Global Casinos & Gaming Review

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Global Casinos & Gaming Review March 2017 Bhum ika Gashti, CFA U.S. Consumer Sector Specialist +1 312 345 6166 bhumika.gashti@credit-suisse.com Stephen Price U.S. Consumer Team +1 212 538 3041 stephen.

1 Global Casinos & Gaming Review March 2017 Bhum ika Gashti, CFA U.S. Consumer Sector Specialist Stephen Price U.S. Consumer Team Em ily Tsui NJA Consumer Sector Specialist credit-suisse.com/holtmethodology Analysis

2 Executive Summary Global Casinos & Gam ing: Aggregate global casinos and gaming companies are earning lower than peak levels of CFROI but still higher than the credit crisis lows Historical Expectations: CFROI forecasts have been below market expectations, but that gap has started to close and absolute CFROI absolute expectations are near decades lows Fundam ental Drivers: Both margins and asset efficiency are below highs, leaving room for improvement during next upcycle Macau vs Las Vegas: Macau Expectations appear demanding relative to the Las Vegas aggregate long term history, pricing in more CFROI improvement and twice the growth of Las Vegas Casinos Gam ing Equipm ent & Online Gam ing: Asset light online gaming earns higher CFROI levels and has lower relative expectations than Regional Casinos Relative Com pany Expectations (slides 11-12, 16-17): Global Casinos: Non Macau exposed Asia names have some of the lowest expectations (GENT, GENM, CWN). MGM has lowest expectations of Las Vegas peers. Gaming Equipment & Online Gaming: SGMS and TTRL stand out within gaming equipment and online gaming, respectively. Regional Gaming & Racetracks: CHDN, MCRI and FLL have some of the lowest relative expectations. PNK is priced for significant operational improvement 1

3 Global Casinos & Gam ing 2

Aggregate Global Casinos & Gam ing 1. Historically, casinos and gam ing com panies have achieved CFROI levels above the cost of capital. 2.

4 Aggregate Expectations: Aggregate global casinos and gaming companies are currently earning midcycle CFROI levels. Near term forecasts and long term expectations suggest improvement to ~10% levels (previous cycles high levels). Global growth is expected to improve to 5% long-term. Aggregate Global Casinos & Gam ing 1. Historically, casinos and gam ing com panies have achieved CFROI levels above the cost of capital. 2. And CFROI is forecasted to continue to decline to new trough levels next year, before im proving 3. The m arket is expecting future CFROI levels to im prove 4. Coupled with growth expectations of 5%, which is lower than historical asset growth. Source: Credit Suisse Lens Universe: Global Casinos & Gaming firms 3

Spread % CFROI % Implied expectations for Global Casinos & Gaming in history: CFROI forecasts (pink bars) have been below market expectations (green dots) for several years now, but that gap has

5 Spread % CFROI % Implied expectations for Global Casinos & Gaming in history: CFROI forecasts (pink bars) have been below market expectations (green dots) for several years now, but that gap has started to close. Additionally, absolute levels of implied corporate performance are not far from the lows of the last decade Aggregate Global Casinos & Gam ing Historical Expectations Analysis Forecast CFROI Market Implied CFROI Global forecasts (pink bars) were in line with expectations (green dots) during the last upcycle. Now, however, the group is priced for improvement. Current absolute expectations (level of green dot) are near the lows of the last decade. Spread (Forecast CFROI Market Im plied CFROI Consensus driven forecast levels of CFROI have started to increase while market expectations have continued to fall, resulting in a narrowing of that spread. Source: Credit Suisse Lens Universe: Global Casinos & Gaming firms 4

Fundamental Drivers: In the previous CFROI upcycle

initial CFROI expansion, margins and operating

Both margins and asset efficiency are below highs,

6 Fundamental Drivers: In the previous CFROI upcycle ( ), margins were steady while sales growth and asset efficiency improved. In the prior cycle, while asset turns led the initial CFROI expansion, margins and operating leverage offset over-investment and declining asset efficiency towards the end. Relative Wealth Chart Sales, Margins, Asset Turns Both margins and asset efficiency are below highs, leaving room for improvement during next upcycle Source: Credit Suisse Lens Universe: Global Casinos & Gaming firms 5

7 Macau vs Las Vegas Casinos 6

Macau vs Las Vegas: Prior to regulatory crackdown, Macau earned higher CFROI levels thanks to asset efficiency (focus on tables, less on entertainment) and growth.

8 Macau vs Las Vegas: Prior to regulatory crackdown, Macau earned higher CFROI levels thanks to asset efficiency (focus on tables, less on entertainment) and growth. Macau has maintained higher asset efficiency than US peers even during recent slowdown Macau Casinos Las Vegas Casinos Median: 7% Peak: 21% 20Y median: 8% 20Y peak: 10% Pre-Macau investment Median: 21% 20Y median: 12% Since peaking in 2010, aggregate sales growth has been on a decline. Asset turns have dropped dramatically to 0.5x in 2015, which is still above US peers Although CAPEX cycle is largely over, the US experience shows that turns would be difficult to revert upwards given the current forecasts. Source: Credit Suisse Lens Universe: Macau Gaming Operators including Galaxy, MPEL, MGM China, Sands China, SJM and Wynn Macau; Las Vegas includes CZR, ISLE, LVS, MGM, WYNN 7

Asset Growth % CFROI % Macau vs Las Vegas Historical Expectations: Macau Casinos have higher absolute CFROI levels embedded and more improvement from forecast priced in than Las Vegas.

Market Im plied CFROI Forecast CFROI Market Im plied CFROI Macau priced for higher absolute levels of CFROI and more improvement going forward Forecast Asset Growth Market Im plied Asset Growth

9 Asset Growth % CFROI % Macau vs Las Vegas Historical Expectations: Macau Casinos have higher absolute CFROI levels embedded and more improvement from forecast priced in than Las Vegas. Addtionally Macau s expectations for growth have not declined and are twice that of Las Vegas peers Macau Casinos Historical Expectations Las Vegas Casinos Historical Expectations Forecast CFROI Market Im plied CFROI Forecast CFROI Market Im plied CFROI Macau priced for higher absolute levels of CFROI and more improvement going forward Forecast Asset Growth Market Im plied Asset Growth Forecast Asset Growth Market Im plied Asset Growth Macau asset growth expectations have not declined and are 2x that of Las Vegas peers Source: Credit Suisse Lens Universe: Macau Gaming Operators including Galaxy, MPEL, MGM China, Sands China, SJM and Wynn Macau; Las Vegas includes CZR, ISLE, LVS, MGM, WYNN 8

10 What level of sales growth is priced in?: Using Lens Aggregate Flex Valuation, solve for level of sales implied by today s price, assuming margins held flat and asset efficiency recovery Flex Valuation Inputs Sales, Margins & Turns 1 1 Solve for level of sales CAGR going forward Sales Growth % EBITDA % Asset Turns CFROI % Real Asset Growth % Discount Rate Margins held flat 2 Assume asset efficiency reverts to recent highs 3 3 Source: Credit Suisse Lens Universe: Macau Gaming Operators including Galaxy, MPEL, MGM China, Sands China, SJM and Wynn Macau; Las Vegas includes CZR, ISLE, LVS, MGM, WYNN 9

What level of sales growth is priced in?: Macau Casinos are priced for 21% sales growth, assuming flat margins and asset efficiency recovery.

Macau Casinos Aggregate Flex Valuation Las Vegas Aggregate Flex Valuation Macau has 21% sales growth priced in (yields 6% asset growth) Las Vegas

SOLVE: Sales growth CAGR at 21% 2. Margins held flat at 21%, 3. Asset turns improve to.80x (prior peak) Assumptions: 1.

11 What level of sales growth is priced in?: Macau Casinos are priced for 21% sales growth, assuming flat margins and asset efficiency recovery. Las Vegas is priced for less than half of that growth (9.2%). Macau Casinos Aggregate Flex Valuation Las Vegas Aggregate Flex Valuation Macau has 21% sales growth priced in (yields 6% asset growth) Las Vegas has 9.2% sales growth priced in (yields 3% asset growth) Market Im plied Sales Growth Market Im plied Sales Growth Assumptions: 1. SOLVE: Sales growth CAGR at 21% 2. Margins held flat at 21%, 3. Asset turns improve to.80x (prior peak) Assumptions: 1. SOLVE: Sales growth CAGR at 9.2% 2. Margins held flat at 26.5%, 3. Asset turns improve to.41x (prior peak) 21% 9.2% Source: Credit Suisse Lens Universe: Macau Gaming Operators including Galaxy, MPEL, MGM China, Sands China, SJM and Wynn Macau; Las Vegas includes CZR, ISLE, LVS, MGM, WYNN 10

12 Asset Growth % CFROI % Global Casinos Relative Expectations: Most non-macau Asia names are priced at a discount to forecast (GENT, GENM, CWN). Las Vegas (MGM, LVS, WYNN) are generally priced for slight improvement and Macau names are priced for significant operational improvement. Global Casinos (>$5bn) Lower expectations Higher expectations yr CFROI Median LFY CFROI CFROI Forecast Market Im plied CFROI yr Median Asset Growth LFY Asset Growth Forecast Asset Growth Market Im plied Asset Growth Source: Credit Suisse Note: 27 = Galaxy,, 1928=Sands China, 1128 = Wynn Macau, 2282 = MGM China 11

What level of sales growth is priced in?: Macau and heavy Macau exposed names have the highest level of sales growth priced in, assuming 1. Margins held flat and 2.

Vegas See p 9 for methodology details Source: Credit Suisse Universe: Macau Gaming Operators including Galaxy, MPEL, MGM China, Sands China, SJM and Wynn Macau; Las

13 What level of sales growth is priced in?: Macau and heavy Macau exposed names have the highest level of sales growth priced in, assuming 1. Margins held flat and 2. recovery in asset turns Margins 1 held flat 2 Assume asset efficiency reverts to recent highs Solve for level of sales CAGR going forward Asia ex Macau Macau Las Vegas See p 9 for methodology details Source: Credit Suisse Universe: Macau Gaming Operators including Galaxy, MPEL, MGM China, Sands China, SJM and Wynn Macau; Las Vegas includes CZR, ISLE, LVS, MGM, WYNN, Asia ex Macau operators include GENS Note: tax and margins held constant, sorted by region, then by level of sales growth priced in 12

Global Casino Credit Com parison: While more highly levered, Las Vegas names have been

Default (%) (rhs) Debt/ Total Capital Asia Macau Las Vegas Asia Macau Las Vegas PoD (%)

Las Vegas Some capacity to take on more debt s Fixed Charge Ratio is s cash flow divided by

14 Global Casino Credit Com parison: While more highly levered, Las Vegas names have been deleveraging and display better Fixed Charge coverage ratios (forecast cash flows ability to cover fixed payments). Asia ex Macau s credit profile is more attractive than Macau Leverage (lhs) & Probability of Default (%) (rhs) Debt/ Total Capital Asia Macau Las Vegas Asia Macau Las Vegas PoD (%) (yellow dot) Median Debt/ EBITDAR (x) Fixed Charge Ratio (x) Asia Macau Las Vegas Asia Macau Las Vegas Some capacity to take on more debt s Fixed Charge Ratio is s cash flow divided by the firm s fixed charges. It indicates the firm s ability to meet fixed financing expenses (such as rent and interest) Note: Sourced from Credit Suisse Global Casinos >8bn 13

15 Global Gam ing, & Regional Casinos 14

Regional Casinos vs Gaming Equipment & Online Betting: Online gaming

resulting in greater shareholder wealth creation.

Equipment and Online Gaming expectations are at a discount from

priced in Source: Credit Suisse Universe: Global Gaming Equipment &

16 Regional Casinos vs Gaming Equipment & Online Betting: Online gaming earns materially higher returns on account of superior margins and asset turns. Additionally, online betting has seen higher levels of growth resulting in greater shareholder wealth creation. Regional Casinos & Racetracks Equipm ent and Online gam ing Equipment and Online Gaming expectations are at a discount from forecasts while regional casinos and racetracks show improvement is priced in Source: Credit Suisse Universe: Global Gaming Equipment & Online Betting: 888, AGI, AYA., ALL, EVOG, IGT, KINDsdb, LCL, PPB, SGMS, TAH, TTS, WMH Regional Casinos & Racetracks: BYD, CHD, GC., ISLE, MCRI, PENN, PNK, RRR 15

17 Asset Growth % CFROI % US Regional Casinos & Racetracks Relative Expectations: MCRI and FLL have low expectations relative to forecast. Among Racetracks, CHDN has one of the highest CFROI profiles. PNK is priced for considerable improvement US Regional Casinos & Racetracks Lower expectations Higher expectations 25 5-yr CFROI Median LFY CFROI CFROI Forecast Market Im plied CFROI yr Median Asset Growth LFY Asset Growth Forecast Asset Growth Market Im plied Asset Growth

18 Asset Growth % CFROI % Gaming Equipment & Online Gaming Relative Expectations: SGMS and IGT stand out with low expectations among Gaming Equipment. In Online Gaming, TTRL and KINDSDB have low expectations relative to peers Online Gaming & Gaming Equipment Lower expectations Higher expectations yr CFROI Median LFY CFROI CFROI Forecast Market Im plied CFROI yr Median Asset Growth LFY Asset Growth Forecast Asset Growth Market Im plied Asset Growth 17

Global Gaming Credit Comparison: Companies engaged in online betting have more attractive credit

PENN has higher than median leverage levels, low fixed charge coverage and the highest PoD (%)

Gam ing Regional & Racetracks Online Gam ing PoD (%) (yellow dot) Median Debt/ EBITDAR (x) Fixed

capacity to take on more debt Higher Fixed Charge Coverage for regional casinos 18 Note: Sourced from

19 Global Gaming Credit Comparison: Companies engaged in online betting have more attractive credit profiles than regional peers with more capital intensive activities. PENN has higher than median leverage levels, low fixed charge coverage and the highest PoD (%) Leverage (lhs) & Probability of Default (%) (rhs) Debt/ Total Capital Regional & Racetracks Online Gam ing Regional & Racetracks Online Gam ing PoD (%) (yellow dot) Median Debt/ EBITDAR (x) Fixed Charge Ratio (x) Regional & Racetracks Online Gaming Regional & Racetracks Online Gam ing Significant capacity to take on more debt Higher Fixed Charge Coverage for regional casinos 18 Note: Sourced from Credit Suisse 4 largest companies by market cap in Regional & Racetracks (p 7), 4 largest companies by market cap in Gaming & Online Equipment (p 7)

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HOLT Growth Percentile Leveraging HOLT for Expected Growth

cumulative excess return (log scale) HOLT Growth Percentile Leveraging HOLT for Expected Growth Contacts: Richard Curry, PhD HOLT Investment Strategy +1 212 325 9545 richard.curry@credit-suisse.com David