Macau Gaming 27 February 2017

【 2017 outlook: Mass Market Continues To Be The Major Driver

Investment Highlights:

GGR resumes growth in 2016Q3: According to the DICJ figures, Macau’s gross revenue from Games of Fortune amounted to MOP 60,418million in 2016Q4, as compared to MOP 55,005million in 2016Q3, recording a 10.2% YoY growth in the quarterly GGR. Looking forward in 2017, we estimate Mass GGR, VIP GGR and EBITDA to grow by 13%, 6% and 14% respectively. The long-term prospects for the industry remain attractive, particularly for the Mass segment.

Mass market to be the major engine: Mass market represents 47% of the GGR mix in FY2016, and we expect the mass market to further gain importance in the next five years. The strength will be underpinned by 1) increasing visitation to Macau; and 2) the upcoming projects in Cotai, including MGM Cotai and Grand Lisboa Palace.

VIP may bottom out, but to be confirmed: The quarterly VIP GGR recorded a 12.7% CASH Research YoY growth in 2016 Q4, represent a strong and the first positive year- on- year [email protected] growth since 2014 Q2. However, with mixed factor such as anti-graft campaign and 27 Feb 2017 capital flow control in China, we remain cautious on the prospect of VIP gaming. It is Cynthia Tam worth noting that the 19th National Congress to be held in 2nd half of 2017 will set Tel: 852-2287-8466 the tone for the upcoming monetary and anti- corruption policy, which in turn have [email protected] a significant impact on Macau VIP gaming. Despite the recent trend signaling a possible turnaround, we would like some more time before calling it a definitive trend.

Gaming Tax Reform has an influence on Macau competitiveness: Facing intense competition from casinos located in Asia, including Singapore, Philippines, Cambodia and Malaysia, there is a need for Macau to have a gaming tax reform to maintain its competitiveness. Gaming concessionaires are currently subject to a 39 percent tax, which is substantially higher than other countries. A potential tax cut will be an upside factor to the gaming industry. Consultation on tax reform will roll out before the present casino licenses are due for renewal between 2020 and 2022.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. ---1-111---- February 27, 2017 Japan casinos pose no immediate threat to Macau: Japan's parliament recently passed a bill legalizing casinos. We believe its impact on Macau gaming industry is yet to come as it will take numbers of years until the first Japanese casino open doors. The future impact of Japanese casino on Macau gaming will depend on 1) how likely Japan's casinos to draw Chinese players, especially from North- Eastern area ; 2) the intensity of the anti- graft campaign; 3) the role of junkets in Japan. We believe the impact of Japan casinos on Macau will only take place later than 2021. We will update our analysis when necessary.

2017 EBITDA boosted by non- gaming revenue: In Macau’s Five- Year Development Plan, covering the period 2016- 2020, the government states that non-gaming revenue should account on average for at least 9 percent of all revenue generated by casino operators by 2020. With more projects open on Cotai, non- gaming segment will become a larger component of revenue. We forecast non- gaming revenue to grow at a CAGR of 14% for the industry from 2017E to 2020E.

Galaxy and Wynn are our top picks: We remain positive on the mass gaming performance of Galaxy and Wynn. For Galaxy, the uptrend of Galaxy Macau™ and StarWorld Macau will continue. Meanwhile, we believe Wynn Palace will be a new value driver for Wynn.

Galaxy (27.HK) and Wynn Macau (1128.HK) are our top picks.

Table 1: Valuation and financial ratios of Macau gaming stocks

Source: Bloomberg, CASH

Table of Contents

2017 Growth Drivers 1. GGR resumes growth in 2016 Q3 4 2. Mass Market to be the Major Engine 7 3. Positive effect brought by Cotai development 18

Investment themes 1. Picking companies with high- performing Mass business 20 2. VIP may bottom out, but to be confirmed 22 3. Market Share Forecast 27 4. Legalized Gambling in Japan Should Have little Impact on Macau business in short term 30 5. Potential Risks for the Industry 30 6. Other factors to be considered 32

Stock Recommendations Galaxy (27.HK) 33 Wynn Macau ( 1128.HK) 38

2017 Growth Drivers

1. GGR resumes growth in 2016 Q3, signaling industry recovery Going forward, we estimate Mass GGR, VIP GGR and EBITDA to grow by 13%, 6% and 14% respectively. The long-term prospects of the industry remain attractive, particularly for the Mass segment.

According to DICJ’s figures, officially the Gaming Inspection and Coordination Bureau of Macao, the gross revenue from Games of Fortune amounted to MOP60,418million in 2016Q4, as compared to MOP55,005million in 2016Q3, recording a 10.2% YoY growth in the quarterly GGR.

Figure 1: Industry GGR up 10.2% YoY to MOP 60,418 mn in 2016Q4

Source: DICJ, CASH Research

GGR to be fueled by mass market: In 2017, we expect mass GGR growth of 13%, higher than the 6% VIP GGR growth. There will be a continuous structural change of the Gaming industry by having VIP shift to Mass, to be explained by the challenging environment imposed by the China’s anti- graft campaign and the tightening monetary policy. Meanwhile, the mass market growth will be due to the improvement in infrastructure, ramp of the new projects and the increase in overnight visitation. We see the mass market to be the theme of the Macau gaming industry for the coming five years. Market players with strong mass GGR growth will outperform the industry and validate a higher valuation.

Figure 2: The trend and forecast of Industry VIP & Mass GGR

Source: DICJ, CASH Research

Figure 3: The growth of Industry VIP & Mass GGR

Source: DICJ, CASH Research

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -5- February 27, 2017 The mass market in 2017 Q3 & Q4 will be strongly supported by the new Cotai projects. MGM Cotai is expected to open in the second half of 2017. We see the catalyst for VIP gaming to be limited compared to the mass gaming sector, due to the fact that MGM Cotai will only focus on Mass gaming business, that is to say, there will be no VIP tables in MGM Cotai.

Our GGR estimate for the fourth quarter of 2017 is conservative due to the high base. The 12.7% growth in VIP gaming in 2016 Q4 can be explained by the catalyst from Wynn Palace opening. We estimate the growth rate to be flat when compared to the corresponding period in 2016.

Meanwhile, Grand Lisboa Palace will be opened later than 2018, and therefore, MGM Cotai will be the major projects to be opened in this year.

FY2017 to be a year recording positive GGR growth: The GGR of FY2016 was MOP223,211 million, recorded a slight decline of 3.3% from FY2015. Looking forward, we expect FY2017 will record a turnaround with the GGR grow at a positive 9.18%. The main reason is the strong performance of mass gaming. The growth rate will be further increased if VIP gaming becomes a surprising factor in 2017, however, for the time being we would exercise caution on VIP GGR forecast.

Figure 4: Annual GGR growth expected to be 9.2%

Source: DICJ, CASH Research

Figure 5: Mass to gain proportion in GGR mix

Source: DICJ, CASH Research

From 2011 onwards, the Mass GGR is gaining significance in the overall GGR. The ratio of Mass/ VIP rose from 27%/ 73% to 47%/ 53% within six years. We believe this trend will continue in 2017. With the VIP GGR and Mass GGR estimated to be MOP 125,906 million and 117,794 million respectively, we expect the ratio of Mass/ VIP to be 48%/ 52% in FY2017.

The catalysts for Mass segment include a) Increase in numbers of overnight visitors; b) Ramp of recently opened projects, mainly from Wynn Palace; c) Stimulus from upcoming projects; d) Infrastructure development in Macau

Increase in numbers of overnight visitors According to DSEC, the aggregate number of overnight visitors in 2016 exceeded 15.7 million, up 9.8 percent year-on-year. Overnight visitors accounted for 50.7 percent of total visitor arrivals, exceeding same-day visitor arrivals for the first time in a decade.

Source: DSEC, MGTO, CASH

Chinese New Year visitation According to the statistics from MGTO, Macau recorded over 930,000 visitor arrivals during the CNY holiday, up 9.9 % over the corresponding period of last year. Over 660,000 visitors came from Mainland China, accounting for 70.9% of total visitor arrivals, increased by 13.8% YoY.

Figure 7: Visitor Arrivals during CNY holiday

Source: MGTO, CASH

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -8- February 27, 2017 Ramp of recently opened projects In 2016 Q4, the performance of Wynn beat the market estimate, confirming our positive view towards the gaming industry. The cannibalization effect on existing Peninsula property can be minor given the attractiveness of the new project. The recently opened projects will continue to be the catalysts driving Mass GGR growth, due to 1) the cluster effect on the Cotai area; 2) increase in the overall number of gaming tables; 3) additional hotel room capacity; 4) positive sentiment under enhanced travel experience.

In 2017, we believe Wynn palace will continue to provide a positive impact to the industry. However, the ramp of Parisian Macao may be less significant given the original high market share of Sands China. From the fourth quarter report announced by Sands, Parisian Macao appeared to be cannibalizing the existing property. Meanwhile, to be fair, we have to see the 2017 Q1 result in order to conclude whether it is more of a blip than a trend.

Upcoming projects MGM Cotai MGM announced that MGM Cotai, an integrated casino, hotel and entertainment resort to be located in Cotai, will open during the second half of 2017. When it does open, it is expected to come with approximately 1,500 hotel rooms and up to 1,500 slot machines and 500 gaming tables.

The final allocation is to be subject to a cap linked to several issues including the amount of non-gaming facilities by the new development.

MGM currently has approximately 600 guest rooms, 409 gaming tables and 1032 slot machines. According to the plan, MGM Cotai's opening will have the largest incremental expansion, relative to other operators, with respect to footprint, room inventory and gaming capacity.

We believe MGM Cotai will attract more visitors to Macau in the coming October Golden Week, and create a positive effect to the entire industry, similar to the impact bought by Wynn Palace in 2016 year end.

Source: 2015 MGM annual report

Grand Lisboa Palace Grand Lisboa Palace in Cotai is expected to be completed by the end of this year, ready for its official opening in 2018. Grand Lisboa Palace will feature a total of approximately 2,000 hotel rooms and suites, facilities for meetings and conferences, shopping, dining and entertainment, and a casino.

As at 30 Sep 2016, SJM operated an average of 323 VIP gaming tables, 1311 mass market gaming tables and 2,748 slot machines. SJM Holdings Ltd has applied for 400 to 500 new gaming tables for the Grand Lisboa Palace.

Infrastructure development LRT to be operate in 2020 The Light Rail Transit (LRT) system will serve the Macau Peninsula, Taipa and Cotai, linking major border checkpoints such as the Border Gate, the Outer Harbour Ferry Terminal, the Lotus Bridge Border and the Macau International Airport. The light rail will be fully ready in 2020.

In future, MLRT System would be connected with Guangzhou-Zhuhai Intercity Mass Rapid Transit (Guangzhu MRT) through the Lianhua-Hengqin line in a seamless way, providing Macau a platform to connect its railway system with the national intercity and high-speed rail network.

Source: Macau GIT

Macau International Airport Expansion According to the Macau International Airport Master Plan released by the Civil Aviation Authority, the expansion is necessary due to some of the facilities already being at capacity, such as the general aviation facilities, the passenger terminal and the road transport facilities, while some other facilities will become saturated very soon and therefore no longer meeting the demand and affecting the service quality.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -11- February 27, 2017 The proposed expansion programme consists of three stages, with the ultimate aim being to expand its capacity to accommodate a maximum of 15 million passengers, 58,000 tons of freight as well as 107,000 aircraft movements per year.

Figure 10: The current layout of the Macau International Airport

Source: Macau International Airport Company Limited (CAM)

Figure 11: Expected layout after the expansion

Source: Macau International Airport Company Limited (CAM)

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -12- February 27, 2017 Pac On ferry terminal Macau’s new Pac On ferry terminal, with a capacity to accommodate 400,000 passengers per day – located near the airport on Taipa Island and designed to bring mass-market tourists direct to the nearby Cotai resorts – will start operations in the second quarter of 2017.

The upcoming terminal will accommodate three ferry operators, namely Turbo jet, Cotai Water Jet and Yuet Tung Shipping across its 16 berths. The project, which has a total of 88 immigration counters, will also feature three multifunctional berths that will house large ferries and cruise ships, while its heliport will accommodate five helicopters.

Hong Kong-Zhuhai-Macau bridge Hong Kong-Zhuhai-Macau Bridge is due to be completed by the end of 2017 and will eventually be 55 km long, starting from Lantau Island in Hong Kong with branches to Zhuhai and Macau.

Figure 12: Layout of the Hong Kong-Zhuhai-Macao sea-link project

Source: HZMB

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -13- February 27, 2017 Macau tourism industry will see a new phase of development when the bridge starts operating, as traffic time from Hong Kong International Airport to Macau is expected to be dramatically shortened to about 30 minutes. We view the infrastructure development as a key long-term catalyst for Macau to further penetrate the Chinese market, leading to greater visitation (and better overnight visitation mix) and thus boost the mass gaming revenues and non- gaming spend.

The increase in numbers of hotel room In 2017, the hotel room inventory in Macau will further increase with the opening of new projects. Additional room capacity is a positive factor for mass gaming sector as it allows stronger overnight visitation, in particular on weekends and holidays.

Figure 13: Hotel room inventory of the Macau Concessionaires

Source: Company data, CASH

Approximately 9910 hotel rooms will be added by the six Macau gaming operators in year 2017-2018, from the current room supply of approximately 24,607 rooms to the future room inventory of 34,517 rooms, representing a 40% increase in room supply within two years.

Figure 14: The positive relationship between hotel guest numbers & Mass GGR

Source: DSEC, DICJ, CASH

Source: DSEC, CASH

We see a continued growth in overnight visitation starting from mid-2015. We expect the new opening in 2017 and 2018 will attract more visitors to stay overnight and thus increase the mass gaming GGR.

Figure 16: The map of Cotai

Source: Google map, CASH

We see a ramp of mass market in the Cotai driven by increasing accessibility of the area. In 2020, the cotai area will be reached by the LRT, namely Light rail transit system. Connected to the Macau International Airport and the new Pac On ferry terminal located nearby, the favorable location of cotai will benefit from the higher visitation volume.

Figure 17: VIP GGR growth of Cotai casinos

Source: Company data, CASH

Figure 18: Mass GGR growth of Cotai casinos

Source: Company data, CASH

We see Melco’s City of Dreams, Galaxy’s casino, and Wynn Palace recording a strong momentum in their mass GGR segment. Cotai will continue to be a hot area in Macau, with the new projects upcoming in 2017 to 2018. The major projects include MGM Cotai, Grand Lisboa Palace and the Phase 3,4 of Galaxy.

Figure 19: The upcoming project in Cotai

Source: Company data, CASH

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -19- February 27, 2017 Investment themes 1. Picking companies with high- performing mass business

Figure 19: The QoQ growth of Mass GGR

Overall, we see a promising growth in the industry Mass GGR. Among the six gaming operators, SJM and MGM recorded a relatively lower growth in mass sector. The lower growth of the SJM mass can be explained by its over-reliance on satellite casinos and its lower ability to attract gamblers. However, we will update our analysis upon the opening of Grand Libosa Palace. For MGM, its 2016 Q4 mass performance fell -7.5% qoq. It can be explained by the following reasons: 1) the high base of Q3; 2) MGM is relatively late to Cotai compared to the competitors. The trend of the mass of MGM will be clearer only after the opening of MGM Cotai, which will focus on mass gaming.

We have an optimistic view on Galaxy and Wynn. For Galaxy, both Galaxy Macau and StarWorld are showing a strong performance in Mass Game. In 2016 Q3, the mass gaming revenue of Galaxy Macau was HKD3.6 billion, up 19% year-on-year, up 10% quarter-on-quarter. Meanwhile, the mass gaming revenue of StarWorld was HKD1.3 billion, up 22% year-on-year, up 14% quarter-on-quarter.

For Wynn, the higher- than- expected performance from Wynn Palace partially offset the declining growth of Wynn Macau. The fourth quarter of 2016 represented the first full quarter of operations for Wynn Palace. In mass market operations of Wynn Palace, its table drop was USD 725.0 million (approx. HKD 5625 million), table games win was USD 159.6 million (approx. HKD 1238 million). Slot machine handle was USD 534.4 million (approx. HKD 4147 million) and slot machine win was USD 28.1 million (approx. HKD 218 million) for the fourth quarter of 2016.

Figure 21: Wynn’s mass GGR recording strong momentum

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -21- February 27, 2017 2. VIP may bottom out, but to be confirmed The quarter VIP GGR recorded a 12.7% YoY growth in 2016 Q4, represent a strong and the first positive year- on- year growth since 2014 Q2. However, with mixed factor such as anti-graft campaign and capital flow control in China, we remain cautious on the prospect of VIP gaming. It is worth noting the 19th National Congress in 2nd half of 2017 may announce new policy on corruption crackdown. We would like some more time before calling it a definitive trend.

Figure 22: The turnaround of VIP GGR

Source: DICJ, CASH

The role of junkets Junkets in Macau play a vital role in VIP gaming segment by arranging accommodation, transportation and providing credits to high rollers. Macau has long relied on junkets to bring in VIP clients as junket operators can tap personal relationships reaching deep inside mainland China to recruit gamblers, who in turn bring in significant amount of profits to the casino. However, the Macau junket system is under pressure due to the anti- graft and AML campaigns.

Decline in number of licensed junkets The total number of licensed gaming promoters in Macau – also known as junkets – shrank by 10.6 percent over the past 12 months.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -22- February 27, 2017 According to the list of licensed operators published by the Macau’s gaming regulator, the Gaming Inspection and Coordination Bureau, the total numbers of licensed junkets fell from 141 in January 2016 to 126 in January 2017. The figure includes both companies and individuals licensed as junkets.

Previously in January 2015, Macau had a total of 183 licensed junkets.

Figure 23: Decline of the number of junkets

Source: DICJ, CASH

China Macro affecting VIP recovery The pace of VIP recovery will be favored by a combination of positive China macro factors, for instance, higher liquidity, property price rally, coal/steel price hikes and higher producer price index. Property prices in China play a critical role in the VIP gaming segment as real estates will affect the individuals’ notion of wealth and properties are often used as collateral for gaming credit in Macau. As such, any tightening of the monetary policy in Mainland will become a headwind for the high roller market.

The credit surge of China highlights the challenges faced by the Chinese policy makers as they need to balance steady economic growth with controllable leverage in the financial system. The PBOC recently moved to tighten monetary policy by raising the interest rates it charges in open-market operations and on funds lent via its SLF, known as Standing Lending Facility.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -23- February 27, 2017 Figure 24: The correlation between M2 Growth and VIP GGR Growth

Source: Wind, DICJ, CASH

Figure 25: The widening gap between M2 and GDP

Source: Wind, DICJ, CASH

Meanwhile, the gap between the M2 growth and nominal GDP growth will be a concern about financial stability, which may limit the People’s Bank of China’s room to ease further.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -24- February 27, 2017 Property prices in China playing a critical role in the VIP segment Real estate market has an impact on the VIP market as junkets tended to rely on property as collateral for extending credit to gamblers. The further roll- out of home purchase restrictions in mainland may become headwinds for the property market.

Recently, Beijing shortens mortgage terms for second-home borrowers, taking another step to clamp down on speculative home buying and prevent asset bubble. Buyers who already own one residential property are now only eligible to take out a mortgage on a second home for no more than 25 years, implying a shorter mortgage terms from the previous 30 years.

Figure 26: VIP GGR growth and China housing prices

Source: Wind, DICJ, CASH

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -25- February 27, 2017 Commodity prices in China impacting the VIP segment China’s PPI raw materials rose at a fast pace and had shown the first growth since spring 2016.

Figure 27: The trend of China’s raw material PPI

Source: Wind, CASH

Figure 28: Coal price slightly slide from the peak

Source: Wind, CASH

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -26- February 27, 2017 3. Market Share Forecast As a review of the market data, Galaxy and Sands led the VIP and Mass gaming market respectively in the third quarter of 2016.

Figure 29: Galaxy leading the VIP market in 2016 Q3

Figure 30: Sands leading the Mass market in 2016 Q3

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -27- February 27, 2017 Figure 31: Galaxy and Sands being the top two market leader

Looking forward in 2017, we believe Sands and Galaxy will remain the market leader, meanwhile, MGM and Wynn will gain market shares in the mass segment due to the ramp- up of MGM Cotai and Wynn Palace.

Figure 32: The VIP market share forecast for 2017

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -28- February 27, 2017 Figure 33: The Mass + Slot market share forecast for 2017

Figure 34: Wynn gaining market share in 2017

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -29- February 27, 2017 4. Legalized Gambling in Japan Should Have Little Impact on Macau gaming in short term Following the passage on December 14 of the enabling bill legalizing casinos in Japan, a second piece of legislation will be necessary to establish the administrative framework of the industry and the location of venues. We believe it could be beyond the year 2021 before the first Japanese casino resort opens.

The risk that Japanese casino will bring to the Macau gaming industry depend on 1) how likely Japan's casinos to draw Chinese players, especially from the North- Eastern area ; 2) the intensity of the anti- graft campaign; 3) the role of junkets in Japan. We believe the impact of Japan casino to Macau will only take place later than 2020. We will update our analysis when necessary.

5. Potential Risks for the Industry Looking forward in 2017-2020, the VIP gaming sector will continue to be vulnerable to the China macro economy and the policy changes. The factors include: 1) Implementation of VIP smoke ban; 2) Tightening monetary policy in China; 3) Price retreat of property and coal; and 4) Anti- graft campaign of China. Meanwhile, new policy may roll out in the 19 th National Congress which will be held in 2H 2017.

VIP Smoke Ban Since October 2014, smoking in Macau casinos had only been allowed in VIP rooms or in authorized airport-style lounges on the mass gaming floor. The passage of a revised tobacco control bill, which proposed a VIP smoke ban, may have a negative impact on the VIP GGR.

RMB depreciation Under yuan depreciation, China may implement greater control over capital outflow. Starting from 2014, the foreign reserves of China keep depleting. In early February, China’s forex reserves dropped below USD 3 trillion for first time in six years. The further decline in foreign reserve will increase China’s concern over capital flight. Lower liquidity will affect the credit provided by the junket.

Figure 32: China's foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in February

Cool down of Property market China's property sales have fallen recently since the government began tightening and the market expects more to be done in 2017 to deflate the bubble.

According to the China Index Academy, property sales in China dropped 36.7 percent month on month in January, in terms of floor space. Meanwhile, sales fell by 27.3 percent yoy in January, with Beijing and Shenzhen declining by nearly 50 percent.

The Central Economic Work Conference put more emphasis on "financial risk control and prevention", implying a change in macro policy tone for this year. Both real interest rate and the standing lending facility (SLF) rate increases recently, any further tigtening credit policy may act as a heavy blow to the property market.

Of 70 large and medium-sized cities surveyed, 46 saw prices for new residential housing climb month on month in December, down from 55 in November and 62 in October, according to the National Bureau of Statistics.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -31- February 27, 2017 Anti- corruption Campaign Continues Since the Xi presidency, China’s wide scale anti- corruption campaign had shown negative impact to the Macau VIP gaming segment.

Despite the anti- corruption campaign showing some sign of moderation recently, the tone of the central government’s policy may change and the continuation of softening remain uncertain.

According to the figures from the annual work report of Wang Qishan, head of the Central Commission for Discipline Inspection, the number of officials expelled from the party and handed over to China’s courts for prosecution fell more than 20 per cent last year to 11,000. It was the first time ever since 2011 having fewer officials’ persecution than previous year.

6. Other factors to be considered The tax regime for gaming establishments in Macau is less competitive than in other jurisdictions in the Asia Pacific region. At 39 percent, the tax charged on casino gross revenue in Macau is one of the highest in the world among major regulated gaming markets. Currently, the effective gaming tax rate in Singapore is a 10-percent blended rate between VIP and mass. Gaming Tax in Korea, at 20 percent, is also lower when compared to Macau. The tax rate in Philippine and Cambodia is even more competitive, the tax on VIP play in the Philippines is the equivalent of 15 percent of the gross, meanwhile Cambodia is contemplating a lower blended GGR tax rate at a mid-single digit.

Charging a high tax rate, VIP-market play in Macau faces intense competition from nearby regions. VIP players can be highly mobile and tend to play in the casinos that offer them the most attractive deals. Gaming tax rates can have an influence on how much casinos and junkets can pay VIP players in incentives, and thus have an impact on the rolling chip turnover.

The emergence of competition elsewhere in Asia has sparked calls for a rethink on casino tax collection in Macau. As officials and casino operators in Macau gear up for a key gaming franchise renewal process which begins in 2020, it is possible for Macau to have a gaming tax reform. If the VIP gaming tax rate is lower, it can help enhance the competitiveness of Macau’s gaming sector.

Galaxy Entertainment (27.HK) Gaming

Key Investment Themes ‹ Strong Mass performance to drive stock higher ‹ Seeing strength in EBITDA ‹ Maintaining the leading market share in VIP market

4Q16 Preview: We forecast adjusted EBITDA to grow by 4% qoq and 12% yoy to HKD2784million. The EBITDA uptrend will continue with the strong performance of mass segment.

Previously in 3Q16, Galaxy recorded a 28% yoy growth in its EBITDA. The strong growth is contributed by the ramp up of Galaxy Macau and the well- performing StarWorld Macau. Looking forward, we expect the EBITADA to grow further, explained by the strong performance driven by mass segment and the company’s effective cost control policy.

Continue to be the market leader in VIP market: In Q3, Galaxy continued to lead the market in the high- roller segment by having a 26% market share. As we see a potential bottom out of the VIP segment, Galaxy being the market leader, will be the biggest beneficiary in the turnaround. We expect the VIP GGR in Galaxy Macau and Starworld Macau to record a sequential change of positive 7.1% and 4% respectively. We see the Galaxy Macau™ as a major property to drive the VIP revenue growth and a higher- than- expected industry rebound will be a positive surprise for the Group.

Seeing strength in mass segment: StarWorld Macau is having a successful transition to Mass. StarWorld Macau recorded a HKD 536 million EBITDA in Q316, representing a 4% yoy and 15% qoq increase. We see the growth explained by its 14% qoq and 22% yoy up in mass GGR. Going forward, we have a positive view towards the mass performance of Galaxy. We see this growth to be important in supporting the share price of Galaxy. Having a prediction of 13% growth in industry mass GGR, the continued gains in mass will be a value driver for Galaxy.

Figure 33: StarWorld’s mass GGR growth outperform the industry

Price target of HK$42; Initiate “Buy” rating: Our top pick is Galaxy due to its strong Mass GGR growth and the high potential to benefit from the VIP GGR rebound. Using the EV/EBITDA valuation, we initiate our target price HK$42, implying an upside potential of 13%.

Downside Risk : 1) the tightening monetary policy in PRC may hinder the VIP segment recovery, 2) strong industry competition due to the ramp- up of competitors’ projects.

Fig 34: Galaxy’s five-year history of estimated P/E ratio

Source: CASH, Bloomberg

Relative performance chart

Source: CASH, Bloomberg

Key data on Galaxy Entertainment

Galaxy Macau property model

Starworld property model

Balance sheet (HKD mn)

Key Investment Themes ‹ Strong ramp of Wynn Palace ‹ Mass being the drivers of EBITDA growth ‹ Attractive valuation

We believe a multiple- year ramp in Wynn palace. The Cotai development in Macau will continue to boost the growth of Macau gaming business in 2017 especially for Wynn. We forecast its FY2017 EBITDA to grow more than 40% yoy. Due to the lower- than- expected cannibalization at Wynn Macau, the continued ramp of Wynn Palace would be a renewed value driver. Wynn should be the market player that benefit most from the turnaround of Macau gaming industry

Lower cannibalization that expected: In 2016 Q4, Wynn’s property EBITDA amounted to USD226.4 million, rose 41% yoy and 28% qoq. Among which, 34% of the adjusted EBITDA was contributed by Wynn Palace. The cannibalization on Wynn Macau is little, shown by the flat-ish change of Wynn Macau’s EBITDA. The adjusted EBITDA of Wynn Macau amounted to USD 148.9 million, slightly dropped by 1% QoQ.

Looking forward in 2017, we expect the EBITDA contribution from Wynn Palace to climb up in percentage, coupled with little cannibalization on Peninsula operation, Wynn Palace will be an effective value driver for the group.

Ramp of Wynn Palace: We see a clear path for Wynn palace to exhibit substantial growth and we believe Wynn Palace to be the fastest growing casino in Macau. With the favorable mass performance in cotai, Wynn recorded a 54.7% yoy increase and 37.7% qoq increase in 2016Q4. Despite Wynn has always been focusing on VIP business, its mass segment is enlarging in size, due to the industry trend of mass gaining in significance.

Other positive catalyst: 1) the cluster effect of the Cotai area; 2) increasing accessibility due to the implementation of the Cotai Connect bus program; 3) removal of construction barricade around Wynn Palace.

Price target of HK$17; Initiate “Buy” rating: Wynn is our favorite pick due to the ramp of Wynn Palace. Using the EV/ EBITDA valuation, our price target goes to HK$17, which suggests 24% potential upsides.

Downside Risk: 1) slower ramp of Wynn Palace; 2) unfavorable factor from anti- graft campaign of China; 3) stronger- than- expected competition from Cotai area, for example the upcoming MGM Cotai in 2H 2017.

The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -39- February 27, 2017 Fig 36: Wynn Macau’ five-year history of estimated P/E ratio

Source: CASH, Bloomberg

Relative performance chart

Source: CASH, Bloomberg

Financial Summary of Wynn

Balance Sheet (HKD mn)