Hong Kong 12 August 2013 Sector Report Macau Hengqin Roadshow Positive Takeaways on Hengqin Outlook Hengqin rocks! On Friday, we took over 20 fund managers to Hengqin, Zhuhai and Macau to better understand the various development plans Gaming and property projects in the southern Guangdong region. Participants Jeremy TAN had the opportunity speak to officials from the Hengqin Planning [email protected] Commission to learn about government’s latest reform. (852) 2268 0635 Consensus overweight underscored by infrastructure surge. We visited Sands’ Venetian and SJM’s Grand Lisboa, arguably the two Property most iconic completed properties in Macau amongst tourists; the two Karen P KWAN operators are also the largest in terms of 1H GGR market share at 21% [email protected] and 25%. We were also privileged to have senior management from (852) 2268 0640 Neptune, a junket investor, join us in the evening. Management from each company shared with us in detail their individual strategies for Philip TSE, CFA FRM future growth and addressed our queries of their operations. In [email protected] summary, the gaming sector appears to be a consensus overweight (852) 2268 0643 amongst both analysts and fund managers alike, with a plethora of both non-gaming and gaming infrastructure to come on-stream in the next five years. Key questions from the fund managers to the casino operators included: 1) the impact of credit conditions on VIP business; 2) expected capex, table supply and margin outlook; 3) growth strategies amid competition. Our top gaming pick remains Sands. Hengqin – rising land costs and Huarong project Sea of Dreams to set an initial benchmark but local sales from the Huarong project would not pinpoint on a launch price yet. Recent land transactions in Hengqin including by the entity Keshanghui at an AV of above CNY15k/sqm for a residential parcel in Shizimen indicate that land costs are going up. Hengqin Island is not under home purchase restrictions, and Zhuhai’s HPR applies to the central area, Xiangzhou. We believe land costs would stay elevated in Hengqin given the low tax rate for qualified industries, support from the Zhuhai and central government as well as improving infrastructure. Listed developers with confirmed land parcels in Hengqin include Shun Tak and COLI, while there were media reports that Lai Sun and Shimao/Shanghai Shimao signed agreements for investments on the island but have not added Hengqing land to their official landbanks. Zhuhai – we also visited Yanlord’s Marina Center in the Xiangzhou district (close to the border). Though it is in a prime location, we expect sales to be slow given large lump sum of each unit (minimum of close to CNY9m per fitted unit) and high ASPs of ~CNY43k/sq m targeting buyers from Macau and Zhuhai. Only ~20 out of 97 units to be launched were reserved. When the port facilities between Hengqin If the city’s overall ASP of a particular We continue to excel and innovate in the and Macau get fully ramped up and the month is still within government’s mass-market segment, where other HK-Zhuhai-Macau bridge becomes more tolerance range, some units should still operators have chosen not to focus in the mature, we believe there could be over allowed to transact even though Marina past. Setbacks that hit the VIP side, 10 m visitors a year handled by the port. Center post-discount ASP of ~CNY43k almost never touches the mass side, /sqm tops Zhuhai high-rise apt and far which has been growing resiliently at “Rep from Hengqin Planning exceeds the price control target. about 30% the last quarters. Commission” “Local Zhuhai Sales, Yanlord” “Director of IR, Sands China” SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Macau Hengqin Roadshow Hengqin Island – a new Special Economic Zone. Adjacent to Macau, Hengqin Island (Hengqin) was once an undeveloped island at the south of Guangdong province. Along with Nansha and Qianhai, Hengqin has been designated a Special Economic Zone under the China’s 12th five-year plan. Other special economic zones, such as Tianjin’s Binhai, have experienced rapid economic growth since it was targeted for development in the China’s 11th five-year plan. Hengqin spans 106.5sq km and is more than three times the size of Macau. There is also established infrastructure within 100km of Hengqin, including five international airports, four deep harbours, eight highways and three major railway lines. Seven industries of focus. The government has specified that Hengqin will be focused on the following seven industries: 1) leisure & tourism, 2) business services, 3) financial services, 4) cultural innovation, 5) research, 6) hi-tech industry and 7) healthcare. Hengqin sits in close proximity to Macau’s exciting Cotai Strip, separated by a dedicated border checkpoint at the Lotus bridge. We believe Hengqin will be rapidly developed given support from both the Zhuhai government as well as China’s central government. Favorable tax regime. In order to boost trade in Hengqin, the State Council has introduced a total import duty exemption on all goods on condition that the goods are not subsequently transferred to other parts of Mainland China. Furthermore, qualified companies are also charged a lower corporate tax of 15%, compared to the average China corporate tax rate of 25%. Figure 1: Hengqin, Macau, Hong Kong Island map Source: Maybank Kim Eng, Google Maps Figure 2: Artist impression of Hengqin Figure 3: Artist impression of Hengqin’s various districts Source: Hengqin Planning Commission Source: Hengqin Planning Commission 12 August 2013 Page 2 of 17 Macau Hengqin Roadshow China’s largest amusement park planned. We visited Hengqin Island Exhibition Center and, over lunch, discussed with Hengqin Planning Commission the exciting plans the government has proposed. There are currently about 56 projects planned with total investment in the whole Hengqin district estimated at about CNY226b. Hengqin is poised to be a major tourist destination and we expect it to track the growth of the Cotai strip. The first phase of the Ocean Kingdom theme park (to be operated by Chimelong group, a leading theme park operator in Guangdong) is expected to become China’s largest amusement park, will have its soft launch from 2H13. The amusement park is expected to eventually house 10 distinct themes, 12 luxury hotels and three golf courses, according to Chinese media sources. The original total investment that Chimelong plans for the project is around CNY10b, but we believe the eventual investment cost may not be so high. Furthermore, it is our understanding that there will also be a residential/serviced apartment component of Chimelong’s project that could be sold. Figure 4: Planning model of Hengqin and Macau Figure 5: Ocean Kingdom Theme Park by Chimelong Source: Hengqin Planning Commission, Maybank Kim Eng Source: Zhuhai News High speed rail connects Hengqin. The current Guangzhou-Zhuhai intercity railway will be extended a further 17km to Hengqin from Gongbei. Hengqin will also be linked to the Zhuhai airport, thus reducing travel time to ~25 minutes from the current one hour. We believe that the greater accessibility in southern Guangdong province will drive tourism in Hengqin. Furthermore, the access into Macau will become seamless with the Gongbei border and Lotus Gate border linked with Macau’s light rail, which is currently under construction. The local government is also in talks to implement a 24-hour border checkpoint which will be mutually beneficial to the two administration region. Figure 6: Guangzhou-Zhuhai Intercity and Macau LRT Figure 7: Guangzhou-Zhuhai Intercity Railway Network Source: Hengqin Planning Commission, Maybank Kim Eng Source: Guangzhou and Zhuhai Metro Bureaus, Maybank Kim Eng 12 August 2013 Page 3 of 17 Macau Hengqin Roadshow Hong Kong-Zhuhai-Macau bridge narrows the gap. Work on the major Hong Kong-Zhuhai-Macau Bridge has begun and is expected to be completed by end- 2016. We believe the bridge will encourage land-based travel, particularly for stopover tourists in Hong Kong, by reducing time spent by up to 2-3 hours. This is in addition to the savings on travel cost. Furthermore, the bridge’s proximity to the Hong Kong International Airport will result in more traffic flow and economic expansion in the western Pearl River Delta region, which currently is accessed predominantly by sea-based transportation. We believe this would alleviate the current transportation bottleneck, as the ferry between Hong Kong and Macau is not operated 24 hours a day and long waiting times (sometimes between 1-2 hours) are a norm for commuters if they have not pre-purchased ferry tickets. Figure 8: Model of Hong Kong-Zhuhai-Macau Bridge Figure 9: Model of new reclaimed checkpoint Source: Company, Yanlord, Maybank Kim Eng Source: Company, Yanlord, Maybank Kim Eng Figure 10: Macau visitors YTD Jun 13 by geography Figure 11: Macau visitors YTD Jun 13 by entry points Others, Airport, Heliport, 1,416,441 , 900,829 , 20,732 , 0.1% Outer 10.0% 6.4% Other Land Harbour, Taiwan, China, Entry, 3,439,563 , 458,072 , 3.2% 739,668 , 24.3% Mainland 5.2% China, Inner Harbour, 8,906,352 , 259,888 , 63.0% 1.8% Hong Kong, 3,361,375 , Taipa 23.8% Provisional Border Gate, Harbour, 6,823,776 , 1,957,784 , 48.3% 13.8% Source: DSEC, Maybank Kim Eng Source: DSEC, Maybank Kim Eng Housing prices soar. As property prices soar in space-scarce Macau, so has the area in Hengqin, driven by increasing infrastructure and rising affluence. The average price of housing just four years ago was around CNY6,500/sqm, based on the price of resettlement homes for landowners who sold to developers.