Inside Asian Gaming

34 age being HK$6.9 million) and that the casino will pay back its project costs within a year. Morgan Stanley says the Cotai casino—due to be constructed on a piece of land acquired in a swap with the Macau Government— is unlikely to be completed for another five to six years because of Shun Tak’s other property commitments. Looking beyond Macau On the face of it, STH has enough projects on its books to drive growth for half a decade. Other analysts think though that as Macau’s gaming and tourism markets mature, STH may need to seek new op- portunities in mainland China in order to maintain growth. UBS said in its recent report on the company:“To sow the seeds of growth beyond 2009, we believe STH may announce within 2007 new projects outside Macau,be it in property,hospitality,or transport, and whether in China or beyond. Early announcement of a sensible growth plan would not only allay investor concerns about growth, but also reduce calls for return of capital given STH currently sits on HK$2.5 billion of net cash.” Shun Tak also has indirect exposure to Stanley Ho’s VIP and mass- market casino operations.This comes through Shun Tak’s 11.5% stake in STDM, Dr Ho’s umbrella organisation for his business interests. STDM in turn owns 80% of SJM, which runs Dr Ho’s casino operations. Morgan Stanley values Shun Tak’s indirect stake in SJM at HK$3.6 bil- lion, less a 15% discount because Shun Tak doesn’t have control over cash flows. Ferries still deliver Looking to the long term, significant diversification from sea transport is probably wise. Although the numbers on ferry revenues still look very healthy, the growth in ferry arrivals is much flatter than the growth in arrivals by road frommainland China. In anticipation of this trend, STH has started a coach service between Macau and main- land China. It recently added 10 new coaches, taking its fleet to 40 vehicles, and has plans to increase the pool to 100 coaches. From next year, Shun Tak’s ferries will have direct competition from Las Vegas Sands Corp (LVS), which intends to operate a Hong Kong to Macau service via a new pier at Macau International Airport, in order to funnel visitors direct to its huge new Venetian resort at nearby Cotai. Extra ferry capacity does though appear to be urgently needed. Macau Visitors by Type of Tansport Source: DSEC, Morgan Stanley Research 14 12 10 8 6 4 2 0 Visitor (mn) 2000 2001 2002 2003 2004 2005 2006 2007 YTD Sea Land Air An analyst from a European investment bank recently reported that after playing golf in Macau and missing his Sunday afternoon ferry back to Hong Kong, no amount of money could buy him a seat on a ferry or even a helicopter until 11.15pm that night. Although demand for ferry capacity seems at present to be out- stripping supply, ferry operators’ margins have been choppy recently because of volatility in fuel prices, though JP Morgan says Shun Tak has engaged in fuel hedging which should help stabilise its operating costs until the first quarter of 2008. A quick glance at Shun Tak’s balance sheet and future estimated revenues suggests the ferry operation will account for around three quarters of STH’s income until at least 2008. In the 2006 financial year, passenger numbers were up 13% and operating profit in its transport sector rose 12%. The company realised some time ago ferries alone were unlikely to deliver the levels of profit growth demanded by Shun Tak’s share- holders in Macau’s bullish market. Property forays Shun Tak has been using its excellent contacts in the territory to reposition its business and take advantage of the demand for A- grade residential and commercial units. This process began as far back as 2002 when the Las Vegas-style casino resorts of Wynn, LVS and MGM Mirage were still at the plan- ning stage.STH began buying land or taking stakes in prime develop- ment sites on peninsular Macau,Taipa and Cotai. The first of Shun Tak’s recent Macau property projects, Nova City—a medium grade high rise development at Taipa—is, as men- tioned, already contributing to the balance sheet and will add more value as new phases are built between now and 2010. One Central, the JV with Hongkong Land, overlooking Nam Van Lake at the southern end of the Macau peninsula, will feature a luxury shopping mall similar to The Landmark in Hong Kong, a new five-star hotel managed by Mandarin Oriental and luxury apartments. The company says the housing on the site is now sold Shun Tak will face competition from new ferry services offered by Venetian-operator Las Vegas Sands Corp (LVS). Last month, LVS pur- chased 10 high speed ferries to launch a CotaiJet service linking Hong Kong directly to the Cotai Strip. The service is expected to commence late this year or early 2008.