Inside Asian Gaming

17 16 lthough the opening of new casinos and tourist attractions in the first quarter spurred April gaming revenue to jump 24% year-on-year,growth in May and June slowed significantly. The key calendar event that softened May growth was the Golden Week holiday in China. The GoldenWeek holiday in the first week ofMay had traditionallybeen thepeak season for mainland Chinese travelers to visit Macau. This year, however, expensive room rates and packed tourist spots kept many mainland visitors away. Chinese tourists now prefer to spread their traveling evenly throughout the year, leaving May 2006 visitation only 11% higher year-on-year – well below the year to date growth of 18%. Visitor arrivals in June also grew 11%, bringing year to date growth to 17%. As of end-June, 10.4 million visitors had descended on Macau in 2006. The bulk of visitors hailed from mainland China (50%), Hong Kong (30%) and Taiwan (7%). Same day visitors represented 51.6% of total arrivals, while approximately 45.3% of mainland Chinese visitors came under the eased travel restrictions of the Individual Visi- tor Scheme (IVS). Visitor growth could remain subdued in the third quarter as the summer will be another dull quarter in the casino opening pipeline.Thankfully, the low base of compari- son set by the weak performance in July last year – when gaming revenue declined 11% year-on-year – should be easier to beat. Key sector risks include a slowdown and possible monetary tightening in the Chinese econo- my, and disruptions to travels. Golden Week, World Cup tough on Q2 June’s growth of 7% year-on-year was well below the year-to-date growth of 14%. We believe the low June growth could be attrib- uted to two factors. Firstly, there was a brief lull in the casino resort pipeline, before the high growth phase kick starts in the second half of the year. Secondly, the World Cup, which began in mid-June, diverted gambling activity to sports betting, particularly in the VIP segment. VIP baccarat revenue fell 3% year-on-year in the second quarter, and con- tinued to be a drag on overall growth. The soft results could put stocks under pressure in the near term.Long-term investors, however, could buy on dips as strong growth should resume in the fourth quarter after the opening of Wynn Macau on September 6. 2Q growth driven by mass market Growth in the second quarter of 2006 was driven mainly by an expansion in the mass market segment, which continued to benefit from the opening of new casinos and tourist attractions in 2006. Mass market gaming rev- enue was up 37% year-on-year to US$0.67bn, in line with our full-year expectations of 35% growth, while the VIP segment witnessed a marginal 3% decline in revenue growth to US$ 0.90bn. We believe this could be the re- sult of the World Cup effect and certain casi- nos and cruise ships in South East Asia offer- ing “remote gambling via live video link.”This implies that high-rollers no longer need to travel to Macau to gamble,and can now place their bets from other locations. Despite the slowdown, we still maintain our full-year fore- cast of 2% growth for the high-roller market. Due to its stronger growth momentum, the mass market segment captured 43% of total Macau gaming revenues in the second quarter, up from 34% in the second quarter of 2005.Conversely,theVIP segment has seen its market share drop 9 percentage points to 57% in the second quarter of this year. Slots remain a tiny portion of gaming revenues, edging up one percentage point to 4% over the same period. Average table win US$8,800 per day Macau added 277 tables in the second quarter to a total of 1,925, mainly due to ca- sino openings (Galaxy Grand Waldo) and the Sands expansion.This represents a 55% year- on-year increase in table supply. With such a big increase in supply, unit table revenue was diluted 28% year-on-year from US$12,200/ table/day in the second quarter of 2005 to US$8,800/table/day in the corresponding quarter this year. On a sequential basis, the dilution is equal to 13% quarter-on-quarter. With a full pipeline of new casino openings over the next two years, we expect this num- ber to be further diluted to US$4,600/table/ day by 2008.This is still almost 2x the current Las Vegas average of US$2,600/table/day. In addition, Macau faces a wide discrep- ancy in table win between its VIP and mass market segments. We estimate that in the second quarter of 2006, VIP tables averaged US$18,700/table/day, and mass market ta- bles averaged only a quarter of that, around US$4,700/table/day. Slots – Market acceptance increasing Macau added 310 slot machines in the sec- ond quarter of 2006 to total 4,533. Despite this 64% year-on-year jump in slot unit, win per slot machine remained relatively stable, down only 7% year-on-year to US$136/ma- chine/day in the second quarter. This sug- gests that the Macau market is embracing the new developments in slots, which could eventually contribute a lot more to the total gaming revenue as the mass market devel- ops. For full year 2006, we expect slot win to remain at around US$140/machine/day. Industry demand and supply We expect the Macau market to double from US$5.6bn in 2005 to US$11.4bn in 2009. In other words, it would grow at a compound annual growth rate (Cagr) of 19%. Due to the distinct difference between the high-roller Macau 2Q Trends The World Cup and a lull in new casino openings led to soft gaming revenue growth in May and June, but Deutsche Bank’s Karen Tang expects growth to return to its strong track from the fourth quarter New supply on the way Quarterly gaming revenue by segment 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 (US$bn) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 34% 66% 34% 66% 39% 61% 68% 42% 42% 58% 43% 57% VIP Slots Mass mkt Source: Gaming Inspection & Coordination Bureau, DSEC 80% 60% 40% 20% 0% -20% 2004 2005 1Q06 2Q06 2006F 2006-08F Cagr Gaming revenue (yoy change) 44% 34% 75% 11% -3% 45% 17% 3% 44% 12% -3% 37% 16% 2% 35% 20% 4% 38% Source: Deutsche Bank 50% 40% 30% 20% 10% 0% -10% -20% Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Monthly gaming revenue (yoy change) -11.0% 18.2% 9.5% 3.7% 0.2% 10.8% 42.9% 16.1% -4.6% 24.3% 3.7% 6.8% YTD Source: Gaming Inspection & Coordination Bureau, DSEC A