Shore Capital

Macau Property Opportunities Fund

Analysts: Jon Bell Gavin Jago

September 2008 United Kingdom Macau Property Opportunities Fund+ N/R Property development in Macau 25th September 2008 Site visit & initiation of coverage 87p

FTSE AIM All Share 681 Reuters/Bloomberg MPO.L/ MPO LN Rising in the East

No. of shares - diluted (m) 105 Macau has now overtaken Las Vegas as the world’s premier gaming Mkt Cap (£m) 91 location (gaming revenues exceeded $10bn last year as the region attracted Pro forma debt (£m) 14 27 million visitors). This is creating a fertile environment for property EV (£m) 105 development as locals and investors demand higher-quality properties

1 across all classes. As an established investor and developer with a strong NAV as at 30/06/08 (p) 154 Premium to share price (%) 77 local presence and a valuable portfolio of projects, we believe MPO is well Shore Capital NPV (p)1 174 placed to generate high returns from the region’s transformation. Premium to share price (%) 100 Website www.mpofund.com Strict adherence to investment strategy. MPO has adopted a judicious approach to investment, undertaking careful due diligence prior to committing Absolute performance (%) capital. Targeting niche property opportunities often overlooked by larger 1m/3m/12m -/(14)/(25) Relative to FTSE AIM All Share (%) developers, the company is focused on the luxury and entry-level residential, 1m/3m/12m +15/+18/+13 mixed-use and industrial segments. To date, MPO has committed c$294m to projects (c156% of the company’s total equity). Management has adopted a Analysts: prudent approach to the use of financial gearing, unlike many of its peers, and Jon Bell 0207 647 8130 agreed terms at attractive rates, leveraging off its excellent banking relationships. Gavin Jago 0207 647 8121 Site visit confirms valuable portfolio. We visited Macau in August 2008 and Sales: viewed the company’s projects. Construction of the prestigious One Central Rupert Armitage 0207 647 8123 development - where the company has an agreement to acquire 84 residential Richard Arthur 0151 600 3706 units - is now well advanced and on schedule for delivery in 2009. Given the rapid William De La Warr 0207 468 7933 rise in the price of luxury apartments in the region, the initial amount paid (c$590 Andy Forshaw 0151 600 3708 per ft2) for 59 units in Tower Six looks very attractive. Including 25 units located in Stephen Henney 0151 600 3718 other parts of the complex, also with superior aspects, the company will own 12% Jane Hodgson 0151 600 3715 Malachy McEntyre 0151 600 3710 of the development’s residential floor area. Elsewhere, the company has four core John Ritchie 0151 600 3705 development projects, which are located in desirable or emerging parts of the Terry Sissons 0207 647 8165 region. Scope to generate high returns for shareholders. MPO’s shares have Email: [email protected] weakened as sentiment towards overseas property stocks has deteriorated (the 1 - Using £1 = $1.82 at 19th September 2008 shares are now c35% below their peak). Our view is that this provides investors All dollars referred to in this document are US$ unless otherwise stated with an excellent opportunity to gain exposure to Macau, the world’s most densely

+ Non-Independent Marketing Communication: populated region and the only part of China in which gaming is legal, where rising This is a non-independent marketing tourist revenues are stimulating both the wider economy and the local property communication. The analyst who has prepared market. Management has a proven track record of generating very high returns this report is aware that Shore Capital Stockbrokers and/or another member of the for shareholders (see page 44). We value the company at 174p per share, Shore Capital Group has a relationship with the implying material upside (c100%) to the current share price, and believe this is a company covered in this report. Accordingly, it has not been prepared in accordance with legal compelling investment opportunity for those seeking capital appreciation. requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research. Shore Capital Stockbrokers acts as Stockbroker to Macau Property Opportunities Fund. September 2008

continued 2 September 2008

Table of Contents

Summary ...... 4

Macau property market – attractions...... 5

MPO – attractions ...... 5

Shore Capital’s valuation of the portfolio...... 7

Independent valuation...... 18

Background to Macau ...... 19

The Macau property market...... 21

The residential market...... 21

Case Study: One Central ...... 24

The retail market ...... 26

The office market ...... 27

The industrial market...... 28

The hotel market ...... 29

Zhuhai and the Pearl River Delta...... 30

Economic and political features ...... 31

The gaming industry in Macau...... 33

Sniper Capital – key individuals and track record ...... 43

continued 3 September 2008

Summary MPO floated on AIM in June Macau Property Opportunities Fund (‘MPO’) is a dedicated property development 2006, raising £105m company which constructs high-specification buildings in Macau, a ‘special administrative region’ (SAR) of China, and the surrounding Pearl River Delta region. MPO floated on AIM in June 2006 and currently has a market capitalisation of c£90m. It has a June year end for reporting purposes. The company’s strategy is to take advantage of niche property opportunities which it believes have been overlooked by larger investors.

Investment opportunity We believe MPO provides a compelling investment opportunity, highlighting:

x Macau’s strong macroeconomic backdrop – the economy of Macau is growing at the fastest rate in Asia, buoyed by a huge rise in the number of tourists, the burgeoning gaming sector (Macau is the only region of China in which gaming is legal) and the region’s diversification into other areas of entertainment. Due to the scarcity of land and the emergence of a sizeable middle class, this is resulting in rising property prices.

x Highly experienced management team with an established local presence, impressive track record (see page 44), excellent banking relationships and proven ability to transact, reposition and extract value.

x Attractive portfolio of projects – MPO has established a high-quality, diversified portfolio of properties in Macau and the Pearl River Delta, which offer scope to generate material upside.

x Strong balance sheet and pipeline – a cautious approach to investment leaves the company well positioned to deliver new projects at attractive prices. A pipeline containing potential investments (amounting to an equity injection of up to c$250m in aggregate) provides further scope to capitalise on the continued transformation of Macau.

x Discerning acquisition strategy – since its inception, MPO has evaluated a large number of investment opportunities. A small number of these have proceeded to completion as management has adopted a prudent and highly selective approach to the deployment of its capital.

x Attractive valuation – we adopt a sum-of-the-parts approach and value the company, using assumptions we believe to be conservative, at 174p per share, a c100% premium to the current share price. We believe the company is well placed to extend its current pipeline of projects, generating further value for shareholders.

continued 4 September 2008

Macau property market – attractions Strong economic backdrop and property fundamentals

The economy of Macau Recent data confirms that the economy of Macau continues to expand rapidly, remains buoyant, providing a enjoying the highest growth rate in Asia (see page 31). The local property market helpful backdrop to the local has also enjoyed stellar growth in recent years. Jones Lang LaSalle estimates property market that high-end residential property prices and rents rose by c12% and c7% respectively in the first quarter of 2008.

Continued growth of the gaming sector…

Macau has overtaken Las The popularity of Macau as a gaming location continues to grow, evidenced by Vegas as the world’s largest rising tourist numbers and revenues. Macau has now overtaken Las Vegas as the gaming market world’s pre-eminent gaming centre.

…augmented by the region’s diversification into other entertainment types Macau is broadening its appeal to tourists and provides visitors with a growing number of activities and entertainment options, such as sporting events, rock concerts and theatre productions in venues including the c15,000 seater stadium housed in The Venetian Hotel (see page 33). The region’s international shopping, conference and exhibition facilities are also proving increasingly attractive to tourists, particularly those from Asia (see page 34).

MPO – attractions Highly experienced management team with a strong track record

Management has a very MPO’s management team has an impressive track record and has generated strong track record of very high returns (an IRR of >30% and a total return since inception of >120%) generating value in the region from its South China Sniper Fund (a closed end fund which is now fully-invested – see page 44). This strong performance has been replicated by MPO, which has achieved an NAV uplift of 56% (in constant currency terms) since its inception (we believe this understates the fund’s true returns as reported NAV is based on the residual value of land and does not include potential development margins). The company was also recently nominated by the Financial Times and Investors Chronicle AIM Investment awards for ‘Best AIM Property Investment of the Year’.

Valuable portfolio of existing projects and strong pipeline

We visited Macau in August MPO has established a valuable and diversified portfolio, providing exposure to 2008 and believe that the the region’s high-end and entry-level residential, mixed-use and industrial company has an exciting segments. We believe that the One Central complex is arguably the most sought portfolio of projects after property on the peninsula (all of the company’s residential units in the development have a superior aspect with a lake view). Four other core projects, in addition to some smaller, niche opportunities, give the company scope to capture high development margins. We understand that management is currently appraising pipeline opportunities with a total equity requirement of c$250m.

continued 5 September 2008

continued 6 September 2008

Shore Capital’s valuation of the portfolio We value the company’s MPO’s current portfolio is summarised in the table below. portfolio at 174p per share using our sum-of-the-parts Fig 1: Portfolio valuation approach

Project Type $m

Rua da Penha Residential (niche) 27.8 One Central1 Residential (premium luxury) 219.1 Rua do Laboratório Residential (entry level) 44.0 Senado Square Mixed-use 42.0 Zhuhai logistics site Industrial 15.2 Other assets Various 10.9

Pro forma cash/(debt)2 (26.2) Net present value (NPV) 332.8 Shares in issue (m) 105.0

Shore Capital NPV per share ($c)3 317 Shore Capital NPV per share (p)4 174 Current share price (p) 87 Shore Capital NPV premium to share price (%) 100 Source: Shore Capital Stockbrokers 1 – Tower Six (comprising 59 luxury apartments) and 25 additional units in other towers 2 – based on a current cash balance of c$68m, adjusted for committed consideration in relation to One Central 3 – before any accrual for performance fees 4 – using £1 = $1.82 as at 19th September 2008 Our analysis uses a number of assumptions, including:

x A cost of debt of c4.5% (a 220bps premium to 3-month HIBOR, which is currently c2.3%). We use this as the weighted average cost of capital (WACC), as the company finances construction costs entirely by debt (land investment has been financed by equity).

x Yields of 3.2%, 6.0% and 10.0% respectively on prime residential, retail and logistics properties, in line with prevailing rates.

x The disposal of properties held within special purpose vehicles (SPVs) results in no liability to taxation. This applies to the company’s interest in properties in Tower Six of One Central, where we believe any disposal would be undertaken en bloc. We assume that the sale of other residential units gives rise to a tax charge at a rate of 12% (the prevailing corporate tax rate in Macau). This is likely, in our view, to be conservative, due to the existence of deductible interest. Trading profit earned throughout the period of ownership is taxed in our model at 12%.

continued 7 September 2008

Rua da Penha – niche residential project MPO owns a prime residential redevelopment site located in Penha, a popular Fig 2: Rua da Penha and well-established neighbourhood in the southwest of the Macau Peninsula, Sector Residential where the Portuguese first settled. Management intends to redevelop the property Type Redevelopment into mid-rise, residential apartments targeted at professionals and the high-end of Positioning Niche the local market. Current Status Advanced planning The site was purchased for $8.6m in October 2006 and management estimates Valuation1 $22.0m that the development cost will be c$12.9m. We understand that the planning and Source: Company design process is at an advanced stage and a highly regarded local architect has 1 th – Independent valuation as at 30 June been appointed to liaise with the Government Heritage Department to optimise 2008 the redevelopment of the site in what is an architecturally sensitive area. Subject to securing the final construction permits, management expects to complete the project by the end of 2010. An image of how the development could look is shown below.

Fig 3: An artist’s impression of MPO’s Rua da Penha project

Source: MPO

continued 8 September 2008

We make the following assumptions:

We estimate the net present x 79 units are sold over a two-year period at an average price of $590,000 value of the Rua da Penha (c$728 per ft2 of net saleable area). The average size of an apartment is project at c$27.8m c810 ft2. Reflecting the fact that the development is being aimed at owner-occupiers, sales are heavily skewed towards 2010.

x Construction commences in c6 months’ time and lasts c18 months. Build costs are c$148 per ft2 of gross build area (c87,000 ft2).

Fig 4: Rua da Penha – discounted cash flow model ($m)

Year 2008 2009 2010

Unit sales 0 15 64 Average sales price per unit 0.59 0.59 0.59 Sales income 0.0 8.8 37.8

Build phasing (%) 0 40 60 Build costs, interest and tax 0.0 (7.8) (8.4) Cash in/(out)flow 0.0 1.0 29.4

4.5% discount factor (WACC) 1.00 0.96 0.92 Present value 0.0 0.9 26.9

Net present value 27.8 Source: Shore Capital Stockbrokers Figures subject to rounding Based on our calculations, the Rua da Penha project will generate a gross margin of c45%.

continued 9 September 2008

One Central (Tower Six + 25 units) – premium luxury residential project In November 2006, MPO announced that it had signed a sale and purchase Fig 5: One Central agreement to acquire Tower Six of One Central, the luxury, mixed-use Sector Residential development on the Macau Peninsula, for a consideration of $86.6m (the Type Development equivalent of c$590 per square foot). Tower Six, which will have 40 storeys, Positioning Premium comprises 59 luxury residential units (including two duplex and three large Current Status Under simplex apartments), offers unparalleled views of the lake and has a total area of construction c148,000 ft2. Valuation1 $211.5m Source: Company More recently, the company has acquired 25 individual units located in other 1 th – Independent valuation as at 30 June towers in the development for an additional $48.3m, the equivalent of c$910 per 2008 square foot. We visited the One Central development in August 2008. In total, MPO owns c12% of the total residential floor area of One Central. All of the company’s units have superior aspects with views of the lake and should, in our view, command premium prices, particularly duplex and simplex units which should have an additional scarcity value (the company will own five of c20 such units in the complex). Although management has a number of options, we understand that its current intention to retain ownership of Tower Six until completion of the project, enabling it to commence the rental process. Further details on One Central are included on page 24.

We believe that One Central Fig 6: Construction of One Central is well advanced will be the premier, mixed-use development on the Macau Peninsula

Source: MPO

continued 10 September 2008

We make the following assumptions in our valuation model, which is illustrated below:

x Monthly rent of HK$55,000 for standard units in Tower Six. x HK$120,000 for duplex/simplex units in Tower Six. This reflects the scarcity value of duplex/simplex units (there are only c20 units of this format in the entire complex).

x Monthly rent of HK$50,000 for other units. x A vacancy rate of 5%. x A yield of 3.2% on all apartments.

Fig 7: One Central – valuation model Tower Six Other 25 units Total Standard Duplex Simplex

Units 54 2 3 25 84 Average unit size (gross ft2) 2,311 4,487 4,739 2,127 2,395 Total area (gross ft2) 124,807 8,973 14,217 53,186 201,183

Rent in HK$ per month 55,000 120,000 120,000 50,000 Exchange rate (HK$: US$) 7.8 7.8 7.8 7.8 Rent in US$ per month (fully let) 7,051 15,385 15,385 6,410 Rent in US$ per month (with 5% vacancy) 6,699 14,615 14,615 6,090

Annual rent (US$) 80,385 175,385 175,385 73,077 Yield (%) 3.2 3.2 3.2 3.2 Value per unit (US$m) 2.5 5.5 5.5 2.3 Implied tax on 25 individual units (US$m)1 - - - (1.0)

Value of units (US$m) 135.6 11.0 16.4 56.1 219.1

Source: Shore Capital Stockbrokers Figures subject to rounding 1 – assumes that these units are not sold collectively in a tax-efficient SPV

continued 11 September 2008

We value the company’s residential units in One Central at $219.1m (net of tax), which equates to an average of $1,090 per square foot (an uplift of c63% on the blended purchase price).

Our selling price assumptions Our research reveals that a number of transactions have taken place in the first appear to be underpinned by half of 2008, highlighting demand for properties in the development, and that recent transactions these broadly support our valuation. We understand that large units have changed hands in this period for over c$1,000 per ft2 (we also note that all of these were standard units, rather than simplex or duplex apartments, which should command a higher price). Elsewhere, we believe large units in the competing One Grantai development (see page 25) have sold for in excess of $1,150 per ft2.

continued 12 September 2008

Rua do Laboratória – entry-level residential project Located on a site in the northern part of the Macau Peninsula – an area which is Fig 8: Rua do Laboratória undergoing widespread redevelopment and infrastructure improvements – the Sector Residential Rua do Laboratória site was purchased in November 2006 for $20.6m. MPO Type Redevelopment intends to redevelop the site, which is situated close to the border crossing, into Positioning Entry-level entry-level, high-rise apartments. The projected development cost is $35.2m. Current Status Consolidating Valuation1 $39.1m Negotiations are currently ongoing to consolidate adjacent sites in the area before Source: Company commencing with the planning process and redevelopment. Management 1 th – Independent valuation as at 30 June anticipates construction to commence in September 2009 and to be completed in 2008 two years’ time.

We value the project at We make the following assumptions: c$44.0m x 341 units are sold at an average price of $276,000 per unit (equivalent to c$514 per ft2 of net saleable area). The average size of an apartment is c537 ft2.

x Construction commences in late 2009 and lasts for two years. Build costs amount to $35.2m, equivalent to $129 per ft2 (based on gross build area of c273,000 ft2).

Fig 9: Rua do Laboratória – discounted cash flow model ($m)

Year 2008 2009 2010 2011

Unit sales 0 0 40 301 Average sales price per unit 0.28 0.28 0.28 0.28 Sales income 0.0 0.0 11.0 83.1

Build phasing (%) 0 0 70 30 Build costs, interest and tax 0.0 0.0 (24.9) (18.4) Cash in/(out)flow 0.0 0.0 (13.9) 64.7

4.5% discount factor (WACC) 1.00 0.96 0.92 0.88 Present value 0.0 0.0 (12.7) 56.7

Net present value 44.0 Source: Shore Capital Stockbrokers Figures subject to rounding Based on our calculations, the Rua do Laboratória project will generate a gross margin of c32%.

continued 13 September 2008

Senado Square – mixed-use project On a site adjacent to Senado Square, one of the most popular tourist destinations Fig 10: Senado Square on the Macau Peninsula, management intends to construct a six storey retail and Sector Mixed-use entertainment complex. The site is located in the territory’s World Heritage district, Type Redevelopment which has a rich Macanese architectural history. Growing numbers of tourists are Positioning Retail/Tourism fuelling demand for retail outlets in the area which, in turn, has driven retail Current Status Initial planning property prices and rents to amongst the highest in Macau. Valuation1 $31.9m The site was acquired in October 2007 for $16.0m. Purchased from 17 different Source: Company 1 – Independent valuation as at 30th June owners, the acquisition process took two years and provides evidence of 2008 management’s ability to conclude complex transactions. Estimated construction costs are $14.2m. We understand that the planning process has commenced and a retail consultant has been appointed to provide advice on the project’s positioning, design and tenant mix.

Senado Square, close to the Senado Square (see page 20) has been Macau’s urban centre for centuries and location of the company’s remains the most popular venue for public events and celebrations. The square is mixed-use project, is one of surrounded by pastel-coloured, neo-classical buildings, creating a Mediterranean the most popular tourist atmosphere. destinations on the Macau Peninsula and is rich in architectural history Fig 11: Artist’s impression of MPO’s Senado Square development

Source: MPO

continued 14 September 2008

We make the following assumptions:

We value the project at x The site is redeveloped into a retail building with a net lettable area of c$42.0m c65,000 ft2, which commands rent of $5 per ft2 per month (well below the prevailing prime market rent of $10 per ft2 per month).

x Construction costs amount to $14.2m, the equivalent of $174 per ft2 (based on a gross developable area of 81,600 ft2). It commences in mid- 2009 and takes 18 months to complete.

x An occupancy rate of 95%.

Fig 12: Senado Square – discounted cash flow model ($m)

Year 2008 2009 2010 2011 2012

Rent per ft2 ($) 5.0 5.0 5.0 5.0 5.0 Occupancy (%) 0 0 0 35 95

Rental income 0.0 0.0 0.0 1.4 3.7 Terminal value (using 6% yield) 0.0 0.0 0.0 0.0 62.0 0.0 0.0 0.0 1.4 65.7

Build phasing (%) 0 10 50 40 0 Build costs, interest and tax 0.0 (1.5) (7.3) (6.2) (0.9) Cash in/(out)flow 0.0 (1.5) (7.3) (4.8) 64.8

4.5% discount factor (WACC) 1.00 0.96 0.92 0.88 0.84 Present value 0.0 (1.4) (6.7) (4.2) 54.3

Net present value 42.0 Source: Shore Capital Stockbrokers Figures subject to rounding Based on our calculations, the Senado Square project will generate a gross margin of c55%.

continued 15 September 2008

Zhuhai Logistics Centre – industrial project 2 The Zhuhai industrial site MPO announced the purchase of a 1.1m ft site in Zhuhai for an initial acquisition gives MPO direct exposure to cost of $11m on 27th August 2008. Three warehouses with a total floor area of the storage and logistics 210,000 ft2 currently exist on the site and are approximately 50% leased. The rest sector of the land is vacant and is suitable for development, either as a build-to-suit or standard inventory logistics and manufacturing facility with a net lettable floor area of c1.4m ft2, including c370,000 ft2 of employee accommodation. We make the following assumptions:

x Rent of $0.33 per ft2 per month is achieved (in line with prevailing rates, see page 28) on a net lettable area of 1.4m ft2.

x Construction commences in late 2009 and takes 18 months to complete. x Build costs amount to $34.0m (equivalent to c$24 per ft2).

We value the project at c$15.2m Fig 13: Zhuhai logistics – discounted cash flow model ($m)

Year 2008 2009 2010 2011 2012

Rent per ft2 ($) 0.33 0.33 0.33 0.33 0.33 Occupancy (%) 0 0 0 0 95

Rental income 0.0 0.0 0.0 0.0 5.3 Terminal value (using 10% yield) 0.0 0.0 0.0 0.0 52.7 0.0 0.0 0.0 0.0 58.0

Build phasing (%) 0 0 50 50 0 Build costs, interest and tax 0.0 0.0 (17.4) (18.1) (1.9) Cash in/(out)flow 0.0 0.0 (17.4) (18.1) 56.1

4.5% discount factor (WACC) 1.00 0.96 0.92 0.88 0.84 Present value 0.0 0.0 (15.9) (15.9) 47.0

Net present value 15.2 Source: Shore Capital Stockbrokers Figures subject to rounding

continued 16 September 2008

Other assets

MPO has purchased various MPO has acquired a number of other property assets where it believes there is other properties in Macau for scope for material capital appreciation as investments in their own right, or a total consideration of $7.3m through consolidation, refurbishment or redevelopment. To date, total consideration for assets of this type has been $7.3m. We calculate that these are worth $10.9m (based on the latest independent valuation, in the case of those assets acquired before the period end, and the purchase cost of those purchased since then).

Pipeline We understand that management is currently negotiating on a number of pipeline projects with a combined acquisition value of c$250m and that around half of this is residential in nature.

Attractive financing It is management’s strategy to finance properties, subject to a maximum loan-to- value of 60% for the fund.

The company has recently In June 2008, the company agreed terms for an $82.5m forward commitment loan agreed terms to finance its facility with a consortium of international and Macanese banks led by HSBC. The One Central residential units facility is expected to be drawn down in 2009 and will be used to meet the on terms we consider to be outstanding commitments for the developments at One Central. attractive The facility, which extends until September 2012, carries an interest rate of 3- month HIBOR (currently c2.3%) plus a margin of 140bps (below prevailing rates, reflecting the superior nature of the project and management’s strong banking relationships). Management is also in advanced discussions with lenders regarding construction financing for its redevelopment projects.

continued 17 September 2008

Independent valuation Savills values the company’s An independent valuation of the company’s projects (in accordance with projects every six months… prevailing RICS property valuation practice) was undertaken by Savills in June 2008 (an independent valuation takes place every six months). Details of the most recent valuation are shown in the table below:

Fig 14: Savills’ valuation of MPO’s properties as at 30th June 2008 (US$m) Property Latest valuation Uplift since Uplift in current acquisition (%) period (%) Rua da Penha 22.0 171 51 One Central 211.5 53 25 Rua do Laboratório 39.1 83 37 Senado Square 31.9 99 99 Other assets1 7.3 109 - Total 311.8 67 35

Source: Company

…and calculates that the Based on the latest Savills’ valuation, the company has enjoyed an overall uplift properties owned by the of c67% on initial cost to date. Acquisitions completed since the period end, which company as at the period end include the Zhuhai logistics site (see page 16) and some other small, niche have appreciated in value by assets, are excluded from this valuation. c67% compared with their acquisition costs Based on this independent valuation exercise, the company’s NAV as at 30th June 2008 was $2.81 per share, which equates to 154p per share (based on the exchange rate of £1 = $1.82 as at 19th September 2008).

continued 18 September 2008

Background to Macau Like Hong Kong, Macau is a ‘special administrative region’ (‘SAR’) of China. Formerly a Portuguese colony, the region comprises a peninsula and two islands (Coloane and Taipa), which have been united through land reclamation with the connecting stretch of land now known as ‘Cotai’. Portuguese traders, who had settled in Macau in the 16th century, administered Macau until its handover to China in 1999.

Macau is a ‘special Macau is located on the western side of the Pearl River Delta, bordered to the administrative region’ of north by the Guangdong province and the South China Sea to the east and south China and is the most densely (see figure below). It is situated 60km southwest of Hong Kong, and has an area populated region in the world of just 29.2km2.

Fig 15: Maps of Macau and the surrounding region

Source: MPO

The region’s currency is the Macanese Pataca (MOP), which is pegged to the HK$ (which, in turn, is pegged to the US$). The vast majority (c95%) of the region’s population is Chinese; another 2% is of a mixed Chinese/Portuguese descent (an ethnic group referred to as Macanese). Chinese and Portuguese are Macau’s official languages.

continued 19 September 2008

Two billion people live within Macau, which has a population of c550,000, is the most densely populated region five hours’ flying time of in the world with c18,800 people per square kilometre (its area is just 2.5% of that Macau of Hong Kong). Its location, close to mainland China and Hong Kong, means that it is within easy reach of a huge (and growing) population. It is estimated that c2bn people live within five hours’ flying time of Macau International Airport. The region is a rapidly growing tourist destination (see below), due to it being the only part of China in which gaming is legal.

Fig 16: Senado Square, a popular tourist destination

Source: MPO

continued 20 September 2008

The Macau property market Under existing legislation, foreign firms and individuals are free to establish companies and are not subject to ownership restrictions in Macau. The government has established a centralised property database where title to property is formally registered. In this section, we examine the region’s property segments in more detail.

The residential market At the end of 2007, there were c185,000 residential units in Macau, of which c8% were vacant and c31,000 subsidised by the government (source: Savills, 2008). We understand that c70% of apartments are owner-occupied and that around half Strong demand for residential are mortgage-free. property in Macau has driven prices to record levels…. Rising demand Strong economic growth, enhanced access to capital and net immigration have resulted in a significant increase in demand for residential property in Macau. According to Savills, new residential prices have doubled since 2003 (see chart below). Despite this, average prices remain at a material discount (c80%) to those in nearby Hong Kong. Rental demand has also been growing, due to the rising non-resident worker population (in July, there were c100,000 expatriate workers living in Macau).

…but they remain at a Fig 17: Average residential prices, 2003 – 2007 (HK$ per square foot) discount to those in Hong Kong 8,000 6,000 4,000

2,000 0 2003 2004 2005 2006 2007

Macau Hong Kong

Source: DSEC (Directorate of Statistical and Census Services), Rating and Valuation Department, Savills

continued 21 September 2008

In light of continuing problems in the global credit market, Jones Lang LaSalle reported that residential sales began to slow in June 2008, with discounts offered in some uncompleted projects. JLL also reports that property prices edged down “a few percentage points” in the period. Despite this, the leasing and investment The local population is market for high-end residential properties remains strong as increasing numbers expected to grow markedly in the future of management-level expatriate workers in new casinos drive letting demand. Earlier this year, the Macau government estimated that the population of the region will grow by c4.6% annually between 2007 and 2011. Assuming that the size of the average household in Macau remains unchanged (at 2.92 people), this implies that an additional c8,000 residential units per year are required (Goldman Sachs estimates that as many as c10,000 new households per year will need to be created).

Supply shortages Workers from overseas are As at the end of 2007, there were c185,000 residences in the region, with a migrating to Macau, attracted further 12,500 new units due to be completed by the end of 2011 (of which, c58% by the creation of new jobs in casinos are classed as high-end). We believe the high-end residential market will remain resilient, supported by demand from management-level expatriates working in the casinos currently in the development pipeline. This should lead to a rise in rents and attract investor demand, in our view. We understand that the government has committed to build c19,000 public housing units by 2012, 7,000 of which are currently under construction in the northern Macau Peninsula. This area is undergoing widespread infrastructure improvements and we expect demand to remain strong for these types of properties from local residents seeking to upgrade their homes.

The recent removal from office and conviction for corruption of Au Man Long (the former Secretary for Transport and Public Works) has resulted in the government taking significantly longer than normal to process planning applications for new residential developments. In our view, these delays are likely to further restrict supply of new properties in the area and provide support to prices. Although the residential vacancy rate is c8%, our view is that much of the unoccupied stock is of low quality (see overleaf) and not suitable for an emerging middle class keen to improve their living standards.

continued 22 September 2008

Fig 18: Existing low-quality housing stock in Macau

Source: MPO

Given a shortfall of new residential units in the development pipeline and favourable affordability ratios (enhanced by negative real interest rates), we believe that the imbalance of demand and supply will lend further support to prices.

Rising prices Prices have risen across all The imbalance of demand and supply has created record price growth across all residential segments residential segments. According to Savills, average residential prices grew by c35% during 2007. The new luxury residential sector recorded growth of c50% in the period between 2006 and Q1 2008. We understand that prices at One Central have risen by c51% over the same period. JLL reports that capital values of high- end residential properties grew by c11% in the first half of 2008. During the second quarter of 2008, two new large-scale residential projects – The Residencia on Macau Peninsula (625 units) and Windsor Arch, a luxury scheme on Taipa Island (c1,600 units) – launched high-profile marketing campaigns, both priced to appeal to international investors. Prices in Macau are at a Hong Kong residential prices are often used as a benchmark for Macau’s substantial discount to those residential rents and values, particularly in the luxury sector. New high-rise of equivalent properties in Hong Kong residential projects across Hong Kong and the New Territories are increasingly commanding prices between HK$20,000 – 40,000 per ft2. On this basis, there would appear to be significant scope for current luxury residential prices in Macau (cHK$7,500 per ft2) to continue to rise.

continued 23 September 2008

Case Study: One Central

One Central is a premium One Central is Macau’s premier, multi-use development located in the NAPE multi-use development Area of the Macau Peninsula. The complex, which is currently under construction, located on the Macau will comprise 796 luxury apartments across seven towers (One Central Peninsula… Residences); a 6-star, world class hotel (with 216 rooms) managed by Mandarin Oriental; a c300,000 ft2 shopping complex constructed along the waterfront; and a clubhouse/health spa for the exclusive use of residents (tenants will pay a management charge to cover the use of these facilities). The complex is located between the MGM Grand and The Wynn Macau casinos and will offer spectacular views of the harbour, Nam Van Lake and the three bridges linking Macau to Taipa. With its central location, One Central can be reached by car in just ten minutes from Macau International Airport.

…and is being constructed by We believe the development is of unprecedented quality and is being constructed two of the region’s leading by two of the region’s leading developers, Hongkong Land (listed in Singapore developers, Hongkong Land and the UK) and Shun Tak Holdings (listed in Hong Kong). Hongkong Land will (49%) and Shun Tak Holdings act as managing agent and retain the development’s retail space and car parking (51%) facilities. Residential units in the complex range in size from 654 ft2 for studio flats located in Tower One (of which there are 36) to 3,006 ft2 for four bedroom apartments. There are also a small number of duplex and simplex units, which are of larger sizes.

Fig 19: An artist’s impression of One Central

Source: One Central Residences

continued 24 September 2008

Construction progress to date

A recent update from According to the statement issued by Hongkong Land in its interim results Hongkong Land, the announcement on 31st July 2008, construction of One Central remains on scheme’s co-developer, together with our own schedule for completion in 2009. The statement also refers to pre-leasing of the observations on our visit, retail space “progressing well” and includes the assertion that “almost all of the confirm that construction is residential units have been pre-sold”. now well advanced Competing schemes Competing luxury residential schemes in the pipeline are summarised below:

Fig 20: Luxury residential development pipeline in Macau Scheme Location Units Delivery The Buckingham Taipa 196 2009 Le Royal Arc Macau Peninsula 309 2009 Windsor Arch Taipa 1,624 2010 One Grantai Taipa 856 2010 Avienda Wai Long Taipa 3,500 2011 A number of competing Source: Shore Capital Stockbrokers schemes are in the pipeline Our view is that One Central compares favourably with the competing schemes highlighted above. Of these, we believe only One Grantai, which is situated on the hill slope of the Taipa Grande and commands panoramic views of the Cotai Strip, has a comparable location. In addition, we understand a number of other residential schemes are awaiting government approval, including Bel-Lago and Harbour Mile (on the Macau Peninsula) and Baia de Pac On (on Taipa Island). Again, our research suggests that they will not be of comparable specification and/or location.

MPO’s exposure to One Central

MPO owns c12% of the total MPO has acquired c200,000 square feet of residential space across the seven residential space in the residential towers of One Central. The company owns an entire 40-storey tower development (Tower Six) and 25 other individual units across the complex, all of which are situated on well-positioned floors with superior aspects. In total, MPO owns c12% of the total residential space in the development. MPO has not acquired any of the smaller studio flats in the complex. The company’s standard units range in size from 1,100 ft2 to 3,006 ft2. In addition, it has also acquired five of the complex’s c20 simplex and duplex units, which are larger in size than standard apartments and should, in our view, command a premium price. As other premium luxury residential developments currently being planned in Macau continue to experience delays in obtaining the necessary planning permission and/or construction permits, we believe demand for residential units in One Central will remain strong.

continued 25 September 2008

The retail market The growing number of visitors to Macau is creating a fertile environment for retail property development. Despite a number of casinos increasing their retail space, this expansion is being outpaced by the growth in tourism and, as a result, rents continue to rise.

Rising demand for retail space

The retail sector is growing Rising disposable incomes, increased job security, the influx of new workers, a rapidly in Macau as living government initiative to grant a one-off relief to residents and the growth in standards rise tourism led to a c46% increase in retail sales in the first quarter of 2008 (see chart below) and we understand that demand for prime retail space in Macau remains strong. In addition, some retailers are willing to pay higher rents to retain units in prime locations. We understand that a cosmetic chain store recently renewed its lease in the prime area of Rua de S. Domingos at cHK$500 per ft2 – twice the average rent in the area.

This is reflected by rising Jones Lang LaSalle recently reported that rising demand for retail space drove rents and capital values high street shop rentals up by 7.4% in the first quarter of 2008. The same source reveals that capital values of properties also rose in the period by 6.2% and the average investment yield stood at 6.0%.

Fig 21: Macau retail sales ($m), Q1 2004 – Q1 2008

700

525

350

175

0 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08

Source: DSEC

According to Jones Lang LaSalle, capital values and rents for prime high street shops increased by c10% in the first six months of 2008. The same source expects a tempering of domestic spending in the second half of the year and for retail rents and property values to remain stable.

We understand that prime retail properties can command rents of up to $10 per ft2 per month.

continued 26 September 2008

New retail space of the highest quality is being constructed in Macau, including Shoppes at the Four Seasons Hotel (see below).

Fig 22: Retail space in the Four Seasons Hotel

Source: MPO

The office market

“An increasing number of There are only a few Grade A office buildings in Macau, located mainly in the retailers and business service Baixa de Macau and NAPE e Aterros de Baia da Praia Grande areas. These sector tenants…will help include the Finance and IT Center of Macau (FIT) and the AIA Tower, recently capital values and rents to acquired by Speymill Macau Property Company^ (MCAU.L, N/R at 54c) on a yield remain on the rise” (Gregory of 4.7%. We understand that the take-up of space in FIT is progressing, while the Ku, Managing Director of Jones Lang LaSalle, July AIA Tower is now close to full occupation. JLL reports that capital values and 2008) rents of Grade A office space increased by c14% and c3% respectively in the first half of 2008. The same source expects there to be no new Grade A office space delivered to the market in the next three years. In our view, the restriction of supply should provide support to rent levels in this segment. We understand that average Grade A office rents in Macau are just c$2 per ft2 per month, a substantial discount to those in Hong Kong (currently c$13-26 per ft2 per month). Grade B office space exists in the region and it has recently enjoyed rising interest levels from the telecommunications, financial and advertising segments.

continued 27 September 2008

The industrial market

There is a growing need for Rising consumer spending is creating a fertile environment for logistics facilities in logistics facilities in Macau the region. We understand that demand for high-quality industrial space is and the surrounding region growing exponentially. Our research indicates that there is currently c3.3km2 of industrial space in free trade zones and approximately another c2km2 within a reasonable proximity of Macau (though these do not offer the attractive tax concessions offered in free trade zones). Our analysis suggests that c10-15% of current space is vacant but this includes undeveloped land, which is being held by Chinese investors enjoying an uplift in values. Typical rents are $0.33 per ft2 per month at present, having increased from c$0.2 per ft2 per month in 2006. Generally speaking, premium rents can be charged for build-to-suit premises. We understand that investment yields on industrial premises are currently c10%.

continued 28 September 2008

The hotel market The Macau hotel market is dominated by large casinos. According to the latest Monthly Bulletin of Statistics (July 2008), there are 81 hotels (including 31 casinos) and 16,234 hotel rooms in Macau. We understand that the majority of hotel room stock in Macau is of a low quality, although the standard of recently opened (and pipeline) hotels is vastly superior (see below).

The Four Seasons Hotel has The $1bn, 360-room Four Seasons Hotel (owned by Las Vegas Sands and recently opened on the Cotai operated/managed by Four Seasons), which is located on the Cotai Strip and Strip… features world-class shopping facilities, opened in August 2008 (see below). The development compliments Las Vegas Sands’ existing hotel, The Venetian, and underscores the company’s commitment to the continued development and growth prospects of Macau.

…and others are expected to Two other large hotels, the Shangri-La and St Regis, are expected to open in the open in the near future next year and will be followed, in due course, by the Galaxy Mega Resort, the City of Dreams and Macao Studio City (backed by Oaktree Capital Management and CapitaLand), among others. It is expected that new casinos will create an additional 20,000 hotel rooms by 2010.

Fig 23: The Four Seasons Hotel in Macau

Source: MPO

continued 29 September 2008

Zhuhai and the Pearl River Delta Zhuhai is a ‘Special Economic Zhuhai, which translates as ‘Pearl Sea’, is a prefecture-level city on the southern Zone’ and goods can be coast of Guangdong province in China. Located in the Pearl River Delta, Zhuhai brought to the territory borders Zhongshan to the north and Macau to the south. It includes 146 islands, a without being subject to coastline of 690km and was one of China’s ‘Special Economic Zones’, which Chinese tax or duty were established in the 1980s. This resulted in the city growing into a powerful modern port (Zhuhai is the only city in the western Pearl River Delta with natural deep waters), science and education centre, tourist destination and transportation hub. The city has an international airport, which is located in the Doumen district.

Zhuhai is home to five ‘economic zones’, as follows:

x Zhuhai High-Tech Industrial Development Zone.

x Zhuhai Free Trade Zone. x Harbour Industrial Zone. x Wanshan Ocean Development Testing Zone.

x Hengqin Economic Development Zone.

continued 30 September 2008

Economic and political features

Economic performance

Macau recently overtook Las Macau’s economy is heavily skewed towards gaming and tourism. Since the Vegas as the world’s leading gaming market was deregulated in 2002, several new casinos have opened in the location for gaming region. The gaming sector now contributes over 50% of Macau’s GDP and, revenues… according to Jones Lang LaSalle, the growth of gaming contributed c25 percentage points to the region’s 27.5% GDP growth in 2007. Macau had c27m visitors in 2007 and total gaming revenues amounted to $10.4m – c53% more than the $6.8m generated on the Las Vegas Strip. According to Savills, the sector’s gross receipts grew rapidly in the first half of 2008 to $7.4bn – a year-on-year increase of c48%. Gaming and ancillary services now account for c70% of government revenues.

…and is classified by the Macau is an offshore financial centre, a tax haven and a free port with no foreign WTO as a high-income exchange restrictions. In addition to gaming, the construction and textiles sectors economy are prominent (the latter provides c75% of the region’s export earnings). On 1st January 2004, the Closer Economic Partnership Agreement (CEPA) between Macau and mainland China commenced. Under this, Macau-made products were provided with tariff-free access to the Chinese mainland. This relationship appears to be strengthening. In July 2008, Supplement V of the CEPA was signed to enhance exchanges, promotion and support to service suppliers, formulate implementation rules and details, and establish a notification and discussion mechanism. The World Trade Organisation classifies Macau as a high-income economy – its GDP per capita in 2007 was c$36,350 (c20% higher than that of nearby Hong Kong). This, together with other recent economic data, is summarised in the table below.

Fig 24: Macau key economic indicators (2007) GDP growth (%) 27.5 Unemployment (%) 2.8 GDP per capita ($) 36,350 Inflation (%) 5.6 Source: Statistics and Census Service (DSEC)

continued 31 September 2008

Latest economic data

Economic data remains According to Jones Lang LaSalle, GDP increased by c32% in the first quarter of strong… 2008, an acceleration on last year’s growth rate, underpinned by the continued expansion of the gaming segment and a surge in retail sales, which recorded a 46% year-on-year increase (the highest on record). In the same period, inflation increased to 9.1%, driven by increasing prices of food, housing, fuel and health services.

…with unemployment falling Unemployment in Macau remains low and fell to 2.8% at the end of June 2008. to a record low (2.8%) in June Against the backdrop of slowing global economic growth, the region continues to 2008 and visitor numbers thrive. According to Jones Lang LaSalle, visitor numbers in the first half of 2008 continuing to rise increased by 18% compared with the prior year, and restrictive travel measures recently imposed by the Guangzhou provincial government (see page 36) do not appear to have had a negative impact on the tourism sector. The majority of arrivals to Macau are from China, which accounted for c59% of the 14.9m visitors in the six months to June 2008 (the total number of visitors from the Chinese mainland increased by c36% in June compared with the prior year). The region’s tourism sector is expected to remain strong as increasing numbers visit from Asian countries, such as Japan, South Korea and the Philippines. Jones Lang LaSalle reported that arrivals to Macau from Asia (apart from China, Hong Kong and Taiwan) rose by c53% to 1.2m in the first half of 2008. The latest data from the Statistics and Census Service (DSEC) showed that total visitor numbers to Macau in July rose by c21% year-on-year. Macau’s GDP increased by 26.1% in the first half of the year, though the rate of growth has slowed in recent months. At a seminar on Macau’s role as the economic co-operation and trading platform between China and Portuguese- speaking countries held in September, the Secretary for Economy and Finance, Mr Francis Tam Pak Yuen, said he expected Macau’s GDP to grow by more than 15% this year, despite the slowdown.

Political structure

Macau operates a ‘one Like Hong Kong, Macau operates under the policy of ‘one country, two systems’. country, two systems’ policy China’s central government is responsible for defence and foreign affairs and the region operates its own legal and monetary systems, customs and immigration policy. The region’s government is headed by a Chief Executive, who is appointed by the central government upon the recommendation of a 300-member election committee. The current incumbent is Edmund Ho Hau Wah, who is now serving his second term in office (having first been elected after the handover in 1999).

continued 32 September 2008

The gaming industry in Macau

In this section, we provide an overview of the gaming industry in Macau, in the context of the segment’s role as the key driver of the region’s strong economic growth. We also discuss issues facing the gaming sector, its resilience to an economic downturn and the region’s attempts to diversify its attractiveness to tourists by broadening its range of entertainment options. Casino table games account for the overwhelming majority of all activity of this Macau is a popular location for gaming and has a number type in Macau, leading to the region’s reputation as the ‘Monte Carlo of the of casinos Orient’. This is in stark contrast to other gaming locations, including Las Vegas, where slot machines account for well over 50% of revenues. Baccarat, a card game, represents the vast majority of casino activity. Punto Banco, or North American baccarat, is a game of chance widely played in the region and is a variant of the game believed to have been introduced into France during the 15th century.

Deregulation of the gaming industry and its continued expansion

Stanley Ho retains a large Gaming has been legal in Macau since 1847. Prior to 2002, a gambling monopoly proportion of the Macau held by Stanley Ho had operated for 40 years. gaming sector, despite its deregulation, but his share is In 2002, the government ended the monopoly system and three new casino diminishing, due to the entry licences were awarded (from a total of 21 applicants) to SJM (Stanley Ho’s of Las Vegas-based operators company), Wynn Resorts and a Galaxy Holdings/Las Vegas Sands consortium.

The deregulation of the gaming industry thrust Macau onto the world stage and provided a catalyst for a massive influx of foreign investment. Since then, a number of Las Vegas-style casinos have been built and subsequently expanded. Macau now has 31 casinos (19 of which are owned by SJM), which operate under a government franchise and under a common set of rules. At the present time, Macau does not licence online gaming operations.

High-profile casinos include:

x The Venetian Macau Resort Hotel, a 40-storey renaissance-themed, luxury hotel (see page 36), which is owned by Las Vegas Sands. Opened in August 2007, the hotel is modelled on its sister casino resort (The Venetian in Las Vegas) and is the largest single structure building in Asia (and the third largest in the world). Located on the ‘Cotai Strip’, The Venetian has 3,000 suites, a 15,000 seat arena, 1.2m ft2 of retail space and 1m ft2 of convention and exhibition facilities. The casino is currently the largest in the world, with an area of c500,000 ft2, and attracted almost 25m visitors in its first year of operation, according to a study conducted by the University of Macau.

continued 33 September 2008

x Wynn Macau, a luxury-integrated resort located on the Macau Peninsula, which opened in September 2006 and was widely regarded as the first Las Vegas-style resort in Asia. It is owned by Wynn Resorts (a public company based in Las Vegas), which has also submitted an application to the Macau government to develop 54 acres of land on the Cotai Strip. Adjacent to the Wynn Macau, a new project called Encore is underway which will add c400 suites, four villas and additional retail/gaming space. Construction commenced in 2007 and the new space is expected to open in the first half of 2010.

x MGM Macau, a 35-storey casino resort which opened in December 2007 (see below). Under a sub-concession approved by the Macanese government, the project is owned through a 50/50 partnership between MGM Mirage and Pansy Ho Chiu-King, the daughter of Stanley Ho. The casino will also be connected to One Central and the Mandarin Oriental Hotel.

Fig 25: The MGM Macau casino

In Macau, gamers exchange Hong Kong dollars for chips in order to play

Source: MPO

Just over half of Macau’s visitors travel from mainland China. In the nearby Pearl River Delta, a local population of c95m is enjoying rapid increases in disposable income, driven by the region’s burgeoning manufacturing capability. Hong Kong (31%) and Taiwan (6%) account for the majority of other visitors.

continued 34 September 2008

The IMF forecasts GDP to grow by 9.5% in China in 2009 and by 4.7% and 4.1% in Hong Kong and Taiwan respectively. In our view, this should provide support to the continued expansion of the Macau region. The increase in the number of casinos and tourists in Macau has led to a large rise in the region’s gaming revenues, the principal measure of success for the gaming industry (see chart below). In 2007, gaming revenues in Macau increased by c40% to $10.4bn – c53% more than the $6.8bn generated in Las Vegas. From January 2008, Macau’s gaming revenues have even surpassed those of Nevada state (including the Las Vegas Strip).

Gaming revenues have shown Fig 26: Gaming revenues – Macau versus Las Vegas Strip ($bn) defensive qualities in previous economic 12 downturns

8

4

0 2002 2003 2004 2005 2006 2007

Macau Las Vegas Strip

Source: DSEC, Nevada State Gaming Control Board

Gaming revenues have historically proven to be defensive throughout the economic cycle (see chart below), providing us with some comfort in relation to the Macau economy in the context of the current global environment.

Macanese residents are Fig 27: Gaming revenues - Clark County, Nevada ($bn), 1970 – 2007 benefiting from the growth in employment created by the gaming sector 12

8

4

0 1970 1976 1982 1988 1994 2000 2006

Source: Las Vegas Convention and Visitors Authority

continued 35 September 2008

In response to the rapid growth of the region and concerns that the economy is becoming imbalanced, the government has taken steps to maintain the sustainable development of the gaming industry. In April 2008, the Macau government announced that no new gaming licences would be granted and that land allocations for new casinos would be halted (though we understand that the established casino operators have government approvals for their future projects, a number of which are already under construction).

The gaming industry is a key The Guangdong provincial government also tightened its Individual Traveller source of employment for Scheme in May, restricting the frequency that its residents are allowed to visit the local people region. Despite this, our view is that recent government intervention is a clear demonstration of its commitment to maintaining a sustainable gaming industry, rather than anything more sinister. The gaming industry continues to provide a source of income for Macau’s residents. Under existing laws, croupiers must be Macanese and at least 21 years of age. This type of role typically attracts graduates and we understand that they can earn c$2,000 per month working in this capacity (providing locals with an income source to spend on residential accommodation and retail goods).

…and graduates often work Fig 28: The Venetian Macau Resort Hotel as croupiers in the region’s casinos

Source: MPO

continued 36 September 2008

Diversifying away from gaming – Macau’s enhanced entertainment offer

Measures have been The Macau government has recently introduced a basket of restrictive measures introduced to temper the designed to rein in the rapidly growing gaming sector. These include the growth of the gaming sector… suspension of the issuance of new gaming licences (though existing pipeline projects were unaffected). Although this sparked fears of a knock-on effect on the local property market, we note research published by Jones Lang LaSalle, which …and Macau is broadening its suggested that the direct impact may only be “moderate” and that the high-end range of attractions to residential market would “not be significantly affected”. tourists JLL reports that the rapid growth in the number of casinos in recent years has resulted in a degree of oversupply, highlighting declining per table revenues in the period 2003-07. On this basis, the new rules may actually be beneficial if they serve to prevent further oversupply.

“The key to building a Perhaps more significantly, we believe Macau needs to broaden its entertainment successful tourist destination offer to tourists if visitor numbers are to continue to grow. Our view is that is being able to assemble the progress on this front is being made and that visitors to Macau are increasingly critical mass of attractions attracted by other entertainment sources, including: needed to make the location more unique and compelling Blockbuster shows and performances – based in the 1,800 seat, than its rival destinations” x (Sheldon Adelson, Chairman custom-built theatre in the Venetian Macau, Zaia is a resident show and Chief Executive Officer of performed by the Cirque de Soleil. Directed by Neilson Vignola and Gilles Las Vegas Sands Corp) Maheu, the 90-minute show brings together 75 high-calibre artists from across the globe. The Cotai Strip Arena has also featured a number of international acts, including Beyonce, Celine Dion and The Police.

x International shopping – Macau’s casinos provide a luxurious venue for international brands, such as Louis Vuitton and Versace. In the first quarter of 2008, 19% of retail spending was spent on jewellery, watches and clocks (source: DSEC) as ‘high-rollers’ emerge from casinos. The recently opened Shoppes at Four Seasons is Macau’s first luxury shopping mall and features 180 luxury brands.

x The Macau Grand Prix – running since 1954, the Macau Grand Prix takes place annually in November and attracts thousands of tourists. It is known for being the only street circuit racing event in which both car and motorcycle races are held. Due to the challenging nature of the circuit, the race is also known as one of the most demanding in the world. Famous winners include Ayrton Senna and Michael Schumacher.

x Taipa and Coloane – Taipa is the smaller of the two islands of Macau. Prior to land reclamation, the island itself was split into three. The area is home to the Macau Jockey Club, the Macau Stadium, the International Airport, the University of Macau and Taipa Village, an area of colourful narrow streets. Coloane is a quieter location and a place for beach lovers, hikers, golfers and gourmands who dine in the island’s restaurants.

continued 37 September 2008

x Meeting, Incentive, Conference and Exhibition (MICE) facilities – Macau held 391 international and regional events in 2007 (source: Jones Lang LaSalle), well below the 23,800 events hosted in Las Vegas. Within its existing casino facilities, Macau has significant scope to serve a much larger number of visitors and we expect this segment to grow rapidly in future years. The Venetian Macau’s convention and exhibition centre comprises 1.2m ft2 and is expected to contribute strongly to this growth. We understand that a further 2m ft2 of conference facilities is planned in the region.

x The Historic Centre of Macau – featuring a large number of sites, including the Moorish barracks, Senado Square (see page 20) and the Ruins of St Paul’s (see below), the historic centre of Macau is an area of rich archaeological tradition. The baroque/mannerist style of St Paul’s, the façade of which was originally the Church of Mater Dei, is unique in China. In 2005, the historic centre was inscribed on the World Heritage list, making it the 31st site with this status in China.

Fig 29: The Ruins of St Paul’s in the Historic Centre of Macau

Source: MPO

continued 38 September 2008

x The Macau Tower – based on the Sky Tower in Auckland, the 340 metre Macau Tower (see below), which was officially opened in 2001, offers spectacular views of the region from its observation deck. The 230 metre ‘skyjump’ from the tower’s outer rim is the highest in the world.

Fig 30: The Macau Tower

Source: MPO

continued 39 September 2008

Improving infrastructure

Huge increases in the Macau has an international airport, an established transport network and can be numbers of tourist arrivals reached from mainland China and Hong Kong (the latter by ferry services have resulted in the need for operated by Turbojet and the Cotai Jet, which has increased the frequency of its infrastructure improvements services and started night sailing). The Macau Peninsula is connected to Taipa by three bridges. Soaring visitor numbers, however, are placing a strain on the region’s transport infrastructure, prompting a 20-year urban development plan to be published by the Macau government in January 2006. In response to the growing need for infrastructure improvements, a number of initiatives have been made or are being implemented or proposed, including:

x The Lotus Bridge – now completed, this connects Macau’s Cotai Strip with Hengqin Island in Zhuhai, mainland China (see page 41). It is one of two road crossings connecting Macau and China (the other being the Portas do Cerco Frontier checkpoint in the north of the Macau Peninsula).

x The Hong Kong – Zhuhai – Macau bridge – a proposed c29km series of bridges and tunnels that would connect the west side of Hong Kong and Macau and the neighbouring city of Zhuhai. The design of the bridge was approved by the Chinese Ministry of Transport in July 2008 and final approval from the Central Government and State Commission for National Development is pending. It is expected that the bridge will be part financed by the private sector, with the balance expected to be funded by the Executive of Hong Kong, the government of Zhuhai and the government of Macau, an attempt to establish a commensurate link between the relative costs and benefits of the project to each stakeholder. Construction of the bridge is expected to commence in 2010.

x A light rail system – subject to the conclusion of a feasibility study which is ongoing, the proposed Light Rail Transit (LRT) system is expected to operate 19 hours a day and will start at Macau’s northern district, run through the east side of the peninsula along the reservoir, past the city centre and on to the Sai Van bridge to Taipa. From Taipa, it will link passengers directly to the Cotai Strip and end at the Macau International Airport. The first phase of the rail project is expected to be completed in 2011.

x The Macau – Taipa Undersea Tunnel – to ease the strain on the existing bridges connecting the Macau Peninsula and Taipa, the project proposal for a Macau – Taipa undersea tunnel has been submitted to the central government. The proposed tunnel will be 1.7km long and consist of two airtight pipes, each of which will have three lanes (see page 41). It is currently awaiting approval.

continued 40 September 2008

Fig 31: Macau and its infrastructure network

Source: MPO

continued 41 September 2008

Land continues to be In addition, further land reclamation in Macau is planned. The Macau government reclaimed from the sea is currently awaiting approval from the central government in Beijing to begin works on land reclamation projects totalling c5km2. The construction of residential buildings on newly reclaimed land is expected to lower the population density in the older city districts and help protect the territory’s World Heritage sites. Macau is no stranger to the concept of land reclamation. Previous land reclamation has led to the area of the region more than doubling from c12km2 in 1912 to its current area of c29km2.

continued 42 September 2008

Sniper Capital – key individuals and track record The Sniper Capital team has Sniper Capital is an independent investment manager specialising in property considerable experience in investment in niche, undervalued and developing markets. It was formed in 2004 the Far Eastern property and currently manages two funds with combined assets of $300m. Sniper Capital market has two principals, Thomas Ashworth and Martin Tacon (see below), both of whom have substantial experience of financial and property markets. It has offices in Hong Kong and Macau and employs 23 people, who work in various functions, including finance, research, corporate communications and acquisitions. Thomas Ashworth (aged 42) Mr Ashworth has over 22 years’ experience of international financial markets. He started his career in London with HSBC Securities before transferring to Hong Kong in 1995. He later joined Morgan Stanley before co-founding an independent specialist hedge fund research and brokerage business called EGS in 2000 (prior to its merger with Kim Eng Securities in 2003). He identified the investment potential of Macau at an early stage and over the past seven years has established an extensive local network in the territory where, prior to co-founding Sniper Capital, he undertook several property-related business ventures. He is a Director of a pan-Asia hedge fund manager, Brooke Capital Limited. He is a British national, a permanent resident of both Hong Kong and Macau and a non-executive Director of MPO. Martin Tacon (aged 44) Mr Tacon has been actively involved in transaction-driven property investment and finance for almost 20 years, mostly in Asia. He has an established record of identifying and capitalising on real estate opportunities within investment banking, structured finance and asset management businesses. During his career, he has gained hands-on experience of all aspects of the real estate sector, including feasibility analysis, concept design, development and construction, leasing and corporate finance. He helped to build a pipeline in Asian real estate transactions for Zurich Re group and, as an investment banker for Credit Suisse First Boston (CSFB), was responsible for coverage of the real estate sector. Prior to CSFB, he was an Asian property sector analyst for HSBC Securities (then James Capel). He has raised capital for private real estate investment vehicles in Asia and for the hedge fund, Lynx Arbitrage, which he co-founded in 2002 and is a non-executive Director. He is a British national, a permanent resident of Hong Kong and a Professional Member of RICS.

continued 43 September 2008

South China Sniper Fund

The South China Sniper Fund Sniper Capital also manages the South China Sniper Fund (SCSF), a private fund has generated high returns incorporated in the Cayman Islands. SCSF aims to deliver high returns to since its inception, providing investors through the opportunistic acquisition, development and sale of property a strong endorsement of in Macau. SCSF is fully invested in thirteen properties and has gross property management’s ability to assets under management of c$11m. As such, it provides no conflict of interest generate value for shareholders with MPO. Based on an initial unaudited valuation of the fund’s assets, net of all fees and associated costs at the end of June, SCSF has delivered a total return of c122% since its inception in July 2005. The fund’s IRR now stands at 30.5% (well ahead of its initial target of 20%).

continued 44 DISCLOSURES It is the policy of Shore Capital Stockbrokers Limited not to make recommendations on companies for which it acts in an advisory capacity. Full details regarding our policy on research can be found at our website www.shorecap.co.uk. Research recommendations: Stock recommendation definitions: Buy 10%+ absolute performance within 3-months or otherwise as specified Hold +/- 10% absolute performance on a 3-month basis or otherwise as specified Sell -10% absolute performance on a 3-month basis or otherwise as specified Research distribution: In the period 1 April 2008 to 30 June 2008 Shore Capital covered 178 ‘non-house’ stocks. There was a Buy recommendation on 80 (45%) stocks, a Hold recommendation on 70 (39%) stocks, a Sell recommendation on 28 (16%) stocks and a total number of 178 (100%). The breakdown above only applies to ‘non-house’ stocks. Lead analyst: The lead analyst with respect to each research item is the first and most prominent name. Please note that more than one analyst may work on a specific research item. Recommendation history: For details of recommendation history on a specific stock please contact your Shore Capital contact on 020 7408 4080/0151 600 3700. All formal research notes carry specific recommendation history information. We are initiating coverage in this research report. For this reason, there is no recommendation history. The information above is obtained from sources considered reliable. However, the accuracy thereof cannot be guaranteed by us. Shore Capital or any of its associated companies (or our or their employees) may from time to time hold positions in the above equities as principal, and may also perform corporate advisory services for these companies. The suitability of any investment recommendations for private investors will depend upon their circumstances and they should therefore discuss the recommendations with our dealers before investing. Share prices can go down as well as up and past performance is not necessarily a guide to the future. Some investments may require you to pay more money than the cost of the investment. Levels and bases of taxation may change. This document is being supplied to you solely for your information and may not be reproduced or further distributed to any person (including the media) or published in whole or in part, for any purpose. This report is only directed at persons resident in the UK and is not to be used by any person outside that jurisdiction. All relationships giving rise to a conflict of interest as defined under the Conduct of Business rules of the Financial Services Authority have been disclosed. The issue of this note is not necessarily indicative of long term coverage of the stock. Hence, updates may or may not be issued in the future. The views expressed in this document accurately reflect the research analyst’s personal views about any and all of the subject securities and the Company on the date of this document. Any opinion or estimate expressed in this document is subject to change without notice. Shore Capital may act upon or use the information or a conclusion contained in this document before it is distributed to other persons. This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. None of Shore Capital or any company within the Shore Capital group of companies, or any of its or their directors, officers, employees or agents accept any responsibility or liability whatsoever for any loss however arising from any use of this document or its contents or otherwise arising in connection therewith. By accepting this document, you agree to be bound by the foregoing limitations. AIM is a market designed primarily for emerging or smaller companies and the rules of this market are less demanding than those of the Official List of the UKLA, consequently AIM investments may not be suitable for some investors. Liquidity may be lower and hence some investments may be harder to realise.

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