Inside Asian Gaming

15 14 for gaming suppliers we’d obviously look at both table and slot ma- chine supply data. We believe this is particularly exciting for SHFL, IGT and WMS in our coverage universe as the latter have or will have slot machines in local language to offer while SHFL has an abundance of table, multi-player stations, and utility products to install. Source: Company reports and Prudential Equity Group, LLC estimates. Source: Company reports and Prudential Equity Group, LLC estimates. Figure 1. Macau Casino Pipeline Figure 2. Macau Supply Growth Through 2010 2H06 1H07 2H07 1H08 2H08 2009 2010 Total PF New Supply 914 546 1,658 940 600 1,530 1,900 9,845 Growth Y-O-Y 52% 20% 52% 19% 10% 24% 24% 460% New Supply 1,900 1,100 8,590 2,500 4,000 9,250 14,300 45,445 Growth Y-O-Y 50% 19% 126% 16% 22% 42% 46% 1,094% New Supply 1,100 800 6,227 5,300 5,000 6,200 10,612 41,091 Growth Y-O-Y 19% 12% 80% 38% 26% 26% 35% 602% 2H06 StarWorld Sands Phase 2 Wynn Phase 1 2-3 Mocha Slot Outlets Greek Mythology Phase 2 1H07 Fisherman’s Wharf Gaming Grand Lisboa Grand Waldo 2H07 Wynn Phase 2 MGM Grand Crown Taipa Venetian Four Seasons Far East Consortium 1H08 Arc de Triomphe Shangri-La Sheraton Galaxy Mega 2H08 City of Dreams Hilton Regal 2009 Shun-Tak Nam Van Oceanus Wynn Cotai Shun Tak Cotai 2010 MGM Grand Phase 2 Fortuna Global Ponte 16 Wynn Cotai MGM Cotai booths) in order to get around the country’s ban on gaming.Pachislot machines are similar toWestern slot machines, but the key difference is that players can control when each individual reel stops, implying skill as well as chance can affect the payout of tokens (also indirectly redeemed for cash). The Japanese government estimated pachinko and pachislot raked in over US$300 billion in revenue in 2004 – nearly four times the revenue from legal casino gaming worldwide. Japan’s pachislot market is regulated by local police (Hotsukio), and regulations are evolving in order to reduce the gambling orient- ed nature of the games and increase the entertainment value so that people will lose less money (i.e. on average consumers bring US$300- $500 to gamble in order to have a chance at the biggest payouts which approximate US$1,000). New machines will payout less and require less coin-in (US$100 of coin-in for about US$300 in payout). Basically, players have time based loss limits that are declining follow- ing the adoption of the new Regulation 5 governing the machines. Reg 5 was introduced on 1 July 2004, and all Reg 4 machines must be phased out from halls by 1 July 2007. •We met with Aruze,Sega Sammy (SGAMY),IGT Japan,and visited a number of Pachislot/Pachinko parlors in Tokyo. The point of the trip was to better understand the dynamics of the Pachislot market in advance of the required shift from Reg 4 (4.5 and 4.7) to Reg 5 games. This is an increasingly important market for IGT (with Sammy as its partner), and a market that we believeWMS will eventually en- ter with Aruze as a partner. Though a larger report will follow, the following are key points. • The installed base of Pachislot is approx. 1.89 million units (and an estimated 3 million Pachinko machines) across approx. 15,000 parlors in Japan. Approx. 1.7 million units are sold each year. Three major operators (Maruham, Gaya, and Dinam) own a total of 450-600 parlors in great locations and the rest are gener- ally small facilities run by about 5,000 owners. Games hold ap- prox. 8-9%. Revenue per unit was approx. US$170 at the peak of Reg 4.5 and dropped to approx. US$125 following the introduc- tion of Reg 4.7. Games cost approx. US$3,000-3,500. • Approx. market share: Sega Sammy 40%, Olympia 16%, Yamasa 9%, Taito 8%, Aruze 5% (didn’t have a Reg 4.5 or 4.7 ap- proved game). • Hotsukio has limited capacity to approve Reg 5 games and can approve about 9 per week. This will expand on April 1. Cur- rently, Aruze has 10 Reg 5 approvals – the most, while Sammy has approx. 7 and IGT has 1-2. • We highlight Aruze as an interesting company listed locally on JASDAQ. Aruze whose market cap is approx. US$1.5 billion owns nearly 25% of WYNN, worth approximately US$1.6 billion Notes From Japan The last issue of Inside Asian Gaming featured a report on Japan’s huge pachinko industry. Pachinko machines take the shape of vertical pinball-like devices, with steel balls falling into one of several slots which either retain the balls or pay out a prize of more balls – redeemed for prizes, which in turn can be redeemed for cash at covert kankin (prize redemption properties with Pansy Ho, the JV’s sub-concession fee to SJM (US$200 million + US$60 million land purchase) covers all future projects. • The IVS program that currently allows for individual visitation from 230 million Chinese covers less than 10% of Chinese cities. While the program will continue to expand the qualification is based on dis- posable income metrics of each city. With 18 million visitors in 2005, we’ve yet to see the real strength of the IVS – which should evidence itself over the next five years in conjunction with infrastructure proj- ects in the pipeline. • We saw Aruze’s transparent LCD mechanical reel product in the field (and at their HQ in Tokyo). It is perhaps the most compelling slot product ever introduced.This product transforms traditional mechan- ical reels by layering over video content. WMS has the US rights to this technology which is planned for a Fall 2006 launch. In our view this product could steal the show at G2E 2006 and bolster participation placements in F07. Notes From Singapore • We visited Singapore and saw the Marina Bay site which is the first of the 2 Integrated Resorts (IR’s) being tendered in the wealthy city state. Some basic observations: i) the 51 acre, US$721 million site appears relatively narrow; ii) this part of Marina Bay is currently not pedestrian accessible; iii) significant infrastructure is needed in order to make this a viable site in our view - i.e.light rail (planned) and highway exit ramps - due to its location next to a major highway. • Sentosa Island appears to be a more natural site for an IR than Marina Bay. We visited the site on Sentosa that is anticipated to be the ultimate location of the second IR. Its location is quite conve- nient from the city, more convenient than is commonly believed. This is achieved via a couple minute car or taxi ride over a toll bridge named Sentosa Gateway Avenue which is essentially in downtown Singapore. The site is to the west of the bridge and is not walkable (in our view) to any of the 3 major beaches on Sentosa (Siloso, Pala- wan, Tanjong). Other Field Notes From Macau • Lisboa, SJM’s incumbent market share leading casino, seems to be losing significant mass market share to LVS’s Sands, and perhaps some VIP play to Galaxy Waldo. • SHFL’s Mega Star multi-player product appears to be experienc- ing significant demand in Macau. This includes its Sic Bo and Bacca- rat platforms. We believe placements will continue to ramp in Macau given that it requires no dealer – we see skilled labor becoming an increasing issue in Macau given the worsening labor crunch. • We came across IGT’s first attempt at local language slot product in Macau. This shellfish themed mechanical reel was experiencing tre- mendous play despite the unfavorable location of both the banks we observed on the casino floor. • We believe Wynn Macau plans to target initial gaming revenue mix of 70%mass market and 30%VIP,with a consolidated revenue mix of 85% from gaming and 15% derived from non-gaming. • By 2009 a JV between Shun Tak (Pansy Ho) and Hong Kong Land Holdings’ plans to open an 800,000 sq. foot retail mall (and second Mandarin Oriental hotel) attached to MGM Macau, which we believe should help MGM and Wynn volumes. We don’t believe this retail square footage is/will impact LVS’s lease strategy for Cotai given fa- vorable point of entry geography. • Even though MGM may develop 2 or more additional Macau Tables - 1,757 (current) Slots - 3,805 (current) Hotel Rooms - 5,852 (current) Period Macau Tower Marina Bay