Macau Gaming Sector SECTOR FORECAST. Mar 10. Feb 10. May 10. Apr 10. Source: DICJ, Credit Suisse estimates

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1 Asia Pacific/Hong Kong Equity Research Casinos & Gaming (Gaming & Lodging) Research Analysts Gabriel Chan, CFA Macau Gaming Sector SECTOR FORECAST Earnings surprises to drive rerating, again Figure 1: Junkets' rolling-chip turnover growth continues to accelerate (US$ mn) (%) 7, 6, 5, 4, 3, 2, 1, Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 1 Dec 1 Jan 11 Feb 11 Mar 11 Junkets' rolling-chip turnov er (US$ mn) - LHS YoY % chg - RHS Source: DICJ, Credit Suisse estimates Sector risk-reward has turned more positive. With our concerns about company-specific negative news flow now largely in the price, we believe the sector risk-reward has turned more positive, with stronger-than-expected gross gaming revenue (GGR) growth to drive further rerating. Revising up 211 GGR forecast and price targets. Macau recorded 43% YoY GGR growth in 1Q11, far ahead of the consensus full-year forecast of 24% and our previous projection of 29%. With no sign of a significant slowdown, we revise up our 211 GGR projection by 3% to US$31 bn, implying full-year growth of 32.4%. While the Macau gaming sector is a crowded trade, we believe a continuing positive growth surprise will drive further rerating. We have therefore revised up our target prices on higher earnings projection and more aggressive target valuation multiples. MPEL remains our top pick, followed by Sands China. Our new pecking order: MPEL (O-PF), Sands China (upgraded from N to O-PF), SJM (upgraded from N to O-PF), Galaxy (N) and Wynn Macau (upgraded from U- PF to N). Among the five listed casino operators, we believe MPEL has the highest earnings upside risk on the back of its strong market share momentum, while its 15% valuation discount against peers average of 15x FY11 EV/EBITDA suggests that this has not been priced in. For Sands China, we believe concerns about its recent litigations are largely priced in, and the company offers the best earnings sustainability on a three-to-fouryear horizon. For SJM, we believe the family issue is behind us and rerating should continue from here, with the potential approval of its new project in Cotai being a powerful catalyst. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. 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.

2 Focus charts and table Figure 2: Luck-adjusted GGR growth (%) Figure 3: Typical GGR seasonality (%) Jan 1 Apr 1 Jul 1 Oct 1 Jan 11 YoY grow th in luck-adjusted GGR (%) 1Q 2Q 3Q 4Q Source: DICJ, Credit Suisse estimates Figure 4: Mass-market GGR growth rate projection Figure 5: 1Q11 EBITDA forecast summary (%) (US$ mn) % % Real GDP Growth Inflation Consumption growth Luxury consumption beta RMB appreciation Improving infrastructure % -4.5% +11.7% Galax y MPEL Sands China SJM Wy nn Macau 4Q1 1Q11E Source: Credit Suisse estimates Figure 6: Summary of earnings, target prices and rating changes EBITDA (US$ mn) Net profit (US$ mn) Rating TP (l.c.) FY11E FY12E FY13E FY11E FY12E FY13E Ticker Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Galaxy N N MPEL O O Sands China N O ,424 1,488 1,797 1,839 2,384 2, ,529 1,653 SJM N O ,25 1, Wynn Macau U N ,72 1,97 1,244 1, ,29 1,56 Macau Gaming Sector 2

3 Earnings surprises to drive rerating, again Risk-reward has turned more positive With our concerns about company-specific negative news flow largely in the price, we believe the sector s risk-reward has turned more positive, with stronger-than-expected gross gaming revenue (GGR) growth to drive further rerating. Macau recorded 43% YoY GGR growth in 1Q11, far ahead of the consensus full-year forecast of 24% and our previous projection of 29%. With no sign of a significant slowdown, we revise up our 211 GGR projection by 3% to US$31 bn, implying full-year growth of 32.4%. While the Macau gaming sector is a crowded trade, we believe the continuing positive growth surprise will drive further rerating. We have therefore raised our target prices on higher earnings projections and more aggressive target valuation multiples. Note in the blue sky scenario, assuming a typical seasonality, 211 GGR can be 7-18% above our new projection. 1Q11 results preview luck was against the house Despite the strong overall market performance in 1Q11, with 6.2% QoQ increase in GGR, we expect limited operating leverage for casino operators as luck was against the house, with most operators recording relatively low high-roller win percentage, compared with the previous quarter. Overall, we project casino operators to report +12% to -5% QoQ change in 1Q11 EBITDA, with Galaxy (27.HK, HK$12.52, NEUTRAL [V], TP HK$13.5) likely to report the strongest growth on a more favourable luck-factor, while Wynn Macau (1128.HK, HK$26.25, NEUTRAL, TP HK$27.4) and MPEL (MPEL.OQ, $9.16, OUTPERFORM [V], TP $12.7) are likely to suffer from an inferior high-roller win percentage and report QoQ decline in EBITDA, despite an above-industry average rollingchip turnover growth. MPEL remains our top pick, followed by Sands China and SJM Our new pecking order: MPEL, Sands China (1928.HK, HK$2.5, OUTPERFORM, TP HK$25.) (upgraded from N to O-PF), SJM (88.HK, HK$16.9, OUTPERFORM [V], TP HK$19.3) (upgraded from N to O-PF), Galaxy and Wynn Macau. Among the five listed casino operators, we believe MPEL has the highest earnings upside risk given its strong market share momentum, while its 35% valuation discount against the peers average of 15x FY11 EV/EBITDA suggests that this has not been priced in. For Sands China, we believe concerns about its recent litigations are largely priced in. The company offers the best earnings sustainability on a three-to-four-year horizon. For SJM, we believe the family issue is behind us and rerating should continue from here, with the potential approval of its new project in Cotai being a powerful catalyst. Revising up 211 GGR growth projection to 32.4% from 29.4% Unexciting QoQ EBITDA growth in 1Q11 on poor luck Our order of preference: MPEL, Sands China, SJM, Galaxy and Wynn Macau Galaxy: The opening may need 9-12 months to ramp up, and in the interim, it may turn more aggressive in the high-roller segment. MPEL: Trading at a 35% valuation discount with positive market share momentum and earnings upside risk. Sands China: Concerns about recent litigations are mostly in the price, with the opening of Sites 5 and 6 warranting superior earnings sustainability medium term. SJM: Family issue is behind the company, with the potential new project likely to act as the rerating catalyst. Wynn Macau: Premium valuation, though with a limited company-specific catalyst. Macau Gaming Sector 3

4 Sector valuation and other information Figure 7: Sector valuation comparison Mkt Credit Pot. P/E EV/EBITDA cap Price Suisse TP up/down (x) (x) Company Ticker (US$ mn) (l.c.) rating (l.c.) (%) FY11E FY12E FY13E FY11E FY12E FY13E Galaxy 27.HK 6, NEUTRAL MPEL MPEL.OQ 4, OUTPERFORM Sands China 1928.HK 21, OUTPERFORM SJM 88.HK 11, OUTPERFORM Wynn Macau 1128.HK 17, NEUTRAL Sector average Figure 8: GGR projection Mass- YoY chg High- YoY chg YoY chg YoY chg (US$ mn) market (%) roller (%) Slots (%) Total (%) 29 4, , , , , , , E 7, , , , E 8, , , , E 1, , , , Figure 9: Market share projection (%) 29A 21E 211E 212E 213E Galaxy MPEL MGM China Sands China SJM Wynn Macau Macau Gaming Sector 4

5 Risk-reward has turned more positive In our previous report, Growth may continue to exceed expectation, but risk-reward has become binary, dated 31 January, we stated our concerns being company-specific negative news flow, such as SJM s stake-changing among family members, Sands China s litigations, as well as worries about a sector growth deceleration on the back of China s credit tightening measures. With the dispute among Ho s family changes having been settled with key management personnel re-elected to the board of directors, the share price of Sands China has fallen by as much as 2% from its previous peak on the back of its recent litigation, and the sector on average witnessing share prices fall by about 13% from mid-january to mid- March, we believe majority of our concerns are already priced in. We believe most of our concerns have been priced in already Figure 1: YTD share price performances Jan 11 Feb 11 Mar 11 Apr 11 Galax y MPEL Sands China SJM Wy nn Macau Sector mkt cap w t av g Source: DataStream On the other hand, we have been reiterating our view that GGR growth is likely to continue exceeding expectations, despite the concerns about credit tightening in China. With 1Q11 GGR up 43% YoY (or 49% YoY on a luck-adjusted basis), versus the consensus full year growth projection of 24%, our thesis seems to have been proven right so far. 1Q11 GGR grew 43% YoY, far exceeding consensus full year estimate of 24% Macau Gaming Sector 5

6 Figure 11: Luck-adjusted GGR growth (YoY) 8 (%) Jan 1 Mar 1 May 1 Jul 1 Sep 1 Nov 1 Jan 11 Mar 11 YoY grow th in luck-adjusted GGR (%) Source: DICJ, Credit Suisse estimates Below we recap our thesis about why GGR growth is likely to continue its upside surprises. High-roller segment likely to remain strong Although we agree the credit tightening measures introduced by the Chinese government are likely to eventually slow the growth of the Macau gaming market, we still believe highroller GGR growth may continue to exceed expectations in the near term, as it takes time for those measures to have material impacts. Estimated money outflow to Macau is less than 1% of excess liquidity in China On the one hand, it would take time for further rate hikes to absorb the abundant excess liquidity in China. In 21, the total junkets rolling-chip turnover was US$516 bn. Based on the normal churn ratio of eight times for rolling-chip, the total working capital requirement for junkets, which are a proxy for money outflows from mainland China, was about US$65 bn in 21. Compared to our estimate of over US$8 bn of excess liquidity accumulated since early 29, this US$65 bn of possible money outflow seems relatively small. Note that not all junket-facilitated high-rollers are from mainland China. Also note that some of the working capital is being recycled in the gaming system, i.e., the same high-rollers are getting rolling credits from the same junkets, therefore the US$65 bn money outflows are very likely to be overestimates. Tightening measures may have driven more money outflows On the other hand, the interest rate hike on the back of the Chinese credit tightening measures is expected to bring down returns on some other asset classes in China. As people seek higher returns, we normally see excess liquidity leaving the country at the start of a credit tightening cycle. This has been part of the reason for the accelerated growth of high-roller GGR we observed in 4Q1. Junkets rolling-chip turnover continues to rise, despite China s credit tightening measures Macau Gaming Sector 6

7 Figure 12: Junkets' momentum picked up despite China's tightening measures (US$ mn) (%) 7, 6, 5, 4, 3, 2, 1, Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 1 Dec 1 Jan 11 Feb 11 Mar 11 Junkets' rolling-chip turnov er (US$ mn) - LHS YoY % chg - RHS Source: DICJ, Credit Suisse estimates Mass-market is a form of luxury spending by the mainland Chinese In our view, mass-market gaming is essentially a form of luxury consumer spending. Normally, we have seen consumer spending growth at 3-5 p.p. above the nominal GDP growth rate, while luxury spending typically sees an additional 3-5 percentage points of beta, i.e., plus or minus depending on the economic condition. That said, with China s real GDP growth at about 7-8%, plus 3-4% inflation, and with the economic outlook remaining positive, luxury spending should be expected to grow at 16-22%. Figure 13: China retail sales growth versus Macau mass-market GGR growth (%) Mar 8 Jun 8 Sep 8 Dec 8 Mar 9 Jun 9 Sep 9 Dec 9 Mar 1 Jun 1 Sep 1 Dec 1 China retail sales grow th (%) Macau mass-market GGR growth (%) Source: CEIC, Credit Suisse estimates And for Macau mass-market gaming, we also see other additional growth drivers, namely, the renminbi s appreciation against the Hong Kong dollar (we expect 3-4% per annum) and improving infrastructure that is expected to bring more mainland Chinese to Macau. Macau Gaming Sector 7

8 Figure 14: Mainland Chinese visitors growth versus mass-market GGR growth YoY (%) Mar 8 Jun 8 Sep 8 Dec 8 Mar 9 Jun 9 Sep 9 Dec 9 Mar 1 Jun 1 Sep 1 Dec 1 Mainland Chinese v isitation grow th (%) Mass-market GGR grow th (%) Source: CEIC, Credit Suisse estimates Based on the above factors, we are very comfortable with our 24-26% mass-market GGR growth rate for Figure 15: Contributors of mass-market GGR growth (%) Real GDP Grow th Inflation Consumption grow th Lux ury consumption beta RMB appreciation Improv ing infrastructure Source: Credit Suisse estimates We raise our GGR forecast, again We are revising up our GGR projection by about 3% (or US$ bn) on the back of the stronger-than-expected growth. Our new 211 GGR forecast of US$31 bn implies a 32.4% YoY growth, which we believe is one of the highest among sell-side forecasts. Nevertheless, our current forecast implies a monthly average GGR of US$2,638 mn, or 8.3% above the level recorded in 1Q11. Given that 1Q is typically the slowest month in a year, with fewer calendar days and the Chinese New Year being a low season for the high-roller segment, we do not view our overall assumption as aggressive. 211 GGR is expected to grow 32.4% YoY to US$31 bn We find our projection not aggressive Macau Gaming Sector 8

9 Figure 16: GGR projection Mass- YoY chg High- YoY chg YoY chg YoY chg (US$ mn) market (%) roller (%) Slots (%) Total (%) 29 4, , , , , , , E 7, , , , E 8, , , , E 1, , , , Source: DICJ, Credit Suisse estimates Figure 17: Typical GGR seasonality based on historical record since 25 (%) Q 2Q 3Q 4Q Source: DICJ If we assume typical seasonality, 1Q GGR normally accounts for about 2-22% of the fullyear GGR; then our 211 full-year GGR forecast would be 7-18% higher than our existing projection, and it would indicate a full-year growth rate of 42-56% YoY, or 211 GGR of US$ bn (or 7-18% above our existing forecast). Revising up FY11 EBITDA forecast by 3.4% On the back on our upward-revised 211 GGR projection, we have raised our combined EBITDA projection for the five casino operators by 3.4%, ranging from % for Galaxy (as we now factoring in an increased cannibalisation risk between its two casinos) to the highest 6.6% for MPEL (on the back of its strongest market share momentum plus strong operating leverage). We have also revised up our target prices, partly on the back of our upward-revised earnings forecast, and partly because of our more aggressive target valuation multiples. More details will be discussed in later sections. Blue-sky 211 GGR can reach US$ bn MPEL to see the most earnings upside Figure 18: Rating, target price and earnings forecast changes EBITDA (US$ mn) Net profit (US$ mn) Rating TP (l.c.) FY11E FY12E FY13E FY11E FY12E FY13E Ticker Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New 27.HK N N MPEL.OQ O O HK N O ,424 1,488 1,797 1,839 2,384 2, ,529 1, HK N O ,25 1, HK U N ,72 1,97 1,244 1, ,29 1,56 Source: Credit Suisse estimates Macau Gaming Sector 9

10 1Q11 results preview luck was against the house Despite the strong overall market performance in 1Q11, with 6.2% QoQ increase in GGR, we expect limited operating leverage for casino operators as luck was apparently against the house with most operators recording relatively lower high-roller win percentage compared to the previous quarter. Overall, we project casino operators to report +12% to - 5% QoQ change in 1Q11 EBITDA, with Galaxy likely to report the strongest growth on a more favourable luck-factor, while Wynn Macau and MPEL, on the contrary, are likely to suffer from an inferior high-roller win percentage, and report QoQ decline in EBITDA, despite their above-industry average rolling-chip turnover growth. 1Q11 QoQ EBITDA growth is expected to lag behind GGR growth due to poor luck Figure 19: 1Q11 EBITDA projection (US$ mn) % % % -4.5% +1.6% 5 Galax y MPEL Sands China SJM Wy nn Macau 4Q1 1Q11E Note: EBITDA indicated for Sands China and Wynn Macau are property EBITDA, i.e. EBITDA before royalty fee payable to parent companies and certain non-recurring charges. Galaxy the only operator that enjoyed a favourable high-roller win percentage We expect Galaxy to report 12% QoQ increase in 1Q11 EBITDA to a record high of HK$698 mn, thanks to its superior high-roller win percentage of 2.96%, versus 2.8% during the previous quarter. We project Galaxy to achieve another record high quarterly EBITDA of HK$698 mn in 1Q11 Macau Gaming Sector 1

11 Figure 2: Galaxy 1Q11 EBITDA projection StarWorld (HK$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller 4,494 2, , Slots ,923 3, , Non-gaming revenue EBITDA Rolling-chips turnover 151,835 12, , 3.3 High-roller win % p.p p.p. Overall EBITDA (HK$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - StarWorld City Club Construction material Corporate expenses Nevertheless, on a luck-adjusted basis, StarWorld actually recorded a QoQ decline in market share, which, in our view, is not a good sign, especially ahead of the opening of Galaxy s new flagship casino, Galaxy Macau, in mid-may. According to our channel check, quite a significant number of junkets which will be setting up operations at Galaxy Macau are existing StarWorld junkets. That said, we see a risk of cannibalisation between the two casinos and a decline in market share at StarWorld, ahead of Galaxy Macau s opening may warrant more concern. But we are concerned about cannibalisation between StarWorld and Galaxy Macau Figure 21: StarWorld's market share projection Market share (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall Figure 22: Galaxy's quarterly EBITDA trend (HK$ mn) 1, Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11E StarWorld City Clubs Construction material Corporate ex penses Macau Gaming Sector 11

12 MPEL CoD suffers from bad luck, despite luckadjusted market share reaching record high Contrary to Galaxy, MPEL suffered from an extremely unfavourable high-roller win percentage at its flagship casino the City of Dreams (CoD) of about 2.3% in 1Q11, versus a theoretical average of 2.85% and 2.9% recorded in the previous quarter. Nevertheless, on a luck-adjusted basis, we estimate CoD s market share to be close to 1%, a record high for the 2.5 years old casino. Nevertheless, we project CoD to generate only US$87 mn, down 11% YoY. CoD s 1Q11 high-roller win percentage is expected to be as low as 2.3% On the other hand, Altira maintained a stable performance. However, its high-roller win percentage was estimated to be slightly lower at 2.9%, compared to 3.% recorded in 4Q1, and therefore, its EBITDA is estimated to grow only 5% QoQ to US$49 mn. Overall, including contribution from Mocha Slots and deducting corporate expenses, we estimate MPEL s total 1Q11 EBITDA to be US$145 mn, down 6% QoQ. Figure 23: MPEL's 1Q11 EBITDA projection Altira (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots n.a. n.a Non-gaming revenue EBITDA Rolling-chips turnover 12,618 9, ,4 1.7 High-roller win % p.p p.p. CoD (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 19,717 9, ,4 28. High-roller win % p.p p.p. (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg Altira CoD Mocha Corporate expenses Macau Gaming Sector 12

13 Figure 24: MPEL's market share projection Altira (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots..... Overall CoD (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall Mocha slots (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Slots Overall MPEL (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall Sands China market share erosion continues According to our channel checks, all three of Sands China s casinos recorded high-roller win percentage below the theoretical level of 2.85%, and as a result, both Sands Macao and Venetian Macao recorded a QoQ decline in property EBITDA. Overall, we project Sands China s total property EBITDA to increase by 6% QoQ to US$363 mn, with the increase primarily coming from a reversal of the extremely low highroller win percentage at the Plaza, from 1.55% to 2.7%. All Sands China s casinos recorded below theoretical average high-roller win percentages Macau Gaming Sector 13

14 Figure 25: Sands China's 1Q11 EBITDA projection Sands Macao (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 8,856 6, , High-roller win % p.p p.p. Venetian Macao (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 12,335 1, ,8 4.5 High-roller win % p.p p.p. The Plaza (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 5,71 3, , High-roller win % p.p p.p. Overall (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots ,24 1, , Non-gaming revenue EBITDA Rolling-chips turnover 26,262 2, ,9 9.9 High-roller win % p.p p.p. In terms of market share, Sands China s momentum remained unexciting and dropped by.1 percentage points QoQ. It is worth highlighting that the mass-market GGR at Venetian actually recorded a 14 percentage point QoQ decline and we reckon its market share was partly lost to its neighbour CoD. With the opening of Galaxy Macau in mid-may, Sands China s market share may experience further pressure, until it opens its new project on sites 5 and 6 sometime in mid-212. Sands China s market share momentum remained unexciting in 1Q11 Macau Gaming Sector 14

15 Figure 26: Sands China's market share projection Sands Macao (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall Venetian Macao (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall The Plaza (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall Sands China (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall SJM marginal QoQ EBITDA growth expected It is always more difficult to estimate SJM s quarterly profitability given its relatively low transparency. Our channel checks suggests that SJM s overall market share was down.3% QoQ, with high-roller win percentage declined 14 percentage points QoQ to 2.68%. Overall, we expect the largest Macau casino operator, in terms of market share, to report marginal QoQ EBITDA growth of less than 2% to HK$1,45 mn. We project SJM s 1Q11 EBITDA to growth 2% QoQ to HK$1,45 mn Figure 27: SJM's 1Q11 EBITDA projection (HK$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Grand Lisboa 4,921 3, , Other self-promoted casinos 3,164 2, , Satellite casinos 9,491 6, , Total 17,575 12, , EBITDA - Grand Lisboa Other self-promoted casinos Satellite casinos Total 1,45 1, , Figure 28: SJM's market share projection Market share (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Grand Lisboa Other self-promoted casinos Satellite casinos Total Macau Gaming Sector 15

16 Wynn Macau another victim of poor luck Similar to the situation at CoD, Wynn Macau is expected to report a 5.2% QoQ decline in 1Q11 property EBITDA to US$282 mn, on the back of a significant QoQ decline in its highroller win percentage from 3.15% in 4Q1 to 2.69% in 1Q11, despite rolling-chip turnover increasing by 7% QoQ. We project Wynn Macau s 1Q11 property EBITDA to drop 5.2% QoQ to US$282 mn Figure 29: Wynn Macau's 1Q11 property EBITDA projection (US$ mn) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg GGR - Mass-market High-roller Slots , Non-gaming revenue EBITDA Rolling-chips turnover 29,587 2, ,7 6.8 High-roller win % p.p p.p. The mass-market segment was Wynn Macau s bright spot in 1Q11, which had recorded a.5 percentage point QoQ increase in market share. On the other hand, on the back of the inferior high-roller win percentage, Wynn Macau s high-roller market share suffered a 2.3 percentage point QoQ decline to 14.9% only. Figure 3: Wynn Macau's market share projection Market share (%) 1Q11 1Q1 % YoY chg 4Q1 % QoQ chg - Mass-market High-roller Slots Overall Macau Gaming Sector 16

17 MPEL remains our top-pick, followed by Sands China and SJM Stick to our simply yet effective strategy We maintain our view that in a market with only six operators, which is also very transparent and for which we have up-to-date sector growth and market share information, we believe the best, yet very simple strategy for stock picking is to buy the name trading at below-average valuation, but experiencing above-average growth. To achieve above average growth, a casino operator can either gain market share organically or open new properties. However, for the latter scenario, it involves execution risk, as well as potential cannibalisation against the casino operators existing business, while time is also required for the new casino to ramp up. Therefore, we believe organic growth deserves a higher weighting in comparison, at least on a 6-12 month horizon. Based on these factors, our new order of preference is as follows: MPEL (OUTPERFORM), Sands China (upgraded from NEUTRAL to OUTPERFORM), SJM (upgraded from NEUTRAL to OUTPERFORM), Galaxy (NEUTRAL) and Wynn Macau (upgraded from UNDERPERFORM to NEUTRAL). Please note that we have revised up our target prices by 5-4%, partly on the back of our more aggressive GGR growth assumption, thus earnings forecasts, and partly on the back of a higher target valuation multiple, being 11-15x the FY12 EV/EBITDA. MPEL (MPEL.OQ, $9.16, OUTPERFORM [V], TP $12.7) Among the five listed casino operators, we believe MPEL has the highest earnings upside risk on the back of its strong market share momentum, which on a luck-adjusted basis has increased to about 15% in March and has ranked number two for two consecutive months. Given its 35% valuation discount against the peers average of 15x FY11 EV/EBITDA, we believe the upside potential is not fully priced in. Technically, it is also the least crowded long trade given its US-listed status. Separately, while the headline 1Q11 EBITDA may not be very impressive on the back of poor luck, investors should look through it, and focus on its luck-adjusted numbers, which we estimate to be about US$155 mn, suggesting a 24% increase QoQ. Note that we have revised up our target price for MPEL from US$9.8 to US$12.7, which is based on 12x the FY12 EV/EBITDA. Sands China (1928.HK, HK$2.5, OUTPERFORM, TP HK$25.) We believe concerns about Sands China s recent litigations are largely priced in, and we reiterate our view that the worst case scenario would be the company s inability to monetize its serviced apartments in Cotai and a further delay in the opening of sites 5 and 6. However, since sites 5 and 6 will be the only new openings between 212 and 215 at the earliest, with concerns about potential growth deceleration of the high-roller segment on the back of not just China, but global credit tightening, we believe Sands China offers the best earnings sustainability in a three to four year horizon, given its least exposure to the high-roller segment. Note that we have upgraded Sands China from Neutral to an OUTPERFORM rating. Our target price is also revised up to HK$25., which is based on 15x the FY12 EV/EBITDA. Also note in our earnings forecast, sites 5 and 6 will only open in mid-212, and therefore not provide a full year contribution. Our pecking order: MPEL, Sands China, SJM, Galaxy, Wynn Macau We see highest earnings upside risk from MPEL among the five listed casino operators We believe Sands China will offer the best earnings stability in a 3-4 year horizon Macau Gaming Sector 17

18 SJM (88.HK, HK$16.9, OUTPERFORM [V], TP HK$19.3) We believe the family issue is behind the company, with the re-election of Dr. Ambrose So and Ms. Angela Leong to the board of directors boosting our confidence about management stability. In our view, re-rating should continue from here onwards, with the potential approval of SJM s new project in Cotai acting as a powerful catalyst. SJM has submitted an application to develop a site in Cotai, which is adjacent to the Asian Game Stadium. On the other hand, industry sources suggest that the government may auction sites 7 and 8, which, in our view, SJM is a serious contender for. New project in Cotai to drive further re-rating Note that we have upgraded SJM from a Neutral to an OUTPERFORM rating. The target price is also revised up from HK$14.9 to HK$19.3 on 12x the FY12 EV/EBITDA. Galaxy (27.HK, HK$12.52, NEUTRAL [V], TP HK$13.5) On Galaxy, we believe it is likely to see the strongest earnings growth among peers in a month horizon, on the back of the opening of Galaxy Macau in mid-may. However, we also expect some cannibalisation against its sister casino, StarWorld. That said, while it may take time for Galaxy Macau to ramp up, which we expect to be around 9-12 months, Galaxy s overall profitability could deteriorate in the near term. Nevertheless, with a 12-month view, Galaxy is likely to see the strongest earnings growth, among the six casino operators, with the Galaxy Macau opening. We see potential cannibalisation between StarWorld and Galaxy Macau Note that we have revised up Galaxy s target price from HK$12.5 to HK$13.5, based on our sum-of-the-part valuation matrix (13.5x FY12 EV/EBITDA for StarWorld, 9x FY12 EV/EBITDA for City Clubs, 11x FY12 EV/EBITDA for Galaxy Macau, 1x EV/EBITDA for the construction material business). Wynn Macau (1128.HK, HK$25.35, NEUTRAL, TP HK$27.4) We had a bit of struggle about formulating the investment view on Wynn Macau. On the one hand, given its relatively high exposure to the high-roller segment, it is likely to benefit from the current trend of stronger-than-expected GGR growth, on the back of the robust high-roller segment. On the other hand, Wynn Macau lacks a company-specific positive catalyst. With concerns about growth deceleration, mainly on the high-roller segment in the medium term horizon, Wynn Macau would become the operator most vulnerable to profit-taking, given its relatively higher exposure in the particular segment. Furthermore, if expectations about a new project in Cotai are already in the price, any delay of the approval process may trigger some disappointment. Near-term upside from stronger-than-expected high-roller segment growth, but we see limited companyspecific catalyst and the valuation is expensive Note that we have upgraded Wynn Macau from an Underperform to a NEUTRAL rating, with the target price also revised up from HK$21.7 to HK$27.4 on 25x its FY12 EV/EBITDA. Figure 31: Valuation comparisons Mkt Credit Pot. P/E EV/EBITDA cap Price Suisse TP up/down (x) (x) Company Ticker (US$ mn) (l.c.) rating (l.c.) (%) FY11 FY12 FY13 FY11 FY12 FY13 Galaxy 27.HK 6, NEUTRAL MPEL MPEL.OQ 4, OUTPERFORM Sands China 1928.HK 21, OUTPERFORM SJM 88.HK 11, OUTPERFORM Wynn Macau 1128.HK 17, NEUTRAL Sector average Macau Gaming Sector 18

19 Company updates Macau Gaming Sector 19

20 Asia Pacific / Hong Kong Casinos & Gaming Rating NEUTRAL* [V] Price (15 Apr 11, HK$) Target price (HK$) (from 12.5) 13.5¹ Chg to TP (%) 7.8 Market cap. (HK$ mn) 49,41 (US$ 6,355) Enterprise value (HK$ mn) 58,441 Number of shares (mn) 3, Free float (%) week price range *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Price (LHS) Research Analysts Gabriel Chan, CFA gabriel.chan@credit-suisse.com Rebased Rel (RHS) Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 The price relative chart measures performance against the HANG SENG index which closed at on 15/4/11 On 15/4/11 the spot exchange rate was HK$7.77/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) Galaxy Entertainment Group Ltd (27.HK / 27 HK) Possible execution risk in the near-term Galaxy Macau is expected to open in mid-may. Galaxy plans to open its new flagship casino, Galaxy Macau, in Cotai, on 15 May, a few weeks later than expected and this means it will miss the high-season period of the 1 May Labour Day golden week holiday. Nevertheless, being the company s first mass-market focused casino as well as the first mainland Chinese market focused low-price point property in Cotai, we believe Galaxy Macau should be able to help Galaxy gain market share. The new casino-resort will have 4-45 tables, a 1,5 slot machine casino and 2,2 hotel rooms (under three brands, namely, Galaxy, Okura and Banyan Tree), as well as over 5 Asian-themed F&B outlets. How long will it take for Galaxy Macau to ramp up? For a new massmarket casino, the key is to build up sizeable customer numbers (over 5,) and ensure repeat customers. Referencing the two other previous openings in Cotai, Venetian Macao took advantage of the good economic conditions (mid-27) as well as the customer base already built by its sister casino Sands Macao. Thus, it required only 4-5 months to ramp up. CoD did not have a customer base and it opened in June 28 three months ahead of the global financial crisis. Therefore, it took almost two years to ramp up. Thus, for Galaxy Macau, similar to CoD, it does not have a readily-available customer base, but it enjoys much better economic conditions comparatively, so we expect it will take about 9-12 months to ramp up. Degree of success is the key. Despite relatively strong 1Q11 results being projected, we reckon StarWorld is actually losing market share, even ahead of Galaxy Macau s opening. On the other hand, it is normal for new casinos, such as Galaxy Macau, to turn more aggressive on the high-roller segment, before its mass-market business ramps up, thus we see risk of cannibalisation against StarWorld. Nevertheless, on the back of the sector re-rating trend, we have revised up our target price for Galaxy from HK$12.5 to HK$13.5. Financial and valuation metrics Year 12/1A 12/11E 12/12E 12/13E Revenue (HK$ mn) 19, , , ,23.2 EBITDA (HK$ mn) 2,7.3 3,78.1 5, ,778.9 EBIT (HK$ mn) 1, , , ,89.5 Net income (HK$ mn) , , ,554.2 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. Macau Gaming Sector 2

21 Galaxy 27.HK / 27 HK Price (15 Apr 11): HK$12.52, Rating: NEUTRAL [V], Target Price: HK$13.5, Analyst: Gabriel Chan Per share data 12/1A 12/11E 12/12E 12/13E No. of shares (weighted average) 3, ,9.7 4, ,17.4 EPS (Credit Suisse) (HK$) Consensus EPS (HK$) n.a DPS (HK$) Operating cash flow per share Income statement (HK$ mn) 12/1A 12/11E 12/12E 12/13E Total revenue 19,262 36,683 46,87 51,23 Cost of goods sold 16, , , ,66.5 SG&A (excluding R&D) 1, , ,61.8 7,962.3 R&D costs Other operating inc/(exp.) EBITDA 2,7 3,78 5,175 5,779 Depr & amort (excl. goodwill) Goodwill impairment EBIT 1, , , ,89.5 Net interest expense Net non-operating inc (exp) Share of associates/jvs' equity Exceptional/extraordinary items Recurring PBT , ,16.2 4,79.6 Taxes Profit after tax ,25. 3, ,591.9 Other after-tax income Minority interest Preferred dividends Reported net income , , ,554.2 Analyst after-tax adjustment Net income (Credit Suisse) 898 2,22 3,876 4,554 Cash flow (HK$ mn) 12/1A 12/11E 12/12E 12/13E EBIT 1,497 2,943 4,313 4,89 Cash taxes paid Change in working capital 1, Other cash & non-cash items , Cash flow from operations 2,46.7 3, ,57.9 5,739.2 Capex 5, , Disposals of PPE Free cash flow to the firm -3,84.6-3, , ,971.1 Acquisitions Divestments Other investment/(outflows) Cash flow from investment -5, , Net share issue/(repurchase) 1.3 Dividends paid Change in debt 3, ,. Other financing inflows/outflows Cash flow from financing activities 3,99.7 3,. Effect of exchange rates Movements in cash/equivalents , ,971.1 Balance sheet (HK$ mn) 12/1A 12/11E 12/12E 12/13E Cash and cash equivalents 4, , , ,156.4 Accounts receivable , , ,48.1 Inventory Other current assets Total current assets 5, ,29.1 1, ,73.5 Total fixed assets 12, , , ,2.4 Intangible assets and goodwill 1,32.1 1, ,17.6 1,1.3 Investment securities Other assets 5, ,15. 6, ,495.9 Total assets 25, , , ,428. Current liabilities Accounts payable 5, ,62.9 7,3.5 7,68.5 Short-term debt 2, , , ,693.7 Other short-term liabilities Total current liabilities 8,7.8 9, , ,491.9 Long-term debt 7, , , ,663.5 Other liabilities Total liabilities 15, ,97. 2, ,95.8 Shareholders' equity 9, , , ,846.6 Minority interest Total liab. & shrholders' equity 25, , , ,428. Key earnings driver 12/1A 12/11E 12/12E 12/13E Macau mass-market GGR 5,486. 7,6.72 8,66.3 1,258.1 Macau high-roller GGR 16, , , ,383.3 Macau slot machine GGR 1,73. 1, , , StarWorld's market share Galaxy Macau's market Key ratios and valuation 12/1A 12/11E 12/12E 12/13E Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x) [V] = Stock considered volatile (see Disclosure Appendix). Macau Gaming Sector 21

22 Asia Pacific / Hong Kong Casinos & Gaming Rating OUTPERFORM* [V] Price (15 Apr 11, US$) 9.16 Target price (US$) (from 9.8) 12.7¹ Chg to TP (%) 46.1 Market cap. (US$ mn) 4,651 (US$ 4,651) Enterprise value (US$ mn) 5,331 Number of shares (mn) Free float (%) week price range * Stock ratings are relative to the relevant country benchmark. ¹ Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Research Analysts Gabriel Chan, CFA gabriel.chan@credit-suisse.com Melco Crown Entertainment- ADR (MPEL.OQ / MPEL US) Robust market share momentum deserves further re-rating Exciting market share momentum continues. Among the market share winners in 1Q11, MPEL saw the most exciting market share momentum, as most of its market share gains actually came from the mass-market segment, with its City of Dreams recording an all-time high mass-market market share of 1.3%. Overall, on a luck-adjusted basis, MPEL ranked second in market share terms for the second consecutive month in March. More attractions in the pipeline. The start of the House of Dancing Water (HoDW) has been driving positive market share momentum at the City of Dreams (CoD). With the addition of a new nightclub Cubic in late 1Q11/early 2Q11 and the Hard Rock Café in 4Q11, and the expanding customer database (containing information on over 6, customers and growing), we believe the momentum is likely to continue. Management has also commented that business momentum remains strong YTD with no noticeable slowdown after the Chinese New Year, a fact counter to the typical seasonality pattern. Valuation discount should continue to narrow. Among the five listed casino operators, we believe MPEL has the highest earnings upside risk on the back of its strong market share momentum. While the headline 1Q11 EBITDA may not be very impressive on the back of poor luck, investors should look through it, and focus on its luck-adjusted numbers, which we estimate to be about US$155 mn, suggesting a 24% increase QoQ. In our view, such a robust momentum should drive further re-rating and narrow its valuation discount of 35% against its peers average of 15x FY11 EV/EBITDA. We have revised up our FY11-13 earnings forecast by 3-35% on the back of our upward GGR revision, and the target price is also revised up from US$9.8 to US$12.7, which is based on 12x the FY12 EV/EBITDA. Share price performance Price (LHS) Rebased Rel (RHS) Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 The price relative chart measures performance against the HANG SENG index which closed at on 15/4/11 On 15/4/11 the spot exchange rate was US$1./US$1 14 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/1A 12/11E 12/12E 12/13E Revenue (US$ mn) 2,642. 2, , ,766.2 EBITDA (US$ mn) EBIT (US$ mn) Net income (US$ mn) EPS (CS adj.) (US$) Change from previous EPS (%) n.a Consensus EPS (US$) n.a EPS growth (%) n.a. n.a P/E (x) n.m Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. Macau Gaming Sector 22

23 MPEL MPEL.OQ / MPEL US Price (15 Apr 11): US$9.16, Rating: OUTPERFORM [V], Target Price: US$12.7, Analyst: Gabriel Chan Per share data 12/1A 12/11E 12/12E 12/13E No. of shares (weighted average) EPS (Credit Suisse) (US$) Consensus EPS (US$) n.a DPS (US$) Operating cash flow per share Income statement (US$ mn) 12/1A 12/11E 12/12E 12/13E Total revenue 2,642 2,99 3,283 3,766 Cost of goods sold SG&A (excluding R&D) 2, , , ,43.1 R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non-operating inc (exp) Share of associates/jvs' equity Exceptional/extraordinary items Recurring PBT Taxes.92 Profit after tax Other after-tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (US$ mn) 12/1A 12/11E 12/12E 12/13E EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase).11 Dividends paid Change in debt 41. Other financing inflows/outflows Cash flow from financing activities 41.1 Effect of exchange rates Movements in cash/equivalents Balance sheet (US$ mn) 12/1A 12/11E 12/12E 12/13E Cash and cash equivalents ,43.9 1, ,87.8 Accounts receivable Inventory Other current assets Total current assets 9.5 1, ,896. 2,54.8 Total fixed assets 2, , ,13. 1,821.2 Intangible assets and goodwill Investment securities Other assets Total assets 4, ,21.6 5, ,466.6 Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt 1, , , ,521.3 Other liabilities Total liabilities 2, , , ,366.5 Shareholders' equity 2, , , ,1.1 Minority interest Total liab. & shrholders equity 4, ,21.6 5, ,466.6 Key earnings driver 12/1A 12/11E 12/12E 12/13E Macau mass-market GGR 5,486. 6, , ,92.6 Macau high-roller GGR 16, , , ,671.1 Macau slot machine GGR 1,73. 1, , , Altira's market share (%) City of Dreams' market Key ratios and valuation 12/1A 12/11E 12/12E 12/13E Growth(%) Sales EBIT Net profit , EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x) [V] = Stock considered volatile (see Disclosure Appendix). Macau Gaming Sector 23