Macau Gaming Sector SECTOR REVIEW. What can excite you to pay more? Figure 1: Limited room for upside surprises. Source: DICJ, Credit Suisse estimates

Transcription

1 Asia Pacific/Hong Kong Equity Research Casinos & Gaming Research Analysts Gabriel Chan, CFA Macau Gaming Sector SECTOR REVIEW What can excite you to pay more? Figure 1: Limited room for upside surprises (US$ mn) (%) 2,4 2, 1,6 1,2 8 4 Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct GGR (US$ mn) - LHS YoY chg (%) - RHS Source: DICJ, Credit Suisse estimates Limited rerating catalysts ahead. With expectations being elevated, we see limited room for further upside surprises in the near term in gross gaming revenue (GGR) growth, which has been the key share price performance driver YTD. On the other hand, MGM China s potential IPO may serve as a negative catalyst to the sector, similar to what had happened in 4Q9, and the increasing likelihood of risk of a price war over junket commission rates also warrants some concerns. Valuations are stressed even after pushing forecasts to the limit. We have revised up our GGR projection by 5-1%, implying YoY growth of 54.7%, 2.8%, and 16.7% in 21, 211, and 212, respectively, which we believe should put us ahead of consensus forecasts. Even under our aggressive assumptions, we find stock valuations, which are at x FY11E EV/EBITDA, rich. Converging valuations. While valuations of US operators have remained relatively stagnant YTD, we believe valuations of local operators are likely to converge; we continue to rate SJM as our top pick on the back of its 35% valuation discount, with the likely new project in Cotai as a rerating catalyst. Our stock preference, from most to least favourable, is: SJM, MPEL, Galaxy, Sands China, and Wynn Macau. We upgrade MPEL from Neutral to an OUTPERFORM, but downgrade Sands China from Outperform to a NEUTRAL, and Wynn Macau from Neutral to an UNDERPERFORM. 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 Figure 2: Is there downside to our 21 forecast? (US$ mn) (%) Figure 3: Earnings growth has been driving share prices (%) 2,4 2, 1,6 1,2 8 4 Jan 9 May 9 Sep 9 Jan 1 May 1 Sep Jan 1 Feb 1 Mar 1 May 1 Jun 1 Jul 1 Sep GGR (US$ mn) - LHS YoY chg (%) - RHS Share price performance against MSCI HK (%) - LHS FY11 consensus EV/EBITDA projection - RHS Source: DICJ, Credit Suisse estimates Source: I/B/E/S, DataStream, Credit Suisse estimates Figure 4: Sector valuation remains stagnant Figure 5: Long-term GGR growth projection (%) (US$ mn) 13 35, Jan 1 Feb 1 Mar 1 May 1 Jun 1 Jul 1 Sep 1 FY11 consensus EV/EBITDA (x) 3, 25, 2, 15, 1, 5, 27.3% CAGR 24.4% CAGR E 211E 212E Source: I/B/E/S, DataStream, Credit Suisse estimates Figure 6: Galaxy has been rerated since June (X) Jan 1 Mar 1 May 1 Jul 1 Sep 1 Figure 7: We expect SJM s valuation gap to narrow further (x ) Jan 1 Mar 1 May 1 Jul 1 Sep 1 Galaxy's FY11 EV/EBITDA Industry FY11 EV/EBITDA SJM's FY11 EV/EBITDA Industry FY11 EV/EBITDA Source: I/B/E/S, DataStream, Credit Suisse estimates Source: I/B/E/S, DataStream, Credit Suisse estimates Macau Gaming Sector 2

3 What can excite you to pay more? Limited room for upside surprises While share prices of Macau gaming stocks have risen 6-137% YTD, sector valuation, particularly in terms of FY11E EV/EBITDA, has been relatively stagnant, suggesting that this robust share price performance was primarily driven by better-than-expected GGR growth, and the resultant earnings surprises. With expectations being elevated, we see limited room for upside surprises, at least in the near term, which has been the key share price performance driver YTD. On the other hand, the upcoming MGM China s (not listed) IPO may serve as a negative catalyst to the sector, as happened when Sands China (1928.HK, HK$15.44, NEUTRAL [V], TP HK$15.7) and Wynn Macau (1128.HK, HK$15.92, UNDERPERFORM, TP HK$14.3) launched their IPOs in 4Q9, in our view. Furthermore, we believe the increasing risk of a price war over junket commission rates also warrants some concerns. Note, we have tried to push our assumptions to the limit by raising our GGR projection by 5-1%. Nevertheless, with majority of the increment coming from the lowermargin high-roller segment, we find casino operators valuations, even under our aggressive assumptions, quite rich. 3Q1 preview the good, the bad and the ugly Among the five listed Macau casinos operators, we expect MPEL (MPEL.OQ, $5.37, OUTPERFORM [V], TP $6.5) to report the strongest QoQ growth of 67% to US$11 mn in 3Q1 EBITDA, thanks to market share gains as well as better high-roller winpercentage recorded at the City of Dreams. We also forecast Galaxy (27.HK, HK$6.91, NEUTRAL [V], TP HK$7.1) to report another record high quarterly EBITDA of HK$647 mn, up 13% QoQ. We project SJM s (88.HK, HK$9.64, OUTPERFORM [V], TP HK$11.9) EBITDA to show some marginal QoQ improvement to HK$1,112 mn, while Sands China s property EBITDA is expected to stay flat QoQ at US$37 mn. Last, for Wynn Macau, we expect its 3Q1 property EBITDA to drop 7% QoQ to US199 mn on interior high-roller win percentage, compared to the previous quarter. SJM remains our top pick While valuations of US operators remain relatively stagnant YTD, we believe valuations of local operators will continue to converge, thus, we reiterate SJM as our top-pick on the back of its 35% valuation discount, with potential new project in Cotai as the re-rating catalyst. Our stock preference, from most to least favourable, is: SJM, MPEL, Galaxy, Sands China, and Wynn Macau. With a limited valuation rerating, earnings surprises have been the key driving force to share prices The potential MGM China listing may serve as a nearterm derating catalyst Valuations look rich even under aggressive assumptions We expect MPEL to report the strongest 3Q1 QoQ EBITDA growth, followed by Galaxy and SJM We like SJM most, followed by MPEL, on the back of the valuation convergence trend MPEL: with City of Dreams finally ramped, we believe its valuation gap should be narrowed. We raise our rating to an OUTPERFORM. Galaxy: trading close to the top end of the sector valuation, we believe its rerating has completed unless the opening of Galaxy Macau is proven better-than-expected. Sands China: we are concerned that potential further delay of Sites 5&6 may result in earnings downgrades. We cut our rating to a NEUTRAL. Wynn Macau: we are concerned that the continuous market share erosion may push Wynn Macau to raise its junket commission rate. We cut our rating to an UNDERPERFORM. Macau Gaming Sector 3

4 Sector valuation and other info Figure 8: Sector valuation comparison Mkt Credit Pot. P/E EV/EBITDA Net gearing cap Price Suisse TP up/down (x) (x) (%) Company Ticker US (mn) (l.c.) rating (l.c.) (%) FY1 FY11 FY12 FY1 FY11 FY12 FY1 FY11 FY12 Galaxy 27.HK 3, N MPEL MPEL.OQ 2, O Sands China 1928.HK 16, N SJM 88.HK 6, O Wynn Macau 1128.HK 1, U 14.3 (1.2) Source: DataStream, Company data, Credit Suisse estimates Figure 9: Summary of earnings, target price and rating changes EBITDA (US$ mn) Net profit (US$ mn) Rating TP (l.c.) FY1 FY11 FY12 FY1 FY11 FY12 Company Ticker Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Galaxy 27.HK N N MPEL MPEL.OQ N O Sands China 1928.HK O N ,15 1,199 1,296 1,352 1,635 1, SJM 88.HK O O Wynn Macau 1128.HK N U Figure 1: GGR projection Mass- YoY chg. High- YoY chg. YoY Chg. YoY Chg. (US$ mn) market (%) roller (%) Slots (%) Total (%) 24 1, , , , ,593 (3.1) , , , , , , , , , , , , , E 5, , , , E 6, , , , E 8, , , , Figure 11: Market share projection Operator 29A 21E 211E 212E Galaxy MPEL MGM China Sands China SJM Wynn Macau Source: DICJ, Company data, Credit Suisse estimates Macau Gaming Sector 4

5 Limited room for upside surprises Is the rerating sustainable? Having experienced a period of stagnant performance between June and September, Macau gaming stocks have begun to outperform the market again since mid-september, on the back of a new round of earnings upgrades, driven by high expectations of robust GGR growth during the October golden week holiday, which some believe may linger on. Note that there had been some reports saying that GGR in the first seven days in October grew over 8% YoY, which had exacerbated the optimism. However, our channel checks indicate that YoY growth has moderated to about 5% YoY in the first two weeks of the month, suggesting significant growth deceleration in the second week of October. Optimism over October golden week GGR growth sparked the latest rerating But growth deceleration seems to have lingered on Figure 12: Share price performance against consensus EBITDA forecast (%) Jan 1 Feb 1 Mar 1 May 1 Jun 1 Jul 1 Sep Share price performance against MSCI HK (%) - LHS FY11 consensus EV/EBITDA projection - RHS Source: I/B/E/S, DataStream, Credit Suisse estimates It has been our view that the strong share price performances have been largely driven by stronger-than-expected GGR growth, and thus the resultant earnings upgrades, while valuations remain relatively stagnant. The logical question here is, would the latest round of earnings upgrade be enough to drive a valuation rerating? Earnings surprises have been the key driving force of share price performances Figure 13: Consensus sector FY11E EV/EBITDA has been stable 13 (%) Jan 1 Feb 1 Mar 1 May 1 Jun 1 Jul 1 Sep 1 FY11 consensus EV/EBITDA (x ) Source: I/B/E/S, DataStream, Credit Suisse estimates Macau Gaming Sector 5

6 Recall what happened in 1Q1. The Macau gaming market recorded 58.4% YoY growth, far exceeding the market expectations at that time, which called for 15-2% YoY growth for the full-year 21. As a result, we saw a wave of upward GGR forecast revisions, and thus, earnings upgrades in 2Q1, during which the sector market cap weighted FY11E EBITDA was revised up by about 12%. Nevertheless, 2Q1 also marked the period when Macau gaming stocks experienced a valuation derating, with the market-cap weighted sector FY11 EV/EBITDA dropping from its peak of 12.6x in early April to the lowest of 9.7x in late May and eventually settling at around 11x since July. The share prices, on a market cap-weighted basis, performed largely in line with the market. Is the 4% YoY growth rate sustainable? With expectations being elevated after rounds and rounds of earnings upgrades by the sell side, with the 21 full-year GGR growth expectation being revised up from 15-2% at the beginning of the year to 5-55% currently, we see limited room for further upside surprises here, at least in the near term. Note, the GGR growth rate started to decelerate from 94% since May 21 to 39% in September, partly on the back of a higher based comparison as the Macau gaming market started turning around in July 29 after the financial crisis.. With October 29 forming a record high at that time, there was a continuous growth deceleration, which we believe will linger on, until it reaches the long-term growth rate of about 2%. Figure 14: Long-term GGR growth (US$ mn) 35, 3, 25, 24.4% CAGR 2, 15, 27.3% CAGR 1, 5, E 211E 212E The most aggressive 21 GGR forecast on the street (which is also our latest projection) calls for a full-year YoY growth of 55% YoY, which implies GGR growth to be 43% in 4Q1, with an average monthly GGR of MOP17.1 bn (or US$2.15 bn), which is the same as the previous monthly record high set in May. Our forecast implies 42% YoY growth in 4Q1 Taking into account the above factors, we see less room for further upward GGR projection revisions and thus, less potential for further earnings upgrades from here. Macau Gaming Sector 6

7 Figure 15: Can the GGR growth rate stabilise at 42.2% and linger on? (US$ mn) (%) 2,4 2, 1,6 1,2 8 4 Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct GGR (US$ mn) - LHS YoY chg (%) - RHS Source: DICJ, Credit Suisse estimates Diminishing marginal return on GGR growth? On the other hand, the stronger-than-expected GGR growth observed has been mostly driven by the high-roller segment. According to our industry contacts, casino operators have been providing more working capital to junket operators, with advanced commission increasing gradually from one month to two months. Furthermore, some casinos have raised the junket commission rate significantly to about 5% from the previously prevailing rate of about 44% (including hotel rooms, F&B and other incentives). Note the high-roller business has always been generating a significantly lower margin (~9-13%), compared to the mass market (3-38%). With junket commission rates as high as 5%, we believe that the EBITDA margins for casino operators would be in the low single digits, not to mention the higher financing costs for the additional working capital offered to junkets. On the other hand, the higher commission rate and additional working capital also increase casino operators risk exposure, in terms of high-roller win percentage volatility and credit exposure to junket operators, respectively. Increasing risk of price war over junket rates Furthermore, we believe the risk for another price war over junket commission rates is getting higher as, according to our industry sources, Wynn Macau has started to see substantial market share deterioration over the past two months on the back of MGM China s aggressive offering to junket operators. We agree with Wynn Macau s management that buying market share is not a sustainable growth strategy. However, there is risk that the lingering market share erosion may result in an absolute decline in its top line, and more so of its profit due to operating deleverage, particularly the additional costs associated with the newly opened Encore tower. Due to this, we think Wynn Macau may eventually raise its junket commission rate. which is the lowest among all the casino operators in Macau, especially if the overall GGR growth continues to moderate while new supplies are coming on stream, not only from new casino opening (i.e. Galaxy Macau in Cotai in 1Q11, but more high-roller tables at the existing casinos). The lower-margin high-roller segment has been contributing to GGR surprises Some casinos have raised junket commission rate to 5% of GGR Casinos risk exposure to junket operators is on the rise Wynn Macau has been most affected by MGM China s aggressive junket commission rate Would Wynn Macau eventually join the price war? Macau Gaming Sector 7

8 Nevertheless, the higher commission rate offered by casino operators to junket operators actually signals that demand/supply dynamics have started to become less favourable. After all, all casino operators experienced the ill effects of the price war, and if there is enough potential for all casino operators to expand, why would anyone be interested to raise the commission rate, which hurts their profitability significantly? Listing of MGM China may trigger a derating Rising commission rate signals decelerating liquidity growth MGM China has submitted the A-1 filing for a potential listing in Hong Kong. While we understand that the potential listing size would be significantly smaller than that of the two listings that happened in 4Q9 (Wynn Macau was about US$7 bn and Sands China was about US$1 bn), the potential listing may still trigger a derating of Macau gaming stocks, in our view. Figure 16: Macau gaming sector underperforms the market post new listings Period of underperformance GGR grow th ex ceeding ex pectation 1 5 Wy nn Macau's listing Sands China's listing Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct 1 Relativ e performance of Macau gaming sector against HIS On the one hand, the new equity issue may absorb some of the liquidity and dilute interests in the Macau gaming sector. Furthermore, being the smallest casino operator in terms of market share, MGM China is unlikely to command a valuation premium over its peers. Therefore, we believe the time required to absorb the new issue and the diluted valuation may cause the sector to underperform, at least in the near term. Pushing our forecast to the limit MGM China would be unlikely to command a valuation premium against Sands China and Wynn Macau On the back of strong growth recorded in the first nine months, we have revised up our 21 GGR forecast by 4.5% to US$23 bn, which implies a full-year YoY growth rate of 54.7% or 4Q1 YoY growth rate of 42.2%. Looking ahead, we have revised up our 211 and 212 GGR projections further by 7% and 1%, respectively, to US$27.8 bn and US$32.4 bn, implying YoY growth of 2.8% in 211 and 16.7% in 212, and we believe our 211 and 212 projections are at the top-end of the market expectation range. Note, a majority of our GGR revisions has come from the high-roller segment. Since the high-roller segment commands a much lower margin (based on the prevailing commission rate, only about 6-11%), the resultant earnings upgrades may not be as significant as the numbers suggest, even after factoring in potential operating leverage. We will discuss in more detail about our earnings revision in later sections. Macau Gaming Sector 8

9 Figure 17: GGR projection Mass- YoY chg. High- YoY chg. YoY chg. YoY chg. (US$ mn) market (%) roller (%) Slots (%) Total (%) 24 1, , , , ,593 (3.1) , , , , , , , , , , , , , E 5, , , , E 6, , , , E 8, , , , Macau Gaming Sector 9

10 3Q1 preview: the good, the bad and the ugly We expect the US listed casino operators to kick start the 3Q1 results seasons in the last week of October, while the local operators, i.e., Galaxy and SJM will report late in November. We summarise our 3Q1 results preview below. Galaxy another record high quarter For Galaxy, the key area to watch is the performance of its existing flagship casino, StarWorld. We expect the casino to report a 2% QoQ improvement in EBITDA to HK$592 mn, driven by.8 p.p. QoQ in overall market share to 9.7%, as well as a.24 p.p. higher high-roller win percentage to 3.3%. Figure 18: StarWorld s 3Q1 results preview (HK$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller 4,119 1, , Slots ,466 2, , Non-gaming revenue EBITDA Rolling-chips turnover 136,62 81, , 5.5 High-roller win % p.p p.p. Figure 19: StarWorld s 3Q1 market share projection Market share (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots Overall For the company as a whole, we expect another record high in quarterly EBITDA of HK$647 mn, up 13% QoQ or 125% YoY. Macau Gaming Sector 1

11 Figure 2: Galaxy is likely to set another record high EBITDA in 3Q1 (HK$ mn) Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1E StarWorld City Clubs Construction material Corporate ex penses MPEL strongest QoQ EBITDA growth among peers Similar to Galaxy, we expect the best ever quarter for MPEL, in terms of company EBITDA in 3Q1, with most of the excitement driven by its flagship casino, the City of Dreams (CoD). We expect CoD to report US$13 mn EBITDA in 3Q1, implying a 139% QoQ improvement. This strong EBITDA growth, which we believe is the highest among most of the major casinos in Macau, would be driven by a 3.2 p.p. overall market share improvement, plus a much superior high-roller win-percentage of 3.21% during the quarter, versus 2.27% in 2Q1. Figure 21: CoD's 3Q1 results projection (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 15,147 9, , High-roller win % p.p p.p. Figure 22: CoD's 3Q1 market share projection Market share (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots Overall For its another casino, Altira, we expect its 3Q1 EBITDA to drop 36% QoQ to US$23 mn, largely on the back of lower high-roller win percentage. Macau Gaming Sector 11

12 Figure 23: Altira s 3Q1 results projection (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots n.a. n.a Non-gaming revenue EBITDA Rolling-chips turnover 9,354 9, ,5-1.5 High-roller win % p.p p.p. Figure 24: Altira s 3Q1 market share projection Market share (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots..... Overall For the company as a whole, we expect MPEL s overall EBITDA to increase 63% QoQ to US$119 mn, with its Mocha slots clubs continuing to provide a stable EBITDA contribution of about US$7 mn, and a slightly higher corporate expense. Figure 25: MPEL s 3Q1 results projection (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. Altira CoD Mocha Corporate expenses Sands China luck was against its margin According to our channel checks, Sands China experienced a lower QoQ high-roller win percentage across the board in all of its three casinos, which led to a 1.5 p.p. QoQ decline in overall market share, although its mass-market market share remained stable. Overall, we expect Sands China s 3Q1 property EBITDA (i.e., EBITDA before royalty fee payable to its parent company, as well as certain non-recurring corporate expenses) to stay flat QoQ at US$37 mn, with declines at Sands Macao and the Four Seasons being offset by improvement at Venetian Macao. Macau Gaming Sector 12

13 Figure 26: Sands China s 3Q1 property EBITDA projection Sands Macao (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 6,387 5, , High-roller win % p.p p.p. Venetian Macao (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 11,466 9, , High-roller win % p.p p.p. The Plaza (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 5,379 2, , High-roller win % p.p p.p. Overall (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots , , Non-gaming revenue EBITDA Rolling-chips turnover 23,232 16, , High-roller win % p.p p.p. Macau Gaming Sector 13

14 Figure 27: Sands China's 3Q1 market share projection Sands Macao (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots Venetian Macao (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots Four Seasons (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots Overall (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots SJM marginal QoQ improvement expected SJM has always been the most difficult casino operator for analysts to make earnings forecasts on the back of its relatively less transparent reporting. According to our channel checks, SJM s self-managed casinos maintained stable market share QoQ, while its third-party casinos reported some 1.5 p.p. QoQ market share loss, with most market share changes happening in the high-roller segment. On the other hand, we believe SJM s overall high-roller win percentage remained stable during the quarter at around %. Based on the above, we expect SJM s 3Q1 EBITDA to grow marginally QoQ to HK$1,112 mn. Figure 28: SJM s 3Q1 results preview GGR (HK$ mn) 1Q1 2Q1 3Q1E QoQ % chg. Grand Lisboa 3,165 3,662 3, Other self-promoted 2,955 3,176 3, Third-party casinos 6,563 6,998 6, ,683 13,836 14, 1.2 EBITDA (HK$ mn) 1Q1 2Q1 3Q1E QoQ % chg. Grand Lisboa Other self-promoted Third-party casinos ,18 1, Market share (%) 1Q1 2Q1 3Q1E QoQ % chg. Grand Lisboa p.p. Other self-promoted p.p. Third-party casinos p.p p.p. Macau Gaming Sector 14

15 Wynn Macau marginal QoQ decline in property EBITDA Last but not the least, for Wynn Macau, we expect its property EBITDA to report a 7% QoQ decline to US$199 mn, on the back of the substantially lower high-roller winpercentage of 2.79% in 3Q1, versus 3.22% in 2Q1. Figure 29: Wynn Macau s 3Q1 property EBITDA forecast (US$ mn) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. GGR - Mass-market High-roller Slots Non-gaming revenue EBITDA Rolling-chips turnover 22,13 14, ,7 1.9 High-roller win % p.p p.p. Figure 3: Wynn Macau s 3Q1 market share projection Market share (%) 3Q1E 3Q9 YoY % chg. 2Q1 QoQ % chg. - Mass-market High-roller Slots Overall Macau Gaming Sector 15

16 SJM remains our top pick Valuations look stretched On the back of our upward GGR forecast revisions, we have also revised up our earnings forecast of the five listed casino operators accordingly. In terms of EBITDA projection, we have revised up our forecasts by 4-15% in FY11 and 6-12% in FY12. Figure 31: Ratings, target prices and earnings revisions EBITDA (US$ mn) Net profit (US$ mn) Rating TP (l.c.) FY1 FY11 FY12 FY1 FY11 FY12 Company Ticker Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Prev. New Galaxy 27.HK N N MPEL MPEL.OQ N O Sands China 1928.HK O N ,15 1,199 1,296 1,352 1,635 1, SJM 88.HK O O Wynn Macau 1128.HK N U Note, after our earnings revisions, our earnings forecasts are ahead of consensus estimates by 4-4%, in terms of FY11 EBITDA. Figure 32: Credit Suisse versus I/B/E/S consensus estimates EBITDA (US$ mn) Net profit (US$ mn) FY1 FY11 FY12 FY1 FY11 FY12 Company Ticker CS I/B/E/S CS I/B/E/S CS I/B/E/S CS I/B/E/S CS I/B/E/S CS I/B/E/S Galaxy 27.HK MPEL MPEL.OQ Sands China 1928.HK 1,199 1,86 1,352 1,22 1,836 1, SJM 88.HK Wynn Macau 1128.HK Having pushed our GGR projection and earnings forecasts to the limit, we still find the sector valuation demanding. On a market cap-weighted basis, based on our revised forecast, the five listed casino operators are trading, on average, at 11.3x FY11 EV/EBITDA, with a range from the lowest of 7.4x (SJM) to the highest of 12.7x (Sands China). Figure 33: Sector valuation comparison Mkt Credit Pot. P/E EV/EBITDA Net gearing Cap Price Suisse TP up/down (x) (x) (%) Company Ticker US( mn) (l.c.) rating (l.c.) (%) FY1 FY11 FY12 FY1 FY11 FY12 FY1 FY11 FY12 Galaxy 27.HK 3, N MPEL MPEL.OQ 2, O Sands China 1928.HK 16, N SJM 88.HK 6, O Wynn Macau 1128.HK 1, U 14.3 (1.2) A clear trend of valuation convergence buy SJM and MPEL SJM: new project in Cotai to close the valuation gap further While we turn increasingly more cautious on the sustainability of the sector growth rate, our stock selection becomes more value driven. Macau Gaming Sector 16

17 We observe a clear trend of value convergence over the past six months, with the discount gap between local operators and US operators continuing to narrow. We believe a clear catalyst will be further expansion. While Galaxy has been ignored by the market for quite some time, it got rerated since June with its FY11E EV/EBITDA being rerated from 8.7x to about 12.2x currently, based on I/B/E/S consensus estimates, with the recognition of its upcoming opening, Galaxy Macau in Cotai, being the catalyst. Galaxy has rerated Figure 34: Galaxy has rerated since June (X) Jan 1 Mar 1 May 1 Jul 1 Sep 1 Galax y 's FY11 EV/EBITDA Industry FY11 EV/EBITDA Source: I/B/E/S, DataStream, Credit Suisse estimates For the new project in Cotai, given the size of the site, we expect SJM to develop it in phases. It will consist of a casino (5-6 tables) with three to four hotel towers housing about 3,5-4, hotel rooms in all. Assuming construction to begin in 2H11, we expect the first phase of the new casino to commence operation in 214. Note, SJM is expected to have over HK$1 bn of net cash by the end of FY11, thus we see minimal chance that equity financing for the new project is required. SJM is about to announce a new project in Cotai Based on this, we believe SJM, which is trading at 7.4x FY11 EV/EBITDA, implying a 35% discount to the industry average, has the most potential upside, with the confirmation of a new project in Cotai. More details of the project will be disclosed in 1Q11, and could act as a rerating trigger. Figure 35: SJM to close down the valuation gap as well? (x ) Jan 1 Mar 1 May 1 Jul 1 Sep 1 SJM's FY11 EV/EBITDA Industry FY11 EV/EBITDA Source: I/B/E/S, DataStream, Credit Suisse estimates Macau Gaming Sector 17

18 MPEL: the second cheapest stock in the space On the other hand, with a stabilised market share and the bad debt provision booked in 2Q1 behind our back, we expect MPEL s profitability to improve and thus, benefit from the value converging trend as well. We, therefore, upgrade MPEL from Neutral to an OUTPERFORM with the target price also revised up from US$4.65 to US$6.5 a higher target valuation multiple of 9.5x FY11 EV/EBITDA (previously 8x). In our view, our target multiple, which implies a 15% discount to the industry average, should provide enough cushion to MPEL s relatively more volatile profitability, as compared to its peers. Nevertheless, with limited catalyst post the commencement of the House of Dancing Water shows, we see less upside compared to SJM. Galaxy and Sands China look quite fairly valued Galaxy: Would the new project in Cotai surprise the market on the upside? For Galaxy, we believe its share price performance will largely depend on the execution and initial performance of Galaxy Macau in Cotai, which is scheduled to open in 1Q11. Galaxy s consensus FY11E EBITDA has been revised up 35% YTD to about HK$2,87 mn (US$37 mn). This, in our view, has priced in a lot of execution risk, in terms of potential opening delay (which we heard from our local contacts that Galaxy may experience some issue with the tight labour supply in Macau) as well as time required to ramp up to stabilised profitability (which took Galaxy s neighbour in Cotai, MPEL s the City of Dreams more than nine months to ramp up). Note also that our FY11/12 EBITDA forecasts for Galaxy are ahead of consensus estimates by 33%/3%. Also, the difference is that we have already assumed the benefit of doubt that the new casino in Cotai will open on time and it would take only a short period of three months to ramp up its operations. In our view, unless there is a significant change in the view about overall GGR growth, we see limited catalysts to upgrade Galaxy s earnings forecast further until the opening of Galaxy Macau is proven to be better than expected. Meanwhile, trading at 1.3x FY11E EV/EBITDA, we believe Galaxy is quite fairly valued. Sands China: potential earnings downgrade if Sites 5&6 is delayed further On the other hand, although we are long-term positive on the Macau gaming sector, particularly on the more resilient and profitable mass-market segment, we believe the prolonged labour issue may cap further share price upside for Sands China. Sands China, which has the highest contribution from the mass-market segment among all the casino operators in Macau, may see further delay of the opening of its Sites 5&6. Although recent media reports suggest its construction sub-contractors are likely to receive quotas to hire as many as 5, imported workers shortly, the local law requires companies to hire one local worker before they can hire imported labour. Thus the recruitment process may still take a couple of months. Therefore, we see potential risk of earnings downgrade if the opening of the project is further delayed. Note, management had revised the expected opening date of Sites 5&6 from June 211 to September 211, and later on to late-211. We have assumed in our model the project to open in 1Q12. Wynn Macau: continuous market share erosion may crack its premium valuation We have observed a persisting trend of market share erosion at Wynn Macau since December 29, particularly on the junket high-roller segment. CoD finally ramped up and established a stable and sustainable market share We have already priced in a successful opening of Galaxy Macau The labour issue for Sites 5&6 has not been resolved Macau Gaming Sector 18

19 Figure 36: Wynn Macau's market share trend (%) Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Mass-market High-roller Ov erall Source: DICJ, Company data, Credit Suisse estimates As mentioned before, we agree with Wynn Macau s strategy not to buy market share by offering a higher commission rate to junket operators. However, the persisting market share erosion, on the back of its lowest commission rate offered to junket operations among all casinos in Macau, plus the addition of new supplies of high-roller tables from both existing and new casinos, may eventually push it to join the commission rate price war. Otherwise, it may start to see operating deleverage as GGR growth continues to moderate, particularly due to higher operating costs due to the addition of Encore in April 21. Would Wynn Macau be dragged into the price war over junket commission rate? The share price of Wynn Macau has actually underperformed its peers YTD (albeit still outperforming the MSCI Hong Kong by about 46%). In our view, the continuous market share decline, plus the potential change in its junket commission rate structure may start to crack its premium valuations to peers. We have, therefore, downgraded Wynn Macau from Neutral to an UNDERPERFORM, with a new target price of HK$14.3. Macau Gaming Sector 19

20 Asia Pacific / Hong Kong Casinos & Gaming Rating NEUTRAL* [V] Price (19 Oct 1, HK$) 6.91 Target price (HK$) (from 6.45) 7.1¹ Chg to TP (%) 2.7 Market cap. (HK$ mn) 27,265 (US$ 3,514) Enterprise value (HK$ mn) 32,929 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). Research Analysts Gabriel Chan, CFA gabriel.chan@credit-suisse.com Galaxy Entertainment Group Ltd (27.HK / 27 HK) Rerating should be done for now Revising up our FY11/12 earnings forecast. We have revised up our FY11/12 EPS forecasts for Galaxy by 2.9%/9.4% on the back of our upward revision in overall GGR projection. We also raise our target price to HK$7.1 from HK$6.45 (based on 11x FY11 EV/EBITDA). A successful opening has been priced in. Note our FY11/12 EBITDA projections are 33%/3% ahead of consensus estimates, as we have priced in a successful opening of Galaxy Macau in Cotai to be opened on time in early 211 with a short ramp-up period of about three months only. Our FY11/12 EBITDA projection for the new casinos are US$234 mn/us$347 mn, which in our view, is aggressive, compared to MPEL s City of Dreams first full three-quarters total EBITDA of US$14 mn only. 3Q1 results preview another record quarter. We expect the casino to report a 2% QoQ improvement in EBITDA to HK$592 mn, driven by a.8 p.p. QoQ rise in overall market share to 9.7%, as well as a.24 p.p. higher high-roller win-percentage to 3.3%. For the company as a whole, we expect another record high in quarterly EBITDA of HK$647 mn, up 13% QoQ or 125% YoY, with slower growth in contribution from its City Clubs as well as the construction material businesses. It is quite fairly valued. Having pushed our earnings forecast to the limit, with execution risks on the opening of Galaxy Macau in mind, we believe Galaxy is quite fairly valued at 1.3x FY11E EV/EBITDA (implying a 9% discount to the industry average). Share price performance 1 5 Price (LHS) Rebased Rel (RHS) Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 The price relative chart measures performance against the HANG SENG index which closed at on 19/1/1 On 19/1/1 the spot exchange rate was HK$7.76/US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/9A 12/1E 12/11E 12/12E Revenue (HK$ mn) 12, , , ,32.6 EBITDA (HK$ mn) 1,41.4 1,947. 3, ,99.6 EBIT (HK$ mn) ,43.1 2,99.9 3,812.8 Net income (HK$ mn) 1, ,965. 3,14.5 EPS (CS adj.) (HK$) Change from previous EPS (%) n.a Consensus EPS (HK$) n.a EPS growth (%) n.a 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 Financial summary (Galaxy) Figure 37: Galaxy's profit and loss Year-end 31 Dec. (HK$ mn) FY8A FY9A FY1E FY11E FY12E Turnover 1,497 12,233 18,571 31,28 37,33 Gross profit 1,587 1,814 3,365 7,629 9,283 Other operating income SG&A (2,285) (1,523) (2,73) (4,842) (5,65) EBITDA 23 1,41 1,947 3,838 4,91 Depreciation (86) (541) (637) (1,19) (1,46) Net interest income/(cost) (25) (127) (113) (45) (586) Associates/JV Exceptional items (12,23) 774 (33) (4) Profit before tax (13,58) 1, ,136 3,414 Taxation 1,53 (76) (59) (128) (25) Minority interest 165 (9) (2) (43) (68) Net profit (11,39) 1, ,965 3,14 Figure 38: Galaxy's balance sheet Year-end 31 Dec. (HK$ mn) FY8A FY9A FY1E FY11E FY12E Assets Cash 6,42 4,13 2, ,116 Inventories a/c receivables 1, ,857 3,121 3,73 Other curr. assets Net fixed assets 6,481 9,716 12,899 22,99 22,715 Other non-curr. assets 4,218 4,198 4,23 4,22 4,249 Total assets 18,652 19,116 21,773 31,59 36,318 Liabilities Short-term debt 436 1, A/c payables 4,255 4,116 4,643 7,82 9,326 Long-term debt 6,276 4,894 7,894 12,394 12,394 Other non-curr. liab , Total liabilities 11,378 11,484 13,221 2,95 22,55 Shareholders' equities Share capital Reserves (1,53) (9,73) (8,83) (6,838) (3,697) Share premium acct. 16,67 16,67 16,67 16,67 16,67 Minority int Total equities 7,274 7,632 8,552 1,559 13,768 Figure 39: Galaxy's cash flow Year-end 31 Dec. (HK$ mn) FY8A FY9A FY1E FY11E FY12E Pre-tax profit (829) ,136 3,414 Taxes paid 1, (876) (59) (128) Dep & amortisation ,19 1,46 Associate adjustments (52) (86) (112) (123) (135) Gross cash flow 1,475 1, ,974 4,196 Net capex (1,964) (3,67) (3,714) (1,923) (746) Net change in wc (219) 583 (499) 1, Free cash flow (78) (1,383) (3,585) (6,155) 4,315 Others (1,165) (26) Net cash flow (1,872) (1,49) (3,585) (6,155) 4,315 Macau Gaming Sector 21

22 Asia Pacific / Hong Kong Casinos & Gaming Rating (from Neutral) OUTPERFORM* [V] Price (19 Oct 1, US$) 5.37 Target price (US$) (from 4.65) 6.5¹ Chg to TP (%) 21.1 Market cap. (US$ mn) 2,832 (US$ 2,832) Enterprise value (US$ mn) 4,91 Number of shares (mn) 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) Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 The price relative chart measures performance against the HANG SENG index which closed at on 19/1/1 On 19/1/1 the spot exchange rate was US$1./US$ Performance Over 1M 3M 12M Absolute (%) Relative (%) Melco Crown Entertainment- ADR (MPEL.OQ / MPEL US) Rerating to continue in the near term Upgrade to OUTPERFORM. We have revised up our FY11/12 EBITDA forecasts for MPEL by 8%/8% on the back of our upward revision in the overall GGR projection. As we expect the prevailing trend of valuation convergence to linger on, we have revised up our target valuation multiple from 8x to 9.5x. As a result, we have revised up our target price for MPEL from US$4.65 to US$6.5 and upgrade our rating to an OUTPERFORM. Profitability should stabilise. Having commenced operation for over a year, the City of Dreams (CoD) market share has finally ramped up and shows persistency. The commencement of the House of Dancing Water show marks the final completion of the CoD and we expect MPEL s profitability to stabilise. 3Q1 results preview strong EBITDA growth among peers. We expect the best-ever quarter for MPEL, with most of the excitement from CoD. We expect CoD to report US$1.3 mn EBITDA in 3Q1, implying a 139% QoQ improvement. The strong EBITDA growth, which we believe is the highest among most of the major casinos in Macau, was driven by a 3.2 p.p. overall market share improvement, plus a much superior high-roller win-percentage of 3.21% during the quarter, versus 2.27% in 2Q1. For Altira, we expect its 3Q1 EBITDA to drop 36% QoQ to US$23 mn, largely on the back of a lower high-roller win percentage. For the company as a whole, we expect MPEL s overall EBITDA to increase 63% QoQ to US$119 mn, with its Mocha slots clubs continuing to provide a stable EBITDA contribution of about US$7 mn, and a slightly higher corporate expense. A catch-up play on valuation convergence. Having underperformed its peers for most of 21, we expect the ramped-up and stabilised operating performance to drive a further rerating to narrow its valuation gap of about 24% against its peers. We believe our conservative market valuation multiple of 9.5x, which implies a 15% discount to the industry average, should provide enough cushion to MPEL s relatively more volatile profitability, as compared to its peers. Financial and valuation metrics Year 12/9A 12/1E 12/11E 12/12E Revenue (US$ mn) 1, ,27.2 2, ,723.9 EBITDA (US$ mn) EBIT (US$ mn) Net income (US$ mn) EPS (CS adj.) (US$) Change from previous EPS (%) n.a. 1,424.8 Consensus EPS (US$) n.a EPS growth (%) n.a. n.a. n.a P/E (x) NM NM Dividend yield (%) EV/EBITDA (x) P/B (x) ROE Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. Macau Gaming Sector 22

23 Financial summary (MPEL) Figure 4: MPEL s profit and loss Year-end 31 Dec. (US$ mn) FY8A FY9A FY1E FY11E FY12E Turnover 1,416 1,333 2,27 2,519 2,724 Gross profit ,81 1,164 SG&A (51) (562) (64) (642) (684) EBITDA Depreciation (127) (217) (325) (328) (332) Net interest income/(cost) (8) (4) (86) (11) (19) Exceptional items (22) (99) (22) Profit before tax (4) (39) (53) 1 4 Taxation 1 Net profit (2) (38) (53) 1 4 Figure 41: MPEL s balance sheet Year-end 31 Dec. (US$ mn) FY8A FY9A FY1E FY11E FY12E Assets Cash ,294 Inventories A/c receivables Other curr. assets Net fixed assets 2,18 2,787 2,575 2,285 1,994 Other non-curr. assets 1,414 1,339 1,282 1,225 1,168 Total assets 4,498 4,9 4,849 4,86 4,91 Liabilities Short-term debt a/c payables Other curr. liab Long-term debt 1,413 1,639 1,639 1,639 1,639 Other non-curr. liab Total liabilities 2,9 2,391 2,393 2,394 2,395 Shareholders equities Share capital Reserves (294) (596) (649) (639) (599) Share premium acct. 2,689 3,89 3,89 3,89 3,89 Total equities 2,49 2,59 2,456 2,465 2,56 Figure 42: MPEL s cash flow Year-end 31 Dec. (US$ mn) FY8A FY9A FY1E FY11E FY12E Pre-tax profit 18 (21) (31) 1 4 Taxes paid 2 (1) (1) Dep. & amortisation Gross cash flow Net capex (1,179) (467) (114) (38) (41) Net change in wc (28) (224) (45) (38) (31) Free cash flow (1,6) (684) Dividends paid Chg in share capital 18 Others (14) (21) Net cash flow (1,164) (75) Macau Gaming Sector 23

24 Asia Pacific / Hong Kong Casinos & Gaming Sands China Rating (from Outperform) NEUTRAL* [V] Price (19 Oct 1, HK$) Target price (HK$) (from 13.9) 15.7¹ Chg to TP (%) 1.7 Market cap. (HK$ mn) 124,259 (US$ 16,14) Enterprise value (US$ mn) 17,778 Number of shares (mn) 8,47.87 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) Dec-9 Apr-1 Aug The price relative chart measures performance against the HANG SENG index which closed at on 19/1/1 On 19/1/1 the spot exchange rate was HK$7.76/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) (1928.HK / 1928 HK) Potential further delay of Sites 5&6 may trigger earnings downgrade Revising up FY1/11 earnings forecast but downgrading to a NEUTRAL. We have revised up our FY11/12 EPS forecasts for Sands China by 9.5%/42.1% on the back of our upward revision in overall GGR projection, as well as pushing our pre-opening expenses assumption for Sites 5&6 forward from FY11 to FY12. As such, we have raised our target price to HK$15.7 (based on 1x FY12 EV/EBITDA) from HK$13.9. But with limited further upside to our target price, we downgrade Sands China to a NEUTRAL. Labour issue for Sites 5&6 has not been fully solved. Although recent media reports suggest its construction sub-contractors are likely to receive quotas to hire as many as 5, imported workers shortly, the local law requires companies to hire one local worker before they can hire imported labour. Thus the recruitment process may still take a couple of months Our model assumes the new casino to open in 212, and if there is no breakthrough in the current labour situation, we see the risk of a further delay and thus this may result in a potential earnings downgrade. 3Q1 results preview luck was against its margin. According to our channel checks, Sands China experienced a lower QoQ high-roller win percentage across the board in all of its three casinos, which led to a 1.5 p.p. QoQ decline in overall market share. Overall, we expect Sands China s 3Q1 property EBITDA (i.e., EBITDA before royalty fee payable to its parent company, as well as certain non-recurring corporate expenses) to stay flat QoQ at US$37 mn, with declines at Sands Macao and the Four Seasons being offset by improvement at Venetian Macao. Already trading at a premium over its peers. At the current price level, Sands China is already trading at a premium to its peers on both FY11 and FY12 EV/EBITDA. While we believe the mass-market focus operator should deserve a valuation premium, due to its market segmentation, the potential earnings downgrade risk due to delay in opening Sites 5&6 cannot be ignored, in our view. Financial and valuation metrics Year 12/9A 12/1E 12/11E 12/12E Revenue (US$ mn) 3,31.1 4,249. 4, ,947.1 EBITDA (US$ mn) , , ,836.1 EBIT (US$ mn) , , ,836.1 Net income (US$ mn) EPS (CS adj.) (US$) Change from previous EPS (%) n.a Consensus EPS (US$) 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 24