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3 Jul, 2006

U.S. Casino Barons Salivate at Asia Prospects

Thailand has been identified as one of the “future candidates” for expansion of US casino conglomerates in Asia, a market estimated to be worth US$20bn per annum in gaming revenues by 2009. Other “candidates” are Taiwan, India and Japan.

Callum Nash, Senior Director, Consumer Industries – Asia Pacific of the Royal Bank of Scotland, told a hotel seminar in Hong Kong last month that “Asia represents one of the last remaining areas for a major expansion of new casino venues and consumer gambling expenditure.”

“The Asian gaming market is estimated to generate US$13bn in 2006 from circa 80 casinos. Illegal casinos are estimated to take circa $100bn. Competition for high rollers will generate quality destinations which should be good for the overall market,” he said.

He identified the “key drivers” of growth as being the rapidly growing level of consumer disposable income, the significant under-supply of quality, land-based casino operations and the expectation of regulatory change-enabling venue development.

He also identified the potential “domino effect” as “the success and potential of Macau, coupled with the 2 developments planned for Singapore, may encourage other governments to de­regulate/legalise the industry, encouraged by the anticipated overall scale of demand and the concern at being ‘left behind’ in the regional tourism stakes.”

However, he noted, “other factors, particularly socio-economic, and the influence of local interests, will also be carefully considered as part of the decision-making process and affect outcomes and timing.”

From a purely financial perspective, government tax-collectors, real estate developers and financiers are all salivating at the prospects.

At least US$8bn of investment (current and new/extensions) is planned for Macau. In Singapore, the Sands Marina Bay is estimated to involve an investment of US$3.2bn and Sentosa (estimated US$2bn), with both due to open in 2009.

Mr Nash said that gambling contributes 75% of Macau government’s revenue and supports the city’s only major industry – tourism. As increasing numbers of Chinese mainlanders are able to travel there and new facilities open, Macau is targetting an estimated 30m visitors by 2010 – which will see it overtake the Las Vegas strip as the largest gaming market in the world.

The anticipation of these numbers is leading to other improvements in infrastructure like upgrading the airport, construction of light railway system and the prospective Macau-Hong Kong-Zhuhai bridge, for which an environmental impact study is now under way.

Singapore is projecting that the Marina Bay project alone will generate 10,400 jobs (75% for locals) plus 20,000 jobs in other industries. Estimated to account for 1% of Singapore’s economy, it will help double visitors to 17m and triple tourist revenue to US$16bn by 2015.

The casinos will also allow Singapore to position itself as “an iconic destination resort that offers world-class entertainment and leisure facilities”, and attract high-end foreign visitors,” Mr Nash said.

Casinos are also seen as adding to the real-estate values. Although non-gaming revenues are estimated at only 5% of total revenues in Macau, they are projected at 20-30% in Singapore as compared to 50-60% in Las Vegas.

Said Mr Nash, “The gaming and non-gaming components of an integrated resort are interdependent but the casino makes the overall project economically viable. Revenue generated from the casino is used to cross-subsidise the other non-gaming attractions which draw the high volume of traffic attracted by the wide range of entertainment options on offer i.e. each component creates a critical mass to attract more people and repeat visitation.”

He noted that Marina Bay is being designed as an urban integrated resort, within the city as part of a high-intensity, mixed-­use development with an emphasis on business travel and the MICE business while Sentosa has more of a “get-away holiday feel”- a themed mega-resort outside the city centre.

Mr Nash said noted that mega-resorts are a partnership between the developer/operator and the government. “The government already has a massive equity position through the tax and levy – it doesn’t need a direct stake in the project.”

The comparative gaming taxes levied are a blended rate of 15% in Singapore vs 39% in Macau, 25% in Malaysia, 6.75% in Las Vegas.

He said regional and global gaming companies will likely lead the investment into these new markets, given the relative lack of existing domestic companies. “Investors have the ability and confidence to commit the funding – Sands has received over US$6bn of financing commitments for Sands Marina Bay,” he said.

“Traditionally, the gaming industry has mainly financed itself in the debt capital markets where comfort is taken from the industry’s strong and stable cashflow generation and high barriers to entry.

“The risks pertaining to new-build, non-recourse projects in new markets are, however, quite different and are largely front-end loaded due to factors such as: Construction risk; Risk of industry over-capacity in the short term; and operating cost inflation – particularly labour costs through the shortage of available, qualified workers for construction as well as casino operation.”

He indicated that so far, the investors were pretty bullish about the prospects.

“All the major Macau deals thus far have been over-subscribed, driven by the relatively attractive returns on offer and the continuing strong performance of the Macau market. The funding pipeline in Asia looks strong.”

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