GS - The Essentials of Gaming Investing

April 7, 2009 Americas: Gaming
April 7, 2009
Americas: Gaming
The essentials of gaming investing

The essentials of gaming
WHAT’S INSIDE OUR REVISED GAMING PRIMER
This is the place either to start research on this diverse, $60 billion
industry, or to brush up on a specific topic. We explain what to look for in The basics: Key industry fundamentals,
a gaming franchise, address the most pressing issues facing the industry, size, segmentations, analysis of gaming
and discuss operating metrics and profit drivers. operators, slot suppliers, and racino
industries.
*Updated* Why this economic

downturn was different than previous
cycles
*New* Regional casino operators

could outperform in 2009
*New* Casino compensation

structures could become more return
focused
*New* Balance sheet snapshot and

bank exposure to gaming
*New* Breaking down a slot machine

to show fixed versus variable costs
*Updated* Market monitor for new

and expanding slot opportunities
The players: Analysis of the

competitive landscape, key players,
traits of successful gaming operators
and slot manufacturers, and questions
for management.
Steven Kent, CFA The Goldman Sachs Group, Inc. does and seeks to do business with
(212) 902-6752 | steven.kent@gs.com Goldman, Sachs & Co. companies covered in its research reports. As a result, investors should
Betsy Gorton, CFA be aware that the firm may have a conflict of interest that could affect
(212) 902-5320 | betsy.gorton@gs.com Goldman, Sachs & Co. the objectivity of this report. Investors should consider this report as
Eli Hackel only a single factor in making their investment decision. Customers in
(212) 902-9672 | eli.hackel@gs.com Goldman, Sachs & Co. the US can receive independent, third-party research on companies
covered in this report, at no cost to them, where such research is
available. Customers can access this independent research at
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certification, see the end of the text. Other important disclosures follow
the Reg AC certification, or go to www.gs.com/research/hedge.html.
Analysts employed by non-US affiliates are not registered/qualified as
research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
Goldman Sachs Global Investment Research 1
Table of contents
What’s new in this issue 3

From the analyst’s desk – the road to recovery will cross the Vegas Strip 4
Industry profile 9
Size, segmentation, customer profile, and history 11
Gaming fundamentals 18
Why this time was different 27
*New – Balance sheet and credit snapshot 33
*New – Regional operators could outperform Las Vegas in 2009 36
History of consolidation and private equity; few buyers now 42
*New – Return-focused compensation could benefit the industry 46
Macau: The largest gaming market in the world faces challenges too 52
Singapore—Licenses awarded, projects under way 58
Stock price performance around new property openings 60
Gaming manufacturers—Replacements are slow but legislation could make way for new growth opportunities 63
*New – Slot margins can hold up even with lower unit sales – examining the cost structure of a slot machine 70
New and expansion slot machine estimates 75
A closer look at lottery: The “softer” side of gaming 78
State information pages 81
How “hold” is calculated 96
Economic and demand indicators and their effect on the industry 100
Valuation and stock selection measures 101
Traits of successful franchises 103
Ten sets of questions to ask gaming management 105
Key risks 106
Industry terminology 107
Disclosures 109
The prices in the body of this report are based on the market close of April 6, 2009.

What’s new in this issue

Our revised gaming primer contains several new items, including an analysis and
discussion of the following topics:
• From the Analyst’s Desk: This section lays out a roadmap to recovery for the Las
Vegas Strip operators which includes a commitment to stop building, a focus on
returns, and a repositioning of the market.
• An update on why this time was different in the current economic downturn.
More non-gaming revenue exposure in Las Vegas and the proliferation of gaming
throughout the country could make operators more susceptible to the economic
downturn.
• A casino operator balance sheet snapshot and bank exposure to gaming. Since
September 2008, gaming and financial investors have both increasingly wondered
who has exposure to whom.
We expect regional • An explanation of why regional casino operators could outperform in 2009.
operators to Analysis of the stabilizing top line, a more variable expense structure, lower supply
outperform in 2009.
growth, and FCF on the horizon supports the view.
• An analysis of casino compensation structures and how they could become more
return-focused. Compensation structures based on EBITDA generally led to
overspending and high leverage. Investors and subsequently gaming boards could
become more focused on returns, which would encourage less development and more
participation slot machines.
Slot machine margins • An in-depth look at the “guts” of a slot machine. Our analysis shows that about
should hold up given 80% of the cost of a slot machine is variable. This, combined with potential lower input
high variable costs.
costs/efficiencies, should prop up margins in a declining unit sales environment.
• An updated look at timing, size, and potential of key new slot jurisdictions. States
face significant budget gaps and could well explore gaming as a revenue source. The
markets we looked at include New York, Ohio, Pennsylvania, and Texas.
• A look at the levels of hedge fund ownership in the gaming industry compared
with the S&P 500 and Russell 3000 indexes, as well as a look at which stocks are most
held by hedge funds.

From the analyst’s desk – the road to recovery will cross the Vegas
Strip
Since April 2008, the last time we published a gaming primer, nearly $65 billion of
gaming sector market cap has been destroyed. Most of the investor questions we get
ask which companies will literally survive without facing bankruptcy. The global economy
and the broader stock market have been under unprecedented pressure but we would be
hard pressed to find a group of companies in worse shape than the casinos.
Those are the last three sentences that will discuss how much value has been lost. Both
investors and managements are well aware of the gaming woes as we all have painfully
lived it. Instead over the next five pages we will explore how the Road to Recovery will
Cross the Vegas Strip or how the gaming companies can take back control of their
destiny and rebuild equity.
Gaming has long-term We do not think it is too early to start to talk about this fundamentally sound (at least from
positive attributes. a demand standpoint) industry gaining back traction as the consumer improves and credit
markets ease. There is actually a lot to admire about gaming over the long term,
including, (1) increasingly wide acceptance as entertainment, (2) broad appeal with
dynamic price points, (3) significant cash flow that is sustainable (although more cyclical
than we previously thought), (4) barriers to entry due to licensing requirements, and (5) a
relatively small number of participants.
Ultimately, we think there will be stocks that last and even potential equity recapitalization
of many names but we think this only occurs if gaming management teams and investors
change the fundamental investment thesis from hyper growth and momentum to modest
growth and income. Before we discuss the “come back” we want to be clear where we
see investment opportunities today. As much as we believe there is a road to
recovery the reality is that it is likely a very long highway with lots of detours.
In the near term we The two areas for near-term investment opportunity are in the regional casinos and
prefer regional casino, the slot/lottery stocks. The regional casino companies are starting to see yoy revenue
slot, and lottery
stabilization and even growth in some markets fueled by consumers’ desire to have fun
companies.
but still economize. The Daycation/Staycation impact has resulted in consumers going for
short, lower cost vacations for which these casinos are perfectly targeted. At the same
time, a regional casino’s lower fixed cost base allows them to be well positioned for higher
profits.
At the same time we are broadly buyers of the gaming suppliers (slots and lottery). On the
slot front, we expect new states to contemplate rolling out more gaming, property owners
to shift limited cap ex to high return opportunities like slots and participation games, and
the replacement cycles to show a mini surge due to the very high age of existing slot
floors. At the same time, we think states will encourage more lottery activity through
increasing payouts, ticket prices, and marketing. Finally the slot and lottery companies
have strong balance sheets and cash flow generation suggesting they are a “safe” way to
play a rebound in gaming.
The road to recovery for the Las Vegas Strip

Stop building
The number-one issue casino companies can address to restore investor confidence is to
stop building and agree not to do so for the next few years. The casino industry does not
need to build a mega hotel to build earnings. Ever since we started covering this
industry senior executives have been focused on building earnings through
development rather than enhancing same store sales. In contrast, other leisure service
and retail companies have focused on using marketing and service to build repeat visits

and same store sales. Hotels have used marketing, brand positioning, frequent guest
programs, renovation, and brand standards to gain share and build earnings. In addition,
rather than building new, they renovate the old.
Vegas already has a Now, some gaming executives will say that it is only by building new that they can draw in
lot to offer. more customers to see the “new gate, exhibit or attraction” or “Vegas is the only place
that customers go to look at the hotels, not just stay in them.” This all follows the thesis
that you have to have new things for customers to see in order for them to return to Vegas.
But what if Vegas considered what other resort areas have to offer – good weather, fun
atmosphere, good value and high-quality lodging, entertainment and dining? Las Vegas
casinos already have all of this, but if the focus was on these qualities rather than building
they could be enhanced even further.
Although it might be true that a new casino is very exciting and certainly draws
people to a market, it is not the most ROIC-driven cap ex. For every project that draws
in customers, there is also some degree of cannibalization at existing casinos. The new
builds also have another effect in that they make existing casinos look dated, which in turn
causes share erosion or the need to spend more cap ex to keep up with the Wynn’s,
Adelson’s, Kirkorians or other builders of the past 20 years.
The idea that you need more capacity to grow profits may be self-fulfilling as Vegas is
always building: Vegas casinos are always causing cannibalization, so they need to build
more to offset the impact of the previous boom-and-bust cycle.
Demand could be met Another common refrain is that in every market, we always need more rooms. We
with higher prices, have heard “Atlantic City would be so much better if it just had more rooms” or “the
not more rooms.
Venetian, Bellagio and any other project would generate more earnings if we just added
another room tower” and “we are turning customers away from our reservation lines”.
Although there may be more demand why does it have to be met with more supply. This
has always seemed counter to basic economics. If there is so much demand that you are
“turning away” customers, why not just raise the price? In any other industry if
demand is greater than supply then the price goes up but in Vegas, more supply is added.
At some point in the evolution of the market this made sense. In order to make Vegas a
true destination it did need some supply to make it competitive with other hotel markets.
But now it has 157,000 rooms, which makes it the largest hotel market as measured by
rooms in the United States (see Exhibit 1).
Exhibit 1: Las Vegas is the largest hotel market in the country

top 10 US hotel markets measured by rooms
180,000
160,000
140,000
120,000
# of hotel rooms
100,000
80,000
60,000
40,000
20,000
Las Vegas, Orlando, FL Chicago, IL Washington, LA-Long Atlanta, GA New York, Dallas, TX Houston, TX Phoenix, AZ
NV DC-MD-VA Beach, CA NY
Source: Smith Travel Research, Goldman Sachs Research estimates.

We have a novel idea for casino executives – rather than building more rooms, why not
build the customer experience? Why not make the service experience much better so that
people start to come back because they were treated well, had fun, and got great value?
The reality is that on a Friday afternoon, the snake line to check into any of the major
hotels is 20-30 minutes. Most rooms are not cleaned until mid-afternoon. With the
exception of the four or five top hotels in Vegas, most of the rest might be perceived as
being disappointing.
All of these issues could be cured with a simple mandate to stop building, focus on
customer service, and renovate to achieve quality standards to transform the
hotel/meeting experience.
Focus on returns
Building drove returns Over the past few years the returns for the gaming sector have gone down. If you compare
lower. a basket of stocks in the mid 1990s to now by nearly any measure the returns have
deteriorated. Only 10 years ago managements talked about achieving low 20% returns on
capital on any new project but in recent years the projection has been in the low teens.
Once again this was a self fulfilling prophecy as some management teams specifically said
at one point that “the days of low 20% returns are over” but it seems that that was only
because they could not achieve those returns given the inflated cap ex budgets (see
Exhibit 2).
Exhibit 2: Gaming sector returns continue to move lower

sector average ROIC
8%
7%
6% In the peak EBITDA

year for most properties,
5% returns were 200bp
below the 2000/2004
ROIC
4% levels.
3%
2%
1%
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Goldman Sachs Research estimates.
Return targets did not We acknowledge that with lower costs of capital over the past few years it still made sense
consider that the cost to build even at lower return rates. But just because that spread between prospective
of capital could go up.
returns and cost of capital could be maintained, why not go for an even higher spread
rather than maintain a modest one? Instead, companies aimed for the mediocrity of low-
teen returns and ended up with worse. We clearly believe that management needs to aim
towards higher returns given the risk profile of new builds. In addition this creates a better
long-term buffer on the off chance that the cost of capital rises.
Compensation linked Beyond searching for projects with higher return targets, executives can look toward
to returns and… other ways to boost profitability. The aforementioned use of price when demand is high,
rather than boosting supply, is the obvious answer and one that nearly every other service
industry has embraced. But casino companies could set all executive compensation
linked to returns rather than growth. Later in our report we discuss management
compensation. We think that EVA® or other return calculations should be pushed down

into the property level so that middle management sees that when they comp a room
there is a cost to it even if it is midweek and was going to go empty.
…leasing slot There are other specific examples that properties have used to build their returns. One
machines could that we have advocated for a long time is leasing rather than owning slot machines.
benefit gaming
Through the use of participation games, operators would no longer have to spend cap ex
companies.
on getting the newest slots. Slots increasingly look like they have more “fashion risk” so
why not take this risk out of the equation and use participation games where the operator
takes a new game on to the floor for free and simply shares the revenues with the slot
maker? Because the operator does not spend any cap ex on these machines, the ROIC is
infinite.
Underlying our call for a focus on returns over growth is our sense that an individual
casino generates lots of cash flow and often at the property level generates high
returns. However these characteristics have been diluted by the time they make it to the
corporate level. It seems to us that a refocus on returns from the casino floor to the
executive suite needs to be part of the corporate mantra rather than exclusively focusing
on growth.
Another reason that returns seem to be diluted is the constant need for cap ex on existing
properties. Clearly, not all projects are going to have a 100% success on building returns
but it seems to us that management should take a look at each individual project over the
past ten years and see if it truly added any profit or was simply maintenance cap ex
disguised as growth cap ex.
Embrace growth and income characterization

Fewer growth Investors for the most part have thought of casino stocks as growth stocks. Higher
opportunities should multiples used to be ascribed to companies that had the biggest pipeline of opportunity.
lead to a focus on
However, with fewer growth opportunities and at best modest access to the capital
income.
markets in the future, we think casino stocks should embrace their inner growth-and-
income model.
Historically, very few gaming companies paid dividends and very few were considered
share buyback companies. Before it went private Harrah’s did pay a dividend from 2003-
2007, and the former Mandalay Bay was a significant share buyback company (bought
back $900 million of stock 1996-2002), but for the most part they have not considered
themselves income providers. Instead, they have thought the best way to return value to
shareholders is through stock appreciation. However, considering the cash flow and
relative stability of their regional properties, we think the companies will increasingly
position themselves as growth and income. If they start to show capital discipline and
dividend returns we could see these companies getting a premium for their cash flow. On
the road to recovery, however, the first step for many gaming companies will be to use
cash flow to deleverage.
Repositioning the Vegas market

We expect the Las Vegas market to, once again, reposition itself. We have seen Vegas
transform itself from a gambling destination to a cheap vacation market to a family
destination (theme parks and rides located at the casinos) to a conference convention
destination (three gigantic convention facilities and expansion of in house meeting space)
and lately, into an upscale get-away leisure destination (What Happens in Vegas Stays in
Vegas). We suspect the city is once again poised for resurgence.
Vegas could have to Because of all of the issues we have discussed above – the lack of capital, the need to
reinvent itself as the look at returns, the focus on improving the experience – we think that Las Vegas will
value play.
once again embrace a consumer value orientation. Casinos are already doing this with
low price points on rooms and lots of give-aways. But we have recently seen the M Resort
open to the locals Las Vegas community and they feature more value oriented amenities

like self-serve soft drink counters and nine restaurants, including a buffet with beer and
wine included in the price. M Resort targets a wide array of customers. More of the casinos
may have to move the rest of the products to a wider customer base.
For example, does every mega casino need multiple fine dining experiences? Most of the
hotels offer either a buffet, fast food, coffee shop or very high end, suggesting little in
between. A middle market dining experience (PF Changs, Chili’s, etc.) might target this
customer. The same issue may make sense for entertainment and bars. It seems like there
are either $2 beers in a big souvenir glass or $20 martinis. One can certainly find a spread
of clubs/bar/shows by shopping around the strip but one must leave a high quality hotel
room to go to a much lower quality casino/hotel to find more value orientation. A greater
spread of offerings under the same roof would make sense.
Refocus Marketing
With the sudden weakness in room demand, the major casinos have reached out to
consumers with unprecedented marketing. For example, one promotion provided
American Express platinum card holders with a stay at Vegas’s newest property, Encore,
for free for two nights and receive breakfast and lunch credits. We have also received
emails offers for rooms at $109 at Venetian, Excalibur for $36 and Mandalay Bay for $65
for Las Vegas locals at MGM properties. The problem with marketing of this type is that it
is too widespread and targets customers with little regard for whether they are good
gaming customers or not. We understand that giving customers free accommodations will
fill rooms, but casinos must become more judicious about to whom they market.
Harrah’s made great efforts in data mining its customer base to more accurately target
customers. The company discussed many times how if a customer had not visited for a
few weeks, Harrah’s would send a free $10 off coupon and if the customer did not respond,
the company would ramp up the promotion. This was effective targeted marketing. Now
while in theory this seemed like a good idea, it still appeared that Harrah’s made plenty of
cash giveaways that were not nearly as focused as they could have been, nor was there
consistent evidence that the policy led to sustained higher returns or same store sales.
Nonetheless, it does seem that conceptually more targeted marketing would make much
more sense and bring gaming closer to many other service providers.
Conclusion
For the near term we recommend that investors be highly selective about getting back into
gaming, and we prefer the gaming suppliers and regional operators. For the longer term
we believe there is a road to recovery for the Las Vegas operators but we need to see (1) a
commitment to not building, (2) a renewed focus on returns, and (3) a new marketing plan.

Industry profile
There are more than 850 gambling facilities in the United States (commercial, tribal,
and racinos, that is, combined racetracks and casinos) that support some form of
legalized casino gambling. The gaming industry has become an increasingly influential
economic force, as taxes from gaming operations fund schools and other state-run
activities in a number of states.
In fact, many states often look to gaming to plug holes in budget deficits during more
difficult economic periods. Over the past year as the US economy has fallen deeper into
recession there has been increased interest in many States now looking to either expand
gaming (Illinois, New York) or roll it out for the first time (Massachusetts, Texas). An
extended period of economic challenges could result in a greater chance that there is
increased legalized gambling.
Casino gaming in the Casino gaming has also become an entertainment staple for many Americans. States are
United States increasingly relaxing gaming restrictions: in 2008, there were 12 states with commercial
generates around $60
casinos, 28 with tribal casinos, and 12 states with racetrack casinos (some states have a
billion in revenues.
combination of commercial, Native American gaming, and/or racetrack casinos). In 2007,
the commercial and Native American gaming industry combined generated approximately
$60 billion in revenues.
The gaming industry can be broken into two distinct segments: gaming operators and
gaming equipment manufacturers.
Gaming operators—Las Vegas cyclicality is in full effect; Regional

operators in better shape
The overall gaming industry is cyclical and geographically driven, with two distinct
types of markets—destination and locals (drive-in). The main destination market is Las
Vegas, and almost every other market is considered a locals or drive-in market. Although
the economics of the two types of markets differ, both markets are highly competitive and
operators in both markets spend heavily to maintain their relevance in the marketplace
and drive customers to their properties by offering promotions.
There has been a shift Typically, a Las Vegas Strip casino derives roughly 40% of its revenue from gaming
over the past few operations. Other revenue streams include room revenues (about 25% of revenues), food
years towards non-
and beverage (F&B) sales (around 20% of revenues), and entertainment, retail operations
gaming which could
and other (around 15% of revenues). In the past few years, Las Vegas casino operators,
reverse in the
downturn. such as MGM Mirage and Las Vegas Sands, have been increasingly focused on the
conference/convention customer. While this strategy worked during the economic boom
years it started to backfire in 2008 as these “newer” businesses to Las Vegas are much
more cyclical. As the economy has continued to deteriorate in 2009 the conference
attendees, conventioneers, and more entertainment focused customers have dramatically
slowed their visits and the casinos have been left to dig deep into their player databases
and market large discounts to drive occupancy.
Outside of the Las Vegas operators (i.e., the regional operators), casino gaming is the only
revenue stream that provides significant profits to the casino. This is benefitting the
regional operators during the economic downturn as revenues have been under less
pressure and costs are easier to control.
However, in some large gaming markets, such as Mississippi and Atlantic City, some
casino operators have been working toward emulating the Las Vegas strategy. Instead of
giving away rooms to gaming customers during the historically slower mid-week period,
these operators were seeking to attract more cash-paying customers with mini-
conventions and better entertainment, restaurants, and shopping options. It may be

difficult to continue to pursue this strategy as the downturn in the economy limits the
number of conventions and leisure demand. However, on the flip side, some companies
could choose to have smaller regional conventions instead of larger conventions in a place
such as Las Vegas.
Gaming equipment companies—Up for a difficult year but long-

term fundamentals are strong
Replacement demand The slot machine manufacturers make money by either selling games outright, or
should be weak in leasing them on a participation (revenue-sharing) basis to casino operators. Currently,
2009 as the economy
we estimate that there are approximately 930,000 slot machines in North America.
suffers, but we expect
a pickup in 2010 as We think the slot sector should do well in the long term because:
the economy recovers
and slot floors are • Slot floors are old and getting older. In our 2009 slot manager survey we estimated
increasingly old. that slot floors are the oldest since 2001 and should get even older in 2009 after
another slow year of replacements. We believe that this will lead to a very good setup
as we enter 2010.
• We expect states to roll out new and expanded gaming. As in previous downturns
we expect this one to produce additional gambling throughout the country. As the
economy has deteriorated the number of legislation proposals and “chatter” about
increased gaming has increased substantially. We expect that approximately 30,000
new slot machines could be introduced due to new legislation.
• Networked gaming could spur replacements. While central server has no doubt
been pushed further into the future we believe that it will eventually become
mainstream and would require casinos to replace their machines.
Another aspect of the slot manufacturer business is that machines can be leased to
operators instead of outright sales. Under this distribution method, machines can be
leased through revenue-sharing (participation) agreements or, in some markets where
participation is not allowed, daily fee leases. The advantage to casinos is that they do not
have to spend capital on the machine. They can keep an extremely fresh slot floor and
make an infinite return on investment, as there is no up-front cost for the machine, yet the
operator in general receives 80% of the profits from the machine. For the slot
manufacturers, the advantage is that they receive an ongoing stream of profits. While slot
managers are generally reluctant to share “their” revenues with the slot machine
companies we believe with decreased slot cap ex budgets they could have to give in order
to keep fresh floors.
We also cover the lottery operator Scientific Games, which should show relative
outperformance.
• Scientific Games dominates the instant ticket market with 80% market share and
also offers traditional (or online) lottery services for states and jurisdictions. In most
cases, lottery producers sign three- to seven-year contracts with a recurring revenue
component that allows them to benefit from increased lottery sales.

Size, segmentation, customer profile, and history

Although gaming plays a significant role in state and local economies, gaming stocks
account for only 0.07% of the S&P 500. In 2007, commercial casinos in the United
States drew in more than $34 billion in revenues, with compounded annual growth of
9% over the past 17 years. Major casino operators, like Harrah’s and MGM Mirage,
continued to drive a significant portion of the industry’s revenues, accounting for
more than 50% of the annual gaming revenues on a combined basis. In the gaming
manufacturer sector, IGT, the leading slot machine supplier, accounted for roughly
$2.5 billion of revenues (see Exhibit 3).
Exhibit 3: Revenue ranking

$ millions; fiscal 2008
Gaming Operators 2008 FY

Harrah's Entertainment 9,367
MGM Mirage 7,189
Las Vegas Sands 4,390
Wynn Resorts 2,987
Penn National Gaming 2,423
Boyd Gaming Corp. 1,781
Ameristar 1,268
Isle of Capri 1,081
Pinnacle Entertainment 1,046
Trump Entertainment Resorts 988
Gaming Manufacturers
International Game Technology 2,529
Scientific Games 1,119
Bally Technologies 900
WMS Industries Inc. 650
Shuffle Master 190
Multimedia Games 129
Source: Company reports, Goldman Sachs Research estimates.
According to the American Gaming Association (AGA), in 2007 the commercial casino
industry generated $34 billion in revenue in gaming, an increase of 6.1% from 2006 (see
Exhibit 4).
Exhibit 4: Consumer spending on commercial casino gambling

$ billions
Over the past 17

years, casino gaming
has shown a CAGR of 34.4
9%. 32.4
30.3
28.9
26.5 27.0
24.3 25.7
22.2
19.7
18.2
16.0 17.1
13.8
11.2
8.3 8.6 9.6
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: American Gaming Association, Christiansen Capital Advisors, LLC.

• The American Gaming Association also indicates that the commercial casino segment
employed over 360,000 people in 2007. The industry also contributed more than $5.8
billion in gross tax revenues to local communities in 2007.1
• A study by Harrah’s Entertainment/TNS shows that more than one-quarter of the US

population (54.5 million Americans) visited a casino in 2007. The average consumer
visited a casino once every two months. We believe this varies considerably by market
as proximity is a major factor that influences casino visitation.
• The median age of US casino customers is 47.1
• In terms of equity market exposure, the casino and gaming industry accounts for only
0.07% of the S&P 500 index (see Exhibit 5). The broader consumer discretionary sector
accounts for 8.5%.
Exhibit 5: S&P 500 gaming weightings
Weights
Ticker Company Name Sub-industry % S&P 500 %
IGT International Game Technology 55% 0.04%
WYNN Wynn Resorts 45% 0.03%
100% 0.07%
Source: Goldman Sachs US Portfolio Strategy Group.
Hedge funds tend to We took a closer look at the ownership composition of the gaming stocks to get a better
be heavy investors in understanding of the types of investors that focus on these stocks. We found that this
gaming: Hedge funds
sector generally gets a very heavy weight by hedge funds, in contrast to other investment
have ownership of
funds. The gaming industry accounts for only 0.07% of the S&P 500, but as Exhibit 6
gaming stocks that is
more than 13X the shows, hedge funds have a 0.92% weighting of gaming, or more than thirteen times the
S&P 500’s average. broader market exposure. Even if we compare the exposure to the smaller-cap-oriented
Russell 3000, in which gaming stocks account for a 0.14% weighting, we find that the
hedge funds still have a higher allocation than the index. This overexposure by hedge
funds, which tend to have higher turnover than other mutual funds, may be one of the
reasons for the high volatility of the group.
Exhibit 6: Ownership and index weighting
Casinos & Gaming Hotels, Resorts & Cruise Lines Gaming, Lodging & Cruise Total
Average HF Weight (%) 0.92% 0.54% 1.46%
Russell 3000 Weight (%) 0.14% 0.36% 0.50%
S&P 500 Weight (%) 0.07% 0.36% 0.43%
Mutual Funds Weight (%) 0.08% 0.13% 0.20%
Source: Factset and Goldman Sachs Research.
Characteristics of gaming stocks may attract hedge fund investors. Hedge funds
generally search for stocks for which they can best assess the potential for absolute
performance. With such a small percentage of the S&P 500 allocated to gaming, most
mutual funds can avoid making a decision about this group without hurting their relative
performance. However, hedge funds that are looking for absolute performance spend
more time on this sector.
1
“State of the States: The AGA Survey of Casino Entertainment,” American Gaming Association, 2008.

While the equity market cap of gaming stocks has come down over the past year many
hedge funds continue to look at the space due to its extreme volatility. We also point out
that the gaming industry is an attractive sector to focus on because (1) of the small- to
mid-capitalization nature of most of the companies, which provides opportunities to invest
in less-covered stocks and companies that may grow into the next “big” company, (2) the
access to information and availability of contacts is considerably higher than most other
industries, (3) the stock volatility creates opportunities to generate alpha, (4) there are
high-growth, widespread domestic and international expansion opportunities, and (5)
there are monthly data points of gaming market performance that serve as catalysts.
Exhibit 7 shows the percentage of shares outstanding owned by hedge funds as of the
most recent filing. The table shows that there is substantial ownership by the hedge fund-
oriented investors. In some cases (Multimedia Games and Bally Technologies), hedge fund
ownership exceeds 20% of the shares outstanding. In general, as would be expected, the
larger cap the company, the smaller the percentage hedge funds own.
Exhibit 7: Hedge fund ownership of certain gaming stock

% of shares outstanding
Company % of Hedge Fund Holders

12/31/2008 9/30/2008 Qtr Chg
MULTIMEDIA GAMES INC 36.4% 26.7% 36.2%
BALLY TECHNOLOGIES INC 24.1% 30.4% -20.7%
ISLE OF CAPRI CASINOS INC 19.0% 27.1% -29.9%
BOYD GAMING CORP 11.8% 16.3% -27.8%
PENN NATIONAL GAMING INC 11.7% 16.4% -28.9%
SCIENTIFIC GAMES CORP 10.9% 15.2% -27.9%
AMERISTAR CASINOS INC 8.8% 13.2% -33.0%
SHUFFLE MASTER INC 7.6% 10.1% -25.3%
INTL GAME TECHNOLOGY 6.7% 3.5% 91.5%
WYNN RESORTS LTD 5.8% 13.5% -57.1%
MGM MIRAGE 5.6% 4.7% 19.8%
PINNACLE ENTERTAINMENT INC 4.8% 3.3% 45.5%
WMS INDUSTRIES INC 3.1% 1.6% 87.6%
LAS VEGAS SANDS CORP 2.2% 6.0% -63.2%
11.3% 13.4%
Source: Factset and Goldman Sachs Research.
Segmentation of the industry

We break the gaming industry into two sub-categories: gaming operators and gaming
manufacturers. Within the gaming operators, we evaluate the companies based on the
geographic markets in which they compete and whether they are focused on one market
or are geographically diverse. We segment gaming operators into four groups: local-
oriented casinos, Las Vegas operators, diversified franchises that operate in multiple
jurisdictions, and global operators (see Exhibit 8).

Exhibit 8: Gaming operator segmentation
Global operators - Considerable portion of future earnings outside of U.S.

Las Vegas Sands
Properties include: Venetian, Sands Macau, Venetian Macau, Palazzo, Four Seasons Macau, Sands BethWorks (2009), Marina Bay Sands (2009)
Wynn Resorts
Properties include: Wynn Las Vegas, Wynn Macau, Encore Las Vegas, Encore Macau (2010)
Vegas focused operators- Around 75% of earnings from the Las Vegas Strip
MGM Mirage
Properties include: Bellagio, Mandalay Bay, MGM Grand, MGM Grand Macau,City Center (2009)
Local Oriented Casinos- Customers mainly drive to the casino
Boyd Gaming Corporation
Properties include: Borgata, Sam's Town, Coast Casinos
Penn National Gaming
Properties include: Charles Town and Argosy and Hollywood brands
Pinnacle Entertainment
Properties include: L'Auberge Du Lac, Lumiere Place, River City (2009)
Station Casinos (Private)
Focuses on Las Vegas locals market and manages tribal casinos, currently in CA and MI
Ameristar Casinos
Properties include: Ameristar St. Charles, Ameristar Kansas City, Ameristar Counsil Bluffs
Diversified Franchises- Operates casinos in multiple markets
Harrah's Entertainment (Private)
Harrah's, Caesars, Harveys, Rio, Showboat, and Horseshoe brands
Industry economics
Higher taxes and large Return profile for casino operators tends to be low. We looked at returns for the major
maintenance capex gaming operators since 2003. As Exhibits 9-11 show, even during good times, overall
requirements put
returns for most casino operators are relatively low—with returns on capital ranging
pressure on operators’
mostly in the 5%-9% range. We attribute these low returns to “creeping capex”—capital
returns.
projects above maintenance capital expenditures that add amenities to simply keep
property EBITDA stable but that do not produce positive returns on capital. Basically, in an
effort to keep up with the “guy across the street,” gaming operators have spent capital on
low-ROI projects. In addition to considerably high cap ex requirements, one of the reasons
for low returns in the industry is the high level of taxation that casino operators are subject
to, especially in the regional gaming markets.
Our view is that operators who achieve revenue growth through same-store sales growth
rather than new builds or room-tower expansions would have higher returns on capital. In
the past this strategy did work for Station Casinos (now privately held) who focused on
growing same-store sales by building a database of frequent customers through a
frequent-gaming card and targeting these customers with direct mail. Right now we find
very few US operators focused on high returns; however, we think that this could change
as development slows due to lack of capital. We think that operators may now focus on
improving returns at existing properties in order to drive cash flow, which would represent
a shift from looking to build new projects at almost any cost.
Gaming manufacturers show higher returns on capital. Although casino operators have
spent on low-ROI projects resulting in poor returns, gaming manufacturers’ business
models require minimal cap ex, and owing to the high-margin business model, slot
manufacturers show high relative returns on capital when compared to the operators. We
expect that these high returns should continue going forward even if demand decrease
since games are mostly built to order and many of the costs going into a slot machine are
variable. Additionally, as the companies become more software focused margins should
increase even further.

Goldman Sachs Global Investment Research
April 7, 2009
Exhibit 9: Gaming returns
2003 2004 2005 2006 2007 2008 2009E 2010E

ROIC ROA ROE ROIC ROA ROE ROIC ROA ROE ROIC ROA ROE ROIC ROA ROE ROIC ROA ROE ROIC ROA ROE ROIC ROA ROE
Casino Operators
Ameristar Casinos Inc. 7% 4% 21% 7% 5% 22% 7% 5% 19% 6% 4% 19% 4% 4% 16% 4% -5% 15% 3% 2% 14% 4% 2% 11%
Boyd Gaming 5% 2% 13% 4% 4% 18% 6% 5% 22% 6% 4% 18% 4% 7% 13% 2% -5% 6% 2% 0% 3% 2% 0% 2%
Las Vegas Sands NA NA NA NA NA NA 16% 8% 27% 11% 8% 26% 6% 1% 14% -17% -1% 0% 7% 0% -2% 4% 1% 1%
MGM MIRAGE 4% 2% 9% 5% 4% 14% 4% 3% 15% 5% 3% 18% 4% 7% 13% 3% 1% 6% 2% 0% 1% 2% 0% -1%
Penn National Gaming 9% 4% 23% 10% 4% 25% 5% 4% 25% 6% 6% 22% 6% 3% 16% 4% -3% 8% 4% 2% 6% 4% 3% 8%
Pinnacle Entertainment 2% -3% -2% 2% 1% -1% 5% 0% 3% 5% 5% 10% 2% 0% 4% 5% -14% -11% 1% 0% 0% 2% 0% 1%
Wynn Resorts NM NM NM NM NM NM 3% -3% 0% -11% 16% 4% 10% 5% 19% 9% 3% 16% 4% 0% 2% 5% 1% 4%
Regional Operator Average 6% 2% 14% 6% 3% 16% 6% 4% 17% 6% 5% 17% 4% 4% 12% 4% -7% 4% 3% 1% 6% 3% 1% 6%
Total Operator Average 6% 2% 13% 6% 4% 15% 6% 3% 16% 4% 7% 17% 5% 4% 14% 1% -3% 6% 3% 1% 3% 3% 1% 4%
Slot Manufacturers
Bally Technologies Inc. 14% 2% 40% 14% 12% 12% -1% -3% -19% -5% -7% -7% 8% 3% 30% 16% 12% 35% 15% 12% 28% 15% 12% 25%
International Gaming Technology 17% 10% 24% 23% 12% 23% 11% 11% 22% 12% 12% 25% 15% 13% 30% 10% 8% 31% 7% 6% 28% 8% 7% 28%
Scientific Games 8% 5% 25% 9% 5% 22% 9% 8% 32% 8% 6% 19% 6% 3% 15% 5% 1% 14% 4% 3% 12% 6% 5% 17%
WMS industries -5% -3% -4% -3% -2% 2% 3% 4% 9% 6% 7% 12% 7% 9% 14% 9% 10% 14% 9% 10% 14% 9% 10% 14%
Average 8% 4% 21% 11% 7% 15% 6% 5% 11% 5% 5% 12% 9% 7% 22% 10% 7% 24% 9% 8% 20% 9% 9% 21%
Americas: Gaming
15
Exhibit 10: Gaming operators’ ROE, ROC, and ROAs Exhibit 11: Slot manufacturers’ ROE, ROC, and ROAs
2003-20010E 2003-20010E
Gam ing Ope rators Re turn Gam ing M anufacture rs Re turn
20% 25%
15% 20%
Average Return
Average Re
10% 15%
5% 10%
0% 5%
2003 2004 2005 2006 2007 2008 2009E 2010E
-5% 0%
Ye ars 2003 2004 2005 2006 2007 2008 2009E 2010E
Ye ars
ROIC ROA ROE
#REF! #REF! #REF!
Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.
Historical perspective and a look forward

The gaming industry has come a long way since Bugsy Siegel opened the original
Flamingo Hotel in Las Vegas in 1946. Although some may have the perception that casino
companies are still run by gangsters, this is no longer the case and can only be found now
in the movies. Unlike in the 1930s, major casino operators and manufacturers today are
legitimate public companies. Private equity (Texas Pacific, Apollo, and Colony Capital,
among others) also became involved in 2006/2007, bringing another legitimate owner to
the industry. Gaming today is a highly regulated industry in which regulators in every state
do thorough background checks on all members of the senior management teams of both
gaming operators and manufacturers. The regulatory aspect of the business also creates a
barrier to entry.
The customer base has also changed. Originally, casinos offered one form of
entertainment—gambling. Therefore, the customers that visited the properties were avid
gamblers who were not necessarily interested in fine dining or other entertainment. In
essence, they were going to casinos for the thrill of gambling, not for other amenities—nor
were any expected. However, over time, it became clear that adding other amenities would
allow Las Vegas casinos to appeal to a broader public. Today, although some customers
still go to casinos because they are avid gamblers, we believe that many go to local
casinos and Las Vegas for the overall entertainment experience. This view that visiting a
casino is not that different than other American pastimes is a double-edged sword. It has
increased appeal and broadened the customer base, but it also makes this leisure activity
more susceptible to economic slowdowns. This current economic downturn is proof
that gaming is more cyclical now than ever, as revenues have declined more than in
any other previous recession.
Gaming taxes are an As the perception of gaming has changed, acceptance of gaming has increased as well.
integral revenue This has been especially apparent over the past decade years throughout the United States,
stream for many
as riverboat casinos, Native American casinos, or some form of casino gaming can be
states.
found in 37 states. Currently, taxes from gaming operations have become an integral
revenue source in many states, and in the future, we expect other states to either allow for
expansion of gaming or open their doors to some form of casino gambling (see Exhibit 12).

Exhibit 12: United States gaming markets
WA ME
MT VT
MT* ND*
ND
NY NH
OR*
OR MN MA
ID*
ID SD WI
WY MI CT*RI
PA
NE IA NJ
NE* OH MD
NV IL DE
UT IN
CO WV VA
CA*
CA CO KS MO KY
NC
NC*
TN
AZ*
AZ OK*
OK SC
NM AR
AL GA
MS
TX LA
FL
Mostly Commercial Gaming FL
Mostly Tribal Gaming

Non-Gaming States
Note: Hawaii, which is excluded from this map, does not currently have commercial or tribal gaming but Alaska, which is excluded from this map, does have tribal gaming.
Source: Goldman Sachs Research estimates and American Gaming Association.

Gaming fundamentals
The gaming industry is highly regulated, creating high barriers to entry. It is also one of
the country’s most heavily taxed industries and has become a key source of revenues for
many states. Casino operators generally look to existing property expansions and new
domestic markets for growth and over the past few years, have also focused on
international markets for additional expansion. The slot makers have also seen limited
growth in the North American market in recent years, causing them to search
internationally for opportunities as well and to innovate. However, we think there could be
increased growth on the horizon domestically as additional states roll out gaming to close
budget gaps.
Key economic characteristics

Gaming is an In general, gaming is a consumer leisure expense, making revenues cyclical. Using
economically cyclical data going back to 1960, the correlation between gaming revenue growth and nominal
sector.
GDP growth is 0.51. In addition, revenues for locals casinos can be affected by the local
economy and are therefore also geographically driven. Revenues for Las Vegas operators
(conference and convention business) are also affected by corporate travel budgets.
Challenging credit • The gaming industry is going from a global development boom to a period of
markets led to the little-to-no development. In the past decade the strength in gaming and non-gaming
cancellation of some
revenues has led to casino renovation, expansion, and new building. From Las Vegas
major projects.
to Atlantic City to Macau, the gaming industry expanded in a big way. However, the
recent weakness in the capital markets has slowed down the new project pipeline and
has even led to the cancelation some already started projects such as Boyd’s Echelon
place on the Las Vegas Strip and Las Vegas Sands’ Macau development.
• The customer base for casinos is diversified. Customers at Las Vegas casinos range
from high-end international players to conventioneers to tourists. In regional markets,
customers are often retirees who visit the casinos more frequently.
• Both gaming operators and gaming manufacturers’ industries are dominated by a
few companies. The top-two gaming operators account for over 50% of non-Native
American US casino win, and, in slot manufacturing, the four largest competitors
control more than 90% of the slots deployed.
• High barriers to entry characterize the casino business, as regulatory hurdles are
substantial, up-front construction costs and time to build are significant, and growth is
capital-intensive. Barriers in slot manufacturing come in the form of regulation and the
importance of reputation and relationships in the business. Slots and lottery
companies appear to have even more barriers to entry as they are in nearly every
market, whereas a casino operator may only have to be licensed in the few states they
operate in.
• The government strictly regulates almost every aspect of the casino business, at
times restricting flexibility and growth opportunities. It also prevents unsavory types
from entering into the business.
• Profits for casino operators can be volatile. The hold percentage (the ratio between
the house win—the amount of money the casino wins) and drop (the amount of
money that is played by the casino customers2 —or “luck”) of a casino during a
quarter can have a dramatic effect on quarterly earnings. It is not uncommon for a
casino operator to miss consensus estimates because of a low hold percentage. It is
widely believed that this variation in hold is a function of luck, but the mathematics of
2
Kuriscak, Steve. Casino Talk, S.S. Kuriscak: United States, 1985.

the games should even out over the course of year, so quarterly swings in hold should
be disregarded. However, we believe that the hold percentage could creep lower
during this downturn as players could either be inclined to take any winnings and walk
away from the casino earlier than they would have during more prosperous times, or
simply cannot afford to spend long amounts of time gambling, which adds to the
volatility. In addition, given the high level of fixed expenses, lower revenues lead to
dramatically lower profits.
• Technology continues to be used to better track customer profiles and more
effectively target customers. Casino operators continue to focus on loyalty cards to
track customers based on their play time, spending, game preferences, and frequency
of visit to allow for more targeted marketing to promote same-store sales growth. In
addition, more advanced systems technology from the gaming equipment makers is
keeping players at machines longer with better bonusing and more targeted
marketing.
Gaming demand historically correlated to change in nominal GDP

Gaming revenue growth is highly cyclical—dependent on consumer spending and GDP
growth. As shown in Exhibit 13, there is a relatively high correlation (0.51) between
nominal GDP growth and gambling revenue growth. Although there is a high correlation in
terms of direction, the magnitude of a slowdown in GDP on gaming is hard to determine,
as it has varied significantly during different economic cycles. Up until the most recent
downturn gambling revenue in both Las Vegas and the regional markets has been mostly
resilient. This current recession has shown that gambling is no longer “recession proof” or
even “recession resistant” as gaming revenues in Las Vegas were down 10% in 2008 and
22% in 4Q2008 and several regional markets same-store revenues fell more than 10% in
2008 we suspect that this is because of the proliferation of gambling creating equilibrium
between supply and demand.
Exhibit 13: High correlation between GDP growth and gambling revenue growth
50%
40% Las Vegas room supply

increased 15.6%.
Las Vegas room supply

increased 16.7%.
30%
Las Vegas room supply

increased 9.4%.
20%
10%
0%
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-10%
Casino Gambling % change Nominal GDP % change Business Cycle Trough
Note: This chart reflects absolute gambling revenue growth and therefore benefits from new property openings.
Source: Goldman Sachs Research.

Product differentiation in gaming is difficult

In Las Vegas, operators try to differentiate themselves through higher-quality room
product and entertainment offerings. Outside Las Vegas, where room product is less
important, differentiation is more difficult but could be taking a turn for the better. All
operators have access to the same slot machines and table games. Same-store sales
growth is difficult to achieve, and most operators in the past achieved growth through
direct-mail marketing and discounting—casinos advertise that slot machines have lower
hold percentages (“loose slots”) or mail cash coupons to customers. We are increasingly
seeing the regional gaming operators improve the quality of their facilities and offer more
non-gaming amenities, so that a customer’s decision where to play is not solely
determined by which casino has the best promotion at that time.
Conference and convention business drove revenue growth for Las

Vegas during the boom but is currently very weak
Conference and Much of the revenue growth during this decade in Las Vegas has been driven by its
convention business transformation from solely a gaming center to a destination location for conferences
was very strong on
and conventions. Convention business is an attractive segment for Las Vegas casinos, as
the upside but is very
it allows the casinos to fill rooms during the historically slow mid-week period with higher-
weak on the way
down. rate customers. In addition, conferences and conventions are usually booked 6-12 months
in advance and have significant cancellation fees, reducing the variability of revenues.
However, since the current economic downturn began the conference/ convention market
has been hit especially hard as corporations have been cutting expenses. In addition, it has
become a political issue for companies to host events in Las Vegas, which has hurt
visitation and attendance even more. For the first time since 2004 the number of
conventioneers fell year-over-year in 2008. We expect it to be down again in 2009.
According to the Las Vegas Convention and Visitors Authority, of the 37.5 million visitors
to Las Vegas in 2008, 5.9 million were in the city for a convention or business function (see
Exhibits 14-15). Unlike many other convention cities, Las Vegas offers evening
entertainment rather than daytime attractions, resulting in relatively higher convention
attendance during the day. We believe that the convention business will remain a staple of
Las Vegas in the years ahead although there is no doubt it will be challenged in the near
term.

Exhibit 14: Annual convention and attendance activity Exhibit 15: Annual convention and attendance activity
1980-2000 2001-2008
30,000 7,000,000
30,000 7,000,000
6,000,000
25,000 6,000,000
25,000
5,000,000
Number of Conventions
5,000,000
Convention Attendance
Number of conventions
Convention Attendance
20,000
20,000
4,000,000 4,000,000
15,000
3,000,000 3,000,000
15,000
10,000 2,000,000
2,000,000
10,000
1,000,000
5,000
1,000,000
5,000 0
0 0 2001* 2002 2003 2004 2005 2006 2007 2008
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Number of Conventions Convention A ttendance
Number of Conventions Convention A ttendance
Note: Reflects the change in methodology for counting number of conventions.
Source: Las Vegas Convention and Visitors Authority. Source: Las Vegas Convention and Visitors Authority.
Convention demand prompted the need for more rooms in Las

Vegas
The difficult credit Convention demand helped drive the recent building phase in Las Vegas, and several
markets have put a major new properties are still expected to open in the 2009-2010 time frame however this
halt to new projects
number is down from earlier estimations as some projects have been canceled or delayed.
in Las Vegas but
The Las Vegas Visitors and Convection Authority expects more than 17,500 hotel rooms
several large
developments could added in Las Vegas over the 2009-2010 time period, which is over a 12% increase in the
still open in the room base. A significant portion of these rooms, over 50%, will be “high-end” Strip hotel
2009/2010 period. rooms that can target convention visitors. After these rooms open however there is a lack
of new projects which will open post 2010 due to the current downturn. Even with a
slowdown in new developments it could still take many years for Las Vegas to absorb the
large amount of supply which has and will come online. Exhibits 16 and 17 show the
expected room growth in Las Vegas over the next four years.

Exhibit 16: Las Vegas Room supply projections
180,000 14.0%
160,000 12.0%
140,000
10.0%
120,000
8.0%
100,000
6.0%
80,000
4.0%
60,000
2.0%
40,000
20,000 0.0%
0 -2.0%
20 E
E
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
20 8
09
10
0
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
LV Strip Rooms % change in LV Strip Rooms
Source: Las Vegas Convention and Visitors Authority, Goldman Sachs Research.
Exhibit 17: Five-year moving average room growth

1990-2010E
FiveYear Moving Average Room Growth Rate
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1993 1996 1999 2002 2005 2008
Source: Las Vegas Convention and Visitors Authority, Goldman Sachs Research estimates.
Where casinos make money

Gaming accounts for When first visiting a Las Vegas strip casino, it seems that gambling may almost be
35%-45% of profits at secondary to all the parts of these mega resort/entertainment complexes. The advertising
a Las Vegas Strip
features great rooms, great food, and great entertainment. The actual slots and tables are
casino and an even
prominent, but they are not what distinguishes and even initially attracts the consumer.
higher percentage at a
regional facility. However, after all the capital and time invested in transforming a casino into a “fun zone,”
gambling still accounts for a significant portion of a casino’s profits. Gambling accounts
for 35%-45% of the profits of a typical Las Vegas strip casino and an even higher
percentage in a locals or regional destination.

Conference/ Exhibit 18 shows a hypothetical income statement of a Las Vegas strip casino. Although
convention business gaming continues to contribute to a large portion of a Vegas casino’s revenues, this
increased importance decade has seen the rise of non-gaming revenues, such as room revenues. There
of non-gaming
appear to be at least two explanations for this transformation. First, with its three
revenues in Vegas.
convention centers (Las Vegas Convention Center, Sands Convention Center, and
Mandalay Convention Center) located in close proximity to one another, this gaming
mecca is becoming one of the preferred locations for large conferences and conventions.
Second, the non-gaming amenities, including high-level entertainment, high-quality dining,
and retail options, appear to put Las Vegas into the destination resort category.
• We highlight some of the line segments that are surprisingly weak or strong. For
example, table games, which get a lot of attention, generate about 14%-18% of the
casino’s revenues but account for under 4%-7% of profits because the margin is so
low at only 15%. The high labor cost, credit, and “comp” expenses associated with the
table business drive down the profits.
Exhibit 18: Hypothetical income statement of a Las Vegas Strip casino
Revenues % of total Income % of total Average margin

Gaming
Table Games 14%-18% 4%-7% 15.0%
Slots 22%-27% 31%-35% 60.0%
Other Games 1%-2% 1%-2% 45.0%
Gaming Total 37%-45% 35%-42% 47%-51%
Non-Gaming
Hotel 22%-27% 35%-40% 70.0%
Food and Beverage 18%-22% 15%-18% 40.0%
Entertainment 6%-8% 3%-6% 30.0%
Retail 5.0% 2%-5% 35.0%
Other* 5.0% 2%-5% 40.0%
Non-Gaming Total 55%-65% 60%-65% 50%-54%
Total 100.0% 100.0% 50%-52%

* Other includes spa and salon as well as telephone access fees, etc.
Source: Goldman Sachs Research, MGM filings.
Casinos that cater to On the other hand, the slot segment is 22%-27% of revenues, but with a 60% profit margin,
high-end play, such as it accounts for nearly 31%-35% of profits. Slot machines run non-stop and have virtually no
Venetian, Wynn,
human intervention. They need minimal maintenance and some technology upkeep but
Bellagio, and Caesars
they run virtually labor-free. In total, gaming margins are nearly 50% and account for 35%-
Palace, are likely to
have a higher 42% of profits.
percentage of income The non-gaming operations are led by hotel operations that have nearly 65%-70% margin.
from table games.
The efficiency of the hotel operation lies in its high utilization. Casinos try to run
occupancies close to 100%, so that they get virtually every drop of revenues out of the
rooms. The other non-gaming operations such as restaurants, bars, entertainment, and
retail are almost loss leaders with average margins of 30%-40%.
The profits are in the The net result of high slot and hotel margins offset by weak restaurant, bar, and table
slots and hotel rooms. margins is a very healthy 50%-54% profit margin. This profit margin is as good as or better
than that at a well-run, full-service hotel.
However, we think that trends could revert to old as the conventioneer and leisure
traveler becomes less important to Las Vegas and the slot player’s importance

increase. We think Las Vegas revenues could become much more dependant on the slot
player and not as much on the high end, convention going, and business traveler.
The income statement of a regional operator looks quite different from that of a Las
Vegas Strip operator. For a regional operator 80%-90% of the revenue comes from the
gaming floor with the majority of that coming from slots. This structure has and will likely
continue to put the regional operators at an advantage to the strip operators during the
downturn and recovery (see Exhibit 19).
Exhibit 19: Hypothetical income statement of a regional casino
Revenues % of total Income % of total Average margin

Gaming
Table Games 8%-12% 2%-4% 15%
Slots 70%-80% 80%-85% 60%
Gaming Total 80%-90% 82%-88% 50%-55%
Non-Gaming
Food and Beverage 8%-12% 8%-12% 48%-52%
Hotel 2%-6% 3%-7% 75%-85%
Other 1%-2% 1%-3% 43%-47%
Non-Gaming Total 14%-18% 15%-20% 55%-60%
Total 100.0% 100.0% 53%-57%
Source: Goldman Sachs Research, Ameristar filings.
Operators have focused on non-gaming amenities to drive more

spending per visitor however this could reverse
The pioneers of the shift toward focusing on non-gaming revenues are predominantly the
Las Vegas casino operators that played a crucial role in transforming Las Vegas from a
pure gaming market to a destination resort and a conventioneer’s heaven. While this
transformation has been beneficial the past several years it has hurt Strip results in this
economic downturn as non-gaming revenues tend be more discretionary in nature. As
Exhibit 20 shows, average spend per visitor in Las Vegas increased from 2004-2007 (the
LVCVA no longer provides this information as of 2008). The Venetian, with its Sands
Convention Center, is probably the best example of the benefits of a strong
conference/convention market. Other properties followed the Venetian’s lead, and now just
about any new property on the Las Vegas Strip has a convention or large meeting center.

Exhibit 20: Las Vegas visitor statistics

1985-2008
Visitor Visitor Visitor Visitor Average Average Number Rooms Average Clark County Clark County
Year Volume Volume Dollar Dollar spend spend of chg Room Gaming Revenue Gaming
Change Contribution Contribution per visitor change Rooms inventory (in millions) Revenue
(in mlns) (%) (in mlns) % Chg. ($) (%) (% ) % Chg. % Chg.
1985 14 6,901 $486 53,067 2,257
1986 15 7% 7,461 8% $491 1% 56,494 6% 2% 2,431 8%
1987 16 7% 8,603 15% $531 8% 58,474 4% 5% 2,789 15%
1988 17 6% 10,039 17% $584 10% 61,394 5% 4% 3,137 12%
1989 18 5% 11,913 19% $657 13% 67,391 10% 7% 3,431 9%
1990 21 16% 14,321 20% $683 4% 73,730 9% 10% 4,104 20%
1991 21 2% 14,327 0% $672 -2% 76,879 4% 7% 4,152 1%
1992 22 3% 14,687 3% $671 0% 76,523 0% 2% 4,382 6%
1993 24 7% 15,127 3% $643 -4% 86,053 12% 6% 4,727 8%
1994 28 20% 19,163 27% $679 6% 88,560 3% 7% 5,431 15%
1995 29 3% 20,687 8% $713 5% 90,046 2% 2% 5,718 5%
1996 30 2% 22,533 9% $760 7% 99,072 10% 6% 5,784 1%
1997 30 3% 24,952 11% $819 8% 105,347 6% 8% 6,152 6%
1998 31 0% 24,577 -2% $803 -2% 109,365 4% 5% 6,347 3%
1999 34 10% 28,613 16% $846 5% 120,294 10% 7% 7,209 14%
2000 36 6% 31,462 10% $878 4% 124,270 3% 6% 7,671 6%
2001 35 -2% 31,907 1% $911 4% 126,610 2% 3% 7,637 0%
2002 35 0% 31,614 -1% $901 -1% 126,787 0% 1% 7,631 0%
2003 36 1% 32,778 4% $922 2% 130,482 3% 2% 7,831 3%
2004 37 5% 33,724 3% $902 -2% 131,503 1% 2% 8,711 11%
2005 39 3% 36,726 9% $952 6% 133,186 1% 1% 9,709 11%
2006 39 1% 39,419 7% $1,013 6% 132,605 0% 0% 10,643 10%
2007 39 1% 41,578 5% $1,061 5% 132,947 0% 0% 10,868 2%
2008 37 -4% NA NA NA NA 140,529 6% 3% 9,797 -10%
Source: Las Vegas Convention & Visitors Authority, Goldman Sachs Research.
Besides Las Vegas, the majority of the casino operators in the two largest gaming markets,
New Jersey and Mississippi, have also focused on non-gaming amenities, such as rooms,
restaurants, and retail, to drive cash revenues at their properties. This trend emerged in
the Atlantic City market following the opening of the Borgata in July 2003 and a
subsequent change in the customer mix toward a younger clientele. However, similar to
Las Vegas this trend has somewhat reversed over the past year since the credit crisis
began. A few projects that were targeted at a younger crowd or more corporate kind of
customers have been canceled (MGM and Pinnacle) or downsized (Revel). We think that
over the near-term future, non-gaming amenities will be less of a factor in the regional
markets and they could go back to focusing on their core slot customer.
Majority of expenses are fixed

We estimate that 60%-70% of an operators’ cost are fixed particularly for Las Vegas
operators. The largest ongoing cost components for a gaming operation are labor
(approximately 40% of costs), maintenance (5%-10%), marketing, and other miscellaneous.
• Labor is largely a fixed expense at casinos, as unions, regulatory issues, and the
service component of casinos make labor costs less flexible than in other industries.
Rooms need to be cleaned, other hotel functions need to be performed, and the casino
floor has to be appropriately staffed.
• Marketing and promotional expenses. The percentage of total costs can vary.
However, this is usually a significant cost and normally comprises “comps” or
“promotional allowances” (money-back or free giveaways to customers) and direct-
mail promotions.
• Maintenance expenses. Most casino operators estimate that they spend 5% of

revenues on maintenance capital expenditures. We believe this number is understated
and think maintenance capital should more likely be 10%-15% of revenues to avoid
large capital projects that will have low or no returns.

Maintenance capex The opportunity for meaningful margin expansion is somewhat difficult, as 60%-70%
has to be extensive. of operators’ costs are fixed. So, the only improvement has to come from operating
leverage of higher revenues on a fixed expense structure. Regional operators have a more
variable expense structure given the focus on gaming (no big hotels at which to maintain
occupancy) and higher gaming taxes.
This obviously has the reverse effect in a declining revenue situation. During the
current downturn we were able to really see how much fixed costs are in the business,
especially for the Las Vegas operators. It was not uncommon to see revenues down 10%-
15% and EBITDA down 20%-30%. One of the only ways to reduce fixed costs is to “make”
yourself smaller. Recently we saw Borgata decide to close its new Water Club hotel mid-
week until the summer in order to reduce its fixed costs. In addition, regional operators
have been able to get costs under control more quickly than Vegas operators given more
variable expense structure.
Regulation
The gaming sector is a highly regulated industry at the federal and state levels. For
example, at the state level, restrictions or agreements are often required on the number of
gaming positions and casino space and, in some markets, on how many nongaming
features (such as hotel rooms) must be built. As an example, in Illinois, a casino is limited
to the number of gaming positions allowed at the property. Management is also strictly
regulated and monitored for ties to organized crime, ethics infractions, and tax evasion.

Why this time was different

In the 2008 issue of this primer we wrote a section titled “Why this time could be
different.” From a gaming perspective, this time (the current downturn) has in fact
been very different than previous recessions. Prior to the current recession historical
data suggested that casino revenues hold up relatively well during an economic
slowdown. While the current economic difficulties are the worst since the Great
Depression we believe that several factors helped to contribute to the severe
weakness in gaming over the past year. The two most prominent factors are (1) the
spread of gaming throughout the United States and the absolute increase in slot
machines over the past 28 years; and (2) the changing mix of Las Vegas Strip
revenues to more room, F&B, and retail revenues and away from gaming.
Gaming revenues have seen their worst declines ever

Las Vegas Strip Exhibits 21 and 22 show that that the Las Vegas Strip and Atlantic City gaming revenues
revenue was only held up during the recessions of the 1980s, early 1990s, and in 2001. In fact, during one of
down -2% in 2001. It
the worst travel periods in history during the 2001 recession gaming revenues on the Las
was down -10% in
Vegas Strip were only down -2%. The Atlantic City market fared even better than the Las
2008.
Vegas Strip and had not shown a negative year in gaming revenue growth until 2007 when
the casinos in Pennsylvania opened. However, you can see that in 2008 both Las Vegas
Strip and Atlantic City gaming revenues fell from 2007 levels by the biggest year-over-year
decline on record (Las Vegas Strip fell -10% and Atlantic City fell -19%). Recent monthly
results are even worse for the Strip with November 2008 down 8%, December 2008 down
23%, and January 2009 down 15%.
Exhibit 21: Las Vegas Strip and Atlantic City YOY Exhibit 22: Las Vegas Strip and Atlantic City YOY
gaming revenue growth gaming revenue growth
Las Vegas 1984-2008, Atlantic City 1980-2008 1990-2008
120% 30%
100% 25%
20%
80%
15%
60%
10%
40% 5%
20% 0%
-5%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
09 8
D
20 20 0
0%
YT
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
-10%
0
-20%
8
0
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
-15%
-40% -20%
Las Vegas Strip Atlantic City

Las Vegas Strip Atlantic City
Source: State Gaming Boards, Goldman Sachs Research estimates. Source: State Gaming Boards, Goldman Sachs Research estimates.
It is more difficult to get a broader look at regional markets going further back than the
mid-1990s because so many states legalized gaming in response to that recession. We
have graphed regional gaming revenue growth for select markets. The results show that
these regional markets performed well during the 2001-2002 slowdown but showed more
weakness in 2008 (see Exhibit 23). Some markets, such as Illinois and Colorado were also
negatively affected by smoking bans.

Exhibit 23: Regional gaming market yoy revenue growth

1996-2008
Several regional
Regional markets held
80% markets suffered in
up in the 2002 / 2003
the current downturn.
slowdown.
60%
40%
20%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-20%
-40%
-60%
MS and LA volatility in 2005/2006 is
related to the 2005 hurricane season
-80%
Illinois Indiana Mississippi Louisiana
Source: State Gaming Boards, Goldman Sachs Research estimates.
This downturn has hit the casino operators much harder than
previous recessions
More supply plus We believe two important industry factors have contributed to the extreme weakness in
exposure to non- gaming recently. First, there is currently more gaming in the United States than there has
gaming has made this
ever been. This rise in supply has made the regional markets more competitive than they
time worse.
have ever been. The regional revenues were on average down -1.4% versus the Las Vegas
Strip down 10.4% in 2008. We think the regional markets benefited from the lower price
point and closer to home characteristics. Second, and specifically to the Las Vegas
operators, an increasingly large percentage of revenues now come from non-gaming
sources, specifically rooms, which have been more discretionary and/or conference
convention driven.
Gaming has expanded dramatically since the early 1990s

In prior downturns, particularly in the 1980s and 1990s, gaming was less widespread. This
underpenetration could have been part of the reason that gaming revenues held up so well
during a slowdown. While investors have generally thought that gaming revenues were
more resilient due to the “sticky” or “slightly addictive” nature of the business it could
have been as much due to the fact that there gaming locations were sparse and capacity
was below demand levels.
Gaming is now We believe over the past 25 years gaming has moved from disequilibrium (more
available in 37 states. demand than supply) to equilibrium in which demand and supply are balanced. In
some locations there is greater supply than demand. For example, in 1980 only two
states had commercial gaming (Nevada and New Jersey) compared with twelve states
now (see Exhibit 24). In addition there are now 28 states which offer tribal gaming. In
recent years tribal gaming has actually been growing faster than commercial casinos (not
including racinos) and from 2004 to 2008 the number of slot machine operated by Native
American tribes grew 37%. Near term, tribal casinos should continue to grow as states
such as California, Florida, and Oklahoma continue to expand.

Exhibit 24: States with commercial gaming in 1980 vs. now
States that had gaming in 1980 States that currently have commercial gaming
Nevada Colorado
New Jersey Illinois
Indiana
Iowa
Louisiana
Michigan
Mississippi
Missouri
Nevada
New Jersey
Pennsylvania
South Dakota
Cannibalization is Most states legalized commercial gaming following economic slowdowns in the early
causing some markets 1990s and early part of this decade (see Exhibit 25). Gaming is more widespread now
like Atlantic City to
than it is has been in any prior downturn and people have an exuberant number of
shrink.
choices of where to gamble. This has had negative implications for all markets. For
example, the only drive-to gambling location for somebody living in the New York area
used to be Atlantic City. This person now has several choices in addition to Atlantic City
which include: Pennsylvania, Yonkers Raceway (30 minutes from the city), and Connecticut.
In the future it is likely that this person will have additional options at Aqueduct racetrack
or Belmont racetrack in Queens. The result has been cancelations of future Atlantic City
projects as well as the shrinking of the size of the slot floors in Atlantic City.
The situation is similar in Eastern Texas. Residents used to go to either Baton Rouge or
Lake Charles in Louisiana if they wanted to gamble, but now, with the extremely fast
growth of Oklahoma Tribal casinos there are simply more choices. This makes regional
gaming more competitive and given the growth of “Vegas-style” casinos, such as
Pinnacle’s Lumiere Place in St. Louis, in regional markets people might now choose to stay
closer to home and not make the trip to Las Vegas.
Exhibit 25: Gaming domino effect
The legalization of gaming in one state New York and Illinois already
resulted in a number of neighboring have some gaming but we think
states introducing gaming it could expand
WA ME
MT ND
(1994)
NH
OR MN NY MA
ID SD
SD WI (2001) RI
WY (1989) MI (1992)
PA CT
IA PA
(2004)
NE IA
(1989) NJ
NV IN OH MD
UT CO IL IN
(1993) WV VA
(1990)
CA CO
(1990) KS (1994)
MO
MO KY
(1993)
NC
TN
AZ OK*
OK AR SC
NM (2004)
AL GA
MS
MS
(1990)
TX LA
LA
(1991)
Present Gaming
States which States;
introduced gaming
around 1990-1993
* = Primarily Tribal Gaming FL
States which
Potential introduced
Gaming gaming
States
around 2001-2003
States we think could expand

gaming
Source: Goldman Sachs Research estimates
Source: American Gaming Association and Goldman Sachs Research.

The number of slot machines is up over 5X since the early 1990s

North American slot Another way to show the spread of gaming is the sheer increase in the number of slot
machines are up 67% machines in the United States. Exhibit 26 shows that the current slot count totals about
since 2000.
930,000 machines compared to about 560,000 in 2000 and only 184,000 in 1991. This
means that the number of slot machines has grown by over 10% on average annually
for the past 17 years. The number of machines is up almost 67% since the start of this
decade and we expect machines to continue to be placed. To put this in perspective, in
2000 there were about 520 people in the United States per each slot machine in North
America and in 2008 the proportionate number of slot machines had grown to the
point that there were only 328 people in the United States per each slot machine (on
a larger absolute US population). While the total number of machines in North America
does include Canada, about 90% of all the machines are in the United States.
Exhibit 26: North America installed slot machine base
1,000,000 20%
900,000 18%
800,000 16%
700,000 14%
600,000 12%
500,000 10%
400,000 8%
300,000 6%
200,000 4%
100,000 2%
0 0%
1991 2000 2001 2002 2003 2004 2005 2006 2007 2008
North Americn Slots Base Growth Rate
Source: Goldman Sachs Research estimates, International Game Technology.
Las Vegas is more exposed to non-gaming revenues this cycle

We believe Las Vegas Strip casinos’ current exposure to non-gaming revenues
exacerbated operator declines in this recession. Going into the downturn, Las Vegas Strip
casino operators were earning more money now from the hotels, restaurants, nightclubs,
conferences, shows, and retail than they every have before.
• For example, MGM generated around 82% of its EBITDA from the Las Vegas Strip in
2008 and is the largest operator on the Strip. Exhibit 27 shows how MGM’s business
has increasingly become non-gaming focused with just 38% of 2008 revenues coming
from gaming versus 53% in 2000.
• The Las Vegas Visitor and Convention Authority’s survey of visitors to Las Vegas
shows the same pattern with gaming at just 38% of a visitor’s total budget in 2008
versus 48% in 1998 (see Exhibit 28).
• Las Vegas Sands and Wynn show similar breakdowns among gaming and non-
gaming revenues in 2008 at their Las Vegas Strip properties, with just 33% and 38%
coming from gaming, respectively (see Exhibit 29).

Exhibit 27: MGM breakdown of Revenue Exhibit 28: Breakdown of spend per trip to Las Vegas
2000-2008 1998-2008
55% 65% 65% 55%

53% 60%
51% 60% 50%
55%
49%
47% 50% 55% 45%
45% 45%
50% 40%
43% 40%
41%
35% 45% 35%
39%
37% 30%
40% 30%
35% 25%
2000 2000 2001 2002 2003 2004 2005 2006 2007 2008 35% 25%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Gaming Revenue as % of Total Revenue (lhs)
Non-Gaming Revenue as % of Total Revenue (rhs) Non-Gaming Budget as a % of total budget (lhs)
Gaming Budget as a % of total budget (rhs)
Source: Company reports. Source: Las Vegas Visitors and Convention Authority, Goldman Sachs Research
estimates.
Exhibit 29: MGM, Venetian LV, and Wynn LV generate less than 40% from gaming
Breakdown of 2008 revenue from MGM, Venetian LV and WYNN LV
100%
90% Other Other Other
80%
Hotel
70% Hotel Hotel
60%
50% F&B
F&B
40% F&B
30%
20% Gaming Gaming
Gaming
10%
0%
MGM Venetian LV Wynn LV
MGM, the Veneitian LV, and Wynn LV all generate less than 40% of
their revenue from gaming.
Non-gaming weighing on top-line growth in harder economic times

This intentional diversification to non-gaming proved extremely profitable for the Las
Vegas Strip operators over the past five years and over the long term we think it is the
right strategy as it allows companies to bring in new customers that ordinarily would not
have come to Las Vegas. However, it has made the business more cyclical during
periods of an economic slowdown and we think that 2009 revenues will continue to
be under pressure.
High hotel margins helped but led to significant EBITDA contraction in 2008
The revenue slowdown in non-gaming, particularly in the hotels so far, appears to be
having a dramatic impact on margins. EBITDA margins contracted by 400bp in 2008

destroying the upward momentum from 2000 through 2007 (see Exhibit 30-31). RevPAR at
MGM’s Las Vegas Strip properties was down -10% in 2008, Venetian’s was down -14%,
and Wynn’s down -8%. This has a significant impact on profits given high hotel margins
(75%).
In addition, conference/convention business which helped drive margins on the upswing

started to crumble in 2008 which also hurt margins. Exhibit 32 shows Venetian’s superior
margins as Las Vegas Sands relies heavily on conference/convention business (more so
than MGM) which is why it has relatively high margins for Food and Beverage and Other.
Exhibit 30: EBITDA margins of select Las Vegas properties

2000-2008
Property 2000 2001 2002 2003 2004 2005 2006 2007 2008
Bellagio 33% 31% 35% 30% 33% 32% 36% 34% 31%
Mirage 26% 26% 27% 28% 30% 29% 32% 29% 23%
MGM Grand 27% 24% 29% 29% 34% 32% 31% 33% 25%
Mandalay Bay 22% 21% 26% 27% 30% 32% 30% 30% 28%
Luxor 29% 32% 29% 28% 31% 33% 38% 38% 33%
Venetian 29% 27% 33% 36% 36% 35% 35% 31% 25%
Wynn 29% 29% 29% 29%
Average EBITDA Margin 28% 27% 30% 30% 32% 32% 33% 32% 28%
The average EBITDA Exhibit 31: Average EBITDA margin across select LV strip properties
margin and non- Properties include: Bellagio, Mirage, MGM Grand, Mandalay Bay, Luxor, Venetian, and Wynn
gaming revenue have
trended together. 34% 70%
32% 60%
30% 50%
28% 40%
26% 30%
24% 20%
22% 10%
20% 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Average EBITDA Margin MGM Non-Gaming
Exhibit 32: MGM and Venetian LV operating margin

by segment
MGM 2008 Venetian LV 2006

Gaming 48% 54%
Hotel 73% 75%
Food and Beverage 40% 55%
Other 34% 52%

*New – Balance sheet and credit snapshot

Leverage expanded dramatically during this downturn as EBITDA came under
pressure and many casino companies kept building. The average 2009E net debt-to-
EBITDA for the operators is now 7X with Las Vegas strip operators averaging 5X and
regional operators averaging 8X (see Exhibit 33). Leverage remains high going into 2010.
Exhibit 33: Gaming operator balance sheet snap shot
Estimated Estimated Net

EBITDA/Interest Debt/EBITDA Key balance sheet focus issues or potential risks
2009 2010 2009 2010
• A 2010 credit facility maturity. Currently ASCA has only $1.2bn out of the $1.4bn of its revolver drawn. ASCA
recently renegotiated credit facility covenants to permit a greater use of the facility over the next year. In addition,
Ameristar 3.4 2.9 5.6 4.8
even with a significant increase to ASCA's revolver pricing upon maturity we estimate the company will generate
$90 mn of FCF in 2011.
• Boyd is on strong financial footing ($4bn credit facility maturing in 2012 of which $2bn is available) after
suspending its LV Strip Echelon development. However, Boyd has indefinitely delayed Echelon and the credit
Boyd 2.9 2.6 6.8 6.4 facility matures 2012, therefore if Boyd does restart construction they will have to renegotiate the facility before
restarting which could be challenging in the current environment. BYD does not face significant 2009/2010
maturities.
• LVS solved some of the liquidity issues when it raised $2.1bn of new capital through a combination of common
equity, 10% perpetual preferred and warrants. LVS's announcement that it would suspend some of its Macau
projects and its Las Vegas condo tower should also help the company conserve cash. Our greatest concerns
Las Vegas Sands 2.6 2.6 10.1 5.6 for an additional squeeze going forward center around the company's ability to deleverage (selling Macau
assets or buying back debt) and a potential further deceleration in Las Vegas/Macau operating results.
LVS has recently indicated that it is seeking a waiver from its bank group which would allow the company to
purchase up to $800mn in bank debt (currently trading at a large discount) in order to reduce its leverage levels.
• MGM has $1.3bn of debt maturing in 2009 and $1.1 billion in 2010. When MGM filed its 10-K the company
indicated that it received a covenant waiver from its bank group (it expires May 15, 2009) without which the
company would be in default on its credit facility. MGM is currently looking for sources of cash in order to fund its
remaining equity contribution to the CityCenter development JV and its debt maturities. Complicating the matter
MGM 2.0 1.4 9.4 8.6
MGM is currently being sued by its JV partner Dubai World which is accusing MGM of mismanaging the project.
MGM has already sold one property, Treasure Island, and we believe the company is looking to sell other
properties both in Las Vegas and outside to increase its liquidity position and reduce its debt levels to more
sustainable levels.
• Penn appears to have one of the strongest balance sheets of the gaming operators. With just $340mn of debt
maturities through 2010 and a large amount of cash ($750 mn at year end 2008 and $626mn credit facility
Penn National 3.8 4.8 4.2 3.6
capacity) Penn can focus on operations and a possible acquisition to take advantage of multiple compression in
the space.
• Pinnacle's credit facility matures in 2010. It has only drawn $152mn of its $625mn facility and is limited in
borrowing to $350mn due to a covenant on its 8.75% notes. The biggest issue for Pinnacle it that it cannot move
forward with additional development plans given the covenants and facility maturity in these tight capital markets.
Pinnacle 2.7 3.2 5.5 4.6
In addition, given the dramatic decrease in gaming EBITDA across the county it is likely that Pinnacle will need
to get some covenant relief from its banks. We do not see this as being a major problem given Pinnacle has
relatively little left to spend on its development pipeline.
• Wynn has one of the best balance sheets of the large cap operators. Wynn has $1.3bn of excess cash and just
Wynn Resorts 3.0 2.9 4.8 4.0 $381mn of maturities through 2010. Given the challenging industry fundamentals in Las Vegas and Macau and
the tight credit markets the company indicated during its 3Q conference call that all future projects were on hold.
Most casino operators now find themselves with a capital structure that does not work in
the current environment. Exhibit 34 shows actions we have already seen taken to revamp
balance sheets.

Exhibit 34: Gaming operator actions to relieve balance sheets since September 2008
Date Company Action

3/24/2009 Las Vegas Sands * Petitioning lenders for an amendment to credit agreement to give the company the option to buy back US bank debt
3/17/2009 MGM * Amended credit agreement providing covenant relief through 5/15/09; Received going concern opinion
3/16/2009 Wynn * Issued 11mn shares at $19/share
3/16/2009 Ameristar * Amended credit facility to increase the permitted Senior Leverage Ratio to 5.75X from 5.25X-4.75X throughout 2009
3/4/2009 Harrah's * Announced a second debt-for-debt exchange
3/3/2009 Station * Defaulted on bonds and entered into forbearance agreement with lenders
2/23/2009 Boyd * Boyd delivered indication of interest to purchase certain Station assets for $950mn
2/17/2009 Trump * Filed for Chapter 11 bankruptcy
2/4/2009 Station * Announced a debt-for-debt exchange
1/12/2009 Harrah's * Postponed opening new hotel tower (Octavius) at Caesars Palace in Las Vegas
12/15/2008 MGM * Announced sale of Treasure Island to Phil Ruffin for $750mn; Transaction closed March 2009
11/26/2009 Wynn * Repurchased $625mn of loans at a discounted price of 95.375%
11/25/2008 Station * Announced a debt-for-debt exchange; Subsequently cancelled
11/17/2008 Harrah's * Announced a debt-for-debt exchange; Exchange completed 12/22/2008
11/14/2008 MGM * Issued $750mn of 13% secured notes priced to yield 15%
11/13/2008 Wynn * Issued 9.2mn shares at $43.50/share
11/11/2008 Las Vegas Sands * Issued $2.1bn of common and preferred equity
11/10/2008 Las Vegas Sands * Halted development in Macau and Las Vegas
10/6/2008 MGM * Amended senior credit facility to increase the Total Leverage covenant
9/30/2009 Las Vegas Sands * Sheldon Adelson, CEO, invested $475mn in the company through a covertible note
9/19/2008 Wynn * Amended credit agreement covenants to provide more flexibility
Gaming credit spreads continue to widen and casino returns narrow

The credit crisis hit right at the core of the gaming industry. Only a few deals have been
done since Fall 2008 including MGM issued $750 million of senior secured notes at a 15%
YTM. Gaming credits have remained relatively wide for the past eight months (see Exhibit
35). At the same time, we estimate cash-on-cash EBITDA returns on new developments
have collapsed likely leaving no spread between the cost of debt and the unleveraged
return. Given the amount of restructuring that needs to take place in the industry we
expect spreads to remain wide in the absence of a major turn in the credit markets.
Exhibit 35: Yield trends on select gaming and hotel credits push funding costs up
40
35
30
25
20
15
10
0
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09
BYD 7.125% GRTCAN 7.25% LVS 6.375% MGM 7.5%

MGM 7.25% PNK 7.5% HST 6.75% FCH 8.5%
ISLE 7.0 3/1/14 Penn 6.875 12/1/11 Penn 6.750 3/1/15

Bank exposure to gaming credit

Considering broad investor fears about gaming companies and bank liquidity, this analysis
puts some of the risks and exposure in perspective. Generally, exposure to the Las Vegas
casino industry is broad among US and international banks. US large banks having
exposure to public lodging and gaming companies include Bank of America, Citigroup,
JPMorgan and PNC (see Exhibit 36).
Exhibit 36: Exposure to Hotel industry and specific providers

Legend: X means no exposure, -- mean has exposure. Hotel/Motel exposure as % of CRE is per 4Q08 data.
Lead Agent exposure (x), Participant Exposure (p), No exposure (--) CRE exposure to hotels/motels (4Q08)
CRE Total Total
Hotels %
Summary MAR HOT WYNN WYN HST LVS MGM Harrah's Tropicana # of exposures Bank Hotels/ CRE Loans/
CRE
motels loans Leases
Bank of America p x x p x -- x x -- 7 Bank of America 3.9% $2,513 $64,904 $931,446
Deutsche Bank p x x -- x -- p x -- 6 U.S. Bancorp 4.7% $1,561 $33,213 $185,229
JP Morgan p x -- x -- p p x -- 6 Wells Fargo 0.8% $806 $103,108 $864,830
Citigroup x -- -- x x x p -- -- 5 KeyCorp 1.4% $268 $18,536 $76,504
Bank of Tokyo-MUFJ p p -- p -- -- p -- -- 4 Zions Bancorporation* 12.3% $1,680 $13,712 $40,977
Bank of Nova Scotia p -- -- p p p -- -- -- 4 *Hotel/motel exposure to construction and comm'l mtgs.
Barclays x -- -- -- -- p -- x 3 No construction breakdown given at KEY, BAC.
Royal Bank of Scotland p -- -- -- p -- x -- -- 3
Societe Generale -- -- x -- -- -- p -- x 3
BNP Pariabas p -- -- -- -- x p -- -- 3
Bank of New York p -- -- -- p -- p -- -- 3
Morgan Stanley p p -- -- -- -- p -- -- 3
Mizuho p p -- -- -- -- p -- -- 3
Wachovia p -- -- -- p -- p -- -- 3
Wells Fargo p -- -- -- -- -- p -- -- 2
Credit Suisse p -- -- -- -- -- -- -- x 2
PNC Bank p -- x -- -- -- -- -- -- 2
Bank of China p -- -- -- -- x -- -- -- 2
Commerzbank -- -- -- -- -- x p -- -- 2
Lehman Brothers p -- -- -- -- x -- -- -- 2
Comerica Bank p -- -- -- -- -- p -- -- 2
US Bank p -- -- -- -- -- p -- -- 2
Merrill Lynch p -- -- -- -- -- p -- -- 2
Suntrust Bank p -- -- -- -- -- -- -- -- 1
Fifth Third Bank p -- -- -- -- -- -- -- -- 1
Mellon Bank p -- -- -- -- -- -- -- -- 1
City National Bank -- -- -- -- -- -- p -- -- 1
Keybank -- -- -- -- -- -- p -- -- 1
Note: figures are loan commitments; not the amount that has been drawn.
Loans are not shown if they are indicated as replaced, matured, amended & replaced, retired, or defaulted.
Selected non-covered US and International companies are not listed as well.
Source: Company data, Bloomberg, Goldman Sachs Research estimates.
In general we think this broad-based exposure could keep the price of gaming credit
expensive going forward and significantly limit growth. Most major banks have a lot of
exposure and probably want less. In addition, an impeding wave of restructurings and
potential bankruptcies could leave the banks even less enthused to start lending to casinos
again. On the other hand most of the banks do not have the operational or licensing
requirements to run a casino in bankruptcy with already limited management depth.

*New – Regional operators could outperform Las Vegas in 2009

We think the regional gaming operators will continue to distinguish themselves from
Las Vegas operators via stabilizing trends, lower leverage, and FCF. This combined
with scarcity value of investable options in the space should drive outperformance
relative to the Las Vegas operators and the broader hospitality group. For investment
we recommend, in order of preference, Penn, Pinnacle, and Ameristar.
We think the regional casino operators outperform the Vegas operators in 2009 based on
the following:
• Scarcity value – The major overhang with potential restructurings lies with the Vegas
operators creating scarcity value for “investable gaming stocks” which should also
benefit the regional operators.
• Stabilizing trends – Regional gaming revenue trends are stabilizing (January/

February +1% on average versus 4Q –4%) compared with Las Vegas where we still see
potential for gaming revenue, room rate, and entertainment deterioration.
• Better marketing – Most of the Las Vegas operators are relatively inexperienced at
marketing to the “masses” and they will largely be experimenting for the next few
quarters.
• Gain share from Harrah’s – We think the regional operators are more apt to gain
share from financially troubled Harrah’s than are the Las Vegas operators.
• Variable expense structure – Regional operators have a more variable expense

structure and have more visibly been able to ratchet down costs.
• Low supply growth – Regional operators will face limited supply growth for the next
few years whereas Las Vegas will could still see 12% supply growth through 2010.
• FCF + in 2009 – We estimate Ameristar and Penn will start to generate FCF by the end
of 2009 and generate an average of $90 million of FCF in 2010. This puts the group at a
7% average FCF yield on 2010E.
• Lower leverage – Regional operators are much less leveraged at a 5X average 2009E
net debt-to-EBITDA compared with the Vegas operators at 8X.
Key risk to the regional trade – Legislative risk associated with states discussing
expanded gaming to fill state budget gaps could create headline risk (the same way it
creates headline benefits for the slots) for the regional operators as investors fear
cannibalization. However, this legislation typically takes months or longer to push through,
and years for the casinos to be built (Pennsylvania started the push to legalize when
Governor Ed Rendell was elected into office in 2002, received a yes vote in 2004, and now
in 2009 four of the eleven casinos authorized are still not open). The current credit
environment and stretched operator balance sheets also prevent growth.
Scarcity value – Lack of investable ideas boosts regionals

Regional operators In our view, the gaming operator sector has been generally considered uninvestable for
have fewer the past six to eight months and the regional operators have been lumped in with the
overhangs.
group. Concerns about covenant tests and potential restructurings with several Las Vegas
oriented operators have weighed on the whole group.
As demand trends stabilize and investors have another look, we think they will focus on
the regionals. All of the other positives we discuss here should become more apparent.
The sheer limit of investment options within gaming should drive the regional stocks
generally higher. Investors have been successful before in this space and will look towards
it again. But this time, there will be fewer choices.

Top-line trends in regional markets are stabilizing

Regional markets are Through February we estimate regional gaming markets are +1%% compared with -4% for
stabilizing while 4Q2008 and -1.4% for full-year 2008. March results from states like Pennsylvania and West
Vegas promotions are
Virginia that release weekly data and our checks suggest that trends continue to be
ramping.
relatively healthy. In contrast Las Vegas saw January gaming revenues down -15% and
February -24% compared with -22% in 4Q2008 and -10% for full year 2008 (see Exhibit 37).
We continue to get e-mails and hear about room rate specials in Vegas from $109 to stay
at Wynn with a $50 resort credit and $109-$149 at Encore (the Strip’s newest casino), and
$109 at Venetian, Excalibur for $36 and Mandalay Bay for $65 for Las Vegas locals at MGM
properties, to Wynn and Encore for free if you are a Platinum Amex card holder.
Exhibit 37: Regional gaming revenue has held up much better than the Las Vegas Strip
YoY gaming revenue growth
25%
20%
15%
10%
5%
0%
Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
-5%
-10%
-15%
-20%
Regional Avg. LV Strip
Source: State Gaming Boards, Goldman Sachs Research estimates.
Hotel rates and non- Regional market demand trends should continue to benefit from the Staycation theme, the
gaming will be under upcoming economic stimulus, and easier relative comps. The Las Vegas Strip, on the other
pressure in Vegas.
hand, will continue to suffer from lower conference/convention activity due to the
economy and political pressure, and weak leisure travel trends. Room rates were under
pressure in 2008 and we expect this to continue into 2009 (see Exhibit 38). We are
generally modeling Las Vegas Strip RevPAR down 20% for 2009.
As we discussed in the Why this time was different section (page 27) a regional casino
generates nearly all of its profits from gaming while a Las Vegas casino generates just
around 40% from gaming. Las Vegas will also continue to suffer as non-hotel non-gaming
revenues fall. We were surprised how well non-gaming (F&B, entertainment, retail, etc.)
revenues held up in 2008 but they started to crack in 4Q2008 and we expect them to be
under extreme pressure in 2009 (see Exhibit 39).

Exhibit 38: Las Vegas room revenue took a plunge in 2008

Select Las Vegas property RevPAR growth
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008
-5.0%
-10.0%
-15.0%
-20.0%
Venetian Bellagio MGM Grand The Mirage Mandalay Bay
Source: Company data, Goldman Sachs Research estimates.
Exhibit 39: Non-gaming revenues still have far to fall in Las Vegas
F&B, Entertainment, etc revenues for MGM Mirage (whole company) and Wynn Las Vegas
10%
8%
yoy change in non-gaming revenues
6%
4%
2%
0%
1Q08 2Q08 3Q08 4Q08
-2%
-4%
-6%
-8%
-10%
MGM Mirage Wynn Las Vegas

Marketing to the masses is a new phenomenon for some Vegas

operators
We think many of the existing Vegas operators, particularly at the high end have relatively
little experience in marketing to “gamblers” to drive business which will further pressure
the whole market. Prior to this decade, attracting mid-week gamblers with inexpensive
rooms, buffet meals, and free entertainment was somewhat of the norm in Las Vegas.
However, over the past ten years the market transformed to a conference/convention
center during the weak and more of a leisure travel destination on the weekends. (See
Exhibit 40).
Vegas operators are While customer databases have become much more sophisticated we do not think the
learning to market to operators necessarily know how to use them in a downturn. This came through in 4Q2008
a new customer.
results as the high end properties saw occupancy drop and scrambled to fill rooms by
lowering rate. This put pressure on the whole spectrum of room offerings and from what
we can tell has likely grown worse in 2009.
Exhibit 40: 4Q RevPAR slipped the most as Vegas operators struggled with finding the
“new customer
4Q2008 RevPAR growth for Venetian, Bellagio, Mirage, Mandalay Bay, and Wynn
5%
0%
1Q08 2Q08 3Q08 4Q08
yoy RevPAR change
-5%
-10%
-15%
-20%
-25%
Venetian Bellagio MGM Grand The Mirage Mandalay Bay Wynn LV
Operators lost occupancy and rate

as they scrambled to find a new
customer in 4Q.
Harrah’s likely to continue losing share in the regions

Financially troubled Harrah’s has been losing share in the regional markets (see Exhibit 41).
We think the company has reduced promotional activity as it attempts to restructure and
over leveraged balance sheet. We expect share gains to continue and for regional
operators like Ameristar and Penn who have the most overlap with Harrah’s in the regions.

Exhibit 41: Harrah’s has been losing share in the major markets it competes in
Harrah’s gaming revenue market share
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Growth in Share

Indiana
Harrah's market share 31% 30% 31% 30% 31% 29% -154bps
Harrah’s is Iowa
consistently giving up Harrah's market share 21% 20% 20% 21% 20% 21% -43bps
Missouri
share in the regions.
Illinois
Louisiana
Source: State gaming boards, Goldman Sachs Research estimates
We think this is less likely to benefit the Las Vegas operators as Harrah’s will continue to
use Las Vegas as a reward for its regional customers. In addition, the Vegas competitors
are in less healthy financial positions themselves which will also reduce their capacity to
pick up share.
Variable expense structures benefit regional operators in downturn

Regional operators have a more variable expense structure than the Las Vegas operators
and have already ratcheted down expenses in this downturn. Exhibit 42 shows yoy
margins were down only 70 bp for the regional operators compared with down 580 bp for
the Las Vegas operators.
As regional operators do not have large hotels where they try to drive artificially high
occupancy in a downturn, they have more flexibility in controlling expenses. In addition,
although high tax rate jurisdictions are a long-term negative for the regional operators
(regional gaming taxes average 35% (range from 8% to 67%) vs 6.75% in Las Vegas and
8% in Atlantic City), this is truly variable operating expense that moves with revenues.
Exhibit 42: The regional operators have been better at controlling their costs due to their lower fixed expenses
yoy EBITDA margin change (bp)
Growth in EBITDA margins YoY
100 bp
bp
2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4
-100 bp
-200 bp
The Las Vegas focused
-300 bp operators have had a much
more difficult time containing
-400 bp
expenses revenues fell while
-500 bp regional focused operators
were able to control their
-600 bp costs.
-700 bp
Las Vegas / Macau YoY EBITDA margin growth Regional YoY EBITDA margin growth

Supply growth will be limited in the regional markets

We estimate that just five regional casinos will open through 2010 around the entire
country. This would translate to just a 1% increase in the regional slot base (see Exhibit 43).
We estimate that Native American casinos, which also compete with regional casinos, will
develop less the next few years as well given the economic downturn and credit crunch.
Exhibit 43: There are only five new properties opening in the regional markets through 2010
Company New property Location Cost ($mns) Opening Description Slots
Las Vegas Sands Sands Bethlehem* Bethlehem, PA $600 May 2009 * First phase includes casino, restaurants, and parking garage 3000
Holdings Acquisition Co. Rivers Casino Pittsburgh, PA $780 August 2009 * Casino, five first class restaurants, entertainment, lounges and covered parking 3000
Ameristar Ameristar Blackhawk Hotel Blackhawk, CO $235 Fall 2009 * 536 hotel rooms, meeting/ballroom center, full-service spa, enclosed rooftop pool 0
Penn Argosy Lawrenceberg Lawrernceberg, IN $336 Mid 2009 * A casino, restaurants, and other amenities 1162
Pinnacle River City St. Louis County, MO $380 Early 2010 * Casino and several restaurants 2300
This represents just a 1%

increase in the regional
slot base.
* Las Vegas Sands has the ability to put up to 5,000 slot machines in the property. In addtion, other phases of the project include a hotel, retail, and event center
components.
Source: Company data and Goldman Sachs Research estimates.
In contrast, there are still three major projects (CityCenter, Cosmopolitan, and
Fontainebleau) that could open in Las Vegas through 2010. These projects combined with
other smaller developments could add 12% room growth to Las Vegas. The new Las Vegas
supply will compete at the high end and add further pressure to the market.
Regional operators on track to be FCF positive in 2010

We currently estimate Ameristar and Penn will generate FCF in 2010 and that Pinnacle will
be just slightly FCF negative even on our below consensus EPS estimates (we are 11%
below consensus on average for the regional operators for 2009 and 7% for 2010). FCF has
We have more
been very sporadic in this sector given all of the building but it could be more visible for
confidence in regional
FCF prospects. the regional operators for the next few years. Initially we expect the FCF to be used to
deleverage, particularly for Ameristar and Pinnacle.
To be fair, Boyd, MGM and Wynn could all be FCF positive in 2009/2010 and Las Vegas
Sands could generate FCF in 2011, but we have less conviction around these projections
given the challenging trends in these companies’ core markets. In additions, many of these
companies are much more highly leveraged and therefore FCF will have to be used for
deleveraging for a more extended period.
Regional operators are less leveraged than the Vegas operators

We estimate the regional operators have 2009E net debt-to-EBITDA of around 5X (range of
4.2X-5.5X) compared with the Las Vegas operators average at around 8X (range of 4.8X-
10.1X).

History of consolidation and private equity; few buyers now

In 2009 the gaming operator sector mostly shows extended balance sheets and weak
fundamentals. Several companies are also still winding down massive cap ex plans. In
addition, private equity investors who bought in 2006 and 2007 are generally underwater
on the investments and a few are already involved in restructurings or pre-bankruptcy
negotiations. Given the state of the industry and the credit markets, we see limited
potential for deal flow in gaming over the next twelve months.
There are a few There are a few buyers of casino assets out there but we expect they are looking to pick up
buyers of casino assets at very distressed levels. On the public side we see Boyd ($2 billion available
assets, but most are
liquidity on credit facility) and Penn ($650 million of excess cash and $750 million available
likely looking for
on credit facility) as buyers and potentially Wynn (we estimate $1.7 billion of cash). In
distressed pricing.
addition there are a few people/entities that pop up in the industry and could be looking.
For example, Phil Ruffin recently bought the Treasure Island from MGM and unconfirmed
press reports indicate that Carl Icahn is considering purchase of a major Atlantic City
property. The tension is that the prices these buyers are likely willing to pay would not
help the sellers deleverage. This could lead to some more creative corporate finance
techniques (debt for asset swaps, etc.) but in general we anticipate slow deal flow in the
absence of any bankruptcy-induced “fire sales.”
2005-2007 deals resulted in a more concentrated industry

Nine major gaming During the buyout boom deals closed by private equity players for Harrah’s Entertainment,
companies have been Station Casinos, Kerzner International, and Aztar Corporation. Prior to private equity
bought out or merged
becoming involved the four largest companies (Harrah’s, Caesars, Mandalay Resort Group,
over the past few
and MGM Mirage) consolidated into two companies—Harrah’s (bought Caesars) and MGM
years.
(bought Mandalay Resort Group). Other major operators that have participated in the
consolidation are Penn National (acquired Argosy Gaming) and Boyd Gaming (acquired
Coast Casinos).
This activity drove a steady rise in gaming acquisition valuation multiples over time (see
Exhibit 44). Prior to 2006, there had rarely been a gaming acquisition at a multiple above
10X 12-month forward EBITDA. In 2006 and 2007, however, 11 of the 12 announced deals
were at a multiple at or above 10X. The only deal done recently was the Phil Ruffin
acquisition of Treasure Island from MGM at 8X forward and 6X peak EBITDA announced in
December 2008 and closed in March 2009 (see Exhibit 45). We think additional deals done
in 2009 could face additional pricing pressure as, (1) fundamentals continue to deteriorate,
(2) debt remains expensive, and (3) Mr. Ruffin may have had to rely less on financing than
other buyers given his 2007 sale of the New Frontier for $1.2 billion.

Exhibit 44: History of corporate transactions in the gaming industry—multiples based on the time of acquisition
$ millions
Sector Mean Fwd Deal Forward
Date Date Purchase Price EV/ Forward Multiple During Multiple / Mean
Announced Closed Acquiror / Target Premium Paid1 ($mm) EV/LTM EBITDA2 EBITDA3 Quarter4 Fwd Multiple
Entity-Level Transactions
12-Dec-2007 Terminated Crown Limited / Cannery Casinos NA 1,752 NA 11.0 11.2 98%
15-Jun-2007 Terminated Fortress Investment Group and Centerbridge Partners LP / Penn National Gaming 31% 8,900 14.1 13.3 11.2 118%
22-Apr-2007 20-Feb-2008 Whitehall Street Real Estate Fund / American Casino and Entertainment Properties NA 1,300 14.8 NA 11.2 NA
27-Mar-2007 Withdrawn Riv Acquisition Holdings / Riviera Holdings 6% 525 14.5 13.4 11.2 120%
4-Dec-2006 7-Nov-2006 Fertitta Colony Partners / Station Casinos 30% 8,569 19.7 13.7 9.7 141%
2-Dec-2006 Withdrawn Tracinda / MGM - 15mm shares (tender offer) 12% 825 13.9 11.2 9.7 115%
13-Nov-2006 Withdrawn D.E. Shaw and Ian B. Eichner / Riviera Holdings 4% 454 12.6 11.6 9.7 120%
2-Oct-2006 28-Jan-2008 Investor Group / Harrah's Entertainment 22% 30,559 11.8 10.3 9.7 106%
31-Aug-2006 6-Nov-2006 Harrah's Entertainment / London Clubs International 44% 570 16.0 12.0 8.5 141%
19-Jun-2006 13-Mar-2006 Century Casino Europe GmbH / G5 Sp Zoo NA 9 NA NA 9.6 NA
17-May-2006 4-Jan-2007 Herbst Gaming, Inc / The Sands Regent 9% 148 9.1 7.6 9.6 79%
6-Apr-2006 Withdrawn Investor Group / Riviera Holdings 13% 427 11.5 9.8 9.6 103%
20-Mar-2006 1-Sep-2006 Investor Group / Kerzner International 15% 3,800 18.0 16.6 9.4 176%
13-Mar-2006 4-Jan-2007 Columbia Entertainment / Aztar Corp. 76% 2,659 12.5 11.6 9.4 123%
8-Feb-2005 18-Jul-2005 BLB Investors / Wembley Inc 11% 339 20.2 8.8 9.7 91%
3-Nov-2004 3-Oct-2005 Penn National Gaming / Argosy Gaming 16% 2,200 8.5 8.2 9.3 88%
27-Sep-2004 26-Apr-2005 Colony Capital / Harrah's Tunica, Harrah's East Chicago, Atlantic City Hilton and Bally's Tunica NA 1,240 8.0 8.5 7.9 108%
15-Jul-2004 14-Jun-2005 Harrah's Entertainment / Caesars Entertainment 22% 9,440 9.0 8.0 7.9 102%
16-Jun-2004 26-Apr-2005 MGM Mirage / Mandalay Resort Group 30% 7,900 11.0 10.1 8.3 122%
9-Feb-2004 1-Jul-2004 Boyd Gaming / Coast Casinos NA 1,280 8.8 7.0 8.0 88%
27-Jan-2004 Withdrawn MGM Mirage / Wembley PLC NA 490 7.0 NA 8.0 NA
11-Sep-2003 1-Jul-2004 Harrah’s Entertainment / Horseshoe Gaming NA 1,450 8.3 7.2 6.8 106%
7-Aug-2002 3-Mar-2003 Penn National Gaming / Hollywood Casino Corporation 22% 782 6.8 6.0 6.6 91%
24-Apr-2001 31-Jul-2001 Harrah's Entertainment / Harvey's Casino Resorts NA 675 6.1 5.4 6.9 78%
31-Jul-2000 27-Apr-2001 Penn National Gaming / Louisiana Casino Cruises / CRC Holdings Inc. NA 160 5.2 NA 6.9 NA
22-Feb-2000 31-May-2000 MGM Grand / Mirage Resorts 95% 6,477 11.7 9.6 5.2 184%
6-Oct-1999 2-Mar-2000 Isle of Capri / Lady Luck Gaming Corporation 48% 237 6.1 5.5 5.5 100%
16-Aug-1999 22-Jul-2000 Harrah's Entertainment / Players International 42% 425 9.4 6.1 5.1 120%
4-Apr-1999 30-Dec-1999 Park Place Entertainment / Starwood’s Caesar World N/A 3,000 8.8 7.5 NA NA
9-Nov-1998 1-Mar-1999 MGM Grand / Primadonna Resorts NA 612 6.8 5.5 NA NA
2-Sep-1998 1-Dec-1999 Horseshoe Gaming / Empress Entertainment NA 609 7.2 5.0 NA NA
30-Jun-1998 31-Dec-1998 Park Place Entertainment / Grand Casinos Mississippi properties NA 835 5.5 4.1 NA NA
19-Feb-1998 16-Oct-1998 Hollywood Park / Casino Magic NA 340 7.7 6.2 NA NA
2-Feb-1998 2-Feb-1999 Colony Capital / Harveys Casino Resort 4% 420 6.6 6.8 NA NA
16-Jan-1998 Withdrawn Crescent / Station Casinos 16% 1,750 11.4 8.8 NA NA
19-Oct-1997 24-Feb-1998 Starwood / ITT 14% 14,000 13.0 NA NA NA
5-Jun-1996 18-Dec-1996 Hilton Hotels Corporation / Bally Entertainment 11% 3,022 11.0 9.9 NA NA
24-Apr-1996 30-Jun-1997 Hollywood Park / Boomtown NA 172 7.5 5.7 NA NA
20-Mar-1994 20-Jun-1995 Circus Circus Enterprise / Goldstrike Casinos NA 578 14.9 8.1 NA NA
16-Dec-1994 2-Mar-1995 ITT Corporation / Caesars World NA 1,824 9.4 8.1 NA NA
Entity-Level Transactions
High 95% $30,559 20.2 x 16.6 x 11.2 x 184%
Mean 26% $3,019 10.6 x 8.8 x 8.6 x 113%
Median 16% $508 9.4 x 8.2 x 9.4 x 107%
Low 4% $9 5.2 x 4.1 x 5.1 x 78%
(1) Based on closing share price on day prior to public announcement.

(2) Based on publicly filed information during the trailing four quarters prior to the date of announcement, unless otherwise noted.
(3) Estimated from various research reports, press releases, and news articles.
(4] Based on selected large-cap and mid-cap gaming companies.
Source: Company press releases, Goldman Sachs Research, and industry sources.
Private equity started slow but got in big; interest could be muted
going forward
Private equity Private equity investment involvement drove multiples higher during 2006/2007 relative to
investors are now 5-10 years ago as private equity firms viewed gaming and lodging assets as attractive
highly involved in
acquisitions because of their substantial free cash flow and real estate values. However,
gaming.
the high leverage used in these transactions and the reality that gaming is not recession
“proof” or “resistant” has led to several distressed situations for private equity buyers.
Looking back, most of the private equity acquisitions in the early part of this decade and
prior were for specific non-core property assets that a larger company wanted or was
forced to sell—as when a Harrah’s or MGM Mirage was forced to sell a property in order to
close an acquisition—or if the companies had certain non-core assets that they just wanted
to sell (see Exhibit 45). But in 2006 and 2007 private equity took a larger role in the gaming
and lodging sectors —going from property-level acquisitions to full-corporate acquisition.
This string of buyouts (Penn National (did not close), Harrah’s Entertainment, Kerzner
International, Aztar Corporation, and Station Casinos) spurred by fluid funding capacity
caused an accelerated increase in valuation.

In general, we have seen private equity firms make few changes strategically or with
senior management of the major casinos, suggesting that the financial terms rather than
strategic ideas were the appeal of going private. In this difficult macro environment it
seems especially hard to see how being private with more leverage conveys a competitive
advantage and we think few transactions will lead to any value being returned to the fund.
In addition, private equity or other distressed owners continue to suffer as less
maintenance cap ex is spent and these properties move down on the relevance to the
consumer “food chain.”
Exhibit 45: History of property transactions in the gaming industry—multiples based on the time of acquisition
$ millions
Sector Mean Fwd Deal Forward
Date Date Purchase Price EV/ Forward Multiple During Multiple / Mean
1
Announced Closed Acquiror / Target Premium Paid ($mm) EV/LTM EBITDA2 EBITDA 3
Quarter4 Fwd Multiple
15-Dec-2008 20-Mar-2009 Ruffin Acquisition LLC / Treasure Island Hotel and Casino NA $775 6.9 x 8.0 x 8.5 x 94%
29-May-2008 Pending Coastal Marina LLC / Trump Marina Hotel and Casino NA 316 13.2 12.8 9.5 135%
31-Mar-2008 Terminated Eldorado Resorts / Casino Aztar NA 245 6.9 5.2 9.7 54%
14-Nov-2007 25-Jan-2008 Isle of Capri / Nevada Gold's NA 64 NA NA 11.4 NA
27-Jun-2007 10-Mar-2008 TLC Casino Enterprise / Binion's Gambling Hall & Hotel NA 28 NA NA 11.2 NA
17-May-2007 16-Jul-2007 Elad Group / New Frontier Hotel & Casino NA 1,200 NA NA 11.2 NA
4-Apr-2007 18-Sep-2007 Ameristar Casino / Resorts East Chicago Hotel and Casino NA 675 NA 10.4 11.2 93%
19-Mar-2007 11-Jun-2007 Isle of Capri / Casino Aztar Caruthersville NA 45 6.4 5.6 11.2 50%
3-Mar-2007 1-Aug-2007 SBE Entertainment and Stockbridge Real Estate / Sahara Hotel & Casino NA 350 NA NA 11.2 NA
19-Jan-2007 Withdrawn NTH Advisory Group, LLC / 155 East Tropicana, LLC NA 225 NA NA 11.2 NA
8-Nov-2006 17-Apr-2007 Penn National / Zia Partners' Zia Park Casino NA 200 8.2 8.5 9.7 88%
1-Nov-2006 10-Apr-2007 Herbst Gaming / MGM's 3 Primm, Nev Casinos NA 400 NA 10.0 9.7 103%
17-Oct-2006 21-Dec-2006 Pinnacle / President Casino's St. Louis Casino NA 32 NA NA 9.7 NA
16-Oct-2006 1-Jun-2007 Anthony Marnell III / MGM Mirage's Colorado Belle and Edgewater casinos NA 200 NA 10.5 9.7 109%
2-Oct-2006 27-Feb-2007 Harrah's Entertainment / Barbery Coast Hotel and Casino NA NA NA NA 9.7 NA
2-Oct-2006 27-Feb-2007 Boyd / 24 Acres on LV Strip NA NA NA NA 9.7 NA
5-Sep-2006 28-Nov-2006 Pinnacle Entertainment / The Sands & Traymore sites (Atlantic City, NJ) NA 270 NA NA 8.5 NA
17-Aug-2006 Terminated Fortunes Entertainment LLC / Casino Aztar Caruthersville NA NA NA NA 8.5 NA
25-Jul-2006 24-Oct-2006 Michael Gaughan / South Coast Hotel & Casino NA 577 NA 18.0 8.5 212%
5-Jun-2006 1-Nov-2006 Golden Gaming Inc. / Pahrump Nugget NA NA NA NA 9.6 NA
31-May-2006 1-Mar-2007 Boyd Gaming / Dania Jai Alai + 50 acre of land NA 153 NA NA 9.6 NA
19-May-2006 25-Dec-2006 Pinnacle / President Casino St. Louis Riverfront NA 32 NA NA 9.6 NA
18-May-2006 Terminated Columbia Sussex / Casino Queen in St. Louis NA 200 NA NA 9.6 NA
11-May-2006 5-Feb-2007 Morgans Hotel Group Co. / Hard Rock Hotel & Casino NA 770 19.3 15.4 9.6 160%
9-May-2006 12-Jun-2006 Belfonti Capital Partners / Aruba Resort, Spa & Casino NA 230 NA NA 9.6 NA
18-Apr-2006 31-Dec-2006 Leucadia National Corp / Hard Rock Biloxi NA 249 NA NA 9.6 NA
17-Apr-2006 16-Nov-2006 Pinnacle / Harrah's Lake Charles NA NA NA NA 9.6 NA
17-Apr-2006 9-Nov-2006 Harrah's / Casino Magic Biloxi (PNK) + $25 mm NA NA NA NA 9.6 NA
10-Apr-2006 31-Jan-2007 Full House Resorts / Stockman's Casino NA 26 NA NA 9.6 NA
14-Feb-2006 30-Jul-2006 Legends Gaming / Vicksburg and Bossier City properties NA 240 NA 6.6 9.4 70%
20-Dec-2005 15-Mar-2006 Gulfside Casino Partnership / Grand Casino Gulfport NA NA NA NA 9.3 NA
29-Nov-2005 19-May-2006 America Real Estate Partners / Flamingo Laughlin and Undeveloped Land in Atlantic City NA 170 NA NA 9.3 NA
21-Nov-2005 1-Mar-2006 Westerkirk Harbourfront Ltd / Casino Nova Scotia Hotel NA 45 NA NA 9.3 NA
17-Nov-2005 25-Jun-2006 Jacobs Entertainment Inc / Nevada Pinon Plaza NA 15 NA NA 9.3 NA
9-Nov-2005 19-May-2006 Millenium Gaming Inc / The Meadows NA 225 NA NA 9.3 NA
7-Nov-2005 21-Dec-2005 Majestic Star / Trump Indiana Riverboat NA 253 8.1 NA 9.3 NA
6-Sep-2005 7-Sep-2005 Boyd Gaming / Barbary Coast land NA 16 NA NA 9.3 NA
22-Aug-2005 23-Dec-2005 Harrah's Entertainment / Imperial Palace Hotels and Casino NA 370 18.5 NA 9.3 NA
3-Aug-2005 3-Aug-2005 Harrahs & Keeneland / GTECH's 1/3 interest in Turfway Park NA NA NA NA 9.3 NA
18-Jul-2005 18-Jul-2005 BLB Investors / Wembley Group (incl. Lincoln Park Raceway) NA 598 10.5 8.0 9.3 86%
14-Jul-2005 14-Jul-2005 Ladbrokes (Hilton Group) / Jack Brown Limited NA 136 NA 9.5 9.3 102%
Great Canadian Gaming Corporation and Magna Entertainment Corp / Flamboro Downs
8-Jul-2005 17-Aug-2005 NA 79 NA 8.3 9.3 89%
Racetrack
7-Jul-2005 25-Sep-2005 Bay Meadows Land Company/ Hollywood Park NA 260 NA NA 9.3 NA
6-Jul-2005 19-Oct-2005 Great Canadian Gaming Corporation / Ontario Racing NA 65 8.5 NA 9.3 NA
28-Jun-2005 28-Jun-2005 Eagle Hospitality / Embassy Suites San Juan NA 60 NA NA 10.3 NA
20-Jun-2005 28-Oct-2005 Columbia Sussex Corporation / Argosy Casino - Baton Rouge NA 150 7.4 NA 10.3 NA
Great Canadian Gaming Corporation / Casino Nova Scotia Halifax, Casino Nova Scotia
17-May-2005 31-May-2005 NA 70 NA NA 10.3 NA
Sydney

(4) Based on selected large-cap and mid-cap gaming companies.
Source: Company press releases, Goldman Sachs Research, and other industry sources.

Exhibit 45 cont'd: History of property transactions in the gaming industry—multiples based on the time of acquisition
$ millions
11-May-2005 23-Jun-2006 Grand Sierra Resort Corp. / Reno Hilton (Caesars Entertainment) NA 150 13.6 NA 10.3 NA
15-Apr-2005 13-May-2005 The Henry Brent Co. / Lady Luck Downtown NA 10 NA NA 10.3 NA
14-Apr-2005 19-Aug-2005 Penn National Gaming / Bangor Historic Track NA NA NA NA 10.3 NA
5-Apr-2005 4-Jul-2005 Great Canadian Gaming Corporation / Georgian Downs NA 48 8.0 7.2 10.3 70%
23-Mar-2005 26-Apr-2005 Marian Ilitch / MGM Mirage and Mandalay Resort Group - Motor City Casino NA 525 6.8 8.4 9.7 87%
4-Feb-2005 27-Sep-2005 Landry's Restaurants / Golden Nugget Casino NA 295 12.5 9.8 9.7 101%
24-Dec-2004 31-Mar-2005 Peermont Global Limited / Caesars - Gauteng NA 145 NA NA 9.3 NA
19-Nov-2004 7-Oct-2005 Columbia Sussex Corporation / Caesars Tahoe Casino Resort NA 45 NA NA 9.3 NA
10-Nov-2004 Withdrawn Barrick Gaming Corporation / Golden Nugget Laughlin NA 31 6.4 NA 9.3 NA
22-Oct-2004 7-Jun-2005 Columbia Sussex Corporation / Bally's Casino New Orleans NA 24 NA NA 9.3 NA
15-Oct-2004 25-Jan-2005 Mohegan Tribal Gaming Authority / Pocono Downs NA 280 NA 7.5 9.3 81%
8-Oct-2004 Withdrawn Columbia Sussex Corporation / President Admiral St. Louis NA 57 5.2 NA 9.3 NA
27-Sep-2004 26-Apr-2005 Colony Capital / Harrah's Tunica, Harrah's East Chicago, Atlantic City Hilton and Bally's Tunica NA 1,240 8.0 8.5 7.9 108%
Herbst Gaming / Lakeside Casino Resort (Grace), Mark Twain Casino (Grace), St. Jo Frontier
20-Jul-2004 2-Feb-2005 NA 267 6.2 NA 7.9 NA
Casino (Grace)
1-Jun-2004 22-Dec-2004 Ameristar Casinos Inc. / Mountain High Casino Black Hawk NA 117 11.4 NA 8.3 NA
19-Feb-2004 11-Mar-2004 Harrah's Entertainment and MTR Gaming Group / Binion's Horseshoe Hotel and Casino NA 65 NM 7.5 8.0 94%
10-Feb-2004 23-Jul-2004 SKYCITY Entertainment Group / MGM Grand Australia (Darwin) NA 150 NA NA 8.0 NA
20-Jan-2004 19-May-2004 Boyd Gaming Corporation / Harrah's Shreveport NA NA NA 4.2 8.0 53%
24-Dec-2003 18-Jun-2004 Colony Capital / Las Vegas Hilton NA 280 23.3 NA 7.2 NA
26-Jun-2003 26-Jan-2004 Poster Financial Group Inc. / Golden Nugget Laughlin, Golden Nugget Las Vegas NA 215 7.2 NA 6.7 NA
23-Apr-2003 1-Sep-2004 OpBiz LLC / Aladdin Resort and Casino NA 510 NA NA 6.7 NA
26-Dec-2002 1-Apr-2003 Isle of Capri Black Hawk / Colorado Central Station and Grande Casino NA 84 NA 6.0 6.4 94%
29-Jul-2002 7-Oct-2002 Boyd Gaming / Isle of Capri Tunica NA 8 NA NA 6.6 NA
31-Aug-2001 25-Apr-2002 Penn National Gaming / Bullwhackers NA 6 NA 1.5 6.2 24%
26-Apr-2001 31-May-2001 Boyd Gaming Corporation / Delta Down Racetrack NA 132 NA NA 6.9 NA
16-Apr-2001 31-Jul-2001 Argosy Gaming / Empress Casino and Hotel NA 465 7.0 6.3 6.9 91%
22-Dec-2000 6-Apr-2001 Magna Entertainment / Meadows Harness track NA 53 NA 4.4 6.7 66%
18-Dec-2000 8-Feb-2001 Argosy Gaming / Argosy Lawrenceburg NA 260 6.5 NA 6.7 NA
5-Dec-2000 6-Dec-2001 Majestic Investor / Fitzgeralds – Las Vegas, Tunica, Black Hawk NA 149 NA NA 6.7 NA
30-Oct-2000 25-Apr-2001 Colony Capital / Resorts Atlantic City from Sun International NA 145 6.7 NA 6.7 NA
18-Oct-2000 29-Jan-2001 Station Casinos / Reserve Hotel & Casino NA 72 10.6 7.1 6.7 106%
18-Oct-2000 20-Dec-2000 Ameristar Casinos Inc. / Station Casino St. Charles and Kansas City NA 488 5.7 5.3 6.7 79%
20-Jul-2000 4-Apr-2001 Station Casinos / The Fiesta Casino Hotel NA 205 7.3 NA 6.9 NA
20-Jul-2000 10-Oct-2000 Isle of Capri / Davenport President Casino NA 58 4.7 4.7 6.9 68%
13-Jun-2000 2-Oct-2000 Station Casinos / Santa Fe Hotel & Casino NA 185 8.0 8.5 6.2 137%
28-Apr-2000 23-Jun-2000 Steve Wynn / Starwood’s Desert Inn NA 270 NA NA 6.2 NA
10-Jan-2000 4-Jan-2001 Black Hawk Gaming / Gold Dust West Casino NA 27 5.2 NA 5.2 NA
10-Dec-1999 8-Aug-2000 Penn National Gaming / Hollywood Park's Casino Magic and Boomtown Biloxi Casino NA 195 5.5 4.9 5.5 89%
13-Sep-1999 5-Jun-2000 Isle of Capri / Flamingo Hilton Kansas City NA 34 7.4 4.3 5.1 84%
20-Aug-1999 31-Dec-1999 Lady Luck Gaming / Lady Luck Hotel & Casino NA 46 NA 5.9 5.1 116%
2-Aug-1999 1-Nov-1999 Lady Luck Gaming / Miss Marquette NA 42 5.8 4.3 5.1 84%
28-Jun-1999 12-Nov-1999 Boyd Gaming / Blue Chip Casino NA 273 4.4 3.9 NA NA
18-Jan-1999 8-Jul-1999 AB Capital / Dubuque Diamond Joe NA 77 5.5 4.8 NA NA
10-Aug-1998 1-Jan-1999 Harrah’s Entertainment / Rio Hotel & Casino NA 888 9.0 7.0 NA NA
19-Dec-1997 1-Jun-1998 Harrah’s Entertainment / Showboat NA 1,150 11.7 7.7 NA NA
15-Jul-1997 30-Oct-1997 Boyd Gaming / Treasure Chest NA 113 4.0 NA NA NA
9-Oct-1996 9-Oct-1996 Ameristar Casinos / Gem Gaming NA 53 4.6 3.7 NA NA
19-Aug-1996 16-Dec-1996 Sun International / Resorts Atlantic City from Griffin Gaming & Ent. NA NA NA 8.0 NA NA
26-Apr-1996 5-Dec-1996 Boyd Gaming / Par-A-Dice NA 174 5.0 NA NA NA
16-Dec-1994 2-Mar-1995 ITT Corporation / Caesars World NA 1,682 8.4 7.5 NA NA
Property-Level Transactions
High NA $1,200 19.3 x 18.0 x 11.4 x 212%
Mean NA $232 13.5 x 9.7 x 7.7 x 103%
Median NA $200 8.2 x 9.0 x 9.6 x 93%
Low NA $15 6.4 x 5.2 x 8.5 x 50%

(4) Based on selected large-cap and mid-cap gaming companies.
Source: Company press releases, Goldman Sachs Research, and other industry sources.

*New – Return-focused compensation could benefit the industry

After a year of only having bad news to tell we think we may have found a potential
bright spot for both the gaming operators and the slot manufacturers – as investors
turn their attention to returns, compensation could become more return focused. This
could ultimately make for a healthier industry long term.
Compensation structures can drive management decisions and business practices. In this
section we evaluate how gaming operator compensation, which we estimate historically
has mostly been based on EBITDA versus a set budget/target, EBITDA growth, or net
income, ultimately drives gaming executives to make low return operating and investment
decisions. We believe this compensation structure encourages:
• Gaming executives to build more casinos;
• Gaming executives to run high levels of maintenance cap ex; and
• Casino property managers to buy slot machines instead of leasing them.

Boards could Given the challenging situation (highly leveraged with deteriorated fundamentals) that
reevaluate most casinos operators find themselves in now we think boards could reevaluate
compensation drivers.
compensation structures. To be fair, the equity market also favored growth from 2003-2007
and ignored the declining returns. This encouraged gaming company compensation
committees to base performance on EBITDA, etc.
In our view compensation based on returns on invested capital or a similar metric may
create healthier companies for the long run and greater shareholder value. Casinos
generate significant cash flow (even in this recession most casinos are still running
EBITDA margins of 18%-24%) but it rarely makes it back to the investor. This could be
more of a focus going forward for both gaming company boards and investors. The
companies that make the change the quickest to shore up balance sheets, drive
returns higher, and show free cash flow are most likely to outperform in a challenging
sector over the next couple of years.
Compensation structure encouraged bad habits

Compensation is We think casino operator compensation structures based on EBITDA metrics have driven
currently primarily returns lower over the past few years. Exhibit 46 shows that five of the seven operators
based on EBITDA.
we follow use EBITDA as a key metric for executive incentive-based compensation.
Other quantitative metrics include income, stock performance, and FCF (only includes
maintenance cap ex). None of the metrics are return focused. Most metrics are up against
a predetermined budget set at the start of the year.
Casino operators also generally award senior executives with some form of equity
compensation to encourage disciplined decisions and align long term incentives with
stockholders. However, other than founding families, management insiders generally
own a small amount of shares at 1% to 3% (see Exhibit 47).
In addition, proxy filings not surprisingly reveal that total compensation is considered
within the context of a peer group. However we were pleasantly surprised to see that
several companies (including Boyd, MGM, Pinnacle, and Wynn) expanded the peer group
to include other hospitality companies. In the case of Wynn they have even now included
entertainment companies like Disney and growth companies like Starbucks and Yahoo in
the peer group. We note that the expanded peer group is generally for total compensation
consideration but think that as gaming boards pay more attention outside of the industry
incentive structures could improve.

It is more challenging to get information on property manager level compensation

structures but our conversations with gaming companies suggest that these managers are
also compensated on some form of EBITDA metric.
Exhibit 46: Gaming operator compensation is largely linked to EBITDA metrics rather than returns
Bonus comp metrics

EBITDA Cash flow Income Stock Return Equity
Bonus comp metrics based based based based based comp Peer group
(1) EBITDA vs budget; (2) Aztar, BYD, DDE, ISLE, MNTG,
Ameristar Merit performance grade √ √ PENN, PNK, TRMP
(1) Pre-tax income vs

Did not define gaming peer group but
budget; (2) Relative total
uses the S&P Mid-Cap 400 for a
stock return vs S&P Mid-
comp
Boyd Cap 400 √ √ √
At the time of the IPO, Alliance,
ASCA, Argosy, Aztar, BYD, Caesars,
(1) EBITDAR vs budget Harrah's, ISLE, Mandalay Bay, MGM,
MNTG, PENN, PNK, RIV, Station,
Las Vegas Sands √ √ Trump
(1) Pre-tax income vs BYD, Harrah's, Hilton, IGT, LVS,

MGM Mirage budget √ √ MAR, HOT, Station, WYNN
(1) EBITDA vs budget; (2) ASCA, BYD, Harrah's, ISLE, LVS,

Penn FCF vs peer group √ √ √ MGM, PNK, Station, TRMP, WYNN
(1) CEO - EBITDA vs ASCA, BYD, ISLE, LVS, WYNN,

budget; (2) Mgmt - Aztar, Harrah's, PENN, Station;
individual contribution and Consultant also looked at hospitality
Pinnacle company's performance √ √ and leisure industry
MGM, LVS, Harrah's, Station, Hilton,

(1) Property EBITDA MAR, HOT, DIS, SBUX, YHOO,
Wynn √ √ EBAY
Source: Company filings and Goldman Sachs Research estimates.
Exhibit 47: All gaming companies provide some form of equity compensation but insider ownership among non-
founder executives is relatively low
% held by
% insider % held by sr execs/
owned founder directors Notes
Ameristar 57% 55% 1% * Founder includes the Estate of Craig Neilsen and his son Ray Nielsen (Co-Chairman).
Boyd 37% 36% 1% * Founder includes William S. Boyd, Chairman, Marianne Boyd Johnson, Director, and William R. Boyd, VP.
Las Vegas Sands 53% 52% <1% * Founder includes Sheldon Adelson, Chairmand and CEO, and family.
MGM Mirage 55% 54% 1% * Founder shares represented by Tracinda, which is controlled by Kirk Kerkorian.
Penn 14% 12% 2% * Founder includes Perter Carlino, CEO, and family.
Pinnacle 5% - 5% * Of the insider ownership 2% is held by Dan Lee, CEO.
Wynn 41% 20% 21% * Of the insider ownership 20% is held by Kazu Okada. Founder includes Steve Wynn, Chairman/CEO, and Elaine Wynn, Director.
Source: Company filings, Factset, and Goldman Sachs Research estimates.
This EBITDA-focused compensation structure encourages casino executives and

property level employees to generally overspend, resulting in lower returns. Returns
in the sector, measured by ROIC, were never particularly high peaking around 7% in 2000
and 2004. In 2007, which was the peak EBITDA year for most properties in Las Vegas and
around the country returns only got to 5% and fell to just 2% in 2008 (see Exhibit 48).

Exhibit 48: Average historical ROIC for the gaming operators

1997-2008
8%
7%
6% In the peak EBITDA

year for most properties,
5% returns were 200bp
below the 2000/2004
ROIC
4% levels.
3%
2%
1%
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Development and spending were the obsession of the decade

Developing new properties and embellishing existing assets were the obsessions for most
of this decade. This was well-suited with management’s compensation based on EBITDA
metrics and with investors’ appetite for growth. However it also drove leverage higher and
left the casino companies poorly positioned for the downturn.
Growth was favored Total gaming sector cap ex grew to over $11 billion in 2007 from around $2 billion
by companies and annually in the early part of the decade (see Exhibit 49). New development projects
investors.
sprouted up throughout the United States and Asia. In addition, maintenance cap ex levels
for the most part trended upward. We estimate maintenance cap ex trended to 5%-8% of
revenues from 3%-5% historically. This drove average EBITDA growth of 25%; however, as
previously discussed, the growth came at the expense of lower returns.
Exhibit 49: Gaming operator sector capital expenditures

1999-2008
12,000
10,000
Total sector cap ex ($mns)
8,000
6,000
4,000
2,000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Cap ex spending drove leverage higher and when the economy started to deteriorate it
was evident that gaming operator balance sheets had not been properly stress tested.
Sector average net debt-to-EBITDA reached 6X in 2008 and we estimate it moves to nearly

7X in 2009 (see Exhibit 50). In addition several gaming companies (Aztar, Harrah’s, Kerzner,
and Station) were taken private during the buyout boom at even higher leverage levels (we
estimate 8X-10X).
Exhibit 50: Gaming operator net debt-to-EBITDA

1999-2009E
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
Ameristar Casinos Inc. 4.3 11.9 3.7 3.8 3.1 2.9 2.6 2.9 5.6 5.1 5.6
Boyd Gaming 4.2 3.4 4.8 3.8 4.1 5.8 4.3 3.7 4.5 7.1 8.0
Las Vegas Sands NA NA NA NA NA 1.5 2.0 5.1 9.3 8.6 10.1
MGM MIRAGE 3.0 5.9 5.0 4.5 4.9 4.0 6.7 5.7 5.0 6.8 10.0
Penn National Gaming 3.2 5.0 3.9 2.4 3.9 2.8 7.6 4.4 4.3 4.0 4.2
Pinnacle Entertainment 2.6 1.5 7.8 4.5 6.4 5.5 4.3 3.0 4.0 5.8 5.5
Wynn Resorts NA NA NA NA NA NA 9.4 4.7 3.2 4.6 4.9
Average 3.5 5.5 5.0 3.8 4.5 3.7 5.3 4.2 5.1 6.0 6.9
Casino operators bought slot machines rather than leasing

Compensation An EBITDA-focused compensation structure at the property level could also
encouraged the encourage managers to buy slot machines instead of lease them. A participation slot
buying of slot
machine that does not cost anything for the operator will have higher returns than a
machines.
purchased slot machine, but on an absolute basis will generate a lower amount of EBITDA.
Now, we admit that the returns on buying a slot machine are relatively high (350%-400%)
compared to other investments, but the returns on a participation machine are infinite. In
addition, the casino operator does not take on the “fashion risk” associated with the
machine and can replace it with another machine at any time.
During this decade casino operators also moved away from wanting participation
machines (slot company “gives” the casino a slot machine in return for a percentage of
the revenues) on the floor. In the 1990s public, private, and tribal casinos were more open
to putting participation machines on the floor to keep the floors fresh which access to
capital was still somewhat limited. In the 2000s this reversed as capital availability
increased and compensation parameters drove property managers to remove participation
machines.
Lower levels of WAP This can be seen from looking at wide area progressive (WAP) games as a percentage of
machines provides the casino floor over time (see Exhibit 51). We estimate that WAP games make up between
evidence.
10%-20% of all participation games. In our annual slot managers survey we ask
respondents what percentage of your floor is dedicated to WAP games. In 2001, 45% of
slot floors had over 6% of their floors dedicated to WAP games. This number was down to
28% in 2009.

Exhibit 51: Wide area progressive games as a % of the total slot floor
2009 Slot Survey
100%
12% 11% 13% 15% 11% 12%
22% 20% 16%
16% 24% 19%
75% 18% 29% 25% 33%
22% 22% Over 10%
6%-10%
50%
54% 55% 1%-5%
51% 42% 52% 45% 45% 39%
48% ` None
25%
18% 13% 16% 14% 13% 15% 15% 16%

9%
0%
2009 2008 2007 2006 2005 2004 2003 2002 2001
2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001 s am ple s ize 133, 135,
129, 147, 147, 147, 142, 96, and 67
“A return to returns” returns – potential benefits for all

As casino companies focus more on returns, we think the industry will see less
development/cap ex and have a more favorable view regarding participation slot machines.
This should benefit casino operators as returns go higher and slot machine companies as
they build out their recurring revenue base. To some degree the capital markets will
require these transitions but a change in compensation programs could sustain the change.
In January 2001 we wrote a report titled A return to returns focused to some degree on this
issue. The theme did not play out last time but given the predicament that most gaming
companies are in right now and expectations for a prolonged recovery due to new supply
we think it could be the real deal this time around.
Casino operators could ultimately see higher returns on capital

Operators could stop The bright side of the current downturn is that casino operator returns could improve in
building and see the recovery relative to where they were even during the economic upswing. In an
higher returns.
environment where compensation is based on returns, as the top-line trends stabilize and
spending winds down, we estimate that all of the casino operators can be FCF positive in
2011 and that ROIC will start to improve.
Our fear with this thesis is that once the capital markets eventually eased that the
operators would start building again. This is why the change to the compensation
structure is so important as it could keep spending at bay even when capital is more
abundant. It would encourage casino management teams to think over the longer term
about spending and the cost of capital.
In this scenario several of the casino operators could start to deleverage and ultimately
return more cash to shareholders.

Slot manufacturers would benefit if operators chose to place additional

participation machines
Again, in an environment more focused on returns we expect to see greater interest in
participation slot machines. Participation machines create a more recurring revenue base
for the slot manufacturers and make them less reliant on box sales. In addition, these
revenues are higher margin (75%-85% versus 48%-52% on box sales).
Our current slot manufacturer estimates assume only relatively modest growth (0%-
2%) in participation units. However, we think that this could be an area of upside to
our estimates as more operators look for a cost effective way of keeping floors fresh.
More participation Putting a participation game on the floor is very profitable for gaming manufacturers
machines would drive because they can make their cost back in a couple of months and still own the machine.
returns higher for
This gives them the opportunity to reuse the parts. If they are able to use the old parts in a
operators and
new participation machine the cost is minimal and all of the revenue flows down to the
manufacturers.
bottom line. The same parts can end up in several different units, creating great
efficiencies for the manufacturer.
There are different types of participation units which produce different amounts of revenue
(e.g., wide area progressives, stand-alone games, lottery, etc.). Wide-area-progressive
games tend to earn the most (people like to play for large jackpots) and lottery games tend
to earn the least. We estimate that on average most units produce revenue due to the
manufacturer in the $30-$60 range. When you have thousands of machine out on the
floors earning $50 a day on each of them can really add up especially when there is very
little associated cost. The gross margins on participation machines are 75%-85% compared
with 48%-52% for selling a machine.

Macau: The largest gaming market in the world faces challenges

too
Macau has become an Macau, a former Portuguese colony that is now part of China, has been a haven for
international center gambling for more than 40 years. In fact, Macau is the only part of China where
for the gaming
gaming is legal. The peninsula of Macau is an hour’s ferry ride away (37 miles) from
industry.
the wealthy city of Hong Kong and 1.5 hours from Guangzhou, one of the wealthiest
cities in the Guangdong province of China. Las Vegas Sands, MGM, and Wynn Resorts
all have properties open in Macau now. The market still has significant long-term
opportunities but trends have been under pressure since mid-2008 due to travel
restrictions put in place by the Chinese government, lack of new supply opening, and
the global economic slowdown.
From monopoly to oligopoly to a near free market

Until 2002, gaming operations in this small region were carried out under the monopoly of
one man, Stanley Ho, but this has changed. In 2002, the government ended Stanley Ho’s
monopoly by granting additional gaming licenses to casino operators, including Steve
Wynn, Galaxy (joint venture of Galaxy and Las Vegas Sands), and Stanley Ho.
However, a market that previously looked like it was going to be an oligopoly has evolved
into more of a free market as the concession holders sold subconcessions and entered into
operating agreements (see Exhibit 52). For example, Wynn sold a subconcession to a joint
venture of PBL and Melco and Stanley Ho sold a subconcession to a joint venture between
Pansy Ho and MGM. In addition, the PBL Melco joint venture agreed to operate a casino at
a major development by a Hong Kong company (eSun). Finally, the Macau government
can issue additional licenses/gaming concessions in 2009.
The concessions and subconcessions give the holder the ability to operate an unlimited
number of casinos, contingent on approval by the Macau government, in return for a 39%
tax rate on gross gaming revenues.
Harrah’s even bought Exhibit 52: Evolution to a near free market

a golf course in
Licensing status Progression Development plans
Macau in 2007.
Primary concession holders
Five casinos open and developing a resort on
Galaxy Entertainment Won original concession Cotai
18 casinos open and plans to develop
Sociedad de Jogos de Macau (SJM)* Won original concession additional casinos
One casino resort open and is building an
Wynn Resorts Won original concession expansion; Longer term could build on Cotai
Subconcession holders
Three casinos open; Plans to develop five
Received subconcession as part of more casinos on Cotai were halted due to
Las Vegas Sands Galaxy's original concession lack of financing
Bought subconcession from SJM for One casino resort open on the Macau
MGM MIRAGE / Pansy Ho joint venture for around $350 mn peninsula; Longer term could build on Cotai
Bought subconcession from Wynn for One casino and several slot clubs open and is
Melco PBL Entertainment $900 mn developing another resort on Cotai
Investors without casino licenses

Contracted Melco PBL to run their
eSun casino Developing a casino resort on Cotai
Contracted Las Vegas Sands to run Possible casino development on Cotai but no
Far East Consortium their casino movement yet
Plans to develop a casino resort on the
Shun Tak Contracted SJM to run their casino Penninsula
* SJM is owned by Stanley Ho.
Source: Company data and Goldman Sachs Research estimates.

Huge gaming market but growth has slowed

Macau is already the world’s biggest gaming markets. In 2008, gaming revenue
increased 31% to $13.5 billion (see Exhibit 53), which is higher than the Las Vegas
Strip’s 2008 gaming revenue. New high quality supply from operators like Las Vegas
Sands, MGM, and Wynn broadened the appeal of Macau and drove significant growth.
However, after three years of 20%+ growth in gaming revenues, growth came to a halt in
September 2008 following government imposed travel restrictions from Mainland China, a
slowdown in new supply, and a deteriorating global economy (see Exhibit 54).
We remain particularly concerned about Macau gaming trends as the market is still heavily
reliant on visitor from the nearby Pearl River Delta. This region has reportedly been hurt by
the slowdown in manufacturing activity with many people migrating back to the rural
interior as jobs have disappeared. We expect gaming revenues to be down in 2009 and
only modestly rebound in 2010. Beyond that growth will likely depend on the credit
markets and developers appetite to build and continue trying to transform the market into
more of a destination that draws conference/convention and leisure travelers for multi-day
stays. In addition government policy decisions about visitation, ferries, and infrastructure
will also impact growth.
Exhibit 53: Macau annual gaming revenues

2003-2010E
Macau gaming revenues 2003 2004 2005 2006 2007 2008 2009E 2010E
USD (in millions)
Slots $29 $80 $156 $257 $447 $704 $845 $887
% change 171% 96% 64% 74% 57% 20% 5%
Table games $3,552 $5,076 $5,592 $6,820 $9,886 $12,849 $10,675 $11,209
% change 43% 10% 22% 45% 30% -17% 5%
Total $3,581 $5,156 $5,748 $7,077 $10,334 $13,553 $11,520 $12,096
% change 11% 23% 46% 31% -15% 5%
Source: Goldman Sachs Research estimates, Macau Statistics and Census Service, Macau Gaming and Inspection
Coordination Bureau.
Exhibit 54: Macau monthly gaming revenue yoy growth

March 2008-February 2009
80%
70%
60%
yoy gaming revenue growth
50%
40%
30%
20%
10%
0%
3/1/08
4/1/08
5/1/08
6/1/08
7/1/08
8/1/08
9/1/08
10/1/08
11/1/08
12/1/08
1/1/09
2/1/09
-10%
-20%
-30%
Source: Goldman Sachs Research estimates, Macau Statistics and Census Service, Macau Gaming and Inspection
Coordination Bureau.

However, gaming is a crucial element of Macau’s economic development, as gaming tax

revenues make up more than 50% of Macau’s gross domestic product (see Exhibit 55).
This has not seemed to impact policy decisions such as travel restrictions thus far but it
could going forward.
Exhibit 55: Macau special administrative region fact table

year-to-date data is through March 2008
Gaming Statistics Travel Statistics

Gross Gaming Receipts* ($ billions / MOP billions): Visitor arrivals:
2008 - $13.539 / 108.8 MOP (+31%) 2008 - 30,185,740 (+12%)
2007 - $10.3 / 83.0 MOP (+47%) 2007 - 27,003,370 (+23%)
2006 - $7.1 / 56.6 MOP (+23%) 2006 - 21,998,100 (+18%)
2005 - $5.7 / 46.0 MOP (+14%) 2005 - 18,711,200 (+12%)
2004 - $5.0 / 40.2 MOP (+44%) 2004 - 16,672,600 (+40%)
2003 - $3.5 / 27.8 MOP (+29%) 2003 - 11,887,000 (+3%)
Operating casinos: 31 2008 visitor arrivals as a % of place of residence:

Scheduled key casino openings / expansions: Mainland China - 58% (+18% vs 2007)
2010E - one / zero (405 tables, 1,450 slots) Hong Kong - 27.3% (+1% vs 2007)
2009E - one / zero (470 tables, 1,150 slots) Taiwan, China - 4.4% (-8.4% vs 2007)
Current mkt slots: 11,856 2008 % visitor arrivals in package tours: 16%
Current mkt tables: 4,017 2008 % visitors w/ overnight stay: 22%
2008 avg length of stay: 1.44 days
Slot hold range: 8.0% - 8.5%
Mass table hold: 17% - 20% (non-rolling chip)
VIP table hold: 2.5% - 3.0% (rolling chip) 4 & 5-star hotels: 29
4 & 5-star hotel rms: 13,377
US Operators in Macau: 2008 hotel occupancy rates: 74.5%
LVS - Sands Macau
- Venetian Macau Hotel room growth:
- Four Seasons Macau 2010E - 2,900 (+20%)
WYNN - WYNN Macau 2009E - 2,200 (+18%)
MGM - MGM Grand Macau 2008E - 823 (+7%)
* Gaming Receipts from Games of Fortune

* MOP = Macau patacas
Source: Goldman Sachs Research estimates, Macau Statistics and Census Service, Macau Gaming and Inspection Coordination Bureau.
Visitation has slowed due to travel restrictions and global

slowdown
Lifting of travel With 1 billion people within a three-hour flight of Macau, the historical popularity of
restrictions from gambling in Asia, and a growing middle-class Chinese economy, Macau could, over the
China substantially
longer term, once again grow at an outsized pace and present a growth opportunity for
increases the
casino operators.
addressable
population to visit However, in the near term, we expect visitation to continue to be under pressure due to the
Macau. travel restrictions which started in Fall 2008 and due to the slowing economy. Exhibit 56
shows that visitation growth slowed to 12% in 2008 from 23% in 2007. YTD in 2009 through
February visitation to Macau is down 9%.
In addition, most of the new supply that was to be built on Cotai, a reclaimed area of land
between Macau’s two islands, Taipa and Coloane, has been cancelled or delayed due to
the credit crunch. We now expect table games to grow just 10% annually on average for
2009/2010 and hotel rooms 20% (see Exhibit 57). This new supply would have created
“entertainment” venues much like Vegas with retail, restaurants, and spas that should
have drawn visitors from further away in China which would result in multi-day stays. Until
this critical mass of new quality supply comes online Macau may remain more regionally
driven. In addition the VIP market is likely to remain the dominant force until new supply
creates a more mass market appeal (see Exhibit 58).

Exhibit 56: Monthly visitor arrivals by place of residence
2000 2001 2002 2003 2004 2005 2006 2007 2008

Place of residence TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
GRAND TOTAL 9,162,212 10,278,973 11,530,841 11,887,876 16,672,556 18,711,187 21,998,122 27,001,259 30,185,740
% Change - 12% 12% 3% 40% 12% 18% 23% 12%
EAST ASIA 8,732,612 9,844,786 11,070,552 11,514,589 16,059,117 17,855,496 20,750,930 25,023,302 27,706,995
% Change - 13% 12% 4% 39% 11% 16% 21% 11%
Republic of Korea 45,365 48,274 50,447 38,281 65,631 120,739 162,709 225,417 281,129
Mainland China 2,274,713 3,005,722 4,240,446 5,742,036 9,529,739 10,462,966 11,985,617 14,872,734 17,500,469
% change 32% 41% 35% 66% 10% 15% 24% 18%
Hong Kong 4,954,619 5,196,136 5,101,437 4,623,162 5,051,059 5,614,892 6,940,656 8,176,708 8,227,421
% change 5% -2% -9% 9% 11% 24% 18% 1%
Taiwan 1,311,035 1,451,826 1,532,929 1,022,830 1,286,949 1,482,483 1,437,824 1,444,234 1,322,578
Japan 144,888 140,937 142,588 85,613 122,184 169,115 220,190 299,406 370,409
Others 1,992 1,891 2,705 2,667 3,555 5,301 3,934 4,803 4,989
- - - -
SOUTH ASIA 16,636 17,838 18,109 18,050 25,509 31,854 41,714 64,028 98,696
% Change - 7% 2% 0% 41% 25% 31% 53% 54%
SOUTHEAST ASIA 141,846 150,025 169,898 146,542 261,437 396,100 693,374 1,179,427 1,572,474
% Change - 6% 13% -14% 78% 52% 75% 70% 33%
AMERICAS 108,626 109,044 115,385 86,674 143,552 182,769 219,610 306,316 325,876
% Change - 0% 6% -25% 66% 27% 20% 464% 122%
-
EUROPE 120,907 114,595 113,156 85,211 125,122 162,564 191,002 257,329 281,831
% Change - -5% -1% -25% 47% 30% 17% 35% 10%
OCEANIA 36,347 37,577 38,400 31,067 49,996 71,680 84,222 134,117 169,577
% Change - 3% 2% -19% 61% 43% 17% 59% 26%
OTHER AREAS 5,238 5,108 5,341 5,743 7,823 10,724 17,270 37,712 30,291
% Change - -2% 5% 8% 36% 37% 61% 118% -20%
Source: Macau Statistics and Census Service.
Exhibit 57: Macau table, slot, and hotel supply growth forecast
2003-2010E
Macau gaming supply 2003 2004 2005 2006 2007 2008 2009E 2010E
Slot machines 814 2,254 3,421 6,546 13,267 11,856 13,006 14,456
% change 177% 52% 91% 103% -11% 10% 11%
Table games 424 1,092 1,388 2,762 4,375 4,017 4,487 4,892
% change 158% 27% 99% 58% -8% 12% 9%
Total no. of gaming positions 1,238 3,346 4,809 9,308 17,642 15,873 17,493 19,348
% change 170% 44% 94% 90% -10% 10% 11%
Source: Historical data based on Gaming Inspection and Coordination Bureau Macao SAR, China, Goldman Sachs Research
estimates.
Exhibit 58: Macau VIP versus mass market gaming revenues

2003-2008
Summary Macau gaming revenues in US$ 2002 2003 2004 2005 2006 2007 2008
VIP table revenues $2,041 $2,770 $3,711 $3,603 $4,597 $6,941 $9,193
% change 28.1% 35.7% 34.0% -2.9% 27.6% 51.0% 32.4%
Mass market table revenues 701 782 1,365 1,989 2,223 2,946 3,657 VIP still makes up
% change 9.2% 11.6% 74.6% 45.7% 11.8% 32.5% 24.1% nearly 70% of
Slots 29 29 80 156 257 447 704 gaming revenues.
% change 4.8% 2.2% 170.5% 95.7% 64.4% 74.4% 57.4%
Total $2,770 $3,581 $5,156 $5,748 $7,077 $10,334 $13,553
% change 22% 29% 44% 11% 23% 46% 31%
Source: Historical data based on Gaming Inspection and Coordination Bureau Macao SAR, China, Goldman Sachs Research
estimates.

China’s infrastructure plans could ultimately help Macau

Infrastructure could Over the past few years, the Chinese government has discussed internal and external
be key to Macau’s infrastructure development plans to modernize Macau and make it amore attractive
success longer term.
destination that is easier to get to. Construction plans in the Pearl River Delta for a bridge
from Hong Kong to Macau, improvements in rail and highway infrastructure that should
facilitate travel from within Mainland China to Macau have all been considered. We point
out that all of these projects have taken longer than anticipated to get off the ground.
Policy to stimulate the economy in China with infrastructure work during the economic
slowdown could move some of these projects forward. However, given the persistent
travel restrictions it is not clear what the Chinese government’s attitude towards increasing
access to Macau will be.
Internal infrastructure developments within Macau to increase traffic into the market are
also possible. Las Vegas Sands’ entry into the ferry business has increased the access of
customers more directly into the Cotai strip and a potential lightrail system would ease
access once on the ground in Macau.
VIP vs. mass-market in Macau
Exhibit 59: Table game revenue measurement in Macau

rolling chip play versus non-rolling chip play
In Macau, table games Key Differences

revenues are Rolling Chip play Non-Rolling Chip play
measured differently Segment all VIP mass market
for VIP and mass- Volume measurement all wagers amount cashed in for chips
market tables. Hold range* 2.7% - 3.0% 18.0% - 20.0%
Descriptions
In Macau, table game revenues are measured differently for VIP and mass
market play. VIP play is considered Rolling Chip and mass market play is
is considered Non-Rolling Chip. The key difference is the volume measurement
used for the hold ratio. Rolling Chip hold is a percentage of all bets wagered and
therefore has a lower hold percentage as gamblers win and rewager chips over the
course of play. Non-Rolling Chip hold is a percentage of gaming drop (amount
cashed in for chips) and is consistent with how hold is calculated in the US. Gaming
drop is the amount of money gamblers exchange for chips.
Example
Rolling Chip play Non-Rolling Chip play
$$ exchanged for chips $10,000 $10,000
$$ wagered over course of play 60,000 60,000
Volume for hold calculation 60,000 10,000
Casino win 1,800 1,800
Hold = 3.0% 18.0%
* Hold and win statistics are generally presented before discounts and commissions. Las Vegas Sands’ current expected VIP
hold is 3% and mass market range is 18%-20%. Wynn Resorts current expected VIP hold range is 2.7%-3.0% and mass
market range is 18%-20%.
Source: Company reports.
Map of Macau
We included this map (see Exhibit 60) to show the layout of Macau’s various islands. The
area marked Cotai is where most new development is planned but much of this has now
been delayed.

Exhibit 60: Map of Macau – The Peninsula was the traditional gaming area, and Cotai is
the home of a significant portion of new development
Cotai
Source: Central Intelligence Agency, Goldman Sachs Research.

Singapore—Licenses awarded, projects under way

In 2004, the Singapore government passed legislation that allowed for two integrated
resorts (IR), one in Marina Bay and the other in Sentosa Island, which can be seen in
Exhibit 61. According to The Singapore Tourism Board, the projects are expected to
contribute $1.5 billion to GDP and create a total of 35,000 jobs throughout the economy.
Singapore will start to draw more of a focus this year as we move closer to the late
2009/early 2010 openings of the two projects.
Exhibit 61: Map of Singapore
Marina Bay site
Sentosa Island Site
Source: Central Intelligence Agency, Goldman Sachs Research.
Singapore is likely to Exhibit 62: Rules governing Singapore casinos

be the next Asian
country to open up Rules
The casino license is valid for 30 years. The Singapore government is not expected to issue any new
gaming, with two licenses for the next 10 years. The gaming area is limited to 15,000 sq m, while the maximum number of slot
integrated resorts to Casino concession machines is capped at 2,500 units.
open in 2009 or 2010. Tax rate for the VIP segment: 12% (5% gaming tax + 7% Goods and Services Tax).
Tax rate for the mass market: 22% (15% gaming tax + 7% Goods and Services Tax).
Gaming tax rate There is potential for revision in the GST rate. The gaming tax rate is expected to be constant.
Singapore residents have to pay S$100 per entry or S$2,000 per annum fee. There is no entry levy for
Entry Levy non-residents.
Eligible for non-residents. Singapore residents are required to deposit S$100,000 cash with the casino
Credit to gamblers before they can receive credit.
Source: Company data.

Exhibit 63: Resorts at Sentosa and Marina Bay Sands share duopoly casino business
Resort World, Sentosa Marina Bay Sands

Location Sentosa Island, < 5km away from downtown Along the south coast of Singapore
Surroundings Leisure & hospitality Commercial business district
Total Size 3.7 mn sqft 6.1 mn sqft
Total Investment excluding land cost $4bn $4.5bn
Land cost $400mn $728mn
Casino
Area 161,000 Not exceeding 161,500 sqft
Number of slots 2,000 1,000
Number of table games 700 1,000
Hotel
Number of Hotels 6 3
Rooms 1830 2600
Area 1.6 mn sqft 2.2 mn sqft
Class Middle to High End High End
Retail space 0.8 mn sqft
Meetings,Incentives, Conventions and
Exhibitions (MICE) facilities
Area 60,190 sqm or 650,000 sqft 1.3 mn sqft
Showroom (1,600 seats) Exhibition Hall (441,000 sqft)
Ballroom (7,300 seats) 86,100 sqft Ballroom
Facilities 22 Meeting rooms (3,390 seats) 250 Meeting Rooms Complex
Number of staff 10,000 10,400
Source: Company data, Singapore Tourism Board, and Goldman Sachs Research estimates.

Stock price performance around new property openings

This section provides insight into how casino operator stock prices perform around
the opening of a major new casino resort. The year 2008 was relatively slow for new
openings and 2009 could follow suit as the capital markets have dried up. There could be
three big openings in late 2009/early 2010 in Las Vegas but financing even on projects well
out of the ground could be in jeopardy. In addition, general economic conditions and Las
Vegas trends are more likely to drive the stocks around these potential openings.
The results of our analysis are:

• (1) The perception that stocks always trade up ahead of major openings is not
evident from the data. In the 23 cases that were a part of the analysis, the company
stock price traded up over 10% in only 11 cases (over a six-month period) prior to the
opening of the property. This analysis suggests that at best it is little better than a coin
toss that stocks will outperform going into an opening.
• (2) Las Vegas visitor volume and Clark County gaming trends appear to have a
much greater influence on stock performance surrounding major casino openings
rather than the “buzz,” “channel checks,” and observations around the specific
property. When we looked at the nine openings where operators had Las Vegas
exposure that traded up six months ahead of the casino openings, we found that
visitation trends and gaming revenue growth was strong in Las Vegas in every case.
• (3) There were also cases where the stocks fell prior to the opening and the trends
in Las Vegas/Clark County were also flat or weak. Most recently, Wynn traded
down ahead over 50% ahead of its Encore opening but we believe this was mostly due
to the current economic conditions rather than specific property issues.
The conclusions we draw from this analysis are that investors should be less influenced by
the day-to-day news flow surrounding major property openings and more focused on the
underlying trends of the market where the property is located (see Exhibit 64).

Exhibit 64: Stock price data by company
Stock Price Information
Company Opening Date -6 months -3 months -1 month -1 week Opening date +1 week +1 month +3 months +6 months
Mirage Resorts
The Mirage 22-Nov-89 $4.50 $5.68 $5.40 $6.00 $5.53 $5.80 $5.08 $4.58 $7.45
% 22.8% (2.6%) 2.3% (7.9%) 5.0% (8.1%) (17.2%) 34.8%
Treasure Island 27-Oct-93 $7.50 $8.60 $11.85 $10.48 $11.10 $11.19 $10.75 $12.00 $10.50
% 48.0% 29.1% (6.3%) 6.0% 0.8% (3.2%) 8.1% (5.4%)
Monte Carlo 21-Jun-96 $16.63 $23.13 $26.69 $27.81 $27.44 $26.75 $21.00 $24.50 $21.63
% 65.0% 18.6% 2.8% (1.3%) (2.5%) (23.5%) (10.7%) (21.2%)
Bellagio 15-Oct-98 $22.81 $20.94 $18.25 $14.06 $14.94 $17.25 $16.81 $14.94 $21.00
% (34.5%) (28.7%) (18.2%) 6.2% 15.5% 12.6% 0.0% 40.6%
Beau Rivage 16-Mar-99 $18.25 $13.94 $15.25 $19.88 $22.00 $21.94 $21.00 $18.13 $13.25
% 20.5% 57.8% 44.3% 10.7% (0.3%) (4.5%) (17.6%) (39.8%)
MGM Grand Inc
MGM Grand 18-Dec-93 $7.88 $11.34 $9.25 $10.56 $9.69 $9.28 $8.91 $8.03 $6.22
% 23.0% (14.6%) 4.7% (8.3%) (4.2%) (8.1%) (17.1%) (35.8%)
New York New York 3-Jan-97 $10.25 $11.03 $9.22 $8.91 $8.69 $8.78 $9.84 $8.78 $8.78
% (15.2%) (21.2%) (5.8%) (2.5%) 1.1% 13.3% 1.1% 1.1%
MGM Grand Detroit 2-Oct-08 $62.13 $28.60 $34.48 $29.93 $23.56 $16.26 $16.46 $13.76 $3.22
% (62.1%) (17.6%) (31.7%) (21.3%) (31.0%) (30.1%) (41.6%) (86.3%)
Mandalay Resort Group
Luxor 15-Oct-93 $30.08 $36.83 $45.25 $47.00 $48.50 $39.25 $35.00 $39.38 $28.13
% 61.2% 31.7% 7.2% 3.2% (19.1%) (27.8%) (18.8%) (42.0%)
Mandalay Bay 2-Mar-99 $10.75 $11.44 $13.63 $17.13 $17.56 $17.31 $17.38 $21.06 $20.50
% 63.4% 53.6% 28.9% 2.6% (1.4%) (1.1%) 19.9% 16.7%
MGM Mirage
MGM Grand Macau 18-Dec-07 $86.50 $85.75 $88.62 $90.01 $82.08 $83.56 $67.81 $60.23 NA
% (5.1%) (4.3%) (7.4%) (8.8%) 1.8% (17.4%) (26.6%)
Las Vegas Sands

Venetian Macau 28-Aug-07 $83.84 $76.63 $83.81 $97.89 $97.61 $102.32 $137.00 $106.60 $88.49
% 16.4% 27.4% 16.5% (0.3%) 4.8% 40.4% 9.2% (9.3%)
Wynn Resorts
Wynn Las Vegas 28-Apr-05 $57.28 $61.41 $68.04 $55.65 $53.50 $49.17 $45.29 $57.56 $43.58
% (6.6%) (12.9%) (21.4%) (3.9%) (8.1%) (15.3%) 7.6% (18.5%)
Wynn Macau 6-Sep-06 $70.45 $69.79 $69.10 $75.75 $75.66 $73.91 $71.66 $95.06 $91.35
% 7.4% 8.4% 9.5% (0.1%) (2.3%) (5.3%) 25.6% 20.7%
Encore 22-Dec-08 $86.73 $89.18 $32.02 $40.76 $42.16 $41.90 $35.00 $20.72 $20.72
% (51.4%) (52.7%) 31.7% 3.4% (0.6%) (17.0%) (50.9%) (50.9%)
Station Casinos
Green Valley Ranch 18-Dec-01 $14.98 $10.75 $10.05 $9.56 $10.46 $10.55 $14.50 $14.25 $17.32
% (30.2%) (2.7%) 4.1% 9.4% 0.9% 38.6% 36.2% 65.6%
Red Rock 19-Apr-06 $65.90 $66.73 $77.30 $77.65 $77.24 $76.09 $74.99 $63.77 $61.80
% 17.2% 15.8% (0.1%) (0.5%) (1.5%) (2.9%) (17.4%) (20.0%)
Boyd Gaming
Borgata 2-Jul-03 $14.05 $13.21 $14.88 $16.70 $17.35 $17.24 $15.36 $15.53 $16.14
% 23.5% 31.3% 16.6% 3.9% (0.6%) (11.5%) (10.5%) (7.0%)
South Coast 22-Dec-05 $51.39 $41.35 $49.00 $46.01 $46.62 $47.82 $43.67 $46.51 $40.18
% (9.3%) 12.7% (4.9%) 1.3% 2.6% (6.3%) (0.2%) (13.8%)
Park Place Entertainment

Paris Las Vegas 1-Sep-99 $7.69 $10.69 $10.31 $11.63 $11.19 $11.25 $12.75 $12.63 $11.63
% 45.5% 4.7% 8.5% (3.8%) 0.6% 14.0% 12.8% 3.9%
Ameristar Casinos
St Charles 6-Aug-02 $13.88 $14.89 $13.49 $10.97 $9.44 $10.02 $8.38 $6.63 $4.72
% (32.0%) (36.6%) (30.0%) (13.9%) 6.1% (11.3%) (29.8%) 60.0%
Pinnacle Entertainment
L'Auberge du lac 26-May-05 $17.72 $16.15 $14.98 $17.29 $17.59 $18.18 $18.89 $23.31 $24.40
% (0.7%) 8.9% 17.4% 1.7% 3.4% 7.4% 32.5% 38.7%
Lumiere Place 19-Dec-07 $29.31 $26.80 $26.35 $24.75 $23.38 $24.64 $15.65 $13.78 NA
% (20.2%) (12.8%) (11.3%) (5.5%) 5.4% (33.1%) (41.1%)
When we averaged the results, which are shown in Exhibit 65, we found that overall,
operator stocks tend to trade higher ahead of a major new property opening and lower
initially following the opening. By our calculations, operator stock prices rose 6.4% (over a
6-month period), 4.1% (over a 3-month period), 2.5% (over a 1-month period), and (1.3)%
(over a 1 week period) prior to the opening of one of their casinos. After the opening, we
found that they traded down (1.0)% in the 1-week, (4.4)% in the 1-month period, (6.4)% in

the 3-month period, and (3.2)% in the 6-month periods following the opening. We would
urge caution using the average, however, as it appears that just a few of the openings
influenced the outcome mean.
Exhibit 65: Casino operator stock performance ahead of major openings
Average Stock Price Performance
Company -6 months -3 months -1 month -1 week +1 week +1 month +3 months +6 months

Mandalay Resort Group 62.3% 42.6% 18.0% 2.9% (10.2%) (14.5%) 0.6% (12.6%)
MGM Grand Inc (18.1%) (17.8%) (10.9%) (10.7%) (11.4%) (8.3%) (19.2%) (40.4%)
Mirage Resorts 24.4% 14.9% 5.0% 2.7% 3.7% (5.4%) (7.5%) 1.8%
MGM MIRAGE (5.1%) (4.3%) (7.4%) (8.8%) 1.8% (17.4%) (26.6%) NA
Las Vegas Sands 16.4% 27.4% 16.5% (0.3%) 4.83% 40.35% 9.21% (9.34%)
WYNN Resorts (16.9%) (19.1%) 6.6% (0.2%) (3.7%) (12.5%) (5.9%) (16.2%)
Station Casinos (6.5%) 6.5% 2.0% 4.4% (0.3%) 17.9% 9.4% 22.8%
Boyd Gaming 7.1% 22.0% 5.9% 2.6% 1.0% (8.9%) (5.4%) (10.4%)
Park Place Entertainment 45.5% 4.7% 8.5% (3.8%) 0.6% 14.0% 12.8% 3.9%
Ameristar Casinos, Inc (32.0%) (36.6%) (30.0%) (13.9%) 6.1% (11.3%) (29.8%) 60.0%
Pinnacle Entertainment (10.5%) (1.9%) 3.1% (1.9%) 4.4% (12.8%) (4.3%) NA
Total Average 6.4% 4.1% 2.5% (1.3%) (1.0%) (4.4%) (6.4%) (3.2%)
Underlying market and economic trends are more important to stock

performance
It seems stock price build-ups are often mainly due to positive gaming trends during the
period.
We think it is also important to look at the gaming environment trends (visitors’ volume
and gaming revenues) in Las Vegas surrounding the major casino openings. We found a
strong positive relationship between the Las Vegas trends and the gradual upward move
in the stock price prior to the opening. In other words, if there was an upward move in the
stock price, then inevitably the trends in Las Vegas/Clark County over the same period
were strong. This happened in all nine cases where we could find a trend of stocks with
Las Vegas exposure trading up ahead of the opening. As an example, for the six months
preceding the opening of Mandalay Bay, on average Las Vegas visitor volume was up 7%
while Clark County gaming revenues were up 10%. Recently, visitor volume has declined
in Las Vegas in a pretty significant way which we believe has more to do with the decline
in Wynn’s stock price before the opening of Encore Las Vegas than the actual property
itself.
After the opening, and due to limited availability of property performance data, the stocks
have generally traded down. But we found that stock movements over longer periods are
once again generally tied to the gaming environment. We also believe that stock prices
three to six months after the opening in certain cases gives us an idea about the initial
performance of the property, as by then preliminary data for the property would be
publicly available. A good example here is the Wynn Macau property, which rallied the
Wynn Resorts stock price once information regarding the property performance was
released.
Lastly, we checked the stock performance of the company’s closest competitors

surrounding the openings, and we found similar build ups of their stock prices prior/post
the openings which suggests that the build up is more due to the gaming trends rather
than the specific property opening. Mirage Resorts, MGM Grand Inc, Mandalay Resort
Group and Harrah’s Entertainment all traded along similar trends most of the time around
the opening of their key properties.

Gaming manufacturers—Replacements are slow but legislation

could make way for new growth opportunities
Two categories of slot machines

Gaming manufacturers are product companies that make money by either selling slot
machines directly to gaming operators, or leasing them to casinos (lease fees vary
widely by operator and state).
Video slots provide Broadly speaking, there are two types of machines: reels and video. Reel machines are
greater entertainment what most people think of when they think “slot machines.” These machines typically
value through
have three to five (and sometimes up to seven) spinning reels that, when lined up, pay
graphics and bonus
customers a certain amount based on the individual machine. Video machines are similar
rounds although
stepper slots can have to the reel-based machines, but instead of spinning actual reels, the players watch
top-boxes which use simulated “reels” spin on a screen. The advent of video machines has led to more creative
video. designs and higher entertainment value, resulting in longer playing time on the machine
and increased revenues for casino operators.
Two ways to put a slot on the casino floor—buy or lease

An operator has two different ways to put a slot machine on its floor. It can either purchase
the machine outright or enter into a participation contract with the manufacturer. We will
describe the economics of both decisions. However, whether the operators purchase or
participate, the returns and profits margins are enormous and literally make slot machines
the best use of capital in the casino. Some slot machines also have lease-to-buy options
whereby the slot manufacturer will put the machine on the floor as a participation game
and then after a certain time, the casino operator has the option to purchase the game at a
reduced price.
Economics of purchasing a machine

Up until the early 1990s, the only way to obtain machines was to purchase them like any
other product in a casino. It was no different than buying felt for the tables, mattresses for
the rooms, or dishes for the restaurants. The only difference was that the return on the
machine purchase was extraordinarily high. Currently, 90%-95% of the average casino
floor consists of machines that have been purchased.
Tribal casinos have historically been more participation-heavy. This dates back to the
1980s when they were getting started. The tribes had little money and banks were hesitant
to lend to them due to the legal uncertainties. Therefore the only way they could have
fresh slot floors was to put on participation games “for free.” Many of the tribes have
remained committed to this model.
The casino purchase decision is based on an expectation that the newest machines will
attract customers to play more and longer at the machine. They look at their past
successes and what has attracted consumers as well as the reliability of the machines. Slot
makers sell a standard machine for roughly $12,000-$15,000. The frequency and amount of
payout attracts different customers to a product.
Average purchase For example, some customers look for long length of play. They want frequent but modest
price of a slot wins so that the game stays interesting and they can play for a long time because they are
machine is $12,000-
winning every few pulls. Over time, they lose all of their money, but it still takes a while.
$15,000.
On the other hand, a big payout machine means that the customer gets a big win but the
payouts are very infrequent. This gambler is looking for the big payoff and is willing to
wait a long time to get it. In addition to frequency and payout amounts, other factors that

influence the success of the game are the featured theme or character, graphics, and
bonus rounds/features, which allow the customer to go beyond just playing the reels and
move to another game on top of the machine.
Slot makers sell a standard machine for roughly $12,000-$15,000, with machines
displaying more features selling for up to $20,000. Casino owners have literally
thousands of different machines to choose from. There are “Triple Diamonds” slot
machines, “Lucky Larry’s Lobstermania,” “Blazing Sevens,” and all sorts of combinations
in between. Besides the look of the machine, an important factor in a slot’s popularity is
the math imbedded in the machine—the frequency and amount of the payout. Some
customers like machines that pay off frequently but in smaller amounts, while other
customers like games that pay off infrequently, but in large amounts—also known as
“lifestyle-change” payouts. An example of this payout would be IGT’s Megabucks game,
which can have payouts in the millions.
Purchasing a slot machine is likely to be the highest IRR capital project that a casino
can undertake. Assuming a 20% decline in win per year and zero value for the machine at
the end of five years, the IRR is nearly 397% (see Exhibit 66). We use a win/slot/day of $250
but this number can vary dramatically from state to state and from casino to casino. For
example the, win/slot/day in the average Las Vegas Strip casinos is in the $75-$225 range
and the average win/slot/day in Pennsylvania is in the $250-$350 range.
In addition, in recent years the cost of the machines has increased faster than the win-day
on the machines generally. This has caused the IRR to come down from its highs; however,
they are still very significant.
Exhibit 66: Economics of purchasing a slot machine from a casino operator’s perspective
Year 1 Year 2 Year 3 Year 4 Year 5

Cost of a new machine ($14,000)
After tax profit from machine* $58,400 $46,720 $37,376 $29,901 $23,921
Cash flows $44,400 $46,720 $37,376 $29,901 $23,921
IRR 397%
Assumptions:
Win/Unit/Day* $250
Tax rate 36%
% yearly decline in win 20%
Economics of participation/leased machines

Although (as noted just above) purchasing a slot machine can generate an IRR of
nearly 397%, the IRR on leasing a slot machine on a participation basis is infinite
(assuming no external costs). Leased games are known as “participation machines”
because the slot manufacturer installs the machines on the casino floor at no cost to
the operator and gets a percentage, such as 20%, of the win as a fee (see Exhibits 67
and 68). The operator can have the manufacturer remove the machine from the floor
whenever a better one is released, shifting the risk of an underperforming game back to
the manufacturer. Operators facing shrinking cash flows may turn to this purchase method.
The operator benefits and the manufacturer benefits as it shares the potential upside that
new, higher-winning games produce. This results in better margins for both operators and
manufacturers.
Wide-area progressive (WAP) systems, a form of participation gaming, connect

multiple slot machines at multiple locations to a central computer system. This allows
a large jackpot to accumulate, attracting customers looking for a larger payout than is
available on a “free-standing” slot machine (see Exhibit 69).

The economics for participation and WAP machines are great for the casino operator as
well as the slot manufacturer. Depending on the win of the machine, over a three-year
period, assuming the win on the machine declines 20% per year and the machine is
worthless at the end of the period, the IRR for the manufacturer can range from 24% to
461%.
Exhibit 67: Economics of participation slot machines for the slot manufacturer
Average slot win per day $100 $200 $300 $400 $500
Total slot win per year $36,500 $73,000 $109,500 $146,000 $182,500
Profit (win) per year to operator (80%) $29,200 $58,400 $87,600 $116,800 $146,000
Profit (win) per year to slot manufacturer (20%) $7,300 $14,600 $21,900 $29,200 $36,500
Net profit to slot manufacturer (year 1)* $300 $8,600 $15,900 $23,200 $30,500
Net profit to slot manufacturer (year 2)** $5,840 $11,680 $17,520 $23,360 $29,200
Net profit to slot manufacturer (year 3) $4,672 $9,344 $14,016 $18,688 $23,360
Total profit to slot manufacturer $10,812 $29,624 $47,436 $65,248 $83,060
IRR for slot manufacturer 24% 135% 242% 351% 461%
* Assume $7,000 cost per machine

** Assumes 20% decline in win per year
Exhibit 68: Participation slot machine payout scheme
$ 100
into machine
94%-99% 1%-6%
to consumer Win
80% 20%
Casino Manufacturer
Exhibit 69: Wide-area participation slot machine payout scheme
$ 100
Coin in
$89 $6 $5
Back to consumer Casino Manufacturer
$2.5 Costs $2.5

(funding jackpot Profit
participation)

Accounting for wide-area progressives

Gaming manufacturers must reserve capital for jackpot payouts. Jackpot reserves are
invested in secure, long-term bond investments that are regulated by industry authorities.
As interest rates fluctuate, the amount a manufacturer has to reserve changes; thus as
interest rates decline, it becomes more expensive to operate the machines.
The appeal of slot machines

For customers, the appeal of slot machines is that they can be less intimidating than
table games and are based on mindless entertainment as opposed to skilled play. The
appeal to the casino operators is that the average win per unit on a slot can range from
$100 to more than $300 per day. Multiply that number by thousands of machines that
casinos operate (for example, Foxwoods Resort casino has over 7,000 slots on its floor),
and it is easy to see how slot win can translate into big money for the operators. With
machines that run 24 hours a day, slots can be highly profitable for the owner.
For gaming operators, slot machines and video poker are less prone to swings in win
percentages because the computers that run them are programmed to have small
standard deviations of the win percentage. With table games, the win percentage can
fluctuate significantly in the short run, as the standard deviation of the win percentage can
be large. The fluctuation is exaggerated when high rollers place a few large bets and then
stop playing (large bets are around $100,000). Fluctuations at table games can affect the
quarterly win percentage by 1-3 percentage points for casinos that cater to high rollers.
Slot machines in a Native American context

In Native American gaming, there are two types of gaming devices: Class II and Class
III. The key distinction between Class II and Class III gaming devices is that Class II devices
are typically bingo-style devices, where players play against one another, while Class III
devices are slot machines independent of one another. Most people have only played
Class III slots. Class III slots are the type found in every commercial casino and in most
tribal ones.
Class II slots are just Class II gaming machines can be traced back to the 1987 US Supreme Court decision
sophisticated bingo issued in California v. Cabazon Band of Mission Indians, 480 US 202 (1987). The Class II
games.
market is generally becoming smaller are more states allow Class III gaming. Oklahoma,
which used to be the largest Class II market, is now primarily a Class III market.
The Indian Gaming Regulatory Act established a comprehensive system for regulating
gambling activities on Indian lands and divides gaming into three categories or classes.
Class I gaming consists of social gaming for minimal prizes. Class II gaming (see Exhibit
70) consists of bingo, pull-tabs, bingo-like games, and non-banking card games, for
example, games such as poker that are played against other players, rather than
against the house. A tribe may conduct, license, and regulate Class II gaming if (1) the
state in which the tribe is located permits such gaming for any purpose by a person or
organization; and (2) the governing body of the tribe adopts a gaming ordinance that
is approved by the National Indian Gaming Commission (NIGC). Class III gaming
machines use a random number generator and are the kind of slot machine most
often seen in casinos.

Exhibit 70: An example of a Class II game

bingo outcomes drive the slot reel
Source: Multimedia Games.
Slot expansion in North America slowed slightly in 2008

The overall slot industry is gigantic, with a current installed base of about 930,000
machines in North America (see Exhibit 71). The industry has traditionally grown at
roughly a 9.4% CAGR since 1991 but this pace as slowed dramatically over the past few
years as the North American gaming market has become saturated. The North American
slot market grew 5% in 2008 growing 6% in 2007 and 1% in 2006. The vast majority of
machines are installed in commercial casinos in especially in Nevada and New Jersey and
in Native American casinos the majority of which are in California, Oklahoma, and Florida.
Exhibit 71: Total number of slots in North America
1,000,000 20%
900,000 18%
800,000 16%
700,000 14%
600,000 12%
500,000 10%
400,000 8%
300,000 6%
200,000 4%
100,000 2%
0 0%
1991 2000 2001 2002 2003 2004 2005 2006 2007 2008
North American Slots Base Growth Rate
Source: Goldman Sachs Research estimates, International Game Technology.

Demand for slot machines will remain in a lull
Exhibit 72: 2009 Slot Survey – what percentage of your floor do you plan to replace this year?
100%
27% 30% 30% 24%
40% 41% 38% 35%
43%
75%
Over 15%
50%
15% or less
73% 70% 70% 76%
` 62% 65%
60% 59% 57%
25%
0%
2009 2008 2007 2006 2005 2004 2003 2002 2001
2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, and 2001 sample size:
122, 130, 120, 149, 119, 133, 136, 92, 67
The Slot Manager Survey for 2009 very much suggests that core slot machine sales
will continue to be lackluster over the near to medium term, mostly due to the slow
economy. Nearly all of purchasers’ responses to our questions suggest that they will be
holding off on buying machines or expanding their floors. Our most basic question,
whether a slot manager is going to be changing the number of machines on the floor, got
one of the worst responses ever, with only 24% saying they would increase the number of
machines on the floor. In contrast, in 2008 30% said they would be expanding and in 2007
43% indicated their floors would grow.
The desire for replacement machines remains weak; however, the age of the machine is
starting to show. For example, 34% of the slot managers said more than half of their floor
is over five years old (the age one could assume is ripe for replacement), up from 22% in
2008 and 20% in 2007. This number peaked at 41% peak in 2001, right before the last major
replacement cycle. Finally, when we asked, “What percentage of your slot floor will you be
replacing?” only 27% said more than 15% (Exhibit 72). This modest amount of
replacement is slightly worse than the 2008 number and well below the peak accelerated
cycle of 2002-2006.
We expect that sales could be weak for the slot manufactures in calendar 2009 however
they could be stronger than some expected. We estimated through out slot survey that slot
budgets in the United States could be down around 15% which we believe is less than
some investors could be estimating.
Most costs are variable which should take off some of the margin
pressure
Variable costs outweigh fixed costs, unlike with the casino operators, which allows
for relatively strong margins even in periods of slow sales. Slot machines in many ways
are just large computers. The most important components of a slot machine are items
such as the cabinet, LCD screen, computer chips, and other relevant technology. We
estimate the cost structure is 80% variable and 20% fixed. Therefore, for every $1 sales go
down the COGS should go down by $0.80. The real task for the companies is to manage
their more fixed costs such as SG&A and R&D. When these costs get out of hand is when

the companies have more difficulty with margins. Please see the next section, Slot
margins can hold up even with lower unit sales - Examining the cost structure of a slot
machine, where we go into more detail on this subject.
Market share has been shifting away from IGT and towards WMS
and Bally
Over the past several years IGT has seen some of its dominant market share figures erode
as WMS and Bally have taken share with new innovative and popular games (see Exhibit
73). IGT had its peak share at the beginning of the last replacement cycle (ticket-in ticket-
out or TITO) as it was really the only manufacturer with solid games at a time when slot
managers needed a new technology. However, as WMS and Bally’s games caught up to
IGT they were able to take share as slot floors around the country were not diversified. We
believe that going forward the market will continue to remain competitive as all of the big
game makers have solid product to offer.
Exhibit 73: The North American market for slots has grown increasingly competitive
North American Ship Share
70%
60%
50%
40%
30%
20%
10%
0%
2H 2004 1H 2005 2H 2005 1H 2006 2H 2006 1H 2007 2H 2007 1H 2008 2H 2008
IGT WMS Bally Aristocrat
Fully networked gaming is still years away from domination;

however, systems technology should continue to advance
We have written for several years that networked gaming could cause the next accelerated
replacement cycle. Networked gaming will give the casino operator the ability to change
the floor dynamically and increase the level of player customization. While we still believe
that there is a very big future in server based gaming it is likely that an accelerated
replacement cycle due to it is less likely in the next few years due to its unproven
economics and the weak business environment.
However, we do believe that over the next few years certain elements of networked
gaming will make their way onto casino floors. Player tracking, bonusing, and customer
customization technologies have all advanced over the past few years and we expect them
to continue to move forward. IGT, Bally and now WMS are all working to bring these new
technologies to casinos floors as fast as they are developed.

*New – Slot margins can hold up even with lower unit sales –
examining the cost structure of a slot machine
We have conducted a detailed analysis of the cost of building a slot machine and have
concluded that given the highly variable cost nature and potential for input/efficiency
savings, margins could hold up better than some investors might be thinking even if
unit sales decline dramatically.
We think slot margins Investors have shown increasing concern that if slot unit shipment levels drop off
hold up in a tough significantly, margins will fall with them. In this analysis we lay out what the major
demand environment.
components of a slot machine are in order to show the realities of what could happen if
unit volumes decline. In addition, we show how the input costs of these machines have
been declining, which could actually lead to additional margin expansion.
The major cost of building a slot machine is the raw materials and parts which account for
approximately 70%-80% of the total cost of the machine. Labor accounts for approximately
10%-15% of the machine and overhead accounts for 10%-15%. While this is not surprising,
it does show the importance for these companies of improving working capital efficiency
as inventory has historically been hard to keep under control.
A highly variable cost structure allows for strong margins through

the cycle
IGT margins have held The cost structure for building a slot machine is mostly variable (we estimate above 80%)
up as unit sales have which allows for strong margins even as unit volumes fluctuate. As shown in Exhibit 74,
trended down.
IGT has experienced declining volumes and rising volumes over the past 10 years and its
margins have increased almost every year. While one cannot attribute this solely to any
one thing, we believe it is largely a function of a reduction in technology costs,
manufacturing efficiency improvements, and a variable cost structure.
Exhibit 74: IGT has been growing its margins even though its unit volumes have been
declining
Product sales gross margins 1999-2008
180,000 60%
160,000
50%
140,000
IGT product sales gross margin
120,000 40%
IGT total units shpped
100,000
30%
80,000
60,000 20%
40,000
10%
20,000
- 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
IGT total units shipped IGT product sales gross margin

Component list of a slot machine shows a few parts make up the

bulk of the machine
Parts make up 70%- While there are probably hundreds of different parts which go into any particular slot
80% of the cost of a machine we estimate that the top 11 parts make up about 80% of the total materials
machine.
costs (see Exhibit 75). These parts include the cabinet system, the LCD screen, validator,
speaker system, printer, motherboard, graphics card, RAM memory, CPU, button panel,
and hard drive.
Exhibit 75 shows that while some of the expensive components, such an LCD screen, make
sense, we were surprised to learn how costly other items, such as a printer, were in
building the slot machine. The printer makes the ticket-in-ticket-out (TITO) technology
function and therefore is more sophisticated than an ordinary computer printer: 100%
accuracy is required, as it is very costly for the casino to have its slot machine be down
because of a printer malfunction or print incorrectly.
The cost of the cabinet system was probably the most difficult to determine and therefore
we had to make two assumptions to back into an estimate: (1) materials cost is
approximately 70%-80% of the total cost of the slot machine (remaining 20%-30% is labor
and overhead), and (2) the eleven major material components cost about 85% of the total
materials costs (remaining 15% is Other in Exhibit 75). These percentages were derived
following conversations with industry sources. In order to figure out the cost of the cabinet
system we backed into it after deducting the cost of all the other major components. The
cabinet system is expensive because it has to be built of tamper-proof materials, and in
our analysis ends up representing 15-18% of the total machine cost.
Customization can The actual components and component prices can also vary greatly from machine to
lead to a wide machine depending on customization. In our generic slot machine we assume that there
divergence of
would be two LCD screens. One screen is the main game screen and one screen would be
component costs.
for the top box. It is possible to get a machine with only a single screen but many of the
newer machines have two screens. In terms of how prices can differ among machines all
machines use sound cards and speakers but different ones can range in price. WMS uses a
sound system from Bose (a very high end audio company) in its new BlueBird 2 boxes,
while other manufacturers use lower end systems in their machines.
Exhibit 75: Cost structure of a typical video slot machine
Parts Cost per unit Quantity Total cost % of total cost

Cabinet system (includes door and front panel) $1,316 1 $1,316 15%-18%
LCD screen $500 2 $1,000 10%-15%
Printer $650 1 $650 7%-10%
Reprogrammable button panel $600 1 $600 7%-10%
Bill validator $300 1 $300 2%-5%
Speaker system $300 1 $300 2%-5%
Motherboard $225 1 $225 2%-4%
Graphics card $200 1 $200 2%-4%
CPU $75 1 $75 1%-2%
RAM $75 1 $75 1%-2%
Hard drive $40 1 $40 1%-2%
Other $844 $844 10%-12%
Total cost of parts $5,625 70%-80%
Labor cost $938 10%-15%
Warehouse/overhead cost $938 10%-15%
Total cost of machine $7,500 48%-52%
Selling price of machine $15,000
Source: Goldman Sachs research estimates.

• Note: The slot machine we analyzed is a generic machine and is not specific to any
manufacturer. In addition, as there are many different variations of slot machines,
from video to mechanical to specialty models, such as WMS’ Transmissive Reels or
IGT’s multi-layer displays, we decided to pick just one to look at which we estimate is
close to many of the machines which are built.
Decline in overall technology prices could help increase margins

Technology prices are We believe that slot manufactures could benefit from the continual decline of technology
trending downward. prices. Manufacturers have benefitted over time as some of the major components of a
slot machine, such as LCD screens and CPUs, have come down in price. We think these
prices are continuing to trend downward and expect that the slot manufacturers could
continue to see benefits (see Exhibits 76-77). For example, the Goldman Sachs Semi
Equipment team expects average microprocessor and chipsets to be down 9% in price in
2009 over 2008. However, with that said, new games also tend to use more technology,
which can increase the cost of the game and offset some of these benefits.
Exhibit 76: LCD screen have come down dramatically in Exhibit 77: …and so have microprocessors
price… Average selling price of Intel’s desktop microprocessors
Average price of a 19” LCD monitor
$260 $150
$240 $140
$220 $130
$200
$120
$180
$110
$160
$100 `
$140
$90
$120
$100 $80
$80 $70
$60 $60
Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 2001 2002 2003 2004 2005 2006 2007 2008
Source: Wits View. Source: Goldman Sachs Research estimates.
Materials costs such Beyond technology, basic materials costs are also significant in building a slot machine
as steel are also and there is potential over time for better pricing or more efficiency. For example, sheet
moving lower.
metal (steel), which makes up most of the cabinet shell in the cabinet system, has been
going down in price and we expect that these low prices could continue (see Exhibit 78).
The Goldman Sachs Steel team expects steel prices to average $455 / ton in 2009 after
averaging $843 in 2008, which would be down 46% yoy.

Exhibit 78: Hot roiled coil price over time

Hot rolled coil is the benchmark price which is used for steel
$1,068
$1,100
$1,000
$900
$800 $756
HRC price ($ per ton) $700 $630
$600
$500
$400
$400
$508,
$435,
Feb & Aug 07 $430,
Aug 05
$300 May 09-Jul 09
$200
$260,
$210, May 03
$100 Dec 01
$0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
In addition, recent discussions suggest that slot machine companies could be looking to
use auto parts companies (have spare capacity given downturn in auto sales) to get
cabinets from which could give better pricing. This would help Bally and WMS the most if
they did this because they buy their slot machines shells from third parties. IGT does its
own fabrication.
We estimate margins could up hold relatively well even if unit

volumes decline by 15%
We think that the highly variable cost structure of making a slot machine and the potential
for lower input costs/efficiencies should preserve sector margins. For the sector in 2009 we
are currently modeling in machine sales down 15%-18% and expect flat to slightly higher
gross profit margins on product sales.
As an example, we conducted an analysis to see what happens to margins if unit volumes

decline 15%. We assume that for each $1 decline in sales the material costs decline by $1
(100% variable), labor costs decline by $0.30 and warehouse/overhead costs decline by
$0.10.
We estimate EBITDA The output of this analysis indicates that even with a 15% decline in unit shipments
margins would be hit gross profit margins would only decline by 200 bp. This shows the true variability of the
by just 75 bp.
cost structure of building a slot machine. We estimate that a 200 bp decline in gross profit
margins would lead to a less than a 75 bp decline in overall company EBITDA margins.
This is due to the fact that other expenses such as SG&A and R&D are also supported by a
generally more stable gaming operations business and systems sales. See Exhibit 79.

Exhibit 79: A 15% decline in sales would only lead to a 200 bp decline in gross margin
Income statement item % of sales % of sales $ decline in cost per

$1 decline in sales
Number of machines 100 85
Price per machine $15,000 $15,000
We assume that materials are
Sales $1,500,000 100% $1,275,000 100%
100% variable while the other
costs have a fixed element to
Materials/Parts 75% $562,500 38% $478,125 38% $1.00
them.
Labor 13% $93,750 6% $89,531 7% $0.30
Warehouse 13% $93,750 6% $92,344 7% $0.10
COGS 50% $750,000 50% $660,000 52%
Even with a 15% decline in sales
we estimate that the gross
Gross Profit $750,000 50% $615,000 48%
margin we would only expect
Gross Margin 50% 48%
gross margin to decline by
200bp.
• Note: In order to simplify the analysis we took the midpoints of the cost ranges for
materials, cost and labor. The cost structure for each manufacturer and for each
particular slot machine can vary.
To show the power of improving efficiencies or lower input costs we did the same
analysis as above again but this time assumed that raw material costs decline by
10%, labor efficiency improves by 5%, and warehouse costs decline by 2%. Using these
assumptions gross margins actually increase by 200 bp. We think these cost cuts are a
real possibility for the slot companies and would expect very little if any margin erosion on
the gross profit level even during the current environment of declining sales. See Exhibit
80.
Exhibit 80: If you assume some efficiencies and cost improvements margins could expand even with a 15% decline in sales
Income statement item % of sales % of sales $ decline in cost per $1 % increase in

decline in sales efficiency
Number of machines 100 85
We estimate that materials costs
Price per machine $15,000 $15,000
could decline by 8%, labor
efficiency could improve by 5%
Sales $1,500,000 100% $1,275,000 100%
and warehouse / overhead costs
could decline by 2%.
Materials/Parts $562,500 38% $430,313 34% $1.00 10%
Labor $93,750 6% $85,547 7% $0.30 5%
Warehouse / overhead $93,750 6% $90,750 7% $0.10 2%
COGS $750,000 50% $606,609
If you assume some efficiencies
Gross Profit $750,000 50% $668,391 52% even with a 15% decline in sales
Gross Margin 50% 52% gross margins would increase by
200bp.

New and expansion slot machine estimates

We expect that the number of new slot to be deployed over the next few years will
slow do to the economic situation in North America. There are many different
proposals on the table that would increase the proliferation of gambling across the United
States; however, many of these possibilities are in the early stages and we are thus
assigning them low probabilities. Planned expansions and probability weighted new
legislation could lead to around 91,500 new slot machines coming online over the next
four years in the United States. If we do not probability weight the likelihood of new
projects coming on but assume that all the proposals are approved, then approximately
185,000 new machines could come online over the next four years. The biggest areas of
growth should continue to be Pennsylvania and Florida, which have been some of the
strongest areas of expansion recently. In this section, we provide updates on key gaming
jurisdictions that could serve as growth opportunities. See Exhibit 81.
Exhibit 81: Four-year slot expansion estimates
State 2009 2010 2011 2012 2009-2012

Alabama 500 300 300 300 1,400
Arkansas 0 0 0 70 70
California 1,000 950 0 0 1,950
Florida 2,583 4,083 3,033 2,283 11,983
Illinois 0 750 2,188 938 3,875
Indiana 2,192 0 0 0 2,192
Kansas 575 560 3,310 1,875 6,320
Maryland 0 2,750 2,750 2,750 8,250
Massachusetts 0 0 1,031 1,031 2,063
Missouri 281 3,094 0 0 3,375
Nevada 5,410 563 0 0 5,973
New Hampshire 0 0 375 375 750
New Jersey 0 0 0 625 625
New York 0 3,000 3,375 750 7,125
Ohio 0 0 500 500 1,000
Oklahoma 750 3,300 0 0 4,050
Pennsylvania 5,529 2,429 2,929 2,500 13,388
Texas 0 0 550 550 1,100
Washington 2,667 2,667 2,667 0 8,000
Other 2,000 2,000 2,000 2,000 8,000
Total 23,488 26,446 25,008 16,547 91,488
If we look at just the slots that could come online due to new legislation or old legislation
still being worked out we estimate that almost 204,000 new slots (22% of the current
installed based) could potentially be installed. Given the time it takes to get legislation
through and build new casinos this pipeline would extend beyond the 2012 time horizon
discussed above. If we probability weight the outcomes we would predict that about
30,000 new machines (3% of the current installed base) will actually end up on casinos
floors. The most significant legislation being proposed is in Texas, Florida, Alabama, Ohio,
and Massachusetts (see Exhibit 82).

Exhibit 82: We estimate that over 29,600 new machines could come online due to new legislation
State Proposal Status/Information Estimated GS assumed Probability weighted

number of max. probability number of machines
machines
Alabama To allow bingo driven slot machines at 12 locations A bill has recently passed a state House committee but 24,000 5% 1,200
would need to be approved by the state congress and by
a voter referendum.
Arkansas Allow seven casinos statewide Local businessman has gotten permission to put a 14,000 2% 280
constitutional amendment authorizing the casinos
across Arkansas on the 2010 general election ballot.
Georgia VLT casino in Atlanta Proposed by local developers and would be run by 5,000 5% 250
Dover Downs. It would not require approval of the state
Legislature since it is just an expansion of the lottery. It
needs to be approved by the Georgia Lottery board.
Florida Allow bingo driven slot machines at 18 locations The state senate is working through a bill which would 36,000 5% 1,800
allow bingo driven slot machines at all pari-mutual
faculties in the state in addition to the locations which
have slot machines currently
Illinois Slots at Illinois racetracks and casino in downtown There are currently 5 tracks which could get slot 9,500 25% 2,375
Chicago machines or the state could legalize an 11th casino. No
bills moving through the state legislature yet but it is a
topic being discussed.
Kansas Four state-owned casinos and slots at racetracks The casinos have already been approved but only one 9,100 75% 6,825
out of the four is being built and no slots have been
added at the tracks either due to financing issues or
difficult economic times. The state is rebidding the
Sumner and Wyandotte licenses and the new bids are
due April 1. There is also a bill which is looking to
reduce the share of revenues from slots at the tracks to
22% from 40% as an incentive to get those facilities
built.
Kentucky VLTs at racetracks House Speaker Greg Stumbo introduced the bill which 10,000 25% 2,500
would allow VLTs at eight tracks. This would be an
expansion of the lottery and would not require a
constitutional amendment. Voting for this bill could come
up this summer during a special session or in 2010.
Massachusetts Three slot parlors State Treasurer Cahill proposed to allow three slot 8,250 25% 2,063
parlors around the state. The tax rate would be 27%
which would be low relative to other states. Each parlor
would have 2,500-3,000 machines. Such a plan requires
a state constitutional amendment.
New Hampshire VLTs at several locations There is a senate bill which would allow for up to 15,000 15,000 5% 750
machines at six different sites. The vote on the bill was
recently postponed.
New York Racino at Aqueduct racetrack Delaware North won the right to build the facility but was 4,500 90% 4,050
not able to get the financing. The development will be
rebid and Delaware North, as well as SL Green and
Mohegan Sun are potential bidders.
New York Racino at Belmont racetrack Gov. David Patterson has indicated that he could 4,500 25% 1,125
support VLTs at Belmont and a study was
commissioned to look at the economic impact of such a
facility.
Ohio Four casinos Penn National and Dan Gilbert (founder of Quicken 20,000 10% 2,000
Loans) have put forth a proposal to allow 4 casinos in
Ohio each with up to 5,000 machines. The tax rate
would be 33%. In order to be approved it would require
approval by the voters which could happen on election
day in November.
Texas Allow 12 resort casinos, slots at tracks, and three A house bill has been filed but there would need to be 44,000 10% 4,400
federally recognized tribes could open casinos an amendment to the state constitution which could take
several years. There are currently seven tracks in the
state which could get slots. Other bills have been
introduced which look at different combinations of this
proposal.
Total 203,850 29,618
There are currently around 930,000 slot machines

in North America. If all of the states move forward
with slot machines this would represent a 22%
increase or our probability weighted estimates
represents a 3% increase.

International slot markets can provide good growth opportunities

While the majority of the slot machines in the world are in North America (it is impossible
to know as there are many illegal machines) the international slot markets have been a
good source of growth for all of the major gaming equipment companies. The biggest
gaming market in the world, Macau, is actually not a very big slot market with less than
12,000 slot machines. We believe that growth going forward will be global – from Africa to
South America.
Several years ago it was thought that Mexico would be the next mega slot market when it
licensed electronic bingo halls but the lack of sophistication and marketing has caused
growth to be slower than expected. Other countries such as Russia, Brazil, and Japan have
been talked about as looking to either legalize gambling or expand it, but progress has
been limited recently. We believe that eventually action will be taken in this markets but a
timeframe is difficult to establish.

A closer look at lottery: The “softer” side of gaming

The lottery business is a $52.6 billion industry in the United States and a $224 billion
industry in the world. In this section, we provide a brief introduction to the lottery
industry, its main drivers, current trends, and the competitive landscape.
Lottery 101: The basics

Lotteries are more Lotteries are generally run by governments or government-sponsored organizations, with
socially acceptable the proceeds generally being earmarked for the greater good of the state. Some examples
than commercial
of programs funded with lottery proceeds are education and care for the elderly. Because
gambling.
lotteries are run by organizations that are somewhat linked to the government, they
are more appealing than commercial casino gaming and more socially acceptable.
In the United States, nearly 50% of gross revenues of an online lottery is returned to the
public in the form of prizes. Thirty-five percent of gross revenues is used by the state to
support specific programs, and the remaining 15% is used to fund the operations of the
lottery, including the lottery operator’s fees and sales commissions to retailers (see Exhibit
83).
Exhibit 83: Typical breakdown of lottery proceeds
$ 100
Lottery Proceeds
$50 $35 $15

Prize money Funding of specific Lottery Operations
programs
$10-$14 $1-$5
Lottery Lottery Service
administration Provider
Source: Company reports, Goldman Sachs Research.
Types of lottery
There are two different kinds of lottery: (1) offline lottery and (2) online lottery.
Offline lottery is one that features lottery games that are not computerized, such as
traditional offline lottery games and instant ticket lottery games. These types of games do
not require the use of a lottery terminal
Instant tickets lottery Traditional offline lottery games are those for which the player purchases a ticket for a
is one of the fastest- lottery game for a future drawing at a predetermined date. For instance, at New Year’s or
growing parts of the
major holidays, the size of the jackpot is usually increased to enhance ticket sales. These
lottery industry.
types of lottery games are very popular in international markets.
Instant ticket games, also known as “scratch tickets,” are game where players scratch off
the coating from a pre-printed ticket and find out immediately whether it is a winning ticket
or not, hence the name “instant.” Instant ticket games are more common domestically but
growing internationally. Scientific Games has 80% market share in instant tickets.

All lottery terminals Online lottery games are usually numbers games, such as lotto, sports pool, and keno,
are connected to a where the players make their own selections. The tickets are usually purchased through
central computer lottery terminals, which are then connected to a central computer system. These lottery
system.
terminals can range from self-service kiosks to clerk-operated terminals and can be in
different locations, but the key is that they are all connected to the same central computer
system. As such, the terminal is said to be “online” with the lottery operator. An
online lottery system can also be used for the validation of instant ticket prizes to confirm
the prize and make sure there is no double counting on prize payouts. Lottomatica is the
world’s leading online lottery service provider, with a 70%-80% market share. Online
lottery game sales are mostly driven by the size of the jackpot for that particular game.
Size of the US lottery market

There were $52.6 billion in sales in the United States in FY2008 which was essentially flat
versus 2007. Over the past two years United States lottery growth has slowed below the
4.6% average growth rate of the past ten years likely due to fewer states rolling out lottery
and more recently the economic slowdown. The instant ticket market continues to grow
more than the overall lottery market and now accounts for about 57% of lottery sales (see
Exhibit 84).
Exhibit 84: US lottery sales

$ millions
35,000 Online 10-yr CAGR = 1%

Instant 10-yr CAGR = 8%
30,000
Total Sales ($mns)
25,000
20,000 Online (in $mns)

15,000 Instant Ticket (in $mns)
10,000
5,000
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: LaFleur’s Lottery Almanac, Scientific Games, and Goldman Sachs Research estimates.
Who’s who in the world of lottery

If we look at the lottery industry, we can identify at least seven key sectors: (1) lottery
organizations, government-owned or government-sponsored, (2) online lottery systems
providers, (3) instant ticket providers, (4) instant ticket printers, (5) instant ticket vending
machine manufacturers, (6) video lottery terminal manufacturers, and (7) video lottery
systems providers. Exhibit 85 lists each of the providers of lottery services, ranked from
low- to high-margin business.

Exhibit 85: A closer look at lottery’s competitive landscape
Key Players in the Lottery Market
Line of Business Key Players
Instant Ticket Printing Scientific Games, Pollard,

Lottomatica
Lottomatica, Scientific
Instant Ticket Distribution Games
Online Lottery Services Lottomatica, Scientific

Games, IntraLot
IGT, Bally Technologies,

Video Lottery Terminal Lottomatica, WM S
Video Lottery Systems IGT, BYI, Lottomatica,

M GAM , Scientific Games
Source: Company reports, Goldman Sachs Research.
Online lottery
Online lottery systems providers such as Lottomatica and Scientific Games supply the
infrastructure and services that are necessary to run an online lottery system. These
include the terminals at points of sale, the communication network that connects the
terminals to the data center, or the central computer system, and the maintenance and
operations of the data center as well. In return, an online lottery systems provider gets a
fixed percentage of online ticket sales during the life of a contract, which has a term of at
least five years.
Instant ticket games

Instant ticket game Instant ticket game providers, such as Scientific Games and Pollard, usually have a
contracts can be separate contract with the lottery and provide the instant ticket games, also known as
separate or bundled
scratch games. Similar to an online lottery, an instant ticket vendor is selected through an
with online lottery
RFP process, and the instant ticket service provider receives a percentage of instant ticket
contracts.
sales in that lottery jurisdiction.

State information pages
Colorado
COLORADO
Key stats
Rank of size in US commercial market #13 Maximum gaming tax rate 20%
2008 annual gaming revenues ($mns) $716 Legalization date November 1990
10-year gaming revenue CAGR 4.0% First casino opened October 1991
Commercial casinos 45 Smoking ban on casinos? Yes
Tribal Gaming? Yes Loss Limit/Maximum Bet No/Yes ($100)
Racino? No Day revenue is released each month 15th-18th
Slots* 16,249 Population (mn, 2007) 4.9

win/slot/day* $112 7-year population CAGR 13.0%
Tables* 231 (2000-2007)
win/table/day* $391
Gaming positions* 17,635 *As of Feb 2009
Colorado Annual Gaming Revenues
$900 20%
$800
15%
Black Haw k $700

Denver 10%
Central City $600
$500 5%
$400
0%
Colorado Springs
Cripple Creek $300
-5%
$200
-10%
$100
$- -15%
D
95
96
97
98
99
00
01
02
03
04
05
06
07
08
YT
19
19
19
19
19
20
20
20
20
20
20
20
20
20
09
20
Statewide Total Market Revenue yoy % change
Gaming City Major City
Companies with exposure to the market

Ameristar - 6% of EBITDA from Black Hawk
Isle of Capri
Pinnacle - owns land in Central City but has not developed it yet.
Current legislative issues
•Maximum bet limit increased to $100 - Amendment 50 was approved on November 4, 2008 to raise
the maximum bet wager limit from $5 to $100, add craps and/or roulette, and increase gaming to 24
hours. These new rules should take effect starting in July of 2009.
•Smoking ban in commercial casinos - A smoking ban in most indoor public places including
casinos went into effect on January 1, 2008 in Colorado. Gaming revenues for Colorado casinos
dropped 12% in 2008.
Source: State gaming board, National Atlas of the United States, US Census Bureau, American Gaming Association, and Goldman Sachs
Research estimates

Florida
FLORIDA
Key stats
2008 annual gaming revenues ($mns) $231 Legalization date 2006
10-year gaming revenue CAGR NA First casino opened 2006
Commercial casinos 3 Smoking ban on casinos? Yes (partial)
Tribal Gaming? Yes Loss Limit/Maximum Bet? No/No
Racino? Yes Day revenue is released each week Friday

Tables* 0 (2000-2007)
win/table/day* NA
Florida Annual Gaming Revenues
$300
$250
$200
$150
$100
Pompano Beach
Hallandale Beach $50
Miami
$-
2007 2008 2009 YTD

Boyd Gaming - Boyd owns Dania Jai-Alai but currently does not have plans to install slots due to local
market conditions.
Isle of Capri
•Senate approved two new casino gambling bills - On March 25, 2009 Florida Senate Regulated
Industries Committee approved two new casino bills. The bills will expand gambling at state pari-
mutuels and full scale casinos for the Seminole Indian casinos. The Seminoles would get to add craps
and roulette to the existing black jack games while the pari-mutuels would be granted blackjack. The
tax rate of the pari-mutuels would fall to 35% from 50% under this bill.
Research estimates

Illinois
ILLINOIS
Key stats
2008 annual gaming revenues ($mns) $1,572 Legalization date February 1990
10-year gaming revenue CAGR 4.0% First casino opened September 1991
Commercial casinos 9 Smoking ban on casinos? Yes
Tribal Gaming? No Loss Limit/Maximum Bet? No/No
Racino? Yes Day revenue is released each month 5th working day

Tables* 235 (2000-2007)
win/table/day* $2,520
Illinois Annual Gaming Revenues

Elgin
Chicago $2,500 30.0%
Aurora
25.0%
Rock Island
Joliet
20.0%
$2,000
E. Peoria 15.0%
10.0%
$1,500
5.0%
0.0%
Alto $1,000
-5.0%
-10.0%
E. St. Louis
$500
-15.0%
-20.0%
$- -25.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009YTD
Illinois Annual Gaming Revenues yoy % change

Boyd Gaming - 33% of EBITDA from Midwest and South region from 6 casinos of which 1 is in IL
Harrah's Entertainment
MGM - Owns 50% of the Grand Victoria in Elgin
Penn National - 15% of EBITDA from Northern Illinois and 3% from Alton in Southern IL
• Efforts to close the budget gap through slot machine expansion - State Republicans have
proposed slot machine expansion at existing casinos and horse tracks in order to close the state
budget gap. However, these prospects have been floated around for many years.
• 10th Illinois gaming license awarded to Midwest Gaming LLC - The Illinois Gaming Board
awarded the last (10th) gaming license to Midwest Gaming which plans to build a casino in suburban
Des Plaines, 38 miles from Chicago. The casino license was previously revoked from Emerald Casino
in 2005 because of alleged ties with organized crime. The state will recieve $125mn for the sale, $10
mn every year and a share of casino revenue from the new operator.
•Smoking ban underway - On January 1, 2008 Illinois rolled out a state-wide smoking ban that
affected virtually all public places, except 25% of hotel rooms. A potential exemption for casinos was
rejected. Illinois casino gaming revenues dropped 21% for 2008.
Research estimates

Indiana
INDIANA
Key stats
2008 annual gaming revenues ($mns) $2,668 Legalization date November 1993
10-year gaming revenue CAGR 7.1% First casino opened December 1995
Commercial casinos 11 Smoking ban on casinos? No
Racino? Yes Day revenue is released each month 6th working day

Tables* 715 (2000-2007)
win/table/day * $1,701
Michigan City Indiana Annual Gaming Revenues

Hammond Gary
$3,000 45%
E. Chicago
40%
$2,500
35%
$2,000 30%
Indianapolis 25%
$1,500
20%
Lawrenceburg
$1,000 15%
French Lick Rising Sun

10%
Markland Dam $500
5%
Elizabeth
$- 0%
Evansville 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009YTD
Annual Gaming Revenues yoy % change

Ameristar - 12% of EBITDA from East Chicago
Boyd Gaming - 33% of EBITDA from Midwest and South region from 6 casinos of which 1 casino is in IN
Penn National - 19% of EBITDA from Lawrenceberg
Pinnacle - 11% of EBITDA from Belterra
• Potential tax break for state's two racinos - Despite the economy and a budget gap of $1.1bn, state
lawmakers are supporting tax breaks for Indiana Live and Hoosier Park racinos. The racinos said that they
had over-estimated the slot machine revenues and had borrowed too heavily to pay the state's licensing
fees. The Lawmakers are supporting the tax break to preserve jobs and protect tax revenues.
• Potential statewide smoking ban - Indiana Legislature passed a bill in March 2009, that would ban
smoking throughout the state while giving exemptions to casinos and bars. However, there are doubts
whether the bill will get a committee hearing in the state. Republican committee chairman Sen. Ron Alting
says there isn't enough support in his committee to pass a strict smoking ban.
Research estimates

Iowa
IOWA
Key stats
Rank of size in US commercial market #9 Maximum gaming tax rate (Land based;Racino) 22%;24%
2008 annual gaming revenues ($mns) $1,422 Legalization date July 1989
10-year gaming revenue CAGR 6.9% First casino opened April 1991
Racino? Yes Day revenue is released each month 10th

Tables* 489 (2000-2007)
win/table/day* $765
Iowa Annual Gaming Revenues
$1,600 14%
Northwood
Emmetsburg $1,400
12%
$1,200
Sioux City Waterloo Dubuque 10%
$1,000
8%
Altoona $800
Bettendorf
6%
Davenport
$600
Council Bluffs Des Moines

4%
$400
Osceola
2%
$200
$- 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009YTD
Iowa Annual Gaming Revenues % yoy change

Ameristar - 17% of EBITDA from Council Bluffs
Isle of Capri
Penn National - 3% of EBITDA from Sioux City
• Potential introduction of sports betting - The Iowa Gaming Association is keeping a close watch on the
lawsuit filed by New Jersey Senator Raymond J.Lesniak against the US Justice Department seeking to overturn
the ban on sports betting. Only four states in the U.S. (Delaware, Montana, Nevada and Oregon) are allowed
federal government sanctioned sports betting. The lawsuit challenges the exemption for these four states as
unconstitutional. If the ban is overturned, Iowa could legalize sports betting.
•Extension of delivery date of report on new casino licenses. - In March 2008, the Iowa Racing and
Gaming Commission (IRGC) decided not to expand the number of casino licenses due to the economic
conditions. The IRGC is reconsidering the decision on expansion but will have to wait until June 2009 for a third
party consulting group to deliver its findings. The research was approved in March 2008 by the IRGC to
determine whether there are any remaining underserved or underperforming markets in the state.
•New casino for Lyon County – Lyon County voters in Nov 2008 approved a $90 million casino, resort, event
center and golf course project near Sioux Falls and across the border from South Dakota. The casino could
open in 2011 provided IRGC grants them the license after the above research report is submitted.
Research estimates

Kansas
KANSAS
Key stats
Rank of size in US commercial market NA Maximum gaming tax rate 44%
2008 annual gaming revenues ($mns) NA Legalization date 2007
10-year gaming revenue CAGR NA First casino opened 2011E
Commercial casinos NA Smoking ban on casinos? NA
Tribal Gaming? NA Loss Limit/Maximum Bet? NA
Racino? NA Day revenue is released each month NA
Slots NA Population (mn, 2007) 2.8

win/slot/day NA 7-year population CAGR 3.2%
Tables NA (2000-2007)
win/table/day NA
Gaming positions NA
Bidders and winners for each county

Sumner
Bidders:
Lakes Entertainment LLC
Kansas City (Wyandotte County)
Foxwoods Development Co.
Equity Ventures
Cherokee
Deadline for new bids - April 21, 2009
Dodge City (Ford County)
Ford
Cherokee County
Sumner County
Winner
Butler National service Corp
Wyandotte
Bidders:
Golden Gaming Inc
City/County with winning/bidding casino Kansas Entertainment LLC
Penn National
NA
•New state-owned casinos and slots at racetracks - In June 2008, the Kansas Supreme Court
upheld the Kansas Expanded Lottery Act, 2007 and permitted slot machines and casinos to be a part
of state-owned/operated Kansas Lottery. The ruling will launch four Las Vegas style casinos and slot
machines at the three existing pari-mutuel racetracks in the state. The four counties finalized to host
the casinos are Sumner, Cherokee, Ford and Wyandotte.
Butler National Service Corp. was announced the winner in Ford County. The company has started
the construction of $88mn Boothill casino and Resort in Dodge City and is expected to open in 2011.
The deadline for bidding in Sumner County and Wyandotte County was April 1, 2009. The winners for
these two counties could be awarded by Fall 2009. After Penn National's withdrawal from Cherokee
County selection process, the county has extended the deadline to receive the bids to April 21, 2009.
•Bill proposed to lower tax at racinos - There is also a bill currently in the state legislature which
proposes to reduce the share of revenues from slots at the tracks to 22% from 40% as an incentive to
get these facilities built.
•Primary approval given by Kansas House to block Mulvane casino annexation - The Kansas
house gave initial approval on March 25, 2008 against the city of Mulvane's disputed annexation of
land for a state-owned casino in Sumner county. This land is right outside of Mulvane and if the city is
able to annex it, the city could endorse a casino on the site even without the county's approval.
Harrah's had planned to build their casino on this land before pulling out from the bidding process.
Equity Ventures is now in the bidding process for the casino to be built on the same plot of land.
Research estimates

Louisiana
LOUISIANA
Key stats
Rank of size in US commercial market #5 Maximum gaming tax rate 21.5%/18.5%
2008 annual gaming revenues ($mns) $2,584 (Riverboat/Land-based; Racino)
10-year gaming revenue CAGR 6.9% Legalization date July 1991
Commercial casinos 18 First casino opened October 1993
Tribal Gaming? Yes Smoking ban on casinos? No
Racino? Yes Loss Limit/Maximum Bet? No/No
Day revenue is released each month 3rd Tuesday
Slots* 28,384
win/slot/day NA Population (mn, 2007) 4.3
Tables* 838 7-year population CAGR -3.9%
win/table/day NA (2000-2007)
Shreveport Louisiana Annual Gaming Revenues
$3,000 25%
Bossier City
$2,500
20%
$2,000
15%
$1,500
Opelousas
Vinton
10%
Baton Rouge
Lake $1,000
Charles
Kenner
5%
$500
Amelia New Orleans
$- 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009YTD

Boyd Gaming - 33% of EBITDA from Midwest and South region from 6 casinos of which 3 are in LA
Isle of Capri
Penn National - 7% of EBITDA from Baton Rouge
Pinnacle - 23% of EBITDA from New Orleans, 39% from Lake Charles,7% from Bossier City
There are no current significant legislative proposals in Louisiana.
Research estimates

Maryland
MARYLAND
Key stats
Rank of size in US commercial market NA Maximum gaming tax rate 67%
2008 annual gaming revenues ($mns) NA Legalization date 2008
10-year gaming revenue CAGR NA First casino opened 2011E
Commercial casinos NA Smoking ban on casinos? NA
Tribal Gaming? NA Loss Limit/Maximum Bet? NA
Racino? NA Day revenue is released each month NA

Tables NA (2000-2007)
win/table/day NA
Gaming positions NA
Cecil County
Allegany County •New slots - In November 2008, Maryland voters
Perryville
Rocky Gap State Park approved the constitutional amendment to legalize
Baltimore slots. The amendment allows a maximum of
Anne Arundel County
15,000 slot machines at five locations, including
Maryland City
Baltimore City and the counties of Allegany, Anne
Worcester County Arundel, Cecil, and Worcestor. Slot operators will
Grays Corner be taxed at 67% of slot proceeds by the state. Only
six bids were received for five slot locations by the
deadline of Feb 2, 2009. Two of them were
subsequently rejected (Magna Entertainment and
Empire Resort, NY) due to filing of the bid without
Authorized locations for slots Major City City with possible casino site
the application fee.
Proposed sites for slots

•Anne Arundel County •Allegany County
Bidders: PPE Casino Resorts Maryland LLC Bidders: Empire Resort, NY (disqualified)
Magna Entertainment (disqualified) Max slots / Slots bid: 1500 / 750
Max slots / Slots bid: 4750 / 4750
•Baltimore •Worcester County
Bidders: Baltimore City Entertainment Group Bidders: Oceans Enterprises LLC
Max slots / Slots bid: 3750 / 500 Max slots / Slots bid: 1500 / 800
•Cecil County
Bidders: Penn National
Max slots / Slots bid: 1500 / 500
Penn National - Penn is trying to obtain the permit to operate the slot machines in Cecil County.
Research estimates

Michigan
MICHIGAN
Key stats
2008 annual gaming revenues ($mns) $1,360 Legalization date December 1996
10-year gaming revenue CAGR 22.0% First casino opened July 1999

Tables NA (2000-2007)
win/table/day NA
Gaming positions NA
Michigan Annual Gaming Revenues
$1,600 350%
$1,400
300%
$1,200
250%
$1,000
200%
$800
150%
$600
100%
$400
50%
$200
Detroit
$- 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD

MGM - 9% of EBITDA from Detroit
•Smoking ban under consideration - After being rejected in the State Legislature in 2008, a new
campaign began on March 18, 2009 to ban smoking in all public places including casinos. State
representative Bert Johnson took testimony in his House Regulatory Comittee and expressed his hopes on
putting forth a bill on a smoking ban before the full House by April 1, 2009.
•Deal with tribal casino approved by lawmakers - Michigan lawmakers approved the deal with Gun
Lake tribe to start a Native American casino south west of Grand Rapids. The casino is expected to house
2,500 slot machines and 80 gaming tables. The date of ground breaking has not been released, but the
casino is expected to be fully functional in 12 - 16 months after the ground breaking.
Research estimates

Missouri
MISSOURI
Key stats
2008 annual gaming revenues ($mns) $1,682 Legalization date August 1993
10-year gaming revenue CAGR 7.0% First casino opened May 1994
Racino? No Day revenue is released each month 10th

Tables* 545 (2000-2007)
Missouri Annual Gaming Revenues

La Grange
$1,800,000 35%
St. Joseph
$1,600,000 30%
Riverside
Boonville $1,400,000
25%
St. Charles
Kansas City St. Louis $1,200,000
20%
$1,000,000
Maryland Heights 15%
$800,000
10%
$600,000
5%
$400,000
$200,000 0%
Caruthersville $-
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-5%
YTD

Ameristar - 26% of EBITDA from St. Charles, 21% from Kansas City
Isle of Capri
Penn National - 9% of EBITDA from Riverside
Pinnacle Entertainment - 16% of EBITDA from St. Louis
•Repeal of casino loss limit - Proposition A which passed a voter referendum on November 4, 2008
terminated the loss limit that prohibited gamblers from buying more than $500 chips/tokens every 2
hours. In addition to removing the loss limit, the tax rate on gaming revenue was increased by 1% to
21% from 20%.
Research estimates

Mississippi
MISSISSIPPI
Key stats
2008 annual gaming revenues ($mns) $2,727 Legalization date 1990
10-year gaming revenue CAGR 2.3% First casino opened August 1992

Tables* 931 (2000-2007)
Tunica Mississippi Gaming Revenues
$3,500 20%
Lula
$3,000 15%
Greenville
$2,500 10%
$2,000 5%
Vicksburg $1,500 0%
$1,000 -5%
Natchez $500 -10%
$- -15%
Gulfport Biloxi 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
YTD
Bay St. Louis Annual Gaming Revenues yoy % change

Ameristar - 13% of EBITDA from Vicksburg
Boyd Gaming - 33% of EBITDA from Midwest and South region from 6 casinos of which 1 casino is in
MS
Isle of Capri
MGM - 6% of EBITDA from Mississippi
Penn National - 6% of EBITDA from Biloxi and Bay St. Louis, 3% of EBITDA from Tunica
•Tax breaks for casinos investing in non-gaming development - A law passed in March 2009 gives
a 30% sales tax rebate to casinos that will build golf courses, hotels, conventions and other non-
gambling attractions in the state. Casino companies were previously the only business excluded from
tax incentive programs.
Research estimates

Nevada
NEVADA
Key stats
Rank of size in US commercial market #1 Maximum gaming tax rate 6.75%
10-year gaming revenue CAGR 3.7% First casino opened 1931
Racino? No Day revenue is released each month 10th - 11th

Tables* 5,147 (2000-2007)
Gaming positions* 202,575 *As of Jan 2009
Nevada Annual Gaming Revenues
$14,000 15%
$12,000
10%
Reno
$10,000
5%
Carson City $8,000
0%
$6,000
-5%
$4,000
-10%
$2,000
$0 -15%
Las Vegas
D
97
98
99
00
01
02
03
04
05
06
07
09 8
20 00
YT
19
19
19
20
20
20
20
20
20
20
20
2

Boyd Gaming - 49% of EBITDA from Nevada
Las Vegas Sands - 32% of EBITDA from Nevada
MGM Mirage - 78% of EBITDA from Nevada
Wynn Resorts - 40% of EBITDA from Nevada
•Increase of 3% in hotel room tax in Las Vegas and Reno - The state legislature passed a bill to
increase hotel room tax by 3% in Las Vegas and Reno in March 2008. The new tax will go into effect
starting July 1, 2009.
•Initiative to bring lottery gambling to Nevada - After multiple failed efforts to launch a lottery in
Nevada, a new bill was introduced in the state legislature to clear the path for a state lottery on March
23, 2009.
Research estimates

New Jersey
NEW JERSEY
Key stats
10-year gaming revenue CAGR 1.2% First casino opened 1978
Racino? No Day revenue is released each month 10th

Tables* 1,647 (2000-2007)
New Jersey Annual Gaming Revenues
$6,000 8%
6%
New York City $5,000

4%
$4,000 2%
0%
$3,000
-2%
$2,000 -4%
-6%
Atlantic City $1,000

-8%
$- -10%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
YTD

MGM/BYD - MGM and Boyd each own 50% of the Borgata
Pinnacle Entertainment - Owns land in Atlantic City to possibly develop a casino
• Initiative to legalize sports betting - Senator Raymond J.Lesniak filed a lawsuit on March 23, 2009
at a Federal District Court challenging the exemption in sports betting ban given to four states
(Delaware, Montana, Nevada and Oregon) in USA. If the federal sports betting ban is overturned, New
Jersey (as well as other states) could legalize sports betting.
Smoking ban under consideration - An initiative to ban smoking in all Atlantic City casinos is gaining
back momentum. A ban prohibiting casino floor smoking went into effect on Oct 15, 2008 only to be
overturned due to an unprecedented dip in revenues. Smoking was allowed again on casino floors but
restricted to 25% of the casino floor. The current initiative once again aims at complete ban of smoking
in all eleven casinos.
Research estimates

Pennsylvania
PENNSYLVANIA
Key stats
2008 annual gaming revenues ($mns) $1,616 Legalization date July 2004
10-year gaming revenue CAGR NA First casino opened November 2006
Racino? Yes Day revenue is released each week Monday

Tables* 0 (2000-2007)
win/table/day* NA
Pennsylvania Annual Gaming Revenues
$1,800
Erie
$1,600
$1,400
Wilkes-Barre $1,200
Mt. Pocono $1,000
Pittsburgh Bethlehem
$800
Grantville Bensalem $600

Washington
Philadelphia $400
Chester $200
$-
2006 2007 2008 2009YTD
Gaming City Major City City with casino under construction/in planning

Harrah's Entertainment - Chester Downs
Penn National - 8% of EBITDA from Grantville
Casinos currently opened Casinos expected to open Expected open date
Mohegan Sun (opened November 2006) Foxwoods (Philadelphia) NA (not out of ground)
Philadelphia Park (opened December 2006) Sands Bethworks (Bethlehem) May 2009
Harrah's Chester Downs (opened January 2007) Sugar House Casino (Philadelphia) NA (not out of ground)
Presque Isle (opened February 2007) Rivers Casino (Pittsburgh) August 2009
The Meadows (Opened June 2007)
Mount Airy (Opened October 2007)
Penn National (Opened February 2008)
In 2004, Pennsylvania lawmakers legalized up to 61,000 slot machines at 14 facilities throughout the state of
which 11 have been awarded. Seven have opened to date, two are scheduled to open later this year and
construction has not been started on the remaining two.
•Pennsylvania Gaming Board questions delay in casino opening - Pennsylvania Gaming Board has
requested Sugar House and Foxwood casinos to update their status on casino development on April 8, 2009.
The casinos have not started construction two years after receiving gaming licenses. Foxwood is exploring
possible locations other than the river front site they were licensed for. Sugar House secured the first of the
major building permits from the city of Philadelphia on March 27, 2009.
•Threat of pulling out funds allocated to Philadelphia for its inability to have its two casinos up and
running - State Democrat representative and member of the House Gaming Oversight Committee, Jim
Wansacz plans to introduce legislation to strip Philadelphia of its $64mn annual economic development funds
for failing to have its 2 casinos (Sugar Hill and Foxwood) up and running despite the granting of
license in 2006.
Research estimates

West Virginia
WEST VIRGINIA
Key stats
2008 annual gaming revenues ($mns) $931 Legalization date 1994
10-year gaming revenue CAGR NA First casino opened 1994
Racino? Yes Day revenue is released each week Wed/Thurs

Tables* NA (2000-2007)
win/table/day* NA
Gaming positions* NA *As of Feb 2009
West Virginia Gaming Revenues

Chester
$1,200 8%
Wheeling
6%
$1,000
Charles Town
4%
$800
2%
$600 0%
-2%
Cross Lanes $400
-4%
$200
-6%
$- -8%
2004 2005 2006 2007 2008 2009YTD

Penn National - 19% of EBITDA from Charles Town
•Gaming bill if approved will give casinos permission to give away free play coupons - The
Greenbrier gaming bill, currently being worked out by lawmakers will give the state's racinos and
historic hotels permission to give away promotional free play coupons to entice gamblers to their
venues. The Greenbrier Resort filed for chapter 11 on March 19, 2009 and lawmakers are looking for
ways to keep the hotel in business due to its historical importance to the state and they believe
gambing could be the answer.
Research estimates

How “hold” is calculated
The mysterious hold percentage

There is more to “low One of the most frustrating occurrences for gaming investors is when a casino operator
hold” than just bad misses estimates and informs investors that “low hold” led to the lower-than-expected
luck.
earnings. The casino operator wants investors to believe that this low hold was purely a
function of bad luck.
However, there is sometimes more to the story than just luck. The problem for
investors is that operators do not provide enough information to determine if the true
cause of the “low hold” was bad luck or another factor. Operators almost never
discuss other factors (amount of bet and time played) that could lead to bad luck and
could indicate that the operating environment has deteriorated.
The hold issue frustrates investors not only because they do not receive all the information
necessary but also because (1) hold is nearly impossible to project, and (2) operators
almost never disclose the hold percentage on a consistent basis, making tracking year-
over-year changes in hold percentage unfeasible.
Therefore, not only is tracking down the hold numbers difficult, but how it relates to a
casino’s performance can be misleading.
Breaking down the hold

It is important to break down how hold is calculated and what representation would
more accurately depict results. Two very different numbers can be calculated at the end
of a period. One is the “actual hold”, the number discussed by management, and the other
is the “theoretical win”, a mathematical formula that if used quarterly can show a casino’s
true operating performance. The primary fact is that the mathematically generated
theoretical win is unrelated to hold percentage. The theoretical win, while a better tool, is
rarely discussed by managements, possibly because actual hold is more subjective and
somewhat easier for the general public to understand. The following illustrates the
calculation of actual hold, and theoretical win:
Hold % = total money won (win)/all money casino drop boxes (drop)
Drop is literally all of the money in casino drop boxes at the end of the period
Theoretical Win = amount bet per hand * house advantage per hand * hands played per
hour * number of hours played
Drop calculation is Part of the problem with the way actual hold is calculated is how the drop is
distorted as it can calculated. The “drop” is the number used in the denominator of the hold percentage
double count play.
formula. The drop is a distorted number because drop simply looks at the amount of
money gamblers exchanged for chips. This number is skewed as some people decide to sit
down at a table and play their money until they have won a certain amount, or lost a
certain amount. Other people like to buy chips at tables for different reasons: some might
want to look cool in front of friends; others may want to impress a pit boss to receive
discounts from the casino; many times these chips are never played. In any case, when
money is exchanged for chips, it is recorded as “drop” in the drop box. This drop is what
is used in the calculation of actual hold.
One example of how drop can be misleading is if customer exchanges money for
chips, cashes out, and then returns to another table. The drop is double counted as the
player is in essence re-wagering the initial money. This double counting therefore renders
the reported hold inflated. To take this to the extreme, a customer walks into the casino
and cashes in $1 million at the baccarat table to impress the pit boss. He hopes that the

casino will see that he is a big player and give him perhaps a free room, or a discount on
his losses. After playing one hand, he loses $1,000. He then gets up and leaves, and cashes
in his chips with the cashier for $999,000. Later on in the evening, he goes to another
baccarat table, and cashes in $1,000. He wins even money on his bets, and walks away
with $2,000. Overall, the actual amount wagered was only $2,000. Yet the casino has
counted this as $1,001,000 in drop.
Theoretical win is the The theoretical win is a more accurate metric of casino performance because it cannot
more accurate be manipulated and shows that factors other than luck could affect hold percentage.
measure of casino
As stated earlier, the theoretical win comprises four factors. These factors are (1) the
performance.
amount bet per hand, (2) the house advantage per hand, (3) hands played per hour, and (4)
number of hours played. The amount bet per hand is different from the money that is
traded in for chips (the measure that is used in the hold calculation), because it is the
actual bet made by the player, and cannot be double-counted. In fact, the only two factors
that fluctuate in the theoretical win calculation are (1) the amount bet per hand, and (2) the
number of hours played. The other two factors, the house advantage and hands played per
hour, are nearly constant.
Amount bet per hand Although the operators would have one believe that the luck component is the factor
and time played are changing hold, the house advantage per hand part of the equation remains relatively
crucial factors that
constant. This leaves us with the amount bet per hand and the time played as crucial
could affect win.
factors that could affect win. These two factors can fluctuate as gamblers lose loyalty to
one casino or change their betting habits. The amount bet per hand, and the number of
hours played are both an accurate reflections of volume (business that the casino is
getting) and can give a clear indication of the performance of a property.
In an ideal world, gaming companies would give us the theoretical win statistics for their
properties. However, these statistics are never released. Instead, investors are sometimes
given the less-reliable hold statistic.
Varying hold Despite this problem with the calculation of actual hold, it continues to be the predominant
percentages make it metric on which casinos base their performance. Many operators like to blame a period of
difficult to compare
poor performance on low hold. Hold for most operators usually ranges between 16% and
gaming results from
19%; however a 1% change in hold percentage could add or take away a few cents in EPS.
quarter to quarter.
Because the operators rarely disclose the actual hold percentage for the current and
prior-year quarter, operators can surpass estimates even if hold is “normal” because
the hold is at the high end of the normal range while the year before could have been
at the low end.
Why does the actual hold of a table game differ from the statistical house edge of that
game? As stated before, the casino calculates hold percentage simply by counting the
amount of money in its drop boxes at the beginning of one shift and dividing by the
amount at the end of the shift.
The house edge differs, as it is a mathematical computation that projects the advantage
the casino has over the player when a game is played an infinite number of times. It is the
true advantage the casino has for each hand. This statistic is useful when players are
trying to decide what game to play and is an essential factor in calculating the theoretical
win. For example, blackjack has a house edge ranging from 1% to 5% depending on the
strategy used by the player.1 Baccarat, on the other hand, has a consistent house
advantage of 1.24%,2 suggesting that baccarat would be more advantageous for most
consumers.
1
Brisman, Andrew. American Mensa Guide to Casino Gambling, Sterling Publishing Co., Inc.: United
States, 1999.
2
Brisman, Andrew. American Mensa Guide to Casino Gambling, Sterling Publishing Co., Inc.: United
States, 1999.

Hold vs. house edge. If a player sits at a blackjack table and bets $100, plays for an hour
and walks away with $50, then the hold percentage is 50%. This is clearly much different
from the expected house edge, which can be calculated to be 1%-5%. The difference arises
because the hold is looking at how much the player lost over a period of time, while the
statistical advantage is looking at the expected outcome of each hand.
Why does low hold arise? Most investors and analysts assume the obvious answer when
it comes to low hold is that the casino was just unlucky. This can be the case but the
theoretical win equation shows us that there can also be more to the story. Casinos
depend on the games being played a certain number of times and amount wagered to
reach “normal hold.” At the high end, this combination does not always happen.
Low hold can arise Casinos promoting to attract the high-end players offer discounts that can shorten length
from discounts of play. Players sometimes win big at one casino and because of discounts being
offered to high
promised at other properties will leave the casino and gamble at a competing property.
rollers.
This makes sense for the gambler, because if he won $1 million at casino A and casino B
promises to refund 20% of his losses, it is only logical to pick up and change casinos. This
lowers the length of play, as he can take his winnings and go to another property where if
his luck dries out, at least he will get a discount on his losses. Therefore, a competitive
market where customers are moving from casino to casino to take advantage of
comps can negatively influence hold.
Lack of players can Low hold can arise from simply a low number of players. This goes back to the volume
lead to low hold. problem. The casino expects a certain number of people to play the game and if this does
not occur you can have big changes in your hold percentage, as the standard deviation on
your win percentage rises as the amount of play falls.
Exhibit 86 shows how the casino makes money on a typical baccarat player and why if the
players get up quickly, the hold percentage can be negatively or positively affected. In the
example, player A plays five hands, while player B plays only two hands. The hold
percentage is dramatically different.
Exhibit 86: Casinos benefit when players stay longer
Player A* Player B*
Dollar amount to start $1,000 $1,000
Hand 1 - players win $2,000 $2,000
Hand 2 - player wins $3,000 $3,000 Player B leaves
Hand 3 - player loses $2,000
Hand 4 - player loses $1,000
Hand 5 - player loses $0 Player A leaves
Hold percentage 100% -200%
*Player A and B always bet $1,000 per hand
In Exhibit 87, we show why a game with a 1.2% statistical house edge could have a 25%
hold percentage. For this example, we use baccarat and assume the player is wagering
against the house (in baccarat you can bet with or against the house) the statistical edge
on this bet is 1.24% per hand. For this hypothetical example, you can see what happens
when the player loses the expected amount on each bet. This example also shows why
length of play is important the $12.24 won per bet adds up after a while.

Exhibit 87: Baccarat based on statistical 1.2% house edge
Casino perspective Player perspective

Dollar amount to start 1,000 1,000
Hand 1 1,012 988
Hand 2 1,025 975
Hand 3 1,037 963
Hand 4 1,050 950
Hand 5 1,062 938
Hand 6 1,074 926
Hand 7 1,087 913
Hand 8 1,099 901
Hand 9 1,112 888
Hand 10 1,124 876
Hand 11 1,136 864
Hand 12 1,149 851
Hand 13 1,161 839
Hand 14 1,174 826
Hand 15 1,186 814
Hand 16 1,198 802
Hand 17 1,211 789
Hand 18 1,223 777
Hand 19 1,236 764
Hand 20 1,248 752
Hold % 25%

Economic and demand indicators and their effect on the industry

• Consumer price index (CPI). We compare room rate increases with overall inflation
growth to measure pricing trends.
• Gross domestic product (GDP). Gaming is an economically sensitive sector. GDP

forecasts help to predict the direction of consumer spending patterns.
• Interest rates. Interest rates affect gaming manufacturers’ jackpot funding, as

reserves are invested in long-term bonds. Lower interest rates may also affect the
amount of discretionary income spent on gaming for those with fixed spending
budgets, such as retirees.
• Access to capital. Capital market conditions and gaming companies’ ability to access
debt and equity sources affect their ability to develop.
• Convention attendance statistics. Conferences have been a significant driver of

visitation and mid-week occupancy and gaming activity in Las Vegas. According to the
Las Vegas Convention and Visitors Authority, of the 37.5 million visitors to Las Vegas
in 2008, 5.9 million were there for a convention or business function.
• Air traffic. We monitor Las Vegas monthly arriving and departing passenger trends to
gauge volume.
• Supply and demand. Casino supply and demand comparisons alert us to secular
imbalances.

Valuation and stock selection measures
Key valuation metrics—P/E and EV/EBITDA ratios

For operators, our primary metric is enterprise value-to-earnings before interest,
taxes, depreciation and amortization (EV/EBITDA) ratios to account for the large
depreciation and amortization expenses of casinos. For manufacturers, we favor using
P/E ratios to place a value on the stocks. In this section we look at both metrics for
both the operators and the equipment makers.
On both an EV/EBITDA and a P/E basis the operators are trading below their historic
multiples. We believe that the high multiple seen during 2006-2007 (mid teens for
EV/EBITDA) are unlikely to return as they were largely driven speculation about LBOs. We
believe that a more historic multiples will return to being the norm and would expect Las
Vegas focused operators to trade in the 8X-10X EV/EBITDA range and for regional focuses
operators to trade in the 6X-8X EV/EBITDA range. See Exhibits 88-89.
Exhibit 88: Casino operator forward EV/EBITDA Exhibit 89: Casino operator forward P/E
2002- March 2009 1995- March 2009
35.0X
15.0X
30.0X
13.0X
25.0X
11.0X
20.0X
9.0X
15.0X
7.0X
10.0X
5.0X 5.0X
Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09
Casino Operator Avg. Long Term Casino OperatorAverage Casino Operator Avg. Long Term Casino OperatorAverage
Source: Factset, Goldman Sachs Research estimates. Source: Factset, Goldman Sachs Research estimates.
The gaming equipment makers are trading substantially below their historic multiples on
both an EV/EBITDA basis and a P/E basis. We believe the current multiples in the space are
derived from concerns relating to the survivability of some of the operators. The multiples
for the equipment makers did not get as extended as the operators the last few years
although the multiples have fallen dramatically due to the previously mentioned
uncertainty. On a P/E basis we believe that the multiples for the gaming equipment makers
could return to their historic average of the high teens once some of the uncertainty is
removed from the operators. See Exhibits 90-91.

Exhibit 90: Gaming equipment forward EV/EBITDA Exhibit 91: Gaming equipment forward P/E
2002- March 2009 1995- March 2009
13.0X 40.0X
12.0X
35.0X
11.0X
30.0X
10.0X
9.0X
25.0X
8.0X
20.0X
7.0X
6.0X
15.0X
5.0X
10.0X
4.0X
3.0X 5.0X
Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09
Gaming Equipment Avg. Long Term Gaming Equipment Average Gaming Equipment Avg. Long Term Gaming Equipment Average
Source: Factset, Goldman Sachs Research estimates. Source: Factset, Goldman Sachs Research estimates.
Historical price performance analysis

Until recently gaming stocks had outperformed the S&P 500 index by a wide margin.
However, the past year has been the exact reverse as gaming has dramatically
unperformed the S&P 500. The Goldman Sachs Gaming index is down over 84% from its
high in October 2007. The (once) largest companies in our index have fallen the most,
which has had a disproportionate effect because our index is cap-weighted. One technical
note about our index is there are also fewer stocks in our index now as Station and
Harrah’s are private. This causes all remaining stocks to have a larger impact than
historically (see Exhibit 92).
Exhibit 92: Goldman Sachs Gaming Index, 1984-March 2009
9000
Month to Month Price Performance
% S&P % Relative
8000 GSGI Change 500 Change GSGI/S&P 500
Mar-08 5170 -7.4% 1323 -0.6% -6.8%
Apr-08 5099 -1.4% 1386 4.8% -6.1%
7000
May-08 4998 -2.0% 1400 1.1% -3.1%
Jun-08 3651 -26.9% 1280 -8.6% -18.3%
Jul-08 3628 -0.6% 1284 0.3% -1.0%
6000
Aug-08 3523 -2.9% 1269 -1.2% -1.7%
Sep-08 3113 -11.6% 1166 -8.1% -3.5%
5000 Oct-08 2063 -33.7% 969 -16.9% -16.8%
Nov-08 1565 -24.1% 896 -7.5% -16.7%
Index
Dec-08 1758 12.3% 903 0.8% 11.5%

4000 Jan-09 1411 -19.7% 826 -8.6% -11.2%
Feb-09 1112 -21.2% 735 -11.0% -10.2%
Mar-09 1249 12.3% 807 9.8% 2.5%
3000 1249
2000
Goldman Sachs Gaming Index 487

S& P 500
1000
0
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
S&P 500 reindexed as of December 1984.
Source: Goldman Sachs Research.

Traits of successful franchises
Gaming operators
• Diversified geographic exposure. A diversified portfolio of assets should buffer
weaker regions. An example of this is Harrah’s expansive property library, which owns
or manages around 35 casinos across a number of states, or Las Vegas Sands or
Wynn, which each generate around 65% of EBITDA outside of the United States in
Macau. The current economic downturn is so broad based that even well-diversified
companies are suffering, but over time this strategy should benefit the franchise.
• Targeted marketing and loyalty programs. Well-implemented frequent-player

programs create a significant competitive advantage, which leads to market-share
gains and reduces the cost associated with customer acquisition and retention. Station
Casinos’ Boarding Pass program is one of the more successful loyalty programs in the
industry because customers all over Las Vegas can use their card at Station’s
properties.
• Casino location. As with many other businesses, location is critical. In certain drive-in
markets, a casino that is one mile further from the highway can show considerably
worse results. In Las Vegas and Atlantic City, product offerings have recently started to
trump location as evidenced by the successful Wynn Las Vegas and Borgata Atlantic
City properties. Wynn opened north of the center of the Las Vegas Strip and Borgata
opened away from the Boardwalk, and both have outperformed because of their
superior offerings.
• Technology. Improvements in database and systems management allow casinos real-

time monitoring of machines for accounting, cash monitoring, and security purposes.
These systems, which are connected to every slot machine on the casino floor, also
allow casinos to track players and create player profiles, which can be used for
superior direct marketing.
• Cost containment. Operators that show an ability to lower the fixed-cost structure of
their business and lower promotional expense tend to trade at higher multiples
through the cycle.
• High return on invested capital (ROIC). As gaming has evolved into a more mature
industry, investors are increasingly focusing on operators that show solid returns on
capital and demonstrate prospects for generating FCF.
• Easy access to consumers. The physical aspects of a property are important. Casino
properties that have convenient road access and good roadside visibility attract more
customers.
Gaming manufacturers
• Cutting-edge technology. New technology should, in our opinion, change an
industry. From 2001 to 2004, cashless slot machines were the major technology
innovation, which created a broad, industrywide slot replacement cycle. The next
technology on the horizon is central server gaming, which is expected to help casino
managers better manage their slot floor by allowing them to switch games and
content much more quickly.
• Variety of products. New products and the refinement of existing ones are critical to
sustaining growth and vitality of the brand. Slot manufacturers must continue to
develop “hot” new games. For example, IGT typically shows over 100 new games at
the annual Global Gaming Expo.

• Solid reputation. The reputation of the manufacturer is one of the top characteristics
that operators evaluate when making a purchasing decision. Because the slot machine
is such a core part of the operators’ businesses, they rely heavily on the slot
manufacturers for service and reliable games.
• Popular games (content). Manufacturers with a consistently strong track record of

player appeal command greater market share.
• “Smart” capital allocation. We prefer gaming manufacturers that invest in research

and development and small acquisitions to expand their leadership position, rather
than low-ROI projects.
• Patent protection. We favor gaming manufacturers with secure patents as they are
increasingly critical in the technology business as a barrier to entry.

Ten sets of questions to ask gaming management

1. Who is your average customer? How much does he/she spend per visit? Where do the
players come from? Are your customers mostly conventioneers? Has your customer
changed in the recent downturn.
2. What is your rationale for geographic focus? Do you anticipate any changes to this
focus going forward?
3. What are your new market opportunities—domestic and international?
4. For regional operators: Are there new markets potentially opening around you that
would cannibalize your existing operations?
5. How often do you replace your slot machines? What is the average performance of
your slot machines?
6. What is your plan for same-store sales growth?
7. How strict are your current covenant tests? What upcoming maturities do you have?
8. What is your plan for deleveraging?
9. How do you calculate returns? What is your historical experience on capital projects?
10. What are the metrics used to evaluate compensation for executive management team
and property level managers?

Key risks
• Weak economy. A further deterioration in consumer spending and travel
expenditures would continue to negatively impact gaming revenues.
• Overleveraged balance sheets. Many gaming operators continued to spend as the

economy turned down, and the resulting debt makes it challenging to operate in the
current environment.
• Perceived negative brand. Lack of brand consistency and innovation leads to less
price flexibility and lower casino traffic. For gaming operators to achieve and sustain
strong brand recognition, significant capital investment is required.
• Stricter regulations and higher taxes. The gaming sector remains a highly regulated
industry at the federal and state levels. In an economic upswing this limits growth. In a
downturn this could lead to higher taxes or more gaming that cannibalizes existing
assets.
• Overbuilding. Casino developers have an innate “build” mentality. Overbuilding is

difficult to overcome.
• New entrants. Riverboat and tribal casinos built near traditional gaming markets
could penetrate the base business.
• Management is not challenged to change practices. Most casino managements are

insular; little recruitment is done outside the sector. Most of the executives started
their careers in this industry and are subject to limited outside influences.
For slot manufacturers in particular

• Fashion risk. For gaming manufacturers, the key to selling slot machines is having
machines that win the most money for the casino operator. The end user of the
machines can be “fickle” and switch to the newest, more entertaining games very
quickly.
• Interest rates. Low interest rates make funding jackpots more expensive for
manufacturers and provide less discretionary income for individuals on fixed budgets.
• Software issues. Our experience with gaming machine software glitches is that they
slow sales, sidetrack the attention of the manufacturer’s sales force, and can damage
management credibility.

Industry terminology
All terms are defined in relation to the gaming industry and should not be interpreted
broadly across other Goldman Sachs industries or sectors.
Boat in a moat: A casino that is built on a man-made “tub” of water taken from local
rivers. This allows casinos to be considered riverboat casinos.
Cage: Where players cash out their chips.

Cashless: Machines that allow the player to be paid out with a ticket rather than coins.
These tickets can be used at other machines or taken to the cashier for payment. These
machines are sometimes referred to as Ticket-in Ticket-out.3
Coin-in: Amount of money played at a slot machine.

Commission: A direct charge or fee received by the casino on some bets. In baccarat, for
example, instead of paying the bank hand $0.95 to $1.00, the bet is paid even money, and
the dealer then collects $0.05. The nickel is called commission.4
Comp: The privilege of using casino hotel services free of charge—complimentary. A

comp gives a player, depending on his level of play, the use of a variety of hotel casino
services, meals, lodging, or entertainment at no cost. Comps are promotional tools
intended to maintain a list of patrons who wager in large amounts.
Drop: The total amount of cash plus the value of markers drawn at a table game, on a shift,
throughout the casino, or in any given time frame.5
Eye in the sky: Overhead surveillance cameras.

Hold percentage: The ratio between the house win and the drop.6
House percentage: The advantage the casino has over the player.7
Kibitzer: A spectator at a game that generally makes unsolicited comments and generally
drives everyone to the point of distraction.8
Marker: An IOU extended to a credit player.9

Math: The statistics imbedded in the chip of the slot machine that determine the payout of
the machine. The “math” of the machine can vary dramatically in terms of how much the
machine pays out and the frequency of payouts.
Parlay: A system of betting in which a win and the original bet are wagered again.10
Participation machines: Slot machines for which the operator puts no capital down, earns
a percentage of the profits, and can have the manufacturer remove the machine from the
floor whenever a better one is released.
Pit boss: The most senior gaming supervisor in a grouping of tables called a “pit”.11
3
4
5
6
Kuriscak, Steve. Casino Talk, S.S. Kuriscak: United States, 1985
7
8
9
10

Racino: Horse track/dog track with slot machines.

Shoe: A container from which multiple decks of cards are dealt.12
Skid factor: The lag times between the commencement of building a hotel or gaming
facility and the time it takes to open. This time affects the total amount of rooms available
and the potential RevPAR growth that any one property or segment will be able to achieve.
Table limit: Smallest and largest bet allowed at a table.

Whale: A high roller who generally has a multi-million-dollar credit line with the casino.
Wide-area progressive (WAP) systems: A form of participation gaming that connects
multiple slot machines at multiple locations to a central computer system. This allows a
large jackpot to accumulate, attracting customers looking for a larger payout than is
available on a “free-standing” slot machine.
Win per game: The amount of money that the casino operator earns per game after the
player is paid out.
Win/slot/day: The amount of money that the casino operator earns per day per slot
machine after the player is paid out.
Exhibit 93: 12-month price target methodology and risks
Ticker Rating Price Current Price Methodology Risks

Target
Gaming operators
ASCA Neutral $13.00 $13.74 (1/3) DCF Ability to refinance debt easier, consumer slowdown
(2/3) EV/EBITDA
BYD Neutral $5.00 $5.62 Sum-of-the-parts Competitive pressures, potential Echelon development
LVS Neutral $4.50 $4.96 Sum-of-the-parts LV/Macau slowdown, inability to sell condos in Macau
MGM Neutral $1.00 $5.53 Sum-of-the-parts 2009 debt maturities, CityCenter funding, LV slowdown
PENN Buy $30.00 $26.40 (1/3) DCF Use of cash, consumer slowdown
(2/3) EV/EBITDA
PNK Neutral $9.00 $8.64 Sum-of-the-parts St. Louis ramp, budget overruns
WYNN Neutral $26.00 $31.20 Sum-of-the-parts Unclear growth profile, LV slowdown
Gaming equipment
BYI Buy $22.50 $21.82 (1/3) DCF (2/3)P/E Competitive environment and inability to place games.
IGT Neutral $10.50 $11.60 (1/3) DCF (2/3)P/E Competitive environment and inability to place games.
SGMS Buy $17.00 $14.29 (1/3) DCF (2/3)P/E Deceleration in instant ticket growth, China rollout.
WMS Buy $27.00 $27.32 (1/3) DCF (2/3)P/E Competitive environment and inability to place games.
PENN is rated CL-Buy.
For important disclosures, please go to http://www.gs.com/research/hedge.html.
11
12

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GS - The Essentials of Gaming Investing

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April 7, 2009 Americas: Gaming

The essentials of gaming investing

*Updated* Why this economic

*New* Regional casino operators

*New* Casino compensation

*New* Balance sheet snapshot and

*New* Breaking down a slot machine

*Updated* Market monitor for new

The players: Analysis of the

What’s new in this issue 3

Goldman Sachs Global Investment Research 2

What’s new in this issue

Goldman Sachs Global Investment Research 3

The road to recovery for the Las Vegas Strip

Goldman Sachs Global Investment Research 4

Exhibit 1: Las Vegas is the largest hotel market in the country

Source: Smith Travel Research, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 5

Exhibit 2: Gaming sector returns continue to move lower

6% In the peak EBITDA

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 6

Embrace growth and income characterization

Repositioning the Vegas market

Goldman Sachs Global Investment Research 7

Goldman Sachs Global Investment Research 8

Gaming operators—Las Vegas cyclicality is in full effect; Regional

Goldman Sachs Global Investment Research 9

Gaming equipment companies—Up for a difficult year but long-

Goldman Sachs Global Investment Research 10

Size, segmentation, customer profile, and history

Exhibit 3: Revenue ranking

Gaming Operators 2008 FY

Source: Company reports, Goldman Sachs Research estimates.

Exhibit 4: Consumer spending on commercial casino gambling

Over the past 17

Source: American Gaming Association, Christiansen Capital Advisors, LLC.

Goldman Sachs Global Investment Research 11

• A study by Harrah’s Entertainment/TNS shows that more than one-quarter of the US

• The median age of US casino customers is 47.1

Exhibit 5: S&P 500 gaming weightings

Source: Goldman Sachs US Portfolio Strategy Group.

Exhibit 6: Ownership and index weighting

Source: Factset and Goldman Sachs Research.

Goldman Sachs Global Investment Research 12

Exhibit 7: Hedge fund ownership of certain gaming stock

Company % of Hedge Fund Holders

Source: Factset and Goldman Sachs Research.

Segmentation of the industry

Goldman Sachs Global Investment Research 13

Exhibit 8: Gaming operator segmentation

Global operators - Considerable portion of future earnings outside of U.S.

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 14

2003 2004 2005 2006 2007 2008 2009E 2010E

Source: Goldman Sachs Research estimates.

Gam ing Ope rators Re turn Gam ing M anufacture rs Re turn

#REF! #REF! #REF!

Historical perspective and a look forward

Goldman Sachs Global Investment Research 16

Exhibit 12: United States gaming markets

Mostly Tribal Gaming

Source: Goldman Sachs Research estimates and American Gaming Association.

Goldman Sachs Global Investment Research 17

Updated Why this economic

New Regional casino operators

New Casino compensation

New Balance sheet snapshot and

New Breaking down a slot machine

Updated Market monitor for new