Macau mania

Executive summary Macau maniaLas Vegas provides a guide as to how insulated the industry is fromextraneous events. Since 1970, total tourist arrivals have declined in only oneyear (2001). Between 1970 and 1979 - when real oil prices surged and fuelwas rationed, unemployment hit a record high and the US economy stagnated- visitor arrivals to Las Vegas rose every year: from 6.7m in 1970 to 11.7m in1979. By 1990, tourist arrivals had doubled again and by 2004 they totalledmore than 37m. Last year, one in four Americans visited a casino. Meanwhile,as mentioned already, 722m Asians live within a two-hour flight of Macau.Gambling is incrediblyprofitable for operatorsWhat attracts capital to gambling is the maths behind the game. Gambling ishugely profitable for operators and this has driven stock prices: since 1990,the Standard & Poor’s Gaming Index has risen fivefold. Listed US gamingoperators have been some of the best performers in the past decade and theemergence of a gaming sector should provide comparable returns in Asia.Until recently there has been a dearth of Asia-listed gaming-relatedcompanies. This mirrors the development of Las Vegas, which until the mid-1960s was funded by nefarious groups of ill repute that gave gambling anedgy reputation. But within 15 years, Las Vegas had gained respectability andthe industry had become the domain of large publicly listed companies.Macau and, in a broader context, Asia’s gaming industry stand at such aninflexion point today. A variety of Macau plays are emerging, primarily listedin Hong Kong. The following table shows a list of companies that have, or areset to have, significant exposure to Macau along with our estimates of theirprojected share of revenue from the territory.Fun for the whole familyOur preferred Macau-related plays (in order of Macau exposure)Bloomberg Mkt cap (US$m) Macau share (%)¹Melco 2981 HK 1,291 95Emperor Entertainment 296 HK 153 90Macau Success 487 HK 193 90K Wah Construction 27 HK 1,009 80Shun Tak 242 HK 1,951 80Far East Consortium 35 HK 573 50Las Vegas Sands LVS US 13,529 50Aruze 6425 JP 1,743 50CNAC 1110 HK 800 40MultiVision MVIS SP 60 40Dreamgate DCB MK 104 40Wynn Resorts WYNN US 5,230 30Regal Hotels 78 HK 708 15Wing Hang Bank 302 HK 2,049 15Aristocrat Leisure ALL AU 3,941 10¹ Estimated revenue share by 2008. Source: CLSA Asia-Pacific MarketsAlternatively, investors wanting a broader exposure to the sector may wish tochoose the CLSA gaming basket clone note. Via a single derivativestructure managed by CLSA, this provides exposure to all of the relevantcompanies but without the associated currency risks or settlementheadaches. To complement this product, CLSA is also launching a CLSAMacau Gaming Index.June 2005 nick.cashmore/aaron.fischer@clsa.com 5