Inside Asian Gaming

Cover Story very compelling growth story for a very long time horizon. And then you look at these things and they’re trading at historic low multiples and not too different from US gaming companies, for instance, regional riverboat operators, who are trading at only a slight discount to these names, and you look at the two growth profiles and they’re wildly different.” ‘Just the Beginning’ This evolution toward a more bankable business is accelerating as the market shifts from its traditional dependence on high rollers to one whose profits are derivedmore andmore from an increasingly affluent, increasingly mobile and ultimately far more plentiful supply of low rollers. At an estimated EBITDA margin on mass-market revenue of 40%, versus 10% on VIP, the math speaks for itself. The last 12 months show mass gaming revenue growing faster than VIP and at a steady rate of about 30%. VIP revenue growth year on year slowed from 24% in the first quarter to 7% in Q2 to a 1% decline in Q3. The three months ended 30th September were the first in 11 quarters that VIP accounted for less than 70% of total GGR. As a measure of VIP play over the last year, research by Morgan Stanley shows rolling chip volume dipped into negative territory in June (-2% year on year) and went negative again in July and August before rebounding for a 1% gain in September. But thanks to the haul from mass tables and slots, which was up a combined 36%, 30% and 27% in the first three quarters, total GGR has outgrown 2011 in every month this year, albeit at a steadily slowing pace. In a market that grew by a relatively modest 6% in the third quarter, the five operators that had reported as of this writing delivered a combined US$1.49 billion in adjusted EBITDA. Three of the five reported year-on-year EBITDA increases: • Sands China (HK:1928) $485.1 million (+24.1%). Net revenue: $1.62 billion (+36.3%) • GEG (HK:0027) $338.3 million (+48%). Net revenue: $1.73 billion (+4.8%) • Wynn Macau (HK:1128) $292.2 million (-1.3%). Net revenue: $910.5 million (-4.3%) • Melco Crown (HK:6883/Nasdaq:MPEL) $226.4 million (-6%). Net revenue: $1.01 billion (-4%) • MGM China Holdings (HK:2282) $152 million (+5%). Net revenue: $665 million (+7%) • SJM Holdings (HK:0088) Consensus EBITDA: $245.4 million (+16%) “The fact that even though China has slowed down, and Macau has slowed down, the earnings have been quite resilient at the companies,”notes Mr Monaghan.“And so global investors that used to play China consumer through other forms of consumer stocks are now looking at Macau and saying, ‘Hey, this is not as risky as we once thought.’” Union Gaming sees next year’s revenue split between VIP and mass moving toward 65/35 for the first time since 2006, a more egalitarian customer mix that should justify more bullish valuations. “I think you can make the argument that mass market is a much better business,” says Mr Govertsen. “Much more visibility. Sustainability. The reality is, the profitability of mass is somuch higher than VIP that as mass continues to outgrow VIP on a significant basis I would argue that that average multiple of 10 times should actually go higher as mass grows as a percentage of revenues.” He believes a 65/35 split could bump up EBITDA margins by