2011 looks set to be another record breaking year for inbound Hong Kong tourism. January-October 2011 tourist arrivals were up by 16.2% year on year (y-o-y), to 34,217,497 people, according to data from the Hong Kong Tourism Board (HKTB). Given this strong performance, we have made a slight upwards revision to our 2011 full-year arrivals forecast, targeting a figure of 41.08mn tourists, or an increase of 14% y-o-y.

Looking at source markets, mainland China remains the dominant country, contributing 22.9mn tourists to Hong Kong over January-October, an increase of 23.7% y-o-y. Arrivals under the Individual Visit Scheme (IVS) were up by 27.4% y-o-y. Other short-haul markets that are performing well include South Korea (up by 15.8% in January-October 2011) and Indonesia (up by 16.2%). Further afield, the HKTB continues to identify Russia as a strongly performing source market. Arrivals were up by over 50% during January-October.

BMI remains bullish about the outlook for inbound tourism to Hong Kong over our forecast period through to 2015, with the territory continuing to offer high standards of hospitality and many different types of tourist attractions. China will continue to be the main source market for inbound tourists and should grow rapidly in the years ahead.

Beyond 2011, our forecasting model calculates a just over 5% average annual increase over the coming years, leading to a total of just over 50mn tourists by 2015. We believe that given the strong demand from China, there are significant upside risks to this forecast.

Melco Subsidiary Lists In Hong Kong

On December 7 2011, Hong Kong-based gaming conglomerate Melco Group dual-listed shares in its Melco Crown Entertainment subsidiary, which is co-owned by Australian gaming company Crown, in Hong Kong. The listing of the subsidiary company was by invitation, so new equity was issued as part of the dual-listing process.

Melcos chief financial officer, Geoffrey Davis, stressed in November 2011 that Melco Crown

Entertainment would be able to fund its new multibillion dollar Macau Studio City project without needing to raise fresh equity and that the company was in discussions with banks for project financing. That said, he added that the listing by introduction in Hong Kong offers the flexibility to raise capital in the future.

Macau Studio City is a planned entertainment and hotel complex on Macaus Cotai Strip. Melco Crown Entertainment took control of the long-delayed project in June 2011 and Melco said it will invest about US$1.7bn to build the complex. However, there is still some uncertainty as to whether the Macau government will allow Melco Crown

Entertainment to install gaming floors at the project, which was originally envisaged as an entertainment and leisure travel destination. The company is hopeful that it will get the necessary approval to include gaming facilities and that construction can start in 2012, with a view to opening in 2015.

In August 2011, Melco announced its interim results. They showed Melco Crown Entertainment delivering a record-adjusted EBITDA of US$216.32mn for Q211, an increase of about 195% from US$73.4mn generated during Q210. Further information on the Melco group is available in the Company Profiles section of this report.

Construction Ongoing At New Cruise Terminal

Construction has started at the new Kai Tak cruise terminal, which is on the site of the old Kai Tak airport. The foundation stone for the project was laid in August 2011. International architecture firm Foster + Partners has designed the terminal, which will then be leased to a cruise ship operator. The government will retain ownership of the site.

The development cost, excluding the commercial area, was estimated at HKD2.4bn. According to Foster + Partners, the terminal will have capacity to berth two large 360m-long vessels and disembark a total of 5,400 passengers and 1,200 crew.

Some commentators have expressed dismay at the time it has taken to begin construction work at Kai Tak, pointing out that Singapores International Cruise Terminal is scheduled to be completed before the end of 2011 and could take shipping traffic away from Hong Kong between then and Kai Taks opening. That said, the development of a cruise terminal in Hong Kong will be of crucial economic benefit to the territory. Consultative studies put the economic benefits of the new Kai Tak terminal at HKD1.4-2.2bn per annum by 2020. Estimates for the number of jobs that will be created by the terminal range from 6,900 to 10,900 positions.