Inside Asian Gaming

11 Winners—and some losers MPEL could benefit from the LVS delays on Cotai, says Goldman Sachs L VS’s Cotai suspension is potentially significant not only in terms of gaming table supply but also because the hotels would potentially have formed an important feeder system for The Venetian Macao’s gaming floors next door. Goldman Sachs says if, and only if, LVS’s Cotai work is suspended indefinitely, then Melco Crown Entertainment could build its gaming market share substantially when City of Dreams opens in mid-2009. win per table—we model 20% premium over the industry average,” adds the report. Goldman Sachs adds that Wynn, which has focused a lot of effort on building its VIP business in Macau, could also benefit more than either SJM or Galaxy Entertainment Group, because it does not depend on taking on or servicing significant amounts of debt to upgrade its facilities and capacity. Funding issues “While Galaxy has decided to delay the completion of Mega Resort, we would still be concerned about its ability to fund the remainder of the project,” says the report. “Other than the outstanding HK$7.8 billion capex, the company has US$250 million or HK$1.95 billion in floating-rate notes due in Dec-2010. Even if the notes could be rolled over and its capex were reduced by HK$500 million as management has guided, Galaxy would still need to bridge a HK$1.3 billion funding gap by cash flow from its existing operations, which we estimate to be HK$1.4 billion in 2H2008-2010E,” explains the research paper. “This leaves little margin for error on potential operational disappointment, in our view. We note that Galaxy also has another US$240 million CBs due in Dec-2011 and US$350 million in fixed-rate notes due in Dec-2012.” “Despite our cautious sector stance, we expect MPEL—the only operator with a new casino launch (i.e.City of Dreams) in mid-2009— to be able to gain incremental market share, thereby underpinning an outperformance of its shares over the next 12 months, in our view,” says the research document. “MPEL, with US$886 million cash and US$764 million undrawn facilities (as part of the US$1.75 billion credit facilities secured last year), appears well funded for the US$1.1 billion outstanding construction cost for City of Dreams (COD),” says Goldman Sachs. Main event “We expect COD to gain market share by tapping the premium mass-market. With Shangri-La, Sheraton and Galaxy Mega Resort now postponed to 2010 or later, COD will be the only large-scale casino scheduled for opening next year. We would expect COD to help MPEL to secure further market share from 14% in 2008E to 17%/22% in 2009E/2010E. “We were previously concerned about the project’s rate of return due to: its high cost, i.e. US$2.7 billion, double that of Galaxy’s Mega Resort; and redundant table supply in initial years. Given the reduced supply forecast, we believe MPEL should be able to secure higher net Gaming revenue share changes by operator Macau gross gaming revenue monthly growth, Jan08-Oct08 Source: Company data, Goldman Sachs Research estimates. Cover Story