Inside Asian Gaming

INSIDE ASIAN GAMING | December 2012 30 A fter years of explosive growth, Macau’s gaming sector is on the cusp of a major transformation from which it will emerge as a solid yield play. Given gaming’s high-risk reputation, we are concerned that conservative investors may miss out on what we see as a ‘Raining cash’ opportunity. Indeed, our analysis suggests that evenWarren Buffett, the ultra-safe ‘Sage of Omaha,’ would score Macau highly on his well-known investment checklist. Macau scores eight out of 10 on our Buffett-inspired scorecard, which draws on his key investment criteria. The gaming enclave has a straightforward business model with wide economic moats, excellent earnings visibility, high ROEs, robust balance sheets, disciplined capital management, strong free- cashflowgeneration and generous dividends. The sector also has a wide margin of safety on valuations, trading on a dividend of 5% relative to the market’s 3%. As detailed in our recent “Still raining cash” report, we believe the Macau gaming sector is the best way to gain exposure to the rising Chinese middle class. In light of slower top-line growth, we would own the sector for dividend yield and the gradual pricing in of Cotai projects. 1. Investment criteria Is the business simple and understandable? Just as Buffett favors simple and understandablebusinesses,sodowe.Macau gaming companies are straightforward with around two-thirds of earnings derived from casino, hotel and retail operations. VIP is less transparent and accounts for two- thirds of revenue, but only one-third of the industry Ebitda. Casino operations Each casino game entails a different house advantage, with the average advantage for baccarat of 1.24%, blackjack of 2%, single-zero roulette of 2.7%, craps of 1.0% and Caribbean Stud of 5.47%. The casino theoretical win depends not only on the house advantage but also the player’s average bet size and average length of stay. So it is critical for the casino to keep the players playing. Outcomes at the gaming tables could be volatile and thus it is important for casinos to manage volatility, which could be done in three major ways: In their latest authoritative report on the Macau gaming sector, authors Aaron Fischer, Richard Huang and Jon Oh from leading regional independent brokerage and investment group CLSA Asia-Pacific Markets explain how Macau stocks tick all the right boxes for value investors IN FOCUS