Inside Asian Gaming

Oct 2007 | INSIDE ASIAN GAMING 31 ated hospitality division, with roughly 50% to be directly involved in the casino gaming floor. These include the hiring of croupiers, supervisors, etc. We are already seeing pressure on wages not only in Macau but also in Malaysia. Retaining experienced staff is becoming increasingly difficult as the regional job mar- ket is tight and there are plenty of openings in Macau offering at least 3x the existing salary. DB believes that wage inflation in Macau will be at least 15% per annum over the next three years; if that’s the case, the same wage growth if not more also applies to Malaysia. Falling profitability Return on Investment Capital (ROIC) for new casino projects is falling, especially in Macau, due to rising supply. New projects in Macau are projected to generate mid-teen ROIC.This is a function of rising capital expenditure (capex), increasing supply and diminishing first-mover advantage.We believe that as the project return diminishes, the industry will eventually reach a saturation point where supply growth will taper off until and unless demand growth ex- ceeds projection. To lessen capital outlays in Macau, operators intend to sell apartments at their projects to help reduce funding needs. By shortening the time to realize value on projects, this strategy could help push up project returns tremendously. Rising construction cost pressure In Singapore, both new integrated resorts are projected to yield a first-year ROIC (first 12- month projected EBITDA/budgeted capex) of about 14-16% based on today’s construction budget. However, Las Vegas Sands recently indicated that its Marina Bay Sands casino resort in Singapore could cost over US$4.0bn, implying a potential 10% or more cost overrun com- pared with its original budget of US$3.6bn (or S$5.4bn). Higher construction costs and sand prices are the primary reasons cited, as well as design changes. In January, Indonesia banned the export of sand to Singapore, while stricter checks on barges also disrupted granite sup- plies. Sand and granite are key components of concrete. Construction began in February and the resort is on track to open in late 2009. Resorts World at Sentosa, on the other hand, said that it didn’t know if its US$3.47bn (or S$5.2bn) budget needed to be topped up as the final drawings for the integrated resort are not yet complete. For now, the first two contracts that have been awarded, amounting to more than S$600m, are within cost projections.These contracts include road diversion works, reclamation and a 4,100-lot basement car park. Selective building materials like cement and steel had been contracted forward and prices locked in. InMacau,operators have opted to enhance project return by monetizing residential/retail properties. It is unclear at this stage if this option is available in Singapore under the licensing agreement.In any case,any sale of property assets within the integrated resorts development would require the Singapore government’s approval. A US$2.4bn market size by 2010 is not a tall order, in our view.We expect the gross gam- ing market to hit US$16.7bn in Macau and US$1.2bn in Malaysia (generated by one casino) by then. The imminent issue in Singapore is containing cost, in our view.With the Singapore government committed to not issuing any new gaming license for the first ten years,the chal- lenge hinges on how operators can attract visitors. Analyst Extract Salary scale Malaysia RM 2,000 US$570 RM 3,000 US$857 Macau HK 14,000 US$1,818 HK 20,000 US$2597 Starting salary for a dealer Staring salary for a dealer Salary for gaming floor supervisor Salary for gaming floor supervisor Source: Deutsche Bank Gaming tax (% of gross gaming revenue) Singapore VIP 5% Mass 15% GST/Others 7% Comment Gaming taxed is fixed for at least 15 years Source: Deutsche Bank; company data Macau 35% 35% 5% Up to the government; the last revi w was in 2002 Malaysia 25% 25% 0% Up to the government; the last review was in 1999 ROIC by project City of Dreams Trinity Total Source: Deutsche Bank 2010 EBITDA US$m 332 146 478 Budget US$m 2,650 670 3,320 Returns before asset sale 12.5% 21.8% 14.4% Sale proceeds $m 910 179 1,089 Invested capital $m 1,740 491 2,231 Enhanced ROIC 19.0% 29.7% 21.4%