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David Riedel of Riedel Research Group recently published a note on the gaming industry in Macau. Excerpts:

The pace of visitor arrival growth has slowed down in JanuaryFebruary 2006 because of a larger base and China’s tightening control on corruption. The opening, or re-opening, of casinos is gathering momentum and will swell the number of gaming tables and slot machines by 113% and 69% respectively this year. While Macau remains a very attractive venue for conventions and gambling, we are concerned that at the current pace of growth in tourist arrivals, i.e. 12.2% in 2005 and 17.5% in Jan-Feb 2006, and the spate of casino/hotel development, there could be an oversupply by 2009. Singapore’s casinos will be ready by 2009-11 but are unlikely to pose much of a threat to Macau’s mass gambling market. Las Vegas Sands (NYSE:LVS) is betting heavily in Macau’s gaming industry. Its stake will rise substantially by 2009, when it completes development of Cotai Strip Phase 1 and when its gaming facilities will account for one-third of the industry.

Optimistic demand growth:

1. The most recent new rule allowing Chinese individuals to take up to US$20,000 a year out of China, up from US$8,000 will boost the spending and gambling power of Mainland Chinese, who form the mass market in Macau.

2. Macau’s proximity to Hong Kong and the coastal cities of China’s southern province of Guangdong makes the enclave an ideal tourist hub focusing on gaming and meetings, incentives, conference, and exhibitions (MICE), and leisure. Macau is well positioned to tap the potentially large mainland Chinese market with 100 million people living within a three-hour drive, one billion people within a three-hour flight, and three billion people within a five-hour flight.

3. The Chinese government strongly supports infrastructural developments in Macau and the neighboring Guangzhou province, which will facilitate easier passenger movement and increase visitor arrivals. Macau is building a new ferry terminal and airport that is expected to open in 2007 and a 27 kilometer light-rail system to open in stages from 2009-14. It is currently waiting for approval from Beijing for the proposed bridge linking Hong Kong, Zhuhai, and Macau, which is scheduled for completion by 2011.

4. The continued relaxation of travel rules by China will benefit tourist trade in Macau. According to World Travel Organisation estimates, China is expected to grant 100 million travel visas worldwide by 2020, up from 10 million in 2002.

Possible oversupply of facilities in 2009

A lot of the facilities under construction now in Macau were planned in 2004 when demand outstripped supply. Visitor arrival growth was 40.2% in 2004 but only 12.2% in 2005. Hotel occupancy averaged 75.5% in 2005 but has fallen to 70.9% in 2005. For January and February this year, occupancy hovered at 64.5% and 72.2% respectively. The pace of hotel/casino opening for this year is faster than the arrivals and is expected to further depress hotel occupancy and the utilization of gaming facilities.

LVS 1-Yr Price Performance:

Source: Oversupply in Macau? (LVS)