Inside Asian Gaming

INSIDE ASIAN GAMING | November 2011 14 CLSA Market Outlook destinations such as Hainan. The table-cap policy, effective till March 2013, will limit the number of gaming tables in Macau to 5,500. The Secretary of Economy and Finance, Francis Tam, has guided for 3-5% table growth per year after the table cap expires. Over the next 10 years, casino tables will remain scarce as growth in demand continues to outpace that in supply: we forecast gaming revenue to increase by 11- 25% and table supply by 0-5%. Competitive intensity will be limited in an environment with only moderate supply growth, where casino operators are likely to be less concernedaboutmaintaining revenue share, provided that they could meet their internal cashflow or Ebitda targets. Ramping up short-term earnings to meet debt covenants is no longer an issue. Arguably, committed investments could be viewed as a proxy to competition intensity. Putting this into context, over the past five years, casino operators have invested US$24bn in the Las Vegas gaming market, whose revenue is likely to reach US$6bn in 2011 and remain flattish for some time. In China, local and global multinationals have also made aggressive investments in a wide range of consumer products by existing players and new entrants. Increasingly, global consumer companies need to have a “China strategy” to accelerate growth and justify their high earnings multiples. However, investments in Macau have been constrained for a number of reasons. First, most of the gaming companies operating in the market did not have sufficient financial capacity to invest—in fact, there were real concerns that some of them would be forced into bankruptcy. Sands China delayed construction of sites 5 and 6 (which has been renamed Sands Cotai Central this year and is slated for opening in 1Q12) and did not break ground on other sites. Second, we believe Macau’s current government has a more cautious approach towards planning permissions than the previous administration, from which the Secretary for transport and Public works was sentenced to prison for 27 years. Third, the government announced a ceiling for casino tables in March 2010 and has appeared to be less willing to issue foreign-worker permits. As a result, the sector only saw US$13bn in investments over the past five years, with expected gaming revenue of US$34bn in 2011. Without the above restrictions and if there was scope for new entrants or easy approvals for expansion by existing operators, we imagine the Cotai area would probably be completely covered in cranes with five to 10 casinos set to open within the next few years to capture the huge growth potential. Economic drivers We view Macau as a levered play on China’s growth story. Over the past 12 months, 57% of its tourist arrivals came from the mainland, notwithstanding those visiting the islands via Hong Kong. Macau will continue to benefit from China’s strong consumption and outbound tourism growth, which will drive secular gaming demand. Over the years, we have run many correlation charts and believe the China Purchasing Managers’ Index (PMI) shows the highest correlation to Macau gaming revenue. In contrast, we do not believe luxury-auto sales or liquidity are accurate leading indicators. Over the past two decades, China’s annual disposable income has enjoyed nearly 10% growth. The bar graph on page 15 shows that people in the highest income bracket (ie, decile 10) enjoy the strongest income growth, while those in the lowest bracket (ie, decile 1) see the least. Going forward, we expect this disparity to widen. The superior income growth higher- income groups have enjoyed is the main driver behind the surging demand for luxury goods and gaming. On the back of the government’s determined effort to stimulate private consumption, we remain bullish on China’s consumer sector, especially the luxury-retail and gaming segments. Macau gaming-table growth Source: DICJ, CLSA Asia-Pacific Markets China PMI versus Macau gaming-revenue growth Source: DICJ, DICJ, CLSA Asia-Pacific Markets