Inside Asian Gaming

22 Macau Demand and Supply Backed by a large feeder market with rising incomes, Macau has the potential to become the Las Vegas of Asia, concludes Deutsche Bank’s Karen Tang in her latest industry forecast e expect the Macaumarket to grow at a compound annual growth rate of 25% over the next few years, from US$6.9bn in 2006 to US$16.6bn by 2010.The Street seems to be consistently under-esti- mating the depth of this potential market. Our view is reinforced recently as 1Q07 reve- nues jumped 45% year-on-year, and our top- end expectations could ultimately be proved conservative. With a pipeline of large-scale high-qual- ity destination resorts opening up, we believe the visitor and revenue mix will see a gradual shift from VIP to mass. We think the sluggish mass market growth that was recorded in the second half of 2006 is temporary, and market concerns are overblown.The share of revenue from VIPs will gradually decline from 65% in 2006 to 55% by 2010F, in our view. We see a strong correlation between VIP growth and the Chinese equity markets. Hence, this seg- ment is likely to be more cyclical and sensitive to policy risks. Structural trends support mass market growth We believe growth in the mass market should accelerate to a 28% compound an- nual growth rate over 2007-10F, driven by four main factors: • Visitation growth – The relaxation of visa restrictions for individual travelers from China has been the key driver of visitation. Since the Individual Visitor Scheme (IVS) was launched in 2003, coverage has been expanded to49 cities (with a net population of 314million),accounting for 15-20%of the most affluent people in China.We estimate tourist arrivals to reach a compound annual growth rate of 20% through 2007-10F • Rising disposable income – We antici- pate a strengthening wealth effect on the expanding middle-class population in China given continued growth in the Chi- nese economy. This should translate into higher discretionary spending on leisure- related activities. • Quality new supply – The Wynn opening clearly expanded the market, with gam- ing revenue up 43% year-on-year over the last seven months since the launch in Sept 2006,reinforcing our“Quality Supply Drives Demand”thesis.The pipeline of new open- ings, including Crown (May 2007),Venetian (third quarter of 2007), MGM Grand (fourth quarter of 2007), Galaxy Mega Resort Cotai (late 2008), City of Dreams (late 2008), and Macau Studio City (early 2009), are de- signed to become destination resorts to at- tract leisure visitors.We believe these proj- ects will collectively expand the market. • Infrastructure improvement – While in- frastructure could be a bottleneck, the government is committed to addressing it. The Lotus Bridge in Cotai was opened on May 1, in time for Golden Week (May 1-7). It has a capacity for 26million visitors,com- pared to the 13 million arrivals that came through the Peninsula border last year.The full pipeline of projects over the next three years highlight government efforts to keep infrastructure development in pace with the launch of newcasino-hotels and tourist attractions. This is essential for the enclave to support further visitor growth. Looming supply By 2010, we project the number of gaming tables will be over 3 times the current level. LVS is the most aggressive in adding capacity, with the majority of the new tables in Cotai at Venetian Macau, and the six partner sites. Melco PBL Entertainment is also expanding fast with over 1,400 tables at its four new properties.The other license holders are add- ing roughly 400-800 tables each over the period. By end-2010, LVS should have around 35% of the gaming positions in Macau. We are less concerned about industry supply than the intensifying competition for market share. We view most of the new sup- ply as high quality products, which will help expand the market, rather than totally canni- balizing the existing properties. 23 Macau gaming revenues forecast Gaming revenue growth (yoy change) China GDP growth Visitation forecast W 20,000 15,000 10,000 5,000 – 65% 2006 2007F 2008F 2009F 6,900 13,300 8,600 10,700 16,600 Overall 25% Cagr Slots 62% Cagr 65% 63% 59% 55% Mass 28% Cagr VIP 19% Cagr 2007-10F (m) 40 35 30 25 20 15 10 5 – 2004 2005 2006 2007F 2008F 2009F 17 +20% Cagr 19 22 26 32 38 Others Mainland China (US$ bn) 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 Real GDP yoy (%) 30% 25% 20% 15% 10% 5% 0% 16% 24% 4% 8% 18% 6% 37% 44% 32% 59% 71% 33% 35% 80% 60% 40% 20% 0% 3/06 5/06 7/06 9/06 11/06 1/07 3/07 YTD Wynn opens Source: DSEC Source: Deutsche Bank Source: DSEC, Deutsche Bank Source: DICJ, Deutsche Bank 2010F