Inside Asian Gaming

INSIDE ASIAN GAMING | January 2011 22 Market Outlook Under another sub-heading, “Infrastructure is shaping the landscape”, the report adds: “We believe the various infrastructure improvements could offer major upside potential for the mass market. They should alleviate the infrastructure bottleneck within the territory and make the mass-focused Cotai strip an easier destination for visitors. Most visitors to Macau arrive at the northern Gongbei border with Zhuhai.” Morgan Stanley adds the caveat, however, that in the short term, the VIP market will remain the key driver of balance sheet and stock performance for the Macau operators. The report states: “The VIP business has been growing at a faster rate than mass since August 2009 and stocks more leveraged to that have performed better. This is driven by easy money and credit access, plus strong GDP growth in China and Hong Kong. We do not expect these to change in the near term. Mass revenue per visitor is increasing but the growth would not be as fast as VIP in the near term. Average stay for hotel remained stagnant at 1.5 nights as well.” The suggestion fromMorgan Stanley is that the potential growth spurt in the mass will be linked to a positive upside on the mass sector, including specific economic and social catalysts. “This is driven by an additional attraction (Galaxy Macau), infrastructure improvements (Guangzhou-Zhuhai Intercity Mass Rapid Transit), and wealth effect. However, in 1H 2011, VIP could continue to grow faster due to easier credit conditions,” state the authors. Morgan Stanley also adds some insights on the potential upside risk in the VIP sector. “We expect Macau Gross Gaming Revenue (GGR) to grow at 15% YoY in our base case for 2011 and we think risk is on the upside. We expect Mass Revenue is going to increase by 21% YoY while VIP Revenue is going to increase by 12% YoY. We see upside risk from VIP revenue growth while we see limited downside risk for the mass revenue growth. We make our projection through bottom-up approach from respective projections of the operators.” The report’s authors emphasise they see the risk in the VIP segment as principally related to structural issues in the wider Chinese economy and unlikely to feed through to the market for some time. “Market is worried about the recent credit tightening started in November by the PRC will have impact on the Macau gaming sector; we think it is too early to worry about that. Gross gaming revenues continued to grow during the last tightening cycle starting 2004. Both Macau GGR YoY growth rate and Gaming Index increased with the China PBoC [People’s Bank of China] Lending rate and the Required Reserve Ratio (RRR) until 2007-08.” But Morgan Stanley cites potential changes in Shanghai money markets—the de facto financial capital of China—as having a knock on effect for the Macau VIP business; albeit with a nine-month time lag. Much of China’s high-end wealth has been generated out of equities listed in Shanghai, or via loans for property development done via the Shanghai banking system. “Rising SHIBOR (Shanghai Interbank Offered Rate) could impact VIP Roll YoY growth % in 9 months: Our correlation tests show that SHIBOR has strong inverse relationship with VIP Roll YoY% (SHIBOR leads VIP Roll YoY% by 9 months). SHIBOR has been increasing and thus could impact VIP volume growth, but as long as the growth rate remains higher than 15% (for which PBoC rate needs to go up Mass Revenue per Visitor Trending Up… - 500 1,000 1,500 2,000 2,500 3,000 Mar-07 Jun-07 Sep-07 Dec-07Mar-08 Jun-08 Sep-08Dec-08Mar-09 Jun-09 Sep-09Dec-09Mar-10 Jun-10 Sep-10 MOP$ +126% since Mar07 Source: DICJ, DSEC, Morgan Stanley Research …but Occupancy Rate and Length of Stay Are Flat - 10 20 30 40 50 60 70 80 90 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 1.2 1.3 1.4 1.5 1.6 Occupancy Rate (LHS) Length of Stay (RHS) % Nights Source: DSEC, Morgan Stanley Research Macau GGR YoY% Vs China PBoC Lending Rate 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Lending Rate % -40% -20% 0% 20% 40% 60% 80% 100% YoY % China PBoc 1-Year Lending Rate (LHS) GGR YoY% (RHS) Source: CEIC, DSEC, DICJ, Industry Data, Morgan Stanley Research