New casinos boost property prices but undermine table revenues

Morgan Stanley strategist Rob Hart is cautious about Macau gaming stocks.
Competition is intensifying as established casino operators compete in a relatively small area, but at the same time new casinos are creating job opportunities which are going to boost MacauÆs residential property sector, according to a Morgan Stanley strategist.

Additional casinos, retailers and hotel spaces in AsiaÆs Las Vegas will outstrip demand over the next three years, the US investment bank argues in a research report. VIP revenue per table will halve and mass revenue per table will fall 40% over the coming three to four years.

ôI am not that bullish on the Macau gaming industry because I think the market is going to accept that competition has gone severe,ö says Rob Hart, head of Hong Kong strategy and the Asia Pacific conglomerate and Macau gaming teams at Morgan Stanley.

The report projects Macau gaming revenues will see a 22% compound average growth rate until 2010, yet argues that new casinos have pushed back the likely recovery of the market to 2010 or 2011.

Gaming revenues in the region surged 45% year-on-year during first quarter this year, led by a 50% increase in VIP revenue. However, the report indicates that VIP revenue growth is going to lag behind the growth in the mass-market as more VIP facilities are added in the region.

ôThe mass market is going to be the driver,ö says Hart. ôI donÆt think the level of growth (in the VIP market) we have seen recently is sustainable, because the numbers of VIPs out there is a finite set of super rich people. There are more and more super rich people each day, but the growth rate of super rich people is quite small. It is not like the mass marketàö

He also notes that many of the high rollers from Thailand and Malaysia will be attracted to the Marina Bay casino in Singapore which is scheduled to open in 2009, as this venue will be much closer to them. Given lower blended gaming taxes of 8% to 9% in Singapore, compared with 39% in Macau, Singaporean operators can also offer better incentives to the high rollers in the region. Morgan Stanley estimates that VIP revenues will fall to 55% of the total in 2010, while top-line income from the mass-market will rise to 37% from 31%. The rest of the revenues comes from slot machines.

In addition, the report indicates that the hotel sector in Macau is suffering from oversupply, as the number of rooms is forecast to triple from 2006 to 2010. The bank estimates that the oversupply situation will persist several years, but strong visitor arrival growth as well as low room rates would allow hotel occupancies to top 80% in 2008, before plummeting to 67% in 2010 due to overwhelming supply.

As for the retail market, the bank says it will possibly be crushed by oversupply until 2010. Additional sales of HK$22 billion ($2.8 billion) are needed to keep shopping mall tenants and owners satisfied, and it will take until 2010 to generate that kind of sales, according to the report.

On the other hand, Hart believes residential property prices are likely to rise by approximately 10% per annum for the next few years due to an increasing population and robust job growth.

ôFor the next three years the supply is quite transparent. You have got about 6,500 units per annum, while demand will be 8,500, so there is definitely a bit of a shortage of supply out there,ö he says. ôWhere the growth is coming from is the more sustainable jobs that have been created. With each new casino you have 4,000 or so new employeesà3,500 for CrownàVenetian has more like 10,000. These people are going to have to stay there permanently,ö he says.

Hart suggests the hotel and retail sectors should be avoided over the next few years. But investors still have other ways to make money in Macau, he says, suggesting through investments in property funds or in companies that devote part of their resources to property businesses.
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