Meetings in Macau and Hengqing strengthen our view that Macau market and company
estimates will continue to move higher. Catalysts include remaining 3Q13 earnings releases
(which we believe will include bullish management commentary), followed by raised
consensus outlooks for both the Macau market and individual companies. CY13
infrastructure improvements – such as the visa loosening (1Q13), the completion of the
Guandong/Zhuhai mass rail (1Q13), additional hotel capacity (1Q13), primary border
augmentation (3Q13) - should further be enhanced in CY14 by Hengqin’s continued ramp of
hotel capacity and amenities, the permanency of the Taipa Ferry terminal, and potentially an
early start to Galaxy’s phase 2 development. In CY15, supply begins to ramp and additional
(underappreciated) infrastructure improvements continue – including the HK-Zhuhai-Macau
bridge opening in CY16.
With a stable/growing China economy, benign Mainland Government view of Macau (a
showcase for outlying Islands under the one-party, two-system policy), and ramping
infrastructure and supply from limited concessionaires, we find it difficult to identify a better
consumer story than that of Macau. In our view, stock multiple expansion, and not just
earnings expansion, should begin.
Hengqin ramp – overlooked Macau catalyst. We met with two developers on Hengqin
Island. Hengqin is a special economic zone adjacent to Macau, which offers a corporate tax
rate of 15% (40% below Mainland). Hengqin should benefit Macau by creating additional
hotel capacity and non-gaming amenities to its land constrained neighbor. It should also
relieve wait time at Macau’s main border, making access to the Island more convenient.
Chimelong park (highly popular in Guangzhou) begins to open in phases beginning with hotel
capacity by the end of this month or early next. Some experts believe Hengqin will receive
~20m visitors per year (CY13 Macau visitation run rate is ~29m) as infrastructure
Hengqin’s entry portal into Macau is the Lotus bridge, which is located directly adjacent to
MPEL’s Macau Studio City project, slated to open by mid-2015. At least two
concessionaire’s we met with acknowledge potential plans to purchase property for sister
hotels and/or amenities.
Labor shortage. Two types of labor shortages were discussed. 1) Expansion/construction
labor and 2) Croupier/dealer. All concessionaires we met with cited labor capacity as a
“struggle.” Macau unemployment is ~1.5% (if you are not working as a Macau resident, it is
likely by choice).
For expansion, all operators held to their Cotai opening timelines, but several noted intentions
to not increase expansionary labor until CY14, post the chief executive elections. Reasoning
for this included foreign labor likely being beyond the 1:1 foreign labor ratio policy at this
point, and incumbents do not desire to handle this type of a domestic/political issue just ahead
of an/a (re)election.
On the croupier front, policy calls for to dealers to be a Macau resident. Many checks already
cite deficiencies in dealer service and capabilities, mostly due to the small labor pool from
which operators chose from. However, many adjustments to the croupier policy will also not
be taken up until after the 2014 Chief Executive election (also a domestic/political) issue.
Many believe HK residents, but not Mainland ones, will likely be incorporated into a
new/augmented croupier policy well ahead of most Cotai openings.
Almost all operators and checks suggested the renewal process would most likely involve a
one-time fee and potentially a shorter concession runway (followed by another fee assessment
in return for another runway). Most suggested a tax increase in return for a renewal is
unlikely given already much lower gaming taxation at all current and proposed Asian gaming
jurisdictions. However, one former assembly member believes that slightly higher taxes,
which make it still “manageable” for operators is “certainly possible” as it provides for
“annuity capital” for the Government, rather than an unneeded lump-sum given surpluses. All
contacts found it highly unlikely there would be an auction or otherwise allowing for
Smoking regulations. There continues to be pressure on legislators/assembly members to
tighten smoking regulations. However, Assembly elections were recently completed, taking
some pressure off of politicians to act near-term on the issue.
Current consensus seems to be that casinos will be given yet another air quality test (fourth
one). Most believe that SJM, which has called for a complete smoking ban, encompassed a
majority of the most recent failed tests (we assume they want a complete smoking ban to put
them on an equal playing field versus restrictions placed solely on their portfolio). MGM
may have also failed its latest test, but our contact (not at MGM) suggests the reason for this
was due to construction/cleaning at the time of the test (it had passed the previous two tests).
After the next test, those that fail may be subject to certain restrictions/penalties.
A longer-term solution seems to be in flux, however. Some still cite that mass floors will
become smoke free longer-term. Until there is teeth to any new proposed smoking policy, we
take the position that increased smoking regulation “noise” could lead to longer-term buying
opportunities. Increased smoking regulations have the obvious effect of potentially lowering
the velocity of play (a consequence of a smoker being required to leave the table area to go
elsewhere to smoke). However, Macau remains the only legal place to gamble in all of China
– patrons go to gamble, less so just to smoke.