SELL (Initiation) November 15, Wynn Macau, Limited [1128.HK] Delivering Growth But Valuation Stretched; Initiate with SELL

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1 Wynn Macau, Limited [1128.HK] Delivering Growth But Valuation Stretched; Initiate with SELL The opening of Wynn Palace has lifted Wynn Macau (WYML) s top line significantly, with WYML now accounting for 16% of the VIP and 10% of the Mass Gaming in Macau. Nevertheless, given the high fixed-cost base and the opening of other new casinos, WYML s EBITDA growth may be below expectations, with our forecast being 10% below the market consensus. Pending a significant rebound in Wynn Palace s performance, WYML s valuation seems expensive compared to its growth. Fully valued. More positive industry view. The opening of new casinos has coincided with stronger visitor flow to Macau. With VIP gaming revenues stabilising, we believe Macau s GGR recovery should be sustainable. This will benefit the entire sector. The HK$34bn Wynn Palace should improve WYML s competitiveness. WYML is now more competitive vis-à-vis the Cotai casinos, with the opening of Wynn Palace, which has over 1,706 rooms (1.7x that of Wynn Macau) and a 500,000 sq.ft. casino (2x that of Wynn Macau). We forecast Wynn s market share to increase to 18% in the VIP segment and 11% in the mass segment to increase from 8% in 2017E. November 15, 2016 SELL (Initiation) Price: HK$11.58 (Nov 14, 2016) Target Price: HK$10.0 (-14%) Price Performance Gaming Sector Below Consensus EBITDA growth due to lukewarm initial response. Despite the topline growth, WYML s EBITDA increased only 9%YoY in 3Q16. This is because, in the first 40 days of its operation, Wynn Palace mass and VIP gaming revenues are only 55-75% of Wynn Macau s. While the Palace s business has improved subsequently with heavy promotion, we project WYML s EBITDA to grow at only 18% CAGR from E, and to be 10% to 15% below consensus. Operating costs and charges will weigh on profits. The opening of Wynn Palace should increase the company s depreciation by HK$1,500mn a year. In addition, with gross debt of more than HK$32bn, Wynn s interest expenses should increase from the HK$564mn to over HK$1bn in 2017, adversely affecting Wynn s net profit and dividend payout. Its EPS is forecast to increase 9% CAGR from 2016 to 2018E. Valuation. WYML s share price is down 18% since 15th September and underperformed its peers. At 20.7x 2016E EV/EBITDA and 14.4x 2017E, WYML s valuation is still at a slight premium to the sector median. Unless we see a significant improvement in Wynn Palace s profitability, we believe WYML s valuation is stretched. Our 2017 year-end Target Price is HK$10 based on 13x 2017E EV/EBITDA. HK$ E 2017E 2018E Revenue (HK$m) 19,096 22,859 29,885 31,045 Growth (%) (35) Adj. EBITDA (HK$m) 4,681 4,311 6,049 6,013 Growth (%) (44) (8) 40 (1) Net Profit (HK$m) 2,410 1,812 2,137 2,158 EPS (HK$) Growth (%) (63) (25) 18 1 Source: Bloomberg Market Cap US$7,712m Shares Outstanding 5,195m Auditor Ernst& Young Free Float 28% 52W range HK$ M average daily T/O US$25m Major Shareholder Wynn Resorts(72%) Sources: Company, Bloomberg Johnson Cheung (852) johnsoncheung@chinastock.com.hk Tony Li EV/EBITDA (x) PER (x) Div Yield (%) Net Debt to Equity (x) ROE (%) Source: Bloomberg, CGIS Research (852) tonyli@chinastock.com.hk 1

2 NEW CASINOS HELP JUMPSTART RECOVERY In the past three years, we saw the gaming industry in Macau go through a full cycle. After the monthly gross gaming revenue (GGR) peaked in May 2014, there were 26 consecutive months of YoY declines, and this trend broke only with the opening of the Wynn Palace and Sands Parisian in Q (Figure 1). The recovery should bolster sentiment in the next 12-months. We believe that overall GGR, having fallen to a more reasonable level, should see stronger growth in 2017: 1. The monthly GGR, having fallen to 2011 levels, has consolidated at this level for more than 18 months. 2. The decline in VIP baccarat revenue is turning around. Q VIP revenue fell only 1% YoY. 3. The increase in hotel room supply should foster tourist arrivals and lengthening of their average stay. Mass segment gaming wins have grown steadily at 3%-5%YoY. Figure 1: Macau Gross Gaming Revenue Shows Recovery YoY Growth (%) 50% 40% 30% 20% 10% 0% -10% Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16-20% -30% -40% -50% -60% Gaming Revenue YoY Growth Source: Gaming Inspection, and Coordination Bureau. Macao SAR GGR Has Clearly Consolidated GGR was up 7.4%YoY in September 2016 and 8.8%YoY in October These figures, despite appearing tentative after months of double digit declines, should presage much stronger growth in Q As Figure 1 shows, Macau s GGR has dropped 30% from the 2013 levels; but for the past 18 months, it has stabilized between MOP15bn to MOP21bn a month. 2

3 Figure 2: Monthly Gross Gaming Revenue MOP (bn) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Gaming Inspection, and Coordination Bureau. Macao SAR Improving GGR Structure Aside from headline growth, the structure of GGR is improving. Figure 3 shows the growth rate between gaming wins from VIP baccarat and other mass segments. Generally, gaming revenue from VIP business is more volatile and dramatic. It also has underperformed gaming revenue from the mass segment. In fact, VIP gaming explains the bulk of the GGR drop in the past two years. Mass gaming revenues have actually grown steadily by a 6.8% CAGR from Q to Q Revenues from the mass segment now account for 48% of overall gaming revenue in Q3 2016, up from only 32% in Q Hence we believe the mass gaming segments, whose average EBITDA margin of the mass segment is 2x to 3x higher than that of VIP gaming, will continue to underpin Macau gaming operators profitability. Figure 3: YoY Growth Rates for VIP and Mass Gaming Revenues YoY Growth (%) 60% 40% VIP Mass+Slot 20% 0% -20% -40% -60% 2011 Q Q Q Q Q Q Q Q Q Q Q Q3 Source: Gaming Inspection, and Coordination Bureau. Macao SAR 3

4 VIP Baccarat Gaming Has Stabilised With VIP gaming revenue dropping by only 1%YoY in Q3 2016, compared to the double-digit declines seen earlier, Macau s VIP business seems to have stabilized. Of course, it is still extremely sensitive to Mainland government policies. For instance, in October, the Chinese authorities detained 18 employees of Crown Enterprise (there was a similar detention of employees of South Korean casinos a year ago).the Macau gaming operators were not implicated in these two cases, but they highlight the overhang under which the Macau casinos operate. Figure 4: Market Share for VIP Baccarat VIP Baccarat Revenue (HK$ bn) 3Q2015 3Q2016 YoY Growth (%) 2015Q3 Market Share (%) 2016Q3 Market Share (%) Sands China (7.1) Galaxy Ent (3.0) Wynn Macau MGM China (3.0) SJM Holdings (19.1) Melco Crown (1.4) Overall (1.2) Sources: Company Reports, CGIS Research estimates As Figure 4 shows, GEG remains the leading casino operator in the VIP segment. SJM is the second largest VIP gaming operator, but it was also the biggest loser. Its VIP revenue was down 19%YoY, with most of the drop coming from Grand Lisboa and the 16 smaller satellite casinos. Its 18% market share should see further erosion in the coming quarters. WYML, on the other hand, saw quite significant growth. Its VIP revenue grew 25%YoY; as a result, we believe its market share has increased to 16%. Mass Segment to Benefit From New Hotels Mass market / electronic gaming revenues grew 4%YoY in Q One reason behind the strong secular growth is the strength of the premium mass segment. As the number of VIP junket operators has fallen from over 200 in 2013 to under 100, many ex-junket operators have transformed into premium mass customer relationship managers for the casinos. A portion of the VIP customers have become premium mass players. Another factor driving mass GGR growth is the opening of new casinos, hotels, and other facilities. The supply of high-end hotel rooms should see a massive increase in from 2H2015 to This and the fact that the casino operators will probably reduce their effective room rates should encourage an influx of tourists, longer average stays in Macau, as well as related spending. Figure 5: New Hotel Rooms Coming on Stream Period Hotel No of Rooms 2H2015 Galaxy Macau Phase 2 1,800 Galaxy Broadway 320 Studio City 1,600 2H2016 Wynn Palace 1,706 Sands Parisian 3,000 1H2017 MGM Cotai 1,500 1H2018 Lisboa Palace 1,500 The largest operator in the mass segment is Sands China, whose market share is estimated to be over 32%, despite some market share erosion. The launch of the Sands Parisian will further buttress 4

5 its position as a market leader. The second largest operator is SJM, whose business has slightly retrenched. GEG and Melco Crown both saw significant growth in YoY figures, mainly due to the opening of new casinos. Melco Crown saw the highest YoY growth because its Studio City opened in Q The smallest player is MGM China, at least until its new casino opens. WYML, despite the 13% growth coming from the opening of Wynn Palace, is still the second smallest, with its market share still less than 10%. Figure 6: Market Share for Total Mass/ Slot Gaming Total Mass Gaming Revenue (HK$ bn) 3Q2015 3Q2016 YoY Growth (%) 2015Q3 Market Share (%) 2016Q3 Market Share (%) Sands China (4.4) Galaxy Ent Wynn Macau MGM China (3.0) SJM Holdings (3.7) Melco Crown Overall 3.9 Sources: Company Reports, CGIS Research estimates 5

6 WYNN MACAU S CASINO OPERATIONS Prior to August 2016, WYML had operations only on the Peninsula. Despite its premier status and higher-than-average table wins, WYML was actually the second smallest of the six casino operators in Macau. This changed with the opening of Wynn Palace. The Q3 results showed that WYML has successfully grown its VIP business, with a 16% market share, but it was less successful in the mass segment. How much Wynn Palace s revenues may increase in Q and 2017 remains a key issue, although business seem to improve with WYML s heavy promotion and fine-tuning. Wynn Macau s Major Gaming Properties Wynn Macau. This property, located on the Peninsula, opened in 2006, and the new wing, Wynn Encore, was added in These two hotel towers have 1,008 rooms. In addition, the integrated resort has 284,000 sq.ft. of casino space, eight restaurants and 57,000 sq.ft. of high-end retail space occupied by brand names such as Bvlgari, Graff and Tiffany. Wynn Palace. This opened in August 2016 after four years of preparation. Its total construction cost, including land premium, amounted to US$4.4bn. This is an integrated resort with a 1,706-room hotel, and a 105,000 sq.ft. shopping mall. Other attractions include a performance water fountain and gondola ride. It also boasts a 500,000 sq.ft. casino, which is almost twice the size of Wynn Macau s. In fact, it is the second largest gaming hall in Macau. Wynn was granted 150 additional tables for Wynn Palace. One hundred tables will be available immediately, with another 50 tables coming in 2017/18. Wynn has also shuffled 250 tables from Wynn Macau to the new casino, bringing the latter s table count to 350 at the opening. In line with the changing landscape, most of the tables at Wynn Palace belong to the mass segment. At the moment, only three existing junket operators (Sun City, Guangdong/Neptune and Tak Chun) are operating out of Wynn Palace, although more may eventually follow suit. Figure 7: No of Tables at WYML s casinos E 2017E 2018E Wynn Macau Wynn Palace Total Sources: Company Presentation, CGIS Research estimates WYML s Recent Market Share Gains In Q3 2016, Macau s VIP baccarat revenue was MOP 28.6bn, down 1% compared to Q Total mass gaming revenue, on the other hand, was up 4%. In comparison, WYML s VIP revenues and mass gaming revenues were up 25% and 13%, respectively, beating the industry average by a wide margin in both categories. This implies significant market share gains, particularly in VIP baccarat. Figure 8: VIP / Total Mass Gaming Revenue HK$ mn 3Q2015 Mkt Share (%) 3Q2016 Mkt Share (%) VIP Gaming Revenue 3, , Total Mass Gaming Revenue 2, ,

7 VIP Baccarat Has Jumped Although WYML had relied heavily on VIP baccarat in the past, its importance has steadily diminished for WYML, as it is the case for the other casino operators. VIP now account for 62% of WYML s gaming wins. Gross table wins from VIP baccarat fell from HK$28.7bn in 2013 to HK$12.9bn in It further contracted to HK$6.6bn in 1H16, a 9% YoY drop, before rebounding in Q VIP business accounted for 59% of WYML s gaming revenue in 2015, but only 17% of its EBITDA. To attract VIP customers, WYML pays the gaming promoters or junkets a certain percentage of the gross table wins; part of which may be paid in the form of advance commissions or promotional allowances. In some cases, WYML may directly extend credit to selected VIP players. Once these and other major costs, such as gaming taxes, are subtracted, the EBITDA margin for VIP baccarat was only 5.3% (based on EBITDA/ Total VIP net wins). We estimate that only 30% of tables made money for the firm. As a result, only three gaming promoters now operate out of Wynn Palace. WYML also has its direct VIP Wynn Club room. We forecast WYML s VIP revenues to increase 28%YoY for 2016, despite a 9%YoY drop in 1H2016, due to the new business at Wynn Macau. Overall, WYML s VIP revenues is expected to grow by a 21% CAGR from 2015 to HK$20.5bn in 2018E. Revenues (HKD bn) Revenues (HKD bn) YoY Growth (%) YoY Growth (%) 100% 80% 60% 40% 20% 0% -20% -40% E 2017E 2018E -60% Figure 9 : WYML s VIP Gaming Revenue In 2015, with total VIP net win of HK$12.9bn, we estimate that WYML owned 10% of the overall VIP gaming market. With Wynn Palace, WYML should be able to increase its market share in the VIP segment to 18% by 2018 (Figure 10). 7

8 Figure 10 : Market Share Comparison 2013 VIP Breakdown 2018E VIP Market Share SJM, 23.8% Sands China, 17.0% SJM, 17.1% Sands China, 14.7% MPEL, 12.5% MGM, 10.6% Wynn, 11.7% Galaxy, 24.4% MPEL, 13.0% MGM, 9.2% Wynn, 18.4% Galaxy, 27.5% Sources: Company Presentations, CGIS Research estimates Mass Segment Has Disappoint The mass segment and slot revenues accounted for 41% of WYML s gaming revenues and 62% of its EBITDA in The EBITDA margin was 22% (based on EBITDA/ Total net wins). WYML s mass gaming business increased at an 8.4% CAGR from , but this dropped 3%YoY in 1H16. We expect this to increase by 16% YoY for 2016 as a whole, with the opening of Wynn Palace, which has two premium mass lounges (the Chairman s Club and the Diamond Club that cater to high-rollers), and c140 tables in the mass gaming hall. Revenues (HKD bn) Revenues (HKD bn) YoY Growth (%) YoY Growth (%) 50% 40% 30% 20% 10% 0% -10% -20% E 2017E 2018E -30% Figure 11: Mass Segment Revenue Growth Sources: Company Annual Reports, Bloomberg, CGIS Research 8

9 Originally, Wynn Palace has a separate management team to ensure that each team will be properly incentivized. Theoretically, this should minimize cannibalization and allow the profitability of each property to be maximized, but this means Wynn Palace cannot properly leverage WYML s existing client base and relationships. We project that the company s mass gaming revenue to grow by 16% CAGR from 2015 to HK$14.9bn by 2018E. WYML should be one of the two casino concessionaires which will see significant market share gains in the next few years. Our projections show that WYML s share of the mass/slot segment, which was 9% in 2015, is likely to jump to 13% in Nevertheless, WYML will still be the second smaller player in the mass segment. Figure 12: Market Share Comparisons Sources: Company Presentation, CGIS Research estimates Non-Gaming Revenues Revenues from WYML s non-gaming operations, which include room, food and beverage, retail, and other operations, amount to only 6% of Wynn s revenues. However, their actual importance should not be overlooked, because: (i) they accounted for 21% of WYML s EBITDA, and (ii) a significant portion of these services are provided as promotional allowance. Consequently, they are excluded from revenues in the consolidated statement of profit or loss, but as Figure 13 shows, promotional allowance can be sizable. They amounted to almost HK$1.6bn in 2015.We forecast the company s non-gaming revenues to grow by 19% CAGR from Figure 13: Promotional Allowances and Reported Revenues HK$ mn Reported Revenues Promotional Allowance Total Hotel Rooms ,108 Food and Beverage Retail and others

10 WYML s two hotels occupy different niches. Wynn Macau has been rated a Forbes 5-star hotel seven years in a row. It has over 1,008 rooms located in two towers: the Wynn Tower and the more luxurious Encore Tower. Average occupancy has been 93%. Wynn Palace is a much larger integrated resort. It has over 1,706 rooms, half of which are Palace rooms with a large room size of 700 sq,ft. The rest are suites of different sizes, ranging from 800-1,700 sq.ft. In addition, there are the super luxury nine Penthouses and Garden Villas, which cater for ultra- high net worth VIP customers. Other attractions and facilities include a Performance Lake with choreographed water fountain shows every 15 minutes, and SkyCap, a 10 minute gondola ride around the lake. Figure 14: Wynn now has over 2,700 rooms E 2017E 2018E Wynn Macau No of Rooms Average Room Size ~560 sq.ft. (Wynn Tower) ~1020 sq.ft. (Encore Tower) Wynn Palace No of Rooms Average Room Size ~700 sq.ft. (Rooms) ~up to 1700 sq.ft. (Suites) Sources: Company Presentation Retailing generated HK$864mn in revenue last year. Wynn Macau has 57,000 sq.ft. of retail space, with high-end luxury-goods retailers, such as Rolex and Cartier. Its retail-related EBITDA margin was over 50% in Wynn Palace has more than 105,000sq.ft. of retail space, with more than 50 shops, including Graff Diamonds, Cartier, and Hermes. There are also 13 restaurants, which run the gamut from SW Steakhouse and Mizumi Sushi to Starbucks. Figure 15: Wynn Palace retail space commonly known as Wynn Esplanade Source: Company Website 11

11 EBITDA OUTLOOK AND FINANCIALS WYML s revenues and EBITDA should show substantial growth from 2H16 on, thanks to market share gains and economies of scale. This remains the case even though the company recently announced worse-than-expected Q performance indicators, mainly due to Wynn Palace s below-par initial performance. After fine-tuning our numbers, we forecast that WYML to see 20% EBITDA growth and 19% net profit growth for E. This is 10% to 15% below the market consensus estimate. Less Than Stellar Q Despite the strong topline growth, WYML s EBITDA increased only 9% YoY to HK$2.38bn. The higher fixed costs, as well as the interest costs and depreciation charges at Wynn Palace, cause WYML to report a net loss of HK$67mn for Q Figure 16: WYML s 3Q2016 Summary Results HK$ mn 3Q2105 3Q2016 YoY Change (%) VIP Gaming 3,022 3, Mass Gaming 2,157 2,329 8 Aggregate Gaming Revenue 5,179 6, Revenue 4,262 4, Adjusted EBITDA 2,183 2,382 9 Net Profit 484 (67) na Source: Company Annual Reports, CGIS Research estimates Weak Wynn Palace Results We believe this disappointment is mainly due to the weak Wynn Palace numbers. Wynn Palace was only opened for 40 days out of the 91 days in Q It only contributed to 25% WYML s VIP revenue and 20% of mass gaming revenues. To better analyze the numbers, Figure 17 compares their daily revenues. For a US$4.4bn investment, Wynn Palace s revenue was only 40%-60% that of the older Wynn Macau. Figure 17: Comparing Wynn Palace with Wynn Macau 3Q Revenues Daily Revenue HK$mn Wynn Macau Wynn Palace Wynn Macau Wynn Palace VIP Baccarat 2, Mass Segment 1, Slot Machine Win EBITDA and Net Profit Outlook After taking this into account, we forecast the company s revenue to increase from HK$9.69bn in 1H16 to HK$30.2bn in 2017 and HK$31.4bn in 2018, after netting out 80% of the commissions that WYML pays the gaming promoters. We forecast that non-gaming revenue will increase by a 19% CAGR from 2015 to

12 Figure 18: WYML s Profit and loss Income Statement (HK$ mn) E 2017E 2018E Casino Revenues 17,887 21,286 28,100 29,012 Other Revenues 1,209 1,573 1,785 2,033 Operating Revenues 19,096 22,859 29,885 31,045 YoY Growth (%) (35) Gaming taxes and premiums (8,701) (10,706) (13,788) (14,411) Staff costs (3,121) (4,370) (5,619) (5,899) Depreciation and amortization (1,000) (1,563) (2,500) (2,500) Other operating expenses (3,242) (3,823) (4,780) (5,071) Operating profit 3,032 2,398 3,199 3,163 Adj EBITDA 4,681 4,311 6,049 6,013 YoY Growth (%) (44) (8) 40 (1) Finance revenues /costs (564) (538) (1,013) (956) Other gains/ (expenses) (51) (41) (41) (41) Profit before tax 2,417 1,819 2,145 2,166 Income tax expense (6) (8) (8) (8) Profit after tax 2,410 1,812 2,137 2,158 On the cost side, the most significant items are gaming taxes, promotion expenses, and employee expenses. We forecast that the Company s adjusted EBITDA will increase from HK$2.55bn in 1H16 to HK$6.05bn in 2017, approximately 60% of which should be from Wynn Palace. Our EBITDA forecast is 10% - 15% lower than the market consensus. 13

13 Figure 19: WYML s Net Profit vs. EBITDA Net Profit Negatively Affected WYML s net profit historically amounted to 75% of EBITDA in 2014; this declined to only 50% in With its HK$32bn debt, we estimate that interest costs are HK$1,100m and that the incremental increase in D&A will be HK$1.5bn once annualized. It is likely that WYML will report a drop in net profit in 2016, despite the improvement in revenues and EBITDA. Financial Position WYML has increased its debt levels with the construction of Wynn Palace. Its gross debt reached HK$32.5bn at the end of June WYML s credit facilities consist of a HK$7.4bn fully funded senior loan facility that matures in 2018 with an interest rate of HIBOR/LIBOR % to 2.50%, depending on WYML s leverage ratio, and a HK$12.1bn revolving credit facility. It also has issued HK$10.5bn in 5.25% senior notes, which mature in The company has fixed the interest rate for 80% of its bank borrowings, so the interest rate sensitivity of WYML s earnings is minimal. WYML s net debt to equity ratio is estimated to be 10.5x by the end of This high level is likely to persist as WYML will probably maintain a high payout ratio. WYML s payout ratio (DPS/EPS) has ranged from 100% to 124% since 2011 (Figure 20). The interest coverage ratio is estimated to be over 5x for

14 Figure 20: WYML s Dividend Record DPS (HKD) DPS (HKD) 1.0 Payout Ratio (%) H 2017E 2018E 160% 140% 120% 100% 80% 60% 40% 20% 0% 15

15 VALUATION The principal metric we use in peer comparison is EV/EBITDA. Most Macau gaming companies have very strong cashflows, despite a relatively high net debt to equity ratio. The only exceptions are Galaxy Entertainment and SJM Holdings, both a net cash position. With a market capitalization of HK$59.7bn, and estimated net debt of HK$28bn by the end of 2016, WYML s Enterprise Value is HK$87.8bn. Its market capitalization accounts for 68% of its EV. Figure 21: Gaming Companies EV compared with Market Cap (HK$ bn) EV Market Cap - Sands China Galaxy Ent MGM China SJM Hold WYML According to our estimates, WYML is trading at a 2016E EV/EBITDA of 20.8x, 33% above the industry median of With its EBITDA expected to increase by 40%, the 2017E EV/EBITDA should come down to 14.5x in 2017E, but this is still high relative to its peers. We believe a fair valuation will be 13x 2017/18E EV/EBITDA. Figure 22: Valuation Table Price EV/EBITDA (x) PER (x) P/B(x) Div Yield (%) Casino Operators 11/14/2016 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16 FY16 FY17 SANDS CHINA LTD* GALAXY ENT* MGM CHINA HOLDINGS* SJM HOLDINGS LTD* MELCO CROWN ENT* WYNN MACAU LTD MEDIAN Sources: Company Annual Reports, Bloomberg, CGIS Research estimates. *Denotes Bloomberg Consensus Estimates 16

16 APPENDIX A: COMPANY BACKGROUND The Company was listed on the HKEx on 9 th October 2009, with the sale of 1.44bn new shares at HK$ There has been no sale of new shares since. Wynn Resorts is the largest shareholder, and retains a 72% interest. Figure 23: WYML s Shareholding Structure Wynn Resorts Limited (Wynn US) Public Investors 72.15% 27.85% Wynn Macau Limited (HK. 1128) 100% WRM* 1 -Wynn Macau - Wynn Palace *Wynn Resorts (Macau) S.A. Actual Concessionaire and operating entity Share Price Performance After its listing, WYML s share price reached its all-time high of HK$38.35 on 5 March The share price hit a 52-week low of HK$6.513 on 21 January With the opening of Wynn Palace, WYML s share price went up to HK$14.18 on 15 September 2015, before seeing selling pressure. WYML s share price is up 27% since the beginning of WYML significantly underperformed the sector in 2012 and 2013, when the sector s share price saw sizeable gains. In 2014 and 2015 WYML s share price either performed in-line or worse than the industry. In 1H16, WYML significantly outperformed its peers in anticipation of the opening of the Palace. After WYML s share price hit its 52-week high on 15 th September, it has fallen 17%; once again WYML was the worst performer in the sector. Figure 24: Share Price Relative Performance Price 52 Wk 52 Wk Since Price change (%) Casino Operators 11/14/2016 High Low 15-Sep Oct-16 3Q2016 1H SANDS CHINA LTD (4) 0 30 (2) (30) (40) GALAXY ENTERTAIN (6) (44) (37) MGM CHINA HOLDINGS (5) 34 4 (51) (40) SJM HOLDINGS LTD (6) (6) 21 (15) (55) (52) MELCO CROWN ENTERTAIN (25) (34) (35) WYNN MACAU LTD (17) (7) (59) (38) 68 7 MEDIAN 1 (2) 28 (4) (47) (39) Sources: Company Annual Reports, Bloomberg, CGIS Research estimates 17

17 Parent Company Background Wynn Macau s parent company, Wynn Resorts, Limited (WYNN US), is a publicly traded company in the US, based in Paradise, Nevada. Formed and listed in 2002 by former Mirage Resorts Chairman Stephen Wynn, WSR is a developer and operator of high end hotels and casinos. It major properties, aside from Wynn Macau s operations, include Wynn Las Vegas and Wynn Boston Harbor. The latter will be completed in Litigation Risks WYML s subsidiary WRM and certain individuals who are or were directors of WRM or WYML have been named as defendants in a lawsuit filed in the Court of First Instance of Macau by Mr. Kazuo Okada ( Okada ) and two of Okada s controlled companies. The principal allegations are that the redemption of the Okada Parties shares in WRL was improper and undervalued, that the previously disclosed payment by WRM to an unrelated third party for relinquishing the latter s certain rights in and to any future development on the site of Wynn Palace was unlawful, and that the previously disclosed donation by WRM to the University of Macau Development Foundation was unlawful. The Okada Parties are seeking the dissolution of WRM and compensatory damages. WYML made a voluntary announcement in respect of this lawsuit on 3 July 2015, and based on advice from WYML believes that the claims are devoid of merit and unfounded. WRM has been named as a defendant in several lawsuits by individuals with credits in accounts maintained by Dore Entertainment Company Limited ( Dore ), an independent Macau registered and licensed gaming promoter with business at Wynn Macau. The plaintiffs allege that Dore failed to honor withdrawal of funds requests in connection with alleged theft, or other crimes perpetrated by a former employee of Dore, and that WRM, as a gaming concessionaire, should be held responsible for Dore s conduct. Both these cases are still in their initial stages. 18

18 APPENDIX B: FINANCIAL MODELS Figure 25: Profit and Loss Summary Income Statement (HK$ mn) E 2017E 2018E Casino Revenues 29,536 27,788 17,887 21,286 28,100 29,012 Other Revenues 1,805 1,657 1,209 1,573 1,785 2,033 Operating Revenues 31,341 29,445 19,096 22,859 29,885 31,045 Gaming taxes and premiums (15,144) (13,885) (8,701) (10,706) (13,788) (14,411) Staff costs (2,351) (2,885) (3,121) (4,370) (5,619) (5,899) Depreciation and amortization (919) (986) (1,000) (1,563) (2,500) (2,500) Other operating expenses (5,115) (4,723) (3,242) (3,823) (4,780) (5,071) Operating profit 7,812 6,966 3,032 2,398 3,199 3,163 Finance revenues /costs (236) (457) (564) (538) (1,013) (956) Other gains/ (expenses) 139 (40) (51) (41) (41) (41) Profit before tax 7,716 6,469 2,417 1,819 2,145 2,166 Income tax expense (15) (24) (6) (8) (8) (8) Profit after tax 7,701 6,445 2,410 1,812 2,137 2,158 Attributable profit to shareholders 7,701 6,445 2,410 1,812 2,137 2,158 Minority interest

19 Figure 26: Key Data Ratio Analysis E 2017E 2018E Debt to equity (%) , Net debt to equity (%) (26.97) , Interest coverage (x) na na na Grow th (YoY%) Revenue 10.2 (6.0) (35.1) Adjusted EBITDA 13.2 (7.7) (49.3) (7.9) 40.3 (0.6) Net profit 19.6 (16.3) (62.6) (24.8) Diluted EPS 19.4 (16.2) (62.9) (24.2) Margins (%) EBITDA margin Net profit margin Other ratios (%) Return on average assets Return on average equity Dividend payout ratio

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Explanaon on Equity Rangs BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior wri+en consent of China Galaxy Internaonal Securies (Hong Kong) Co., Limited. China Galaxy Internaonal Securies (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: