 15-20% of the most affluent people in China. We estimate tourist arrivals to reach a 20% CAGR through 2007-12F. • Rising disposable income - We anticipate a strengthening wealth effect on the expanding middle class population in China given continued growth in the Chinese economy.This should translate into higher discretionary spending on leisure-related activities. • Quality new supply - The Venetian Macao opening in August 2007 clearly expanded the market, with Macau’s casino revenue up 47% year-to-date since then. The strong growth reinforces our “Quality Supply Drives Demand” thesis. The new properties set to open on Cotai over the coming years, including Melco’s Macau Demand and Supply Deutsche Bank’s Karen Tang provides her latest outlook for the city’s gaming market, foreseeing a steady rise in revenue as a string of new high-quality destination resorts open Macau gaming revenues forecast Visitation forecast China GDP growth