Credit FAQ:

Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

Primary Credit Analyst: Joe Poon, Hong Kong (852) 2533-3507; joe.poon@standardandpoors.com Secondary Contacts: Paul Draffin, Melbourne (61) 3-9631-2122; paul.draffin@standardandpoors.com Melissa A Long, New York (1) 212-438-3886; melissa.long@standardandpoors.com

Table Of Contents
Frequently Asked Questions Related Criteria And Research

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Credit FAQ:

Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

The good times are rolling for Asia-Pacific's gaming industry. Casino operators have generated stronger cash flows from their existing assets so far this year, which is helping to underpin the sector's credit quality. Standard & Poor's Ratings Services expects revenue and earnings growth to remain relatively robust for the remainder of the year. Casino operators have significant cash on hand and are searching for new opportunities to expand their gaming operations. Major new investment is underway in Macau and the Philippines, and some operators have shown interest in investing in potential new gaming markets, including Japan and Taiwan. Such expansion carries risks, however. Weaker liquidity conditions could curb gaming demand amid global economic uncertainty. Further, gaming regulations may conspire to limit market growth. In Macau, we think that growth in gaming demand, particularly from the key Chinese market, should more than offset new supply. However, a sharper-than-expected slowdown in the Chinese economy could tilt the balance toward gaming oversupply. That, in turn, could undermine the credit quality of issuers, particularly for those operators with high debt burdens and significant capital expenditure programs.

Frequently Asked Questions

What is Standard & Poor's outlook for gaming operators?
We have stable rating outlooks for most of the casino operators that we rate in the region (see table 1). Modest improvement in credit quality this year is mainly because of much stronger cash flow from existing properties, which has resulted in a better balance between cash-generating assets and assets under development. We expect this improvement to largely mitigate the risks associated with investments in new gaming capacity and any moderation in gaming demand.
Table 1

Ranking Table
Rank Company 1 2 3 4 5 6 7 8 9 Genting Bhd. Crown Ltd. Tabcorp Holdings Ltd. Ratings BBB+/Stable/-BBB/Stable/A-2 Business risk profile Financial risk profile Satisfactory Satisfactory Modest Intermediate Intermediate Intermediate Significant Significant Aggressive Highly leveraged Highly leveraged

BBB/Negative/-- Satisfactory Satisfactory Satisfactory Satisfactory Fair Satisfactory Weak

SKYCITY Entertainment Group Ltd. BBB-/Stable/-Las Vegas Sands Corp. Wynn Resorts Ltd. Melco Crown Gaming (Macau) Ltd. MGM Resorts International Studio City Co. Ltd. BB+/Positive/-BB+/Stable/-BB/Stable/-B+/Stable/-B+/Stable/--

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Credit FAQ: Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

Casino operators across Asia-Pacific are also eyeing new investment opportunities to expand their gaming operations and diversify across growing economies. Operators are expected to make multi-billion dollar investments in several new integrated casino resort projects over the next few years, mainly in Macau and the Philippines. They are likely to use debt to partially fund most of these projects. We expect this strategy to limit any material improvement in the financial risk profiles of our rated casino operators, while new developments also carry construction and execution risks. In addition, uncertainty surrounds the extent to which significant new gaming supply planned for the region over the next five years will be absorbed by growth in gaming demand, particularly from the key Chinese market. That could raise risks for gaming operators.

What are the growth prospects for major markets?

We expect revenue and earnings growth to remain relatively robust across most Asia-Pacific gaming markets for the rest of 2013. This underpins our stable to slightly positive credit outlooks on the sector. We expect growth in the gaming markets of Australia, Macau, Malaysia, and Singapore to be broadly correlated with our real GDP growth expectations (see table 2). Our base-case forecast for growth in gross gaming revenue in Macau is about 10%, compared with our previous forecast of 5%-10% for 2013. The Singapore gaming market, in contrast, is performing below our expectation. We are revising our forecast for net gaming revenue growth there to between 0% and -5% for the year.
Table 2

Standard & Poor's Real GDP Growth Scenarios For Asia-Pacific

Base-case scenario (%) Australia China Malaysia New Zealand Philippines Singapore f--forecast. 2013f 2.9 7.9 5.5 2.8 6.5 1.9 2014f 3.0 8.0 5.3 2.8 6.3 3.6 2015f 3.5 8.5 5.1 2.5 6.0 4.8 Downside scenario 2013f 2.4 6.5 4.8 1.9 5.5 (0.2) 2014f 2.4 6.0 4.7 1.9 5.2 1.3 2015f 2.7 6.2 4.5 1.8 5.0 2.4 Upside scenario 2013f 3.0 8.2 6.3 3.1 6.8 2.8 2014f 3.1 8.4 6.4 3.1 6.6 5.0 2015f 3.6 8.8 6.1 2.9 6.3 6.4

We expect low single-digit growth in the Australia and New Zealand gaming markets over the next 12 months. The completion of several major casino redevelopments in the past 12-18 months, however, should allow some operators to sustain slightly higher levels of growth over the next year. Finally, we expect gross gaming revenue in the Philippines to increase well above annual GDP rates; but much depends on the opening and success of new resorts. Overseas Filipino worker (OFW) remittances have spurred economic growth in the Philippines. In 2012, OFW remittances rose 6.3% to a record US$21.4 billion, leading to higher disposable income--some of which we expect to filter through to the gaming industry.

Do you see a risk of oversupply in Asia-Pacific?

We believe major Asian gaming markets, such as Macau, have sufficient demand to continue to expand capacity. That's because we expect economic growth to remain robust and the middle-class population to grow in key feeder markets, such as China. Also, gaming operators are likely to continue to use their improving financial capacity to

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Credit FAQ: Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

aggressively bid for new casino licenses and to invest billions of dollars in new gaming projects. Supply has grown significantly in Macau. The number of available guest rooms has tripled since revised gaming regulations paved the way for more operators to enter the market. Nevertheless, hotel occupancy rates have remained steady at between 70% and 85% (see chart 1), while visitors' length of stay has increased modestly to about 1.5 days from about 1.2 days.
Chart 1

Macau is entering the second round of major construction, and we think capital spending could reach about US$20 billion over the next five years. This will add substantial additional capacity from all six gaming operators that we believe the growing market demand can absorb. This reflects our expectation of moderate growth in visitation numbers, support for which should come from improving transportation infrastructure, economic growth in China, and a continuing shift toward mass-market customers that is likely to extend length of stays. Moreover, we think it's unlikely that the Macau government will grant further gaming licenses to new entrants, similar to our expectations in Singapore. However, we do see some oversupply risks in the Philippines. Although Manila is well located in the center of Asia-Pacific to attract overseas gamblers, significant new gaming and entertainment supply will be launched at Pagcor

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Credit FAQ: Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

Entertainment City over the next few years. We expect this new supply could intensify competition in the region, particularly for the "VIP" (or high-roller) market, which is yet to be tested in the Philippines. We also expect increased earnings volatility as the market adjusts to the rapid increase in new supply, similar to the earnings volatility during the ramp-up of the Singapore market.

What is blocking Macau's gaming operators from becoming investment-grade companies?

For U.S. gaming operators, weaker financial risk profiles at the group level continue to constrain ratings. Many players still have relatively high debt levels or substantial capital investment programs. For local players, such as Melco Crown Gaming (Macau) Ltd., limited product and geographic diversity is a rating constraint. Melco Crown is also exposed to execution risks associated with its new development, Studio City, and, to a much lesser extent, the Philippines project. In addition, the Macau gaming market remains heavily dependent on visitation from China and the evolving regulatory environment in Macau. In our view, Chinese government polices--including the granting of visa permits and a recent anti-corruption push--will continue to be a key risk factor for Macau. All Macau-based gaming operators that we rate are in the speculative-grade category, even though Macau is the world's largest gaming market by revenue. Nevertheless, since the global financial crisis, we have raised the ratings on many of these issuers--more than once in some cases--because of their improving business and financial risk profiles. U.S. gaming companies operating in Macau all have stronger business risk profiles than Macau-based gaming companies because of greater product and geographic diversity. On the other hand, gaming operators in Australia, Malaysia, and Singapore benefit from a more favorable regulatory environment, with less competition and a lower likelihood of new casino licenses. The lower gaming tax rates outside Macau also allow the casino operators to generate higher EBITDA margins. Nevertheless, these countries also face significant ongoing regulatory risks, particularly relating to regulatory strategies to deal with problem gambling.

How will the shift toward the mass-market segment in Macau affect revenues, and what risks are associated with this trend?
We estimate the mass market in Macau could exceed 40% of gross gaming revenue by 2016. Most of the development in Macau, which will occur in Cotai, is already oriented toward this segment. In 2012, business shifted meaningfully from VIP to mass-market customers (see chart 2).

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Credit FAQ: Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

Chart 2

Gaming operators in markets such as Australia, New Zealand, and Malaysia have a good track record of generating resilient cash flows because the majority of their gaming revenues come from the mass-market segment. In Macau, however, earnings and cash-flow generation can be more volatile, given that this market is highly reliant on the VIP segment. Profit margins are thin for this segment because of the high tax rate in Macau and the commissions for junket operators (people paid to bring VIP players into the casinos and to provide credit to these players). The performance of the Macau VIP segment is also strongly correlated with liquidity in the market and economic growth. However, substantial capital will be invested in new project developments, which will increase execution risks and intensify competition. Any unexpected slowdown in the Chinese economy also remains a risk to the absorption of this new gaming supply.

Is fund raising and refinancing a risk for gaming operators?

We don't see fund-raising or refinancing as a key risk for operators over the next 12 months. Significant cash on hand and strong cash flow generation from existing properties underpin "strong" liquidity positions, as defined by our criteria, and this supports the issuers' ability to meet near-term debt maturities and capital expenditure needs (see table 3). Nonetheless, we expect casino operators to seek new investment opportunities because of their strong cash balances.

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Credit FAQ: Are Asia-Pacific's Casino Operators Gambling Too Much On Expansion?

Table 3

Asia-Pacific Casino Operators' Liquidity Positions

Company Crown Ltd. Genting Bhd. Las Vegas Sands Corp. Melco Crown Gaming (Macau) Ltd. MGM Resorts International Liquidity Strong Strong Strong Strong Adequate

SKYCITY Entertainment Group Ltd. Strong Studio City Co. Ltd. Tabcorp Holdings Ltd. Wynn Resorts Ltd. Adequate Adequate Strong

Asian gaming operators have had good access to capital markets for new developments. In the past eight months, Melco Crown group's Studio City--an integrated gaming resort--raised over US$2.2 billion in debt for project development, and its Philippines project raised about US$337 million in equity. In addition, the group issued US$1.0 billion in senior unsecured notes to buy back its US$600 million senior notes due 2018 at much lower interest rates.

What are some downside scenarios for the gaming sector?

We have identified a few downside scenarios that could have a negative ratings impact; but we have not factored them into our base-case expectations: A hard landing in China's economy. A significant and sustained decline in the Chinese economy is one of the most significant downside risks for Macau gaming operators and the broader Asia-Pacific gaming market. A weaker Chinese economy would likely reduce customer visitation and liquidity in the market. This could have a negative impact on some ratings, especially for those issuers with high debt burdens and significant capital expenditure programs. Regulatory risk. For more developed gaming markets, such as Australia, Singapore, Macau, and Malaysia, we expect the government's policies to focus on maintaining stability in the sector and avoiding any rise in social problems related to gaming. Gaming market growth could be affected, therefore, by visa restrictions, smoking bans, or curbs on local patronage. We also see regulatory risk as a key risk factor for Philippine gaming operators. This is because Philippine Amusement and Gaming Corp. is a state-owned entity that regulates gaming in the Philippines, but it is also the main gaming operator in the country. Substantially weakened liquidity. The VIP market in Macau relies heavily on gaming and junket operators to provide lines of credit to gaming customers. Accordingly, if liquidity in the market weakens, it could undermine the liquidity positions of lenders, and, to a larger extent, the junket operators. This will likely result in lower gaming revenues as gamblers are unable to access credit from the junket operators. In this scenario, credit quality could be strained if reduced liquidity materially curtails gaming demand, increases credit risks, or weakens the liquidity position of the issuers. Lack of infrastructure development to support visitor growth. We believe infrastructure development remains crucial for growth in each market, particularly for Macau and the Philippines. Several major infrastructure projects are underway or in the pipeline in Macau, but projects are progressing slower than expected. With total arrivals in Macau reaching 28 million in 2012, the Cotai area would benefit significantly from proposed new initiatives, such as a mass-transit light rail system, to reduce traffic congestion and reliance on taxies and buses.

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Related Criteria And Research

Softer Traction In Some Asia-Pacific Economies But Growth Expected To Hold Steady, May 14, 2013 Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Business And Financial Risks In The U.S. Gaming Industry, Sept. 25, 2008 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

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