Macau Legend Development Limited (1680.HK / 1680 HK)

Transcription

1 Asia Pacific/Hong Kong Equity Research Casinos & Gaming Rating OUTPERFORM Price (09 Aug 13, HK$) 2.39 Target price (HK$) 3.13¹ Upside/downside (%) 31.0 Mkt cap (HK$ mn) 14,895 (US$ 1,921) Enterprise value (HK$ mn) 15,326 Number of shares (mn) 6, Free float (%) week price range ADTO - 6M (US$ mn) 2.0 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Jul-13 Price (LHS) Research Analysts Isis Wong isis.wong@credit-suisse.com Kenny Lau, CFA kenny.lau@credit-suisse.com Rebased Rel (RHS) 102 The price relative chart measures performance against the HANG SENG INDEX which closed at on 09/08/13 On 09/08/13 the spot exchange rate was HK$7.75/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) Macau Legend Development Limited (1680.HK / 1680 HK) INITIATION Game changer of the Peninsula Initiating coverage with OUTPERFORM and HK$3.13 TP. We set our target price at HK$3.13/share, which is determined by applying 7x EV/ (FY17E EBITDA discounted to 2014 by using WACC of 11.7%). Note that discounted FY17E EBITDA is adopted to reflect the full potential of MFW. With 31% potential upside, we initiate coverage on Macau Legend with OUTPERFORM. MFW is the only site with new capacity in the Peninsula. MLD is currently operating 146 gaming tables in two of SJM s satellite casinos under a gaming service agreement and redeveloping Macau Fisherman s Wharf (MFW), a large waterfront site located right beside the Macau-HK Ferry Terminal, which plans to add 1,263 hotel rooms and ~350 additional gaming tables by end In our view, on the back of its prime location and improving infrastructure around the site, the new MFW is likely to see the greatest growth potential among the Peninsula play in 3-5 years' horizon. We project MLD to report EBITDA of HK$4.1 bn in FY17E, MFW's first fullyear of operations implying 40% CAGR over the five-year period. The first batch of new tables is on the way. According to our observation, the redevelopment of MFW has already kicked off. We expect management to start the discussion of new the tables grant with DICJ shortly, and the first batch of tables is likely to come online within the next 12 months. While the market is cautious about the timeline and actual number of new tables, the receipt of some new tables could be a significant re-rating catalyst. Investment risk. MFW s redevelopment projects are a pre-condition for the grant of 350 additional tables. Yet, there is no assurance from DICJ on the number or the timing of new tables that MLD could receive. Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Revenue (HK$ mn) 1, , , ,394.5 EBITDA (HK$ mn) , ,947.0 EBIT (HK$ mn) ,539.5 Net profit (HK$ mn) ,463.5 EPS (CS adj.) (HK$) Change from previous EPS (%) n.a. Consensus EPS (HK$) n.a. EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and table Figure 1: Revenue sharing model mass-market segment Figure 2: Revenue sharing model VIP segment Gross Gaming Revenue Gross Gaming Revenue $100 $100 SJM SJM $40 $55 $5 $40 $55 $2 $3 Gaming tax, special levies, table premium MLD SJM Gaming tax, special levies, table premium MLD SJM $55 $2 Gaming promoters MLD s income Figure 3: MFW's redevelopment timeline by construction period Yacht Club and Public Pier Shopping, dining and entertainment Colonnade The Prague Harbour View Hotel The Palace Hotel The Legendale Hotel Macau General entertainment and cultural facility Refurbishment of Babylon Casino and Rocks Hotel Others Construction period Source: Company data Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Figure 4: MLD's income projection HK$mn 12,000 10,000 8, CAGR = 47% 6,000 4,000 2, E 2014E 2015E 2016E 2017E Gaming service income Non-gaming revenue Figure 5: MLD's EBITDA projection by properties HK$mn 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, A 2011A 2012A 2013E 2014E 2015E 2016E 2017E -500 Landmark Macau MFW Macau Legend Development Limited (1680.HK / 1680 HK) 2

3 Game changer of the Peninsula MLD: The second largest gaming service provider In Macau, 19 of the 35 existing casinos operate under service agreements with three of the six concessionaires/sub-concessionaires. MLD is the second largest gaming service provider in Macau, and operates two of SJM s 14 satellite casinos at its two main properties, namely Pharaoh s Palace Casino (Pharaoh) at The Landmark Macau and Babylon Casino (Babylon) at Macau Fisherman s Wharf (MFW). Under the service agreement, MLD operates the casinos for SJM and shares 2% to 55% of gross gaming revenue (GGR) generated by the high-roller tables and mass-market tables/slots, respectively. In 2012, we estimate that the casinos operated by MLD contributed to 19% of SJM s total revenue from satellite casinos. The only site with new capacity in the Peninsula Following the completion of its acquisition of MFW in May 2012, the company is planning to redevelop the site to add 1,263 hotel rooms across three new hotels, 350 additional gaming tables and a wide range of new facilities including a yacht club and a canopied open-air shopping, dining and entertainment colonnade, with a budget capex of HK$6.8 bn. MFW is likely to be the most scalable non-gaming properties and the only site with new capacity in the Peninsula in the near term. Therefore, we believe: (1) the addition of these new attractions, (2) MFW s superior location (right beside the Macau-HK Ferry Terminal), (3) improving transportation, including the Lotus Square light rail station due to be completed by 2015 adjacent to MFW, and (4) the close proximity to the Hong Kong- Zhuhai-Macau bridge to be completed around 2016, could provide a boost to the traffic to MFW, as well as the Peninsula as a whole. Attractive growth prospects on capacity expansion As advised by DICJ, the current limit of 3% annual increase of tables would not be an obstacle to MLD s application of 350 additional tables, but it would depend on the progress of redevelopment at MFW. Thus, we expect the additional gaming tables to be allocated across the properties at MFW evenly over , as the redevelopment is rolled out in phases. According to our observation, the redevelopment of MFW has already kicked off. We expect management will start the discussion of the new tables grant shortly, and the first batch of tables is likely to come online within the next 12 months even slightly ahead of Cotai peers in the next casino opening cycle. We estimate the group EBITDA to rise from HK$750 mn in FY12 to HK$4,055 mn in FY17E, the first year of full operation for MFW implying 40% CAGR over the five-year period. Initiating with OUTPERFORM While the market is cautious on the timeline of the new tables grant, we believe the approval for new tables could be a significant re-rating catalyst. We set our target price at HK$3.13/share, by applying 7x EV/(FY17E EBITDA discounted to 2014 by using WACC of 11.7%). Note that discounted FY17E EBITDA, which is the first year of full operation, is adopted to reflect the full potential of MFW. With 30% potential upside, we initiate coverage on MLD with an OUTPERFORM rating. Investment risk The 350 additional gaming tables are subject to MFW s redevelopment projects but approvals are entirely subject to the discretion of the DICJ. There is no assurance on the number of new tables MLD could get or the timing of new tables. Also, given the reduction of the size of the Global offerings in July 13, MLD may need to fund the redevelopment project of MFW by further equity/debt financing in the future. MLD is the second largest satellite casino of SJM and accounted for 19% of the latter s aggregate revenue from satellite casinos in 2012 Adding 350 gaming tables and 1,263 hotel rooms at MFW over We project an EBITDA of HK$4.1 bn in 2017E We set our target price of HK$3.12 based on discounted FY17E EBITDA No assurance that DICJ would approve additional tables. Macau Legend Development Limited (1680.HK / 1680 HK) 3

4 Financial summary Figure 6: Balance sheet Year end Dec 31 (HK$ mn) 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Assets Cash ,178 1,095 2,468 6,188 Inventories Accounts receivables ,552 1,848 Other current assets 655 1,403 2, Net fixed assets ,284 3,794 5,585 7,827 8,576 8,145 Other non-current assets ,730 2,680 2,631 2,581 2,531 2,481 Total assets 2,528 3,362 7,921 8,096 10,171 12,517 15,287 18,837 Liabilities Short term debt Accounts payables 3, ,094 1,978 2,328 2,566 Long term debt 557 1,456 1,405 1,049 2,049 2,049 2,049 2,049 Other non current liability Total liabilities 3,968 2,085 2,597 2,514 3,697 4,580 4,931 5,169 Shareholders' equities Share capital Reserves -1, , ,894 4,313 7,625 Share premium ,396 5,420 5,420 5,420 5,420 5,420 Total equities -1,441 1,276 5,324 5,583 6,474 7,937 10,356 13,668 Figure 7: Cash flow statement Year end Dec 31 (HK$ mn) 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Pre-tax profit ,464 2,419 3,312 Taxes paid Depreciation and amortisation Share base payment Release of prepaid lease payments Exceptional items and others Interest (income)/expense Gross cash flow ,180 1,947 3,137 4,055 Net capex ,629-1,969-2,599-1, Net change in working capital , Free cash flow 183-1, ,450 3,777 Dividends paid Other fund raising Others , Net cash flow , ,373 3,720 Macau Legend Development Limited (1680.HK / 1680 HK) 4

5 MLD: The second-largest gaming service provider Established by David Chow, Co-Chairman, Executive Director and CEO, in 2006, Macau Legend Development (MLD) is a gaming service provider for two of SJM's (0880.HK, HK$19.92, OUTPERFORM, TP HK$22.6) 14 satellite casinos at its two main properties Pharaoh s Palace Casino (Pharaoh) at the Landmark Macau and Babylon Casino (Babylon) at Macau Fisherman s Wharf (MFW). Under the service agreement, MLD operates the casinos for SJM and subsequently shares 2% to 55% of gross gaming revenue (GGR) generated by the high-roller tables and mass-market tables/ slots, respectively. Figure 8: Shareholder structure of MLD David Chow (Co-chairman, CEO) Lam Fong Ngo (Vice-chairman) Li Chi Keung (former Director) Ina Chan Pacbridge Capital (Financial advisor) Other public shareholders The Legend Club SJM (880.HK) Other stakeholders (connected) 30.8% 18.7% 13.9% 1.1% 15% 3.4% 1.1% 0.4% 15.6% Macau Legend Development The Landmark Macau is a highly efficient property. Despite SJM s sharing of 3-5% of GGR unlike other gaming licence holders, each gaming table at The Landmark Macau generates a similar level of EBITDA as Altira of Melco Crown (MPEL.OQ, US$26.4, OUTPERFORM, TP US$27.4) and The Plaza of Sands China (1928.HK, HK$42.25, OUTPERFORM, TP HK$42), suggesting strong customer relationship and execution. Gaming service model in the Macau region History Gambling in Macau was legalised in 1847 under the Portuguese rule and was operated under a monopoly franchise until 2002 after the Macau government initiated a bidding process to grant three new gaming concession licences in late 2001.SJM was awarded the first concession, followed by Wynn Macau (1128.HK, HK$21.0, NEUTRAL, TP HK$22.3) and Galaxy (0027.HK, HK$41.25, OUTPERFORM, TP HK$42.6). A subsequent process allowed each concessionaire to grant one sub-concession, which went to MGM China (2282.HK, HK$22.3, OUTPERFORM, TP HK$19.8), Melco Crown and Sands China, respectively. There are six gaming concession and subconcession licences in Macau Macau Legend Development Limited (1680.HK / 1680 HK) 5

6 Figure 9: The concession regime in Macau Concessionaires SJM Galaxy Wynn Macau Committed investment MOP4.7bn MOP8.8bn* MOP4.0bn Expiry 31 March June June 2022 Gaming taxes and levy - Special gaming tax 35% 35% 35% - Special levy 3% 4% 4% Total 38% 39% 39% Sub-concessionaires MGM Grand Paradise Venetian Macau (VML) Melco PBL Committed investment MOP4.0bn MOP4.4bn * MOP4.0bn Sub-concession premium US$200mn N/A * US$900mn Expiry 31 March June June 2022 Gaming taxes and levy - Special gaming tax 35% 35% 35% - Special levy 4% 4% 4% Total 39% 39% 39% Source: Company data, DICJ,Credit Suisse estimates * VML did not pay any sub-concession premium to Galaxy, instead VML is responsible for MOP4.4bn of Galaxy's original investment commitment under the sub-concession contract Most of the gaming tables in Macau are not actually operated by the concessionaires or sub-concessionaires, but engage a third party, i.e., the gaming service provider, to provide gaming services including marketing, promotion, publicity, customer development and introduction, and coordination of activities at the casinos. These casinos are known as satellite casinos in SJM. Pursuant to the Service Agreement, MLD has the right to nominate a president to oversee the daily operations at the casinos subject to SJM s approval. Also, the employees responsible for gaming operations are nominated by MLD and subsequently employed by SJM. However, most of the tables are actually operated by a gaming service provider engaged by the concessionaire and subconcessionaire MLD is the second-largest gaming service providers in Macau As of 31 December 2012, 19 of the 35 casinos in Macau, which contained 1,174 tables, are operating under service agreements among the total of six concessionaires and subconcessionaires, and various providers. Among them, MLD is the second-largest service provider in terms of the total number of gaming tables and operates two of SJM s 14 satellite casinos. Macau Legend Development Limited (1680.HK / 1680 HK) 6

7 Figure 10: Summary of casinos operating under service agreements Concessionaire/ Number of gaming tables % of total No. Property name Sub-concessionaire VIP Mass-market Total tables 1 Casino L Arc Macau SJM % 2 Casino VIP Legend/Pharaoh SJM % 3 Casino Ponte 16 SJM % 4 Casino Golden Dragon SJM % 5 Casino Lan Kwai Fong SJM % 6 Casino Greek Mythology SJM % 7 Casino Emperor Palace SJM % 8 Rio Casino Galaxy % 9 Casino Fortuna SJM % 10 Casino Jimei SJM % 11 Casino Casa Real SJM % 12 Grand Waldo Casino Galaxy % 13 Waldo Casino Galaxy % 14 Casino Diamond SJM % 15 Taipa Square Casino MPEL % 16 Casino Kam Pek Paradise SJM % 17 Casino Grandview/MJC SJM % 18 Casino Babylon SJM % 19 President Casino Galaxy % Total ,174 Source: Company data, Union Gaming Research Macau In 2012, the casinos operated by MLD contributed to 23% and 13% of SJM s aggregate GGR generated from high-roller and mass-market tables at satellite casinos, respectively. Figure 11: MLD s contribution to SJM s GGR VIP 100% 80% Figure 12: MLD s contribution to SJM s GGR massmarket 100% 80% 60% 60% 40% 40% 20% 20% 0% % Pharaoh (Landmark Macau) Other satelite casinos Pharaoh (Landmark Macau) Babylon (MFW) Other satelite casinos Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Economics of the gaming service model Under the latest Service Agreement with SJM, MLD receives a monthly compensation, from SJM equivalent to: (1) 55% of the GGR from mass-market tables; (2) 2% of the GGR from high-roller tables and 55% of GGR received on behalf of gaming promoters ; and (3) 40% of GGR from slot machines. Note that Weike, the slot machine provider, has guaranteed MLD a monthly minimum of HK$700,000 in gross slot wins at the Landmark Macau. However, if the receipt generated by SJM s slot machines exceeds HK$700,000, 70% of the gross slot wins would be paid to Weike. SJM recognises 100% GGR and rewards MLD with 55% and 57% of GGR generated from mass-market and VIP tables, respectively. Macau Legend Development Limited (1680.HK / 1680 HK) 7

8 As the concession licence holder, SJM is responsible for the special gaming tax of 35% and a special levy of 3% of GGR for public development and social responsibility related contributions in Macau, as well as gaming premium payable to the Macau government, aggregate accounting for around 40% of GGR. Figure 13 Figure 16 demonstrate the revenue sharing of GGR of HK$100 under the gaming service agreement with SJM. Figure 13: Revenue sharing mass market segment Figure 14: Revenue sharing high-roller segment Gross Gaming Revenue Gross Gaming Revenue $100 $100 SJM SJM $40 $55 $5 $40 $55 $2 $3 Gaming tax, special levies, table premium MLD SJM Gaming tax, special levies, table premium MLD SJM $55 $2 Gaming promoters MLD s income Source: Company data, Credit Suisse research Figure 15: Sharing of slot win Babylon Casino (MFW) Source: Company data, Credit Suisse research Figure 16: Sharing of slot win Pharaoh s Palace Casino (the Landmark Macau) Gross slot win $100 Gross slot win $100 SJM SJM $40 $40 $20 $40 $40 $20 Gaming tax, special levies, table premium MLD s income SJM Gaming tax, special levies, table premium MLD SJM $28 $12 Weike (if exceeded monthly guarantee net slot win of HK$700,000) MLD s income In the event of a gross gaming loss, MLD would share with SJM a monthly amount equivalent to 55% of such gaming loss generated by the mass-market, and 57% of gaming losses incurred by the VIP rooms (in which the gaming promoters will be liable for 55% of the loss) and 40% of that generated from slot machine operations (in which Weike will be responsible for such loss at the Landmark Macau, but not Babylon, as well). MLD also shares the gaming loss with SJM Macau Legend Development Limited (1680.HK / 1680 HK) 8

9 The Landmark Macau: Highly efficient property The Landmark Macau, one of MLD s two major properties, comprises Pharaoh s Palace Casino and offers 446 rooms and suites, recreational and dining space, retail shops, commercial and office premises, and residential apartments. The Landmark Macau operated 60 mass market gaming tables, 63 VIP gaming tables and 212 slot machines as at 31 December Currently, there are eight junkets operating in Landmark Macau. Relatively high daily net win per table Despite the relatively second-tier properties, in our view, Pharaoh's daily net win per table is among the highest within the industry in both the high-roller and mass-market segments, suggesting a close customer relationship and highly efficient operations at the casino. Casino at Landmark Macau generates relatively high daily net win per table Figure 17: Comparison of daily net win/table across casinos high-roller segment HK$ 400, , , , , ,000 Figure 18: Comparison of daily net win/table across casinos mass-market segment HK$ 90,000 75,000 60,000 45,000 30, ,000 50, SJM Galaxy MPEL MGM China Sands China Wynn Macau Landmark Macau 15, SJM Galaxy MPEL MGM China Sands China Wynn Macau Landmark Macau MFW Source: Company data, Union Gaming Research Macau Source: Company data, Union Gaming Research Macau Note that the lower net win in 2012 was mainly due to the renovation of gaming areas, which hindered the casino operating at full efficiency. The renovation work in the gaming areas was completed in end-2012, and that of hotel rooms and other non-gaming areas is expected to be completed by end Figure 19: Landmark Macau The lobby Figure 20: Landmark Macau renovated room Source: Company website Source: Company website Macau Legend Development Limited (1680.HK / 1680 HK) 9

10 Similar table efficiency as Altira and The Plaza As gaming tables are deemed to be scarce resources in Macau, and more than 80% of casino operators earnings are generated from the gaming business, we believe it is important for a casino to maximise the profitability of each table. We compare the EBITDA generated by each gaming table across casinos in Macau in assessing the efficiency of tables. Despite the lower gaming margin than other gaming concession holders due to SJM s sharing 3-5% of GGR versus peers who do not have to pay, the property EBITDA of The Landmark Macau is similar to that of Altira of MPEL and The Plaza (Four Seasons) of Sands China in 2012 again suggesting the high efficiency of table utilisation within the property. Figure 21: 2012 property EBITDA/tables across casinos Cotai Central The Landmark Macau Altira The Plaza (Four Seasons) Grand Lisboa MGM Macau StarWorld City of Dreams Galaxy Macau Wynn Macau Sands Macao Venetian US$mn) Source: Credit Suisse estimates Macau Legend Development Limited (1680.HK / 1680 HK) 10

11 The only site with new capacity in the Peninsula Both the properties of MLD The Landmark Macau and Macau Fisherman s Wharf are located at the Macau Peninsula, which has been short of scalable non-gaming offerings to compete with the integrated resorts at Cotai Strips. However, we believe the landscape is set to change after the completion of MFW's redevelopment in Together with improving infrastructure including the Lotus Square light rail station due to be completed by 2015 adjacent to MFW and the close proximity to the HK-Zhuhai-Macau bridge to be completed around 2016 the traffic to MFW and the Peninsula as a whole is set to get a boost. The largest non-gaming offerings in the Peninsula Macau Fisherman s Wharf is the largest waterfront entertainment and leisure complex in the Macau Peninsula in terms of site area current site area of 109,495 sq m and features Babylon Casino with a gaming hall that consists of 23 mass market gaming tables and 78 slot machines as at 31 December Redevelopment projects to be rolled out in phases during Following the acquisition of MFW in May 2012, MLD is planning to renovate the site into the largest entertainment, recreational and retail complex in the Macau Peninsula by adding 1,263 hotel rooms across three new hotels (namely Prague Harbor View Hotel, the Palace Hotel and the Legendale Hotel Macau), around 350 additional gaming tables and a wide range of recreational and entertainment facilities including a yacht club and a canopied open-air shopping, dining and entertainment colonnade, with a budgeted capex of HK$6.8 bn. The new MFW is set to change the competitive landscape of the Peninsula Figure 22: The blueprint of new Macau Fisherman's Whaft (to be completed by 2016) Source: Company data Macau Legend Development Limited (1680.HK / 1680 HK) 11

12 The project involves the redevelopment of existing facilities, including Babylon Casino and Rocks Hotel, and the addition of new facilities, including three new hotels, a general entertainment and cultural facility, a canopied open-air shopping, dining and entertainment colonnade, a yacht club at the Marina and other attractions. The existing Tang Dynasty complex and Vulcania will be demolished. MLD plans to rejuvenate the MFW site with three new hotels and a variety of entertainment and leisure facilities Figure 23: Redevelopment timeline by construction period Yacht Club and Public Pier Shopping, dining and entertainment Colonnade The Prague Harbour View Hotel The Palace Hotel The Legendale Hotel Macau General entertainment and cultural facility Refurbishment of Babylon Casino and Rocks Hotel Others Construction period Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: Company data Figure 24: Summary of expansion plan and related capex projection Capacity Capex Capex schedule Hotel rooms Gaming tables (HK$ mn) MFW redevelopment: Prague Harbour View Hotel (4Q14) 4-stars 444 n.a. 1,591 Palace Hotel (3Q15) 5-star deluxe ,064 Legendale Hotel Macau (2Q16) 5-star deluxe ,060 General (4Q15) 647 Yacht club (2Q14) 70 Canopied open-air colonnade 42 Refurbishment of existing facilities and other works Land premium 135 Subtotal 1, ,765 Landmark Macau renovation Total 1, ,195 Source: Company data Given that there is no similar recreational offering within the Macau Peninsula or even in Cotai, together with its strategic location along the outer harbour and beside the Macau Ferry Terminal, we believe the redeveloped MFW will be able to attract more traffic. The construction work has been kicked off The redevelopment of MFW has been kicked off. In particular, the construction work for the first of the three new hotels, The Prague Harbour View, has started, and the Tang Dynasty is set to be demolished. Macau Legend Development Limited (1680.HK / 1680 HK) 12

13 Figure 25: Construction site of first hotel Figure 26: The Tang Dynasty set to be demolished Source: Company data Improving infrastructure to stimulate traffic to MFW Source: Company data On the other hand, the infrastructure of Macau has been consistently improving. To facilitate the connections to Macau, several transportation improvements to the city have been recently completed, such as the Guangzhou-Zhuhai Intercity Railway, which reduces the travel time between Guangzhou and Zhuhai from two hours to approximately 45 minutes. In fact, MFW s location is superior, as it is close to the Macau-HK Ferry Terminal the entry point to Macau for 25% of the visitors who arrived in MFW is close to the Macau- HK Ferry Terminal, and the Lotus Square station of the light rail system to be completed by 2014 is right outside MFW Figure 27: Locations of MLD s properties Macau-HK Ferry Terminal Lotus Square station (2014/15) Macau Fisherman s Wharf The Landmark Macau Taipa Hengqin Source: Google maps, Credit Suisse research Connectivity to MFW is expected to increase further due to a number of infrastructure projects in the pipeline, including the Macau Light Rail System and Hong Kong-Zhuhai- Macau bridge, to be completed in 2015 and 2016, respectively. In particular, the Lotus Square light rail station of the Macau Light Rail System is adjacent to the property and will facilitate traffic to MFW upon completion. Macau Legend Development Limited (1680.HK / 1680 HK) 13

14 Figure 28: Summary of infrastructure that will facilitate traffic to and within Macau Infrastructure projects Completion date Main improvement Guangzhou-Zhuhai Intercity Railway Expansion of Border Gate in Northern Macau Taipa Ferry Terminal Macau Light Rail System. Hong Kong-Zhuhai-Macau bridge * Estimated completion date. Source: Company data 2012 Reduces travel time between Guangzhou and Zhuhai from two hours to approximately 45 minutes 2012 Increases the capacity of the border from 300,000 people per day to > 500,000 people per day 1H 2013* To have 16 piers for boats with a capacity of up to 400 passengers and three piers for ships of 1,200 passenger berths 2015* Will connect the Macau Peninsula, Taipa and Cotai via 21 different stations 2016* Will link three areas with boundary crossing facilities, access roads and associated works As a result of the abovementioned transportation improvements, we believe the new infrastructure will attract more traffic to Macau, and MFW is likely to be one of the major beneficiaries due to its superior location. Macau Legend Development Limited (1680.HK / 1680 HK) 14

15 Attractive growth prospect on capacity expansion Looking back to the past few years, GGR growth re-accelerated after the opening of new casinos in Macau, suggesting this is actually a supply-driven market. Therefore, we believe MLD s introduction of an additional 350 gaming tables and 1,263 hotel rooms in phases during could stimulate GGR growth and allow MLD to capture the uptrend of tourism and gaming market growth. While the major development projects have been focused on the Cotai strip over the last few years, in the coming years, the redevelopment of MFW into an integrated leisure and entertainment complex is a unique offering in the Peninsula, as well as Macau as a whole. Note that MFW would be the only operator to add hotel rooms and gaming capacity before the next casino opening cycle that is due to be kicked off by Galaxy s Galaxy Macau and MPEL s Studio City in 1H15 in Cotai. Therefore, we expect MLD to enjoy the first mover advantage ahead of the Cotai players when some phases of the redeveloped MFW start rolling out in Major development projects have been in Cotai in recent years Figure 29: Cotai projects in the pipeline Casinos Opening date Gaming capacity Hotels (no. of hotel rooms) Galaxy Macau II Mid gaming tables Ritz-Carlton (1,100) (Budget capex: HK$19.6 bn ) ~1,000 slot machines JW Marriott (250) The Studio City Mid gaming tables ~1,650 (Budget capex: HK$16.5 bn) 1,500 slot machines Wynn Cotai 1Q gaming tables ~2,000 (Budget capex : HK$31 bn) 1,500 slot machines MGM Cotai Mid gaming tables ~1,600 (Budget capex: HK$20 bn) 2,500 slot machines SJM Cotai North TBC (CS estimates: 2017) 700 gaming tables ~2,000 (Budget capex: HK$ bn) 1,000 slot machines SJM Cotai South TBC (CS estimates: 2017) n/a ~6,300 (Budget capex : HK$ 25 bn) Galaxy Macau III & IV TBC (CS estimates: 2017) 1000 gaming tables ~5,500 (Budget capex: HK$50-60 bn) ~3,000 slot machines The Parisian Macao TBC (CS estimates: 1Q 2016) 450 gaming tables ~3,000 (Budget capex: HK$21 bn) ~2,500 slot machines Strong demand for gaming and entertainment Being the only legalised gambling destination in the Greater China region and offering extensive entertainment and recreational facilities, Macau is a favourite travel destination for tourists from Hong Kong and Mainland China. Thanks to the grant of six gaming licences and the implementation of the Individual Visitor Scheme (IVS) in 2003 to the Mainland Chinese, Macau has outpaced the Las Vegas strip and become the world s largest gaming market since In 2012, the GGR generated from Macau was six times of that in Las Vegas Strips. Macau is the number one gambling destination for the Mainland Chinese Macau Legend Development Limited (1680.HK / 1680 HK) 15

16 Figure 30: Comparison of GGR at Macau and Las Vegas Strips US$mn 40,000 35,000 30,000 Figure 31: Macau GGR projection E GGR (US$mn) 70,000 60,000 50, E CAGR = 16% 25,000 20,000 15,000 10,000 5,000 40,000 30,000 20,000 10, CAGR = 30% E 2014E 2015E Macau Las Vegas Strips High-roller Mass market Slot Source: DICJ, Nevada Gaming Control Board Under-penetration to Mainland China Source: DICJ, Credit Suisse estimates Annual visitor arrivals from Mainland China have increased almost three times from 2003 to 17 mn in 2012, of which 46% came from the nearby Guangdong province (Figure 33). Figure 32: Mainland Chinese visits up by almost three times from 2003 to 2012 Person th % 18,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, Figure 33: Place of residence of Mainland Chinese visitors 1Q13 Hunan 3% Beijing 2% Jiangsu 3% Fujian 4% Shanghai 3% Tianjin 1% The rest of Mainland China 37% Chongqing 1% Guangdong 46% Mainland Chinese visitations - LHS YoY % chg - RHS Source: DSEC (Statistics and Census Service of Macau) Source: DSEC However, Macau still looks under-penetrated as far as Mainland Chinese visitors are concerned, given merely 3% of the IVS eligible citizens, approx. 270 mn Chinese citizens, were IVS travellers to Macau in 2012 and the majority of Mainland Chinese were from the nearby Guangdong province. We believe Macau could benefit from more visitor inflow on the back of rising disposable incomes in Mainland China, which could help sustain and fuel its development as a mass entertainment and leisure hub in the Pan Pearl River Delta. Pursuing balance between gaming and non-gaming development The landscape of Macau has been changing following the opening of Las-Vegas style casinos over the last few years, where visitors are not simply looking to gamble but are also looking for quality entertainment, and a recreational and retail experience. The Macau government is also keen to expand the non-gaming offerings to strike a balanced economic and social development. As such, we believe the non-gaming facilities expansion, together We believe Macau is pursuing a balance between gaming and non-gaming offerings Macau Legend Development Limited (1680.HK / 1680 HK) 16

17 with the infrastructure improvement in Macau, would help attract more traffic to Macau and thus stimulate the growth of both the gaming and non-gaming business. but supply is rather limited Introduction of hotel rooms and casinos stimulated GGR growth Looking at Macau over the last few years, GGR growth re-accelerated after the opening of new casinos, which introduced approximately 1,800 gaming tables in aggregate in the Cotai Strip since the opening of Venetian in 2007 and around 400 gaming tables in the Macau peninsula by MGM China, suggesting the capacity expansion is one of the drivers for GGR growth. Figure 34: GGR growth re-accelerated post casinos opening GGR (US$mn) % 4,000 3,500 Venetian opened in Aug 07 City of Dreams opened in Jun 09 MGM Grand opened in Dec 07 Galaxy Macau opened in May , , ,000 1,500 1,000 Financial crisis Cotai Central opened in Apr (20) 0 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 (40) GGR (US$mn) YoY chg (%) - RHS Source: DICJ, Credit Suisse estimates On the other hand, even with the addition of approximately 8,500 hotel rooms between 2008 and 2012, hotel room rates and the average occupancy rate in Macau continue to trend up, suggesting strong demand for hotel rooms in Macau and that the introduction of more hotel rooms could stimulate further growth. Macau Legend Development Limited (1680.HK / 1680 HK) 17

18 Figure 35: Total hotel guests and ADR trend Millions US$ Figure 36: Total available rooms at Macau and occupancy Total available rooms % 30, , ,000 15,000 10, Total Hotel guests - LHS ADR (US$) - RHS , Total available rooms - LHS Average occupacy rate - RHS Source: Company data, DSEC Source: Company data, DSEC Therefore, we believe the gaming market in Macau is supply-driven, and any subsequent increase in gaming facilities and hotel rooms is likely to accelerate growth. Limit of 3% annual increase of tables Although the existing concessionaires and sub-concessionaires do not place a limit on the number of gaming facilities or casinos that may be operated, casino operators can only increase the number of gaming tables they operate upon authorisation from the DICJ. Despite the continuous increase in table count from 4,610 in 3Q09 to 5,746 in 2Q13, the annual GGR generated per table continues to trend up. On the one hand, this indicates the increasing wealth of the Mainland Chinese, on the other, we see that table count is actually in short-supply relative to gaming demand. Grant of new tables is highly regulated and subject to DICJ approval Figure 37: Quarterly gaming table count and GGR growth Table counts % 7, , , , , , , Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 Figure 38: GGR generated per gaming table Table counts % 2, , ,600 1, , , Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 Table counts - LHS GGR YoY growth - RHS GGR/table - LHS YoY%chg - RHS Source: DICJ Source: DICJ, Credit Suisse estimates Note that the Macau government announced in September 2011 that it would limit the annual increase of gaming tables to 3% in Macau for 10 years from 2014 onward, translating to less than 2,000 new tables from , unless special authorisation is granted. This further enhances the scarcity value of the table grant in Macau, especially after the next casino opening cycle in Cotai kicks off in 2015, adding gaming capacity of approximately 4,000 tables in aggregate. Macau Legend Development Limited (1680.HK / 1680 HK) 18

19 MFW: Potential addition of 350 tables There are a total of six projects in the pipeline in Cotai, which are expected to open during ; they will combinedly provide gaming capacity of approximately 4,000 gaming tables with more than 20,000 hotel rooms. We believe DICJ usually considers table grants a few months before, or even after, the commencement of operations. That said, the majority of these 4,000 gaming tables to be allocated to the new casinos in Cotai during would require exceptional approval from DICJ, given the current permissible 3% limit of annual increase in table count. The application of 350 additional tables is not subject to the current limit of table count in Macau The current 3% annual limit would not be an obstacle for MLD s application of 350 additional tables MLD is currently applying for around 350 additional gaming tables so that it would operate approximately 500 gaming tables in total within its gaming premises. As advised by DICJ in writing, the 3% limit in the annual increase of tables would not be an obstacle to MLD s application of 350 additional tables. Having said that, the grant of new gaming tables is entirely at the discretion of the Macau government, in accordance with the investment plan and market studies presented to the Macau government to support the application. Therefore, we believe that the additional 350 tables might be approved by DICJ in phases during , according to the redevelopment progress, and allocated across Babylon Casino and the gaming areas of Palace Hotel and Legendale Hotel in MFW upon project completion in phases. As the redevelopment project has already kicked off, we believe that management will start the discussion of new tables shortly. We expect the first batch of tables to come in within the next 12 months. Figure 39: MLD's table count projection as at year-end As of 31 Dec, Nos E 2014E 2015E 2016E 2017E The Landmark Macau Pharaoh (current) Macau Fisherman's Wharf Babylon (current) Palace Hotel (to open in 3Q15) Legendale (to open in July 2016) Total tables Number of new tables The only expansion before 2015 offers attractive growth prospect While there will be no new casino openings until 1H15 at the earliest by Galaxy and MPEL, we believe the rolling out of redeveloped MFW in phases starting from 2H14 should allow MLD to enjoy the first-mover advantage and achieve better than peers earnings growth. Furthermore, we believe the completion of a wide variety of recreational and entertainment facilities at MFW will increase the length of stay of visitors, in particular inside the MFW, and increase their gaming and non-gaming spending. MLD is likely to enjoy the first-mover advantage ahead of Cotai players Macau Legend Development Limited (1680.HK / 1680 HK) 19

20 Initiating with OUTPERFORM In our view, the new MFW is likely to see the greatest growth potential among the Peninsula play in 3-5 years' horizon. Key assumptions and operation data In projecting the EBITDA of MLD, we assume the 350 gaming tables would be granted in three batches after the roll-out of the yacht club in 2Q14 (tables to house at the existing Babylon Casino) and the completion of the gaming areas planned to house the tables, i.e. the Palace hotel in 3Q15 and The Legendale Hotel in 1H16. Figure 40: Average number of tables based on existence period during the year of grant As of 31 Dec, Nos E 2014E 2015E 2016E 2017E Landmark Macau Gaming tables - High-roller Mass-market Subtotal Slot machines Macau's Fisherman Wharf Gaming tables - High-roller n.a. n.a Mass-market n.a. n.a Subtotal Slot machines n.a. n.a ,000 1,200 Regarding the gross gaming revenue at casinos, we expect the daily net win per VIP table at The Landmark Macau to resume at a similar level before renovation work in 2013 and grow at 5% from 2014 onward, leading to overall GGR growth of 11-13% YoY for at the Landmark Macau, which is lower than our forecast of 15-18% GGR growth of Macau, for the sake of being conservative. While MFW is relatively new, we assume the new gaming tables could achieve 45-65% of the daily GGR per table as in the Landmark Macau over the first to fourth year of operations. Figure 41: Key operating statistics and assumptions daily net win/table As of 31 Dec, HK$ E 2014E 2015E 2016E 2017E Landmark Macau - High-roller 293, , , , , , , ,700 - Mass-market 56,900 69,300 71,200 81,900 91, , , ,500 - Slot Macau's Fisherman Wharf - High-roller n.a. n.a , ,600 - Mass-market n.a. n.a. 33,900 39,000 42,400 52,700 68,300 77,700 - Slot n.a. n.a *numbers rounded to the nearest hundred Source: Credit Suisse estimates Macau Legend Development Limited (1680.HK / 1680 HK) 20

21 Figure 42: Key operating statistics and assumptions hotel rooms and occupancy rate Non-gaming 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Landmark Macau - Number of rooms Occupancy rate (%) ADR (HK$) 1,151 1,132 1,120 1,176 1,235 1,297 1,361 1,429 Rocks Hotel - Number of rooms Occupancy rate (%) ADR (HK$) 1,392 1,462 1,535 1,612 1,692 1,777 Prague Harbour View Hotel (estimated completion in 4Q14)* 4-star - Number of rooms Occupancy rate (%) ADR (HK$) 1,500 1,575 1,654 1,736 The Palace Hotel (estimated completion in 3Q15)* 5-star deluxe - Number of rooms Occupancy rate (%) ADR (HK$) 2,500 2,625 2,756 The Legendale Hotel (estimated completion in July 16) * 5-star deluxe - Number of rooms Occupancy rate (%) ADR (HK$) 2,750 2,888 Overall revenue to reach HK$10.3 bn in FY17E As discussed previously, MLD is neither a concessionaire nor a sub-concessionaire. The gross gaming revenue generated at the casinos is collected by SJM, which subsequently rewards MLD with service income, on a monthly basis, based on 2%, 57% and 55% of GGR generated by outsourced VIP, self-operated VIP and mass-market (both table and slot), respectively. Based on the assumption in Figure 40 Figure 42, we project MLD to report revenue of HK$10.3 bn in 2017E, the first year of full operation of MFW, implying 47% CAGR during E. Assuming 60% of new tables would be allocated to mass-market segment We expect the additional 350 gaming tables to be granted by DICJ in phases upon the completion of the yacht club and the three hotels. We assume that 60% of new tables will be allocated to the mass-market segment and the remaining 40% to the high-roller segment. We expected around 80 new tables to come in by end-2014 Direct VIP business might start in 2015 Currently, VIP players are sourced by designated gaming promoters through direct marketing efforts and relationships. In the long run, MLD intends to operate the direct VIP segment. In a self-run VIP business, MLD could capture the gaming service income currently paid to outsourced junkets, i.e. 55% of GGR generated by the high-roller segment including operating expense, in addition to the existing 2% net sharing of GGR, but at the same time bearing the operating expenses of the VIP business. We assume half of new high-roller gaming tables at MFW would be self-operated from 2015 onward. MLD may participate in the gaming promotion business indirectly in the future We expect 2013 daily GGR at Landmark Macau to resume to the level before renovation Regarding the gross gaming revenue at casinos, we expect The Landmark Macau to resume daily net wins at a similar level to 2011 (before renovation) in 2013 and then grow steadily at 5% from 2014 onward. While MFW is relatively new, we assume the new Macau Legend Development Limited (1680.HK / 1680 HK) 21

22 gaming areas could achieve 45-65% of the daily GGR per table as in The Landmark Macau over the first to fourth year of operations. Figure 43: GGR projections of MLD HK$mn 35,000 30,000 Figure 44: MLD s reported revenue projection HK$mn 12,000 10,000 25,000 20,000 15,000 10,000 8,000 6,000 4, CAGR = 47% 5,000 2, E 2011E 2012E 2013E 2014E 2015E 2016E 2017E High-roller Mass market Slot E 2014E 2015E 2016E 2017E High-roller Mass-market Slot Non-gaming revenue Source: Credit Suisse estimates Following the acquisition of MFW in May 2012, the scope of non-gaming offerings is widening. We forecast non-gaming revenue generated mainly from hotel rentals, food and beverages and retail income to grow at a 29% CAGR during E to reach HK$1,402 mn in 2017E after the completion of the MFW redevelopment project. EBITDA to grow at 40% CAGR to HK$4,055 mn in 2017E We estimate EBITDA margin of 30-36%/2% for mass-market/vip The cost structure of casino operations consists mostly of variable costs as the percentage of GGR, including gaming taxes and special levies and table premium, is fixed at 39-40% of GGR and junket commission capped at 1.25% of rolling chip turnover. In MLD s case, the gaming tax and junket commission are settled by SJM, the concessionaire. We project the mass-market segment to generate EBITDA margin of 30-36% on GGR basis, which is lower than the industry average of around 40% due to the SJM s GGR sharing of around 5%. On the other hand, the operating cost of outsourced VIP rooms is borne by the junkets. Given the minimal utilities and administrative cost for VIP operations borne by MLD, its EBITDA margin for outsourced VIP business would be roughly equal to the receipt of 2% sharing of VIP GGR. For the planned direct VIP business, we project the EBITDA margin to be 6% after the sharing of commission to gaming agents and revenue rebate to customers, which is lower than the industry average of 8-10% due to SJM s sharing of around 3% of VIP GGR. MLD s EBITDA margin is likely to be lower than industry average due to SJM s sharing of revenue Macau Legend Development Limited (1680.HK / 1680 HK) 22

23 Figure 45: EBITDA of outsourced VIP segment Figure 46: EBITDA of self-operated VIP segment Gross Gaming Revenue Gross Gaming Revenue $100 $100 SJM SJM $40 $55 $2 $3 $40 $57 $3 Gaming tax, special levies, table premium MLD SJM Gaming tax, special levies, table premium MLD SJM $55 $2 $36 $15 $6 Gaming promoters MLD s income Gaming agents/ revenue rebate Operating cost of VIP rooms EBITDA We believe the non-gaming segment will account for less than 15% of group EBITDA and generate an EBITDA margin of 30-35%. EBITDA to grow at 40% CAGR to HK$4,055 mn in 2017E The Landmark Macau is a relatively mature property. Therefore, we expect its EBITDA to grow steadily from HK$767 mn in 2012 to HK$1,348 mn in FY17E, implying a CAGR of 12% on the back of the organic growth of the Macau market, and operating leverage after the renovation work to be completed by MFW was loss-making during the track record period and we expect it to turn around in 2014 after the rolling out of phases of the redevelopment project, and for some new tables to come in. After the completion of MFW redevelopment and the addition of 350 tables to the site, we expect MFW to contribute an EBITDA of HK$2,707 mn in FY17E, i.e., the first year of full operation. Overall, we expect MLD s EBITDA to grow from HK$750 mn in 2012 to HK$4,055 mn in 2017E, implying a CAGR of 40% over the five-year period, upon the completion of MFW redevelopment. Group EBITDA to grow at 40% CAGR during FY12- FY17E Figure 47: MLD s EBITDA projections by properties HK$mn 4,500 4,000 Figure 48: We expect EBITDA/table to trend up HK$mn , , , , , , E 2014E 2015E 2016E 2017E Landmark MFW E 2014E 2015E 2016E 2017E EBITDA/table (HK$mn) Source: Credit Suisse estimates Macau Legend Development Limited (1680.HK / 1680 HK) 23