Gaming / Lodging Sector

Gaming / Lodging Sector Fortune Favors the Prepared Into the Golden Week October 3, 16 Macau Gaming Sector Bloomberg Price change (%) Code 1/09/16 MTD QTD YTD 1928 HK (6) 10 30 27 27 HK (3) 16 27 19 1128 HK (8) 19 1 42 2282 HK (1) 13 34 39 880 HK (1) 17 21 3 MPEL US 0 24 28 (4) (3) 18 2 Source: Bloomberg Macau s gross gaming revenue (GGR) in September 16 was MOP18.bn, according to the Gaming Inspection and Coordination Bureau. This represents a 7.4% YoY increase, but 2% decline MoM. Taking the opening of Wynn Palace (which opened on August 22nd) and Sands Parisian (opened on Sept 13th) into account, this is a solid but not impressive number, and confirms our view that Macau is seeing a gradual turnaround. While business should be stronger in October with the Golden Week, the sector s share prices have gone up 10%-% this month. Given our forecast of an overall 1% EBITDA growth in 17, the sector s valuation looks fair rather than attractive. Investors should take advantage of the share price rebound to reduce their positions. We believe the recent numbers confirm a turnaround. The new properties will help to deliver a 1% sector wide EBITDA growth next year. In general, we prefer companies with new openings, a stronger Cotai presence, more mass segment-related revenues, including MICE incomes. However, execution matters, and for this reason, we are cautious on Wynn Macau. Despite the opening of Wynn Palace, the company has found the switch to mass-gaming from VIP and premium players uneven. On a separate note, Wynn Macau s President and executive director Gamal Abdelaziz has resigned. He was hired in January 13 from MGM Resorts by Steve Wynn specifically to promote the development and opening of Wynn Palace. Ian Coughlan, a veteran of the company, has been appointed as the new President. Business should be strong in the October Golden Week, as novelty effect of the new properties will draw in customers. Wynn Palace is fully booked, but this is at the expense of existing hotels. The sector s share prices have also appreciated %- 3% in the last quarter before recent profit taking, so valuation is only fair. With some slowdown likely in November, we recommend investors to take advantage of the share price rebound to reduce their positions. We believe Sands China and MGM China to be more attractively valued with earnings revision upside. Wynn Macau and Melco Crown, on the other hand, face downward revision risks. Figure 1: Monthly GGR has stabilized but still 30% below 13 peak levels Johnson Cheung (82) 3698-627 johnsoncheung@chinastock.com.hk Tony Li, CFA (82) 3698-6392 tonyli@chinastock.com.hk 3 30 2 1 10 - MOP (bn) 13 14 1 16 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1

September GGR The reported GGR numbers for September showed a 7.4% YoY increase, ahead of August s 1.1% YoY growth, after 26 months of consecutive decline. In our view, MOP 18.4bn is a solid but not impressive number, given the contribution of Wynn Palace and Sands Parisian. Figure 2: Monthly GGR (MOP bn) GGR Analysis Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 13 26.86 27.08 31.34 28.31 29.9 28.27 29.49 30.74 28.96 36.48 30.18 33.46 14 28.74 38.01 3.4 31.32 32.3 27.22 28.42 28.88 2.6 28.03 24.27 23.29 1 23.7 19.4 21.49 19.17.3 17.36 18.62 18.62 17.13.06 16.43 18.34 16 18.67 19.2 17.98 17.34 18.39 1.88 17.77 18.84 18. While the September GGR was up 7.4% YoY, it was actually down 2% MoM. September gaming revenues received an extra boost with the opening of Wynn Palace, (a 1,700-room facility) on August 22nd, and the Parisian Macao (which added 3,000 rooms) on September 13th. The ramp-up seem to be in the second-half of the month: reported figures to indicate there was some slowdown in the first two weeks. Hence, we believe there will be some momentum going into the Golden Week in October. The quarterly breakdown between VIP and mass market will come out later. However, it seems that in September, there was also so revival in VIP revenues, even though Wynn Palace only added 3 junket operators, while Parisian Macao is a mass-centric operation. Continued growth in 17 We believe the recent numbers confirm a turnaround. The new properties will help to deliver growth next year, but as room availability becomes increasingly common and the novelty effect of new casinos wears off, we estimate the average monthly GGR for 17 to be MOPbn. As monthly GGR figure has normalized between MOP 17bn-bn for the past 18 months, this represents a 10% YoY increase. 2

YoY Change (%, LHS) GGR (Bil MOP) Figure 3: Monthly GGR (MOP bn) 80 60 0 Jan-11 Jan-12 Jan-13 Jan-14 Jan-1 Jan-16 - - 3 30 2 1 10-60 GGR (Bil MOP, RHS) YoY Change (%, LHS) 0 In this benign scenario, we believe the sector can generate a 1% YoY EBITDA growth. However, the casino operators will not benefit equally: Opening of New Properties : Sand China and Wynn Macau have major properties opening in Q3 16. MGM China s Cotai site will likely open in Q2 17. We believe new properties will drive clientele traffic for both VIP and mass segments. Galaxy Entertainment, Melco Crown and SJM Holdings will not see new openings in 17-18 period. Cotai/ Peninsula: Cotai s share of gaming revenues have been growing much faster and at the expense of the Peninsula s casinos, especially for the mass segment. We expect this trend to accelerate in the next 12 months. This would negatively affect MGM China and SJM Holdings. VIP vs Mass Segments: VIP bacarrat revenues, which still comprise 60% of GGR, can be extremely volatile. However, its attributable EBITDA margin is only 30% of mass gaming s. Hence it is more important to focus on mass gaming, which account for approximately 70% of EBITDA. Sands China, Galaxy Entertainment have a greater slice of business coming from the mass segment. Retail and other operations: Non-gaming revenues and EBITDA are becoming more important. Sands China is the most diversified of all the operators, with the malls accounting for over 1% of its EBITDA. 3

Share Price Performance and Valuation The gaming sector went up by almost 1% to 2% in early September, but gave back 1/3 of the gains in 2H of the month. That said, they are still up 10% to 2% for September, and %-% YTD. The outperformer YTD is Wynn Macau, while SJM Holdings and Melco Crown are either flat or slightly down YTD (Figure 4). Figure 4: Share price performance Casino Operators Bloomberg Mkt. Cap. Price Price change (%) Name Code (US$ mil) 2/10/16 1-Day WTD 1/09/16 MTD QTD YTD 1 SANDS CHINA LTD 1928 HK 3,01 33.6 (2) 1 (6) 10 30 27 (30) GALAXY ENTERTAINMENT GROUP 27 HK 16,072 29.2 (2) 0 (3) 16 27 19 (44) WYNN MACAU LTD 1128 HK 8,602 12.84 (2) (2) (8) 19 1 42 (9) MGM CHINA HOLDINGS LTD 2282 HK 6,9 13.46 (2) 2 (1) 13 34 39 (1) SJM HOLDINGS LTD 880 HK 4,18.7 (4) 1 (1) 17 21 3 () MELCO CROWN ENTERTAINME-ADR MPEL US 7,926 16.11 1 2 0 24 28 (4) (34) (2) 1 (3) 18 2 (48) Sources: Bloomberg, Bloomberg consensus In terms of valuation, the sector is trading at 22x to 30x PER (after eliminating the outliers such as Melco Crown and SJM Holdings. However, because these companies have new openings, causing sizeable increases in depreciation charges/ interest expenses, EV/EBITDA multiples should be just as important, if not more so. These companies are trading 11x to 19x 16 EV/EBITDA. On this basis, we believe the valuation is fair, rather than attractive, given MGM China and SJM Holdings concessions will expire in and the others in 22 (Figure ). Among the companies, MGM China and Sands China s valuation appear reasonable with attractive growth prospects in 18. Wynn Macau and Melco Crown appear to be expensive and face downward earnings revision risks. Figure : Valuation of the Macau gaming plays Casino Operators Bloomberg Mkt. Cap. Price EV/EBITDA PER (x) P/B(x) Rec. Dist. (%) Name Code (US$ mil) 2/10/16 FY16E FY17E FY1 FY16E FY17E FY1 FY16 BUY HOLD SELL SANDS CHINA LTD 1928 HK 3,01 33.6 1.2 12.2 24.0 27.3 24.1 6.0 6.8 3 46 19 GALAXY ENTERTAINMENT GROUP 27 HK 16,072 29.2 11.7 13.2 29.9 23.4 23.7 3.0 2.8 62 3 4 WYNN MACAU LTD 1128 HK 8,602 12.84.0 13.3 27.9 30.8 22.1 16.3 17.0 36 28 36 MGM CHINA HOLDINGS LTD 2282 HK 6,9 13.46 14.4 12.9 16.4 22.0 27.9 10.4 8.3 4 2 21 SJM HOLDINGS LTD 880 HK 4,18.7 4.9.8 13.1 16.6 27.9 1.4 1.3 17 2 30 MELCO CROWN ENTERTAINME-ADR MPEL US 7,926 16.11 18.6 26.6 82.6 0.3 43.2 2.0 2.2 27 18 28.6 29.0 6.6 6.3 39 39 22 Sources: Bloomberg, Bloomberg consensus 4

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