Inside Asian Gaming

May 2009 | INSIDE ASIAN GAMING Macau Market following several meetings involving the six operators over the last few weeks,” adds the paper. The “several meetings” mentioned by the analysts is a reference to theMacau GamingOperators’Association (MGOA), founded earlier this year by the six Macau gaming licence holders. Dr Stanley Ho, Macau’s former gaming monopolist and chairman of SJM Holdings, the biggest single casino operator in themarket, was recently quoted by the Chinese news agency Xinhua as saying he had “promised” (though didn’t specify to whom he had made the promise) not to talk about the commission rate for junket operators. Agenda Dr Ho’s assertion that VIP agent commissions are off the agenda seems to be contradicted by Francis Lui, Vice Chairman of Galaxy Entertainment Group, who told Inside Asian Gaming ahead of the next meeting of the MGOA planned for 18th May that he expected that agent commissions would indeed be a topic for discussion. If the gaming trade body actively pursues among its members the idea of a commission cap, then it may remove the need for the Macau government in effect to impose one, albeit on a supposedly voluntary basis. That idea has been around since at least the summer of last year, rather than the October date mentioned by the report authors. Morgan Stanley says it does believe the government will act if nothing is agreed internally by the industry. “We expect the Macau government to regulate commissions paid to junkets/promoters to be capped at 1.25%. We estimate the current commission rate is around 1.33% for the industry, although some junkets/promoters are paid even more,” explain the authors. Despite the potential upside of the commission cap, Morgan Stanley points out there are what the analysts call “near-term headwinds” in the Macau market generally, including intensified competition as a result of the expected opening of City of Dreams in mid-June. “We believe CoD will drive visitor arrivals up; however, it will also compete fiercely with Venetian for the mass and VIP share coming to [the] Cotai Strip. This could result in bigger discounts and narrower margins in the interim for both operations,” state the authors. ROI down Another issue identified by the research team and touched on in other analysts’ reports and previous stories in IAG, is that as the Macau market matures in terms of the number of venues, there is a tendency for return on capital investment to decay. “We expect CoD and GMR [Galaxy’s currently mothballed Cotai resort, sometimes referred to as Galaxy Mega Resort] to deliver lower returns on investment than peers, such as Sands and Venetian, as the market matures and revenue growth slows down. Also, Galaxy and Melco currently deliver lower returns as shown in Exhibit 1.” Overall though, Morgan Stanley Research justifies its generally bullish view on Macau on the basis of some positive news since the turn of the year. “We expect Macau gaming revenue to decline by 11% in 1H09 before recovering in 2H09 (+4%YoY),” say the authors. “This will translate into a 4% decline for 2009, which is better than consensus estimates of double-digit decline, in our view.” The analysts point to the easing of China’s restrictions on permits issued under the Individual Visit Scheme; positive data from China’s economy and the market bounce associated with the coming opening of a new property, i.e., City of Dreams in June. “Anecdotally, we have heard that in January the Guangdong government loosened the visa approval process to Macau,” states the report. Restrictions eased “It now takes 15-30 days per application versus three months previously. According to a SCMP report, a proposal to make multiple- entry visas available to all Guangdong residents to visit Hong Kong and Macau was raised in the last meeting attended by Chief Impact of Commission Cap on Operators Source: Company data, Morgan Stanley Research Note: based on 2010 top down estimates VIP Gaming Structure with Commission Cap VIP Gaming Structure without Commission Cap Source: Company data, Morgan Stanley Research Source: Company data, Morgan Stanley Research 41