Inside Asian Gaming

MEPL’s gaming table profile for the next five years Tables 2000 1800 1600 1400 1200 1000 800 600 400 200 0 80 142 130 545 Mass Market Tables Mass Market yoy 183 979 189 1246 195 1535 202 1613 Source: Macquarie Research, May 2007 2007E 2008E 2009E 2010E 2011E 2012E 9 8 PBL’s existing Melbourne customer base. Queried about the concern that PBL may prefer to send its high-rollers to its fully- owned Australian property, Mr Pinge an- swers that PBL’s increasing focus on ex- panding its global gaming franchise means that it is more focussed on ensuring that its Macau JV is a success. In addition, given the proximity of Macau to many Asian countries, it is more likely southeast Asian customers who make the trip to Melbourne once a year are more likely to travel to Macau more frequently given its greater proximity. Draw- ing high-rollers directly, rather than through junket operators,“will not only allow Crown Macau to generate higher margins (as it will cut out commissions to the promoters), but will also give it access to customers who are loyal to the Crown brand. We believe that this will be another advantage that Crown Macau will have over its competitors,” he explains. Underestimating Crown’s VIP draw The market appears to be underestimat- ing Crown’s potential in the VIP segment, according to Mr Pinge. “We note that there are only three operators that can operate in the VIP segment. These are Galaxy, Grand Lisboa and Crown Macau.” The US players cannot target the lucrative Chinese VIP mar- ket because of onerous restrictions placed on them by the Nevada Gaming Commis- Melco PBL’s Project Pipeline Crown Macau is the first casino property fromMelco PBL Entertainment (Ma- cau) Ltd (MPEL), a partnership between the offspring of two famous fathers, and what would appear to be a dream team of local and international expe- rience and resources. The joint venture comprises Hong Kong-listed Melco International Development, headed by Lawrence Ho, son of Macau casino tycoon Stanley Ho, and Australia’s Publishing and Broadcasting Ltd (PBL), helmed by James Packer, son of the recently deceased flamboyant media and casino mogul Kerry Packer. Melco PBL also operates a chain of six trendy slot machine outlets throughout Macau, with the first outlet opening in 2003. Called Mocha Slot, the cosy café-style outlets contain an average of 150 machines each, and Lawrence Ho describes them as “Starbucks with slot machines.” Crown Macau is an entirely different beast, with Lawrence Ho proclaim- ing the property would “raise the standard for servicing the VIP and premi- um mass market segments in Macau.”According to Melco PBL, by July, there will be over 80 VIP tables and 145 mass-market tables in operation at Crown Macau. Macquarie analyst Gary Pinge adds “We believe that there are plans to increase the number of VIP tables further depending on the success at Crown Macau.” Melco PBL will follow up Crown Macau with its flagship US$2.47bn City of Dreams mega resort, scheduled to open at the end of 2008 adjacent to Venetian Macao on the Cotai strip. According to Mr Pinge,“The first phase of the project is expected to open towards the end of 2H08 and will have two hotels together with a gaming venue open to the public. The second phase will involve the construction of serviced apartments, which will potentially be sold to the public,generating cash for MPEL.However,this is not expected to happen until 2H09. “We estimate that the first phase of City of Dreams will have 50 VIP tables, 440 mass-market tables and 2,500 slot machines. In addition, there will be an extensive entertainment complex and retail precinct. Melco PBL is also developing another casino property on the Macau Peninsula, in the NAPE area near Sands Macao. According to the company, “Conceptual designs by the Pei Partnership and Paul Steelman Associates have been presented for an iconic twin tower building with a gross floor area of more than one million square feet.The proposed property incorporates a mixed use casino with approximately 215 gaming tables and 500 gaming machines designed to cater to the day tripper mass market, a boutique hotel and a single tower of premium serviced apartments. “We currently anticipate that the purchase of the peninsula site will pro- ceed to completion during the second half of 2007.Consequently,the formal public opening of the peninsula project is now targeted for mid-2010.” Macquarie predicts the Peninsula project will cost US$675m and open in mid-2010. Additionally, Melco PBL has a management contract to run the casino at the US$2bn Macao Studio City resort being developed on the Cotai strip, and expected to open in early-2009. sion.“Given the under-penetrated nature of the Chinese VIP market, this differentiation should deliver Melco greater growth in the VIP segment than the US players,” he adds. “Crown’s experience in handling VIP rooms in Melbourne, as well as Melco’s expertise in the local gaming market,” will enable Melco PBL’s VIP product to appeal to the higher-end of the market, argues Mr Pinge. “However, the market is expecting an overly negative case for them.” Market potential Inhis report,Mr Pinge alsooffers anoptimistic forecast for Macau’s overall gaming revenue. “In sizing up the gamingmarket in Macau,we have assumed a gambling penetration (GGR) of 1.0% (lower than most developed markets with gaming penetration over 2.0%) and a GDP growth rate for China of 9% per annum (consistent with our internal forecasts). As- suming that 80% of the gambling spend is made in Macau, we would see a market as large at US$30bn—and this is before we add in the demand from non-mainland Chinese tourists. “Basedonour projections,we believe that Melco PBL would have 18% share of this mar- ket at HK$48bn by 2012, while Galaxy would have 10.8% share at HK$26bn. We would ex- pect SJM (the original monopoly holder) to cede the most market share given its lack of position on the Cotai strip, which we believe will be the main entertainment and gaming precinct in the longer run.” Mr Pinge is also less concerned than other market watchers about the impact of the Guangdong government’s recent travel restrictions. “We note that, as recently as January 2005, there were similar restrictions imposed on government officials entering Macau for gaming. However, this had little impact on the growth seen by Macau. As such, we believe that the impact of recent visa restrictions are likely to be short-lived and not have a significant impact on VIP op- erators in Macau.” The individual visit scheme (IVS) allows mainland Chinese to visit Macau (and Hong Kong) as individuals, rather than part of strictly regulated tour groups, as previously required. This has greatly boosted mainland Chinese visitation to Macau. Despite the new restrictions on the issuing of IVS per- mits, Mr Pinge points out that “only 30% of total mainland Chinese are now able to trav- el to Macau as part of the IVS. This means that Macau still has a significant untapped potential in China that will continue to drive future growth. Growth in Mainland Chinese visitation will boost the performance of Crown and other Macau casino and tourism properties in future. Mr Pinge continues:“Currently, only 33% of China’s total target market for out- bound travel (24.26m) makes it to Macau. This is also predominantly from one province (i.e., Guangdong), and while they are able to make multiple trips each year into Macau, this number is constrained by the fact that a vast majority of the Chinese population is unable to travel due to poor infrastructure in and around their cities. “However, as infrastructure improves and GDP per capita increases, we believe that over 65m mainland Chinese will have the fi- nancial means to seek outbound travel into Macau by 2012. “Given recent studies, which indicate an increasing propensity by Chinese tourists to seek regional travel (mainly to countries with few language barriers), we believe that over the longer term, Macau will be the destina- tion of choice for Chinese tourists. “The potential for 43m in visitation growth by 2012 has the scope to change Ma- cau’s tourism market and economy substan- tially. With each mainland Chinese tourist currently spending close to HK$1.6k per visit, we estimate that Macau’s tourism economy could almost double by 2012 with total tour- ism receipts increasing to HK$90–100bn (ex- cluding gaming receipts). This could benefit a range of sectors including transportation, hospitality, real estate, retailing and enter- tainment. “From a gaming perspective, it is a little difficult to ascertain the per capita spend on gaming. However, we note that currently 22m tourists support a market of 2,970 gam- ing tables. This represents tourists per gam- ing table of ~7,500. “Given our tourism projections and the new gaming venues entering the market, by 2012,the number of tourists per gaming table should remain relatively similar to current lev- els, which means that operators’profits would be supported in the longer term.” Octo Chang— the author of the first part of this article—is the pseudonym of our regular columnist, a casino marketing professional with extensive qualifications and background in the gaming industry. Please feel free to for- ward any amusing anecdotes or observations of the marketing variety to him at ka.chng@ gmail.com) Macau’s tourism set to see 20% CAGR over the next 5 years mil 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2006 2007 2008 2009 2010 2011 2012 Mainland China Other Tourists 9.8 12.0 11.6 16.0 12.9 21.0 15.8 28.0 15.7 33.4 16.8 39.2 Source: Macquarie Research, May 2007 19.5 45.6