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Macau gaming supply constrained after Sands opening

11 April 2012

CHICAGO -- (PRESS RELEASE) -- Fitch Ratings expects Macau's gaming market fundamentals to remain positive following the opening of Las Vegas Sands Corp.'s (LVS) new casino property on the Cotai Strip. Although gaming revenue growth in Macau continues to decelerate, new supply additions will be constrained over the next few years, providing support for incumbent operators' free cash flow generation potential and credit quality.

We believe gaming authorities in the Chinese-administered territory will remain focused on careful management of supply, as the cap on table games through 2013 limits additional capacity beyond Cotai Central. Following the opening of Cotai Central, which will ultimately have almost 6,000 rooms, we do not expect any major casino properties to open in Macau until 2014-2015. The government has targeted a table growth rate after the cap of 3% annually. The authorities' commitment to manage market growth primarily through supply regulation, as opposed to travel restrictions, is a positive for incumbent gaming operators' long-term profitability.

Sands is opening the Cotai Central property at a time when the Macau gaming market is growing at a reduced, but still very healthy, pace. The growth rate slowed to 27% in the first quarter, down from 42% in 2011 and 58% in 2010, but we do not expect a precipitous decline in visitation or gaming spending trends this year.

We have not adjusted our original full year 2012 gaming revenue growth forecast of 20%, which reflects our broader view that economic growth in China will slow to 8% this year. Although VIP gamblers visiting Macau continue to make up the majority of the gaming market, the burgeoning Chinese middle class is supporting a healthy pick-up in the mass market. We expect this trend to continue in 2012, despite the weaker macroeconomic backdrop on the mainland.

The VIP segment will continue to drive between 70% and 75% of total table revenues, but the mass market segment is growing in importance, and we expect mass market growth to exceed VIP growth over the next few years. The opening of the Cotai Central, last year's launch of Galaxy Macau, and ongoing infrastructure improvements will contribute to this trend as the center of gravity in the Macau market shifts from the peninsula to the Cotai Strip. Cotai now accounts for more than one-third of Macau table revenues, and that proportion will continue to grow materially.

Sands' free cash flow (FCF) profile has been hampered in recent years by heavy development-related capital commitments in Macau and Singapore. Management remains focused in its pursuit of an aggressive global development plan, and the company has signaled a desire to fund multiple properties in Spain, an additional resort in Macau, and other potential new markets, such as Korea or Japan. Still, with Cotai Central and other major properties up and running, Sands' FCF generation power will improve significantly in the near term.

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