We Expect Aristocrat To Continue To Dominate the EGM Market As Conditions Recover

We maintain our AUD 33 fair value estimate for Aristocrat shares and we expect the firm to continue to command a dominant share in major markets. In our view, Aristocrat enjoys a narrow economic moat underpinned by intangible assets in its core electronic gaming machine, or EGM, business. Stringent regulatory licensing requirements in major markets create barriers to entry for new players, and Aristocrat's extensive portfolio of popular games allows the firm to enjoy economic returns in this environment. Success in the EGM industry is highly dependent on new game and cabinet design and development. While the occasional hit game can come down to chance, we expect the ability to consistently deploy popular titles will come down to investment over the long run. This is illustrative of the industry dominated by three major players--Aristocrat Leisure, International Game Technology, and Scientific Games--which control the vast majority of the EGM market in North America. We estimate Aristocrat will maintain research and development investment of around 12% of sales over the long term. This investment is the lifeblood of any EGM manufacturer.