Inside Asian Gaming

INSIDE ASIAN GAMING | December 2012 36 projects, the capex requirement will not be too onerous. Macau’s gaming companies plan to spend US$2.0-3.5 billion on their next Cotai projects, which looks like a huge figure on the surface. But the capex spend will span three to four years, implying that the average annual capex on a new project is around US$0.5-1.0 billion. Companies also normally fund 50-75%of the Cotai expansion by debt financing, which implies the actual cashflow strain to the company would be even less. 7. Rational with managing capital Buffett praises companies which return excess cash to investors. Macau gaming operators score well in this aspect as they return cash generously to investors by means of dividends. In 2011, SJM, MGM China, Wynn Macau and Sands China maintained a dividend payout ratio of 80- 100%, representingUS$3 billion of dividends returned to shareholders. 8. Generates high return on equity As a value investor, Buffett likes companies that generate high ROE. The Macau gaming sector scores well on this front, with its low capex requirement allowing high ROE. In 2012, we expect the Macau gaming sector to generate 33% ROE, which is the highest among all the sectors in Asia. The high return on equity of the Macau gaming sector has been underpinned by the respectable investment return generated by Macau casinos. In 2012, we expect these casinos to generate an investment return of 30-130%. 9. Avoids excess debt Buffett prefers a prudent management style and would favor companies that avoid excess debt. The Macau gaming sector is highly rich in cash. By 2012, we expect the Cotai capex Dividend flow Note: Assume the Cotai projects to take 4 years to build and also to assume 60% of the Cotai capex is to be funded by debt and 40% by equity; Source: CLSA Asia-Pacific Markets Note: Assume the Cotai projects to take 4 years to build and also to assume 60% of the Cotai capex is to be funded by debt and 40% by equity; Source: CLSA Asia-Pacific Markets IN FOCUS