Inside Asian Gaming

February 2013 | INSIDE ASIAN GAMING 7 COVER STORY perceptions and the influence of external factors such as politics and policy. Mr Fong, who is probably the most bullish on the sector, acknowledges the difficulty: “One of the reasons why investors refrain from assigning a higher valuation to the Macau gaming sector is its reliance on credit-driven VIP revenue, the growth of which is extremely hard to predict.” The Bo Xilai scandal hit, with all the talk that followed of a new, harder line on corruption and a closer eye on the billions that are being spirited out of the country every month. “One of the reasons why investors refrain from assigning a higher valuation to the Macau gaming sector is its reliance on credit-driven VIP revenue, the growth of which is extremely hard to predict.” Main-floor Meccas—Sands Macao (left) and Grand Lisboa fundamental shift in revenues from their historical dependence on a relative handful of super-rich gamblers from the immediate environs of Hong Kong and Guangdong to the tens of millions of urbanized mainlanders working and saving their way to the lineaments of a middle-class lifestyle. “It’s not that complicated,” says Hong Kong-based analyst Aaron Fischer of CLSA Asia-Pacific Markets, who advises that investorswoulddowell to think aboutMacau as a big-picture play on China’s prodigious capacity for consumption. “And if you start thinking about it as a consumer category,” he says, “then you need to understand what’s happening in China, and what’s happening all over Asia, which is very obvious—the middle class expanding massively. We’ve understood how high the appetite to gamble is in Asia, and when you combine that with the massive explosion in wealth, it results in a very large market.” Last year was especially trying in this respect. First, the Bo Xilai scandal hit, with all the talk that followed of a new, harder line on corruption and a closer eye on the billions that are being spirited out of the country every month. Then the second half was consumed with the ascent of a new leadership clique at the top of the all- powerful Communist Party, an event that occurs only once every 10 years and naturally is very closely watched. But perhaps this is too much rearview- mirror gazing. Analysts on the eve of the Year of the Snake were feeling good about the comfort level politically within China and the country’s improving macros and so they’re optimistic about VIP. That said, the range of expected growth, currently 5-15%, depending on who you talk to, is wide enough to leave plenty of room for error. What inspires them more, what some investors might even find dazzling, are the prospects when you have 35 casinos, probably they will number no more than 40 or 41 over the next five years, operating on the doorstep of a billion Chinese. This is the amazing story that is the Macau mass market. These are the players at the main-floor tables and slot machines who have been generating top-line growth at quarterly averages of 27% or better going back to the end of 2009. Much has been written about them and the way they’re changing the very architecture of industry profitability as the volume of their play grows. This will be the most closely watched of Macau metrics: this