Inside Asian Gaming

February 2010 | INSIDE ASIAN GAMING 29 is shown in the previous chart, which illustrates that even at points in time when property prices have fallen, Macau’s mass-market gaming revenues generally bucked the trend and continued to grow. The 2008/09 period was an exception, although this was seen only in one quarter (which coincided with visa restrictions), following which, it grew rapidly. We believe that the mass-market resilience is driven by two factors: • The mass market relies less on credit and more on the savings/ earning power of consumers in China. Hence, money supply has less of a direct impact on gambling habits. • Macau has not significantly penetrated the mass-market customer base in China. Hence, although some people may choose not to frequent casinos as economic circumstances change, they are replaced by others who have not been to Macau and want to visit there. Dynamics for mass market remain positive The analysis conducted by our retail analyst, Jessie Qian, and China economist, Paul Cavey, supports our view that although monetary tightening may affect the VIP credit environment, the mass market should remain strong as long as consumer confidence and earning power remains strong. As shown in the chart below, while the reduction in workers incomes has been well publicised, private consumption has still grown quite strongly, supported by government stimulus measures. Implication 2: VIP growth/monetary policy link If there is in fact a relationship between China’s monetary policy and Macau’s gaming revenues, then investors in the gaming sector need to be aware of the risks that emerge as talk of monetary tightening in China increases. Data shows a link between monetary policy and VIP revenues Intuitively speaking, it makes sense that China’s monetary policy should affect Macau’s gaming revenues – particularly in the VIP segment, which is more reliant on credit and liquidity in China. Data is limited, given the infancy of Macau’s gaming market (and Chinese monetary data). The following chart shows a relationship (with a three month lag), for instance, it shows that Macau’s VIP gaming revenues were growing until 2Q08, after which they started to as significant in 2008/09, the decline for Guangzhou and Shenzhen was more significant, with prices falling 15–35%. Intuitively and based on our discussions with industry sources and junket operators, we think there will be an impact on Macau’s gaming market from cooling/declining property prices. This makes sense, mainly because cooling property prices in a high inflationary environment (what China is currently facing) should make consumers feel as though they have less spending power and hence should pull back on discretionary spending (such as gambling). Falling property prices have a negative multiplier effect on junkets There is an even bigger reason why property prices have an impact on the VIP segment specifically. We understand property in China is one of the main sources of collateral that junket operators use against credit provided to VIP players. Hence, if property prices start to fall, junkets would be more cautious about the level of credit extended to VIP players. The inability to turn over the asset and turn the credit into cash (as property transaction volumes also decline) means the extent to which junkets can multiply their credit (or the multiplier effect) also declines. Hence, this would affect the level of VIP turnover in the market. Mass market proves to be more resilient and less affected Interestingly, our analysis also indicates that Macau’s mass- market revenues are not as sensitive to property prices in China. This Macau Policy Watch Macau’s VIP gaming revenues lag property prices by three months HK$m 25,000 VIP Gaming Revenues (LHS) China National Property price (RHS) RMB/sqm 5,000 20,000 4.500 15,000 4,000 10,000 3,500 5,000 1Q03 Note: In“Evidence 4”, property prices in Guangzhou and Shenzhen (the main catchment area for Macau gaming) fell more significantly than the national average. Source: CEIC, DICJ, Macquarie Research, January 2010 3Q03 1Q04 3Q04 1Q05 3Q05 Evidence1 Evidence2 Evidence3 Evidence4* 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 3,000 2,500 0 0 Mass-market gaming revenues are not as sensitive to property prices HK$m 12,000 Mass-market Gaming Revenues China National Property price (RHS) RMB/sqm 5,000 10,000 4.500 8,000 4,000 6,000 3,500 4,000 1Q03 Source: CEIC, DICJ, Macquarie Research, January 2010 3Q03 1Q04 3Q04 1Q05 3Q05 Evidence1 Evidence2 Evidence3 Evidence4* 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 3,000 2,500 2,000 0 2,000 14 yoy% Private consumption Urban household income Rural household income 12 10 8 6 4 2 0 Consumption outgrew income in 2009 stimulated by supportive policies Source: CEIC, DICJ, Macquarie Research, January 2010 2003 2004 2005 2006 2007 2008 2009F 2010F