Monday, September 29, 2014
China Merchants Securities (HK) Company Report Hong Kong Equity Research
Paradise Entertainment (1180 HK) Angela HAN LEE +852 3189 6634 Initiate with BUY: Right segment, right product [email protected] ■ Initiate BUY with 12-month TP of HK$4.70, based on 0.6x FY15E PEG on 43.9% FY14E-17E EPS CAGR. WHAT’S NEW ■ Casino services focus solely on grind mass market with strong Initiation growth, outperforming Macau peers exposed to high-end market. ■ The sole live multi game (LMG) system and terminal supplier in BUY Macau. Upcoming Cotai properties and replacement demand imply Previous good sales visibility. LMGs cater grind mass with low minimum bet for table games. Price HK$3.28
12-month Target Price Catalysts for re-rating HK$4.70 (+43%) The company provides 1) casino services in Macau and 2) LMG sales to (Potential up/downside) Macau (monopoly protected by patent) and overseas casinos. Weak set Previous of 1H14 results and market sentiment caused the recent share price fall: 1) delayed LMG sales, 2) one-off early redemption loss of promissory Price Performance note, and 3) weak GGR trend of Macau. However, we expect to see two (%) major catalysts leading to strong earnings growth at 38.7%/42.7% in 400 1180 HSI Index FY14E/15E: 1) casino services keep growing strongly along with resilient 300 grind mass market (revenue up 28.6%/22.7% YoY in FY14E/15E) and 2) 200 increase in LMG deployment (revenue up 48.8%/80.0% in FY14E/15E). In 2H14E, we expect to see 56.5% YoY earnings growth to HK$88.5mn. 100 0 Well-positioned to benefit from capacity expansion -100 Major earnings driver in the long term is LMG business. We believe LMG Sep/13 Jan/14 May/14 Aug/14 terminals are one of the solutions for upcoming casinos for both gaming table shortage and labour shortage in Macau. We expect 40.0% 3-year Source: Bigdata % 1m 6m 12m CAGR in the company’s LMG sales during FY14E-17E. 1180 HK (25.2) (48.1) 86.8 HSI (5.6) 8.2 2.4 Valuation/ Key risks Our PEG valuation target is at 33%-45% discount to our target for Macau Gaming casino operators to factor in 1) smaller market cap with less liquidity and Hang Seng Index 23678 2) management track record is not as strong as casino licensees in HSCEI 10584 Macau. Our 0.6x PEG target is in line with the current market valuation Key Data for overseas gaming machine suppliers. Key risks: 1) heavy reliance on 52-week range (HK$) 1.74-7.85 patents, 2) substantial cut of minimum bet in Cotai competitors and 3) Market cap (US$ mn) 450 corporate governance. Avg. daily volume (mn) 5.9 Financials BVPS (HK$) 1.12 Shareholdings Structure HKD mn FY12 FY13 FY14E FY15E FY16E Jay CHUN 59.3% Revenue 729 1,030 1,360 1,815 2,215 SHAN Shiyong 2.5% Growth (%) 33.6% 41.4% 31.9% 33.5% 22.1% Bridger Management LLC 3.2% Net profit 106 97 134 191 280 No. of shares outstanding (mn shares) 1,064 Growth (%) 198.7% -8.9% 38.7% 42.7% 46.1% Free float 33.0% EPS (HKD) 0.04 0.15 0.13 0.18 0.26
P/E (x) 87.8x 21.7x 26.x 18.2x 12.5x EV/EBITDA (x) 14.4x 12.2x 8.3x 6.8x 5.x Dividend yield (%) 0.0% 1.5% 1.2% 1.6% 2.4% ROE (%) 27.3% 8.4% 11.5% 15.0% 19.5% Source: Company data, CMS (HK) estimates
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公司报告 招商证券（香港）有限公司
汇彩控股 (1180 HK) 韩琦 +852 3189 6634 首次给予买入评级：恰当的市场定位，恰当的产品 [email protected] ■ 首次覆盖给予买入评级，12个月目标价4.70港元，基于FY15E PEG 0.6x及FY14E-17E EPS CAGR 43.9%。 最新变动 ■ 娱乐场服务仅锐意发展增长强劲的低端中场业务。因此跑赢暴露于高端 首次覆盖
市场的澳门同行。 ■ 澳门直播混合游戏机(LMG)的独家供应商。即将陆续开幕的氹仔新赌场 买入
以及更新换代的需求意味着良好的LMG销售的前景。LMG同样迎合低端中 前次评级 不适用 场玩家的需求，满足他们用较低的最小赌注玩赌台游戏。 股价 HK$3.28 评级上调的催化剂 12个月目标价 HK$ 4.70 （+43%） (上涨/下跌空间) 公司提供1）澳门娱乐场服务业务，2）LMG在澳门（受专利保护的垄断） 和境外销售。2014年上半年业绩及市场情绪均疲弱，导致近期股价下跌： 前次目标价： 不适用 1）延迟了的LMG销售，2）一次性的承兑票据提早赎回亏损，及3）澳门 博彩总收入的弱势。然而，我们预期看到两个主要催化剂，将带动14/15年 股价表现 盈利强劲增长38.7%/42.7%：1）娱乐场服务继续强劲增长，与低端中场表 (%) 汇彩控股 恒生指数 现同步（预测14/15年收入将同比上升28.6%/22.7%），及2）LMG的使用 400 增加（预测14/15年的收入将上升48.8%/80.0%）。我们预计，2014年下 300 半年盈利同比增长56.5%至8,850万港元。 200 进占有利位置受益于容量扩张 100 0 长远的盈利增长动力主要来自LMG业务。我们相信，LMG终端机是解决未 来澳门娱乐场赌桌和人手短缺的其中一个方法。我们预期，2014-17年公 -100 司LMG销售的3年CAGR将达到40.0%。 2013/09 2014/01 2014/05 2014/08
资料来源：贝格数据 估值/风险提示 % 1m 6m 12m 1180 HK (25.2) (48.1) 86.8 我们的PEG目标估值较我们给予澳门娱乐场运营商的目标有33%-45%折 HSI (5.6) 8.2 2.4 让，考虑到：1）公司的市值较小及流动性较低，及2）管理层的往绩不及 澳门娱乐场持牌者般坚实。我们的0.6xPEG目标与海外博彩机供应商现时 行业：博彩 的市场估值相符。主要风险：1）严重倚赖专利，2）氹仔竞争对手显著削 恒生指数 23678 减最低下注金额，及3）企业管治。 国企指数 10584 重要数据 52周股价区间（港元） 1.74-7.85 港股市值（百万美元） 450 日均成交量（百万股） 5.9 每股净资产（港元） 1.12 盈利预测及估值 主要股东 陈捷 59.3% 百万港元 FY12 FY13 FY14E FY15E FY16E 单世勇 2.5% 营业额 729 1,030 1,360 1,815 2,215 Bridger Management LLC 3.2% 同比增长(%) 33.6% 41.4% 31.9% 33.5% 22.1% 总股数 （百万股） 1,064 净利润 106 97 134 191 280 自由流通量 33.0% 同比增长(%) 198.7% -8.9% 38.7% 42.7% 46.1% 每股盈利(港元) 0.04 0.15 0.13 0.18 0.26 市盈率(x) 87.8x 21.7x 26.x 18.2x 12.5x 企业价值收益比率(x) 14.4x 12.2x 8.3x 6.8x 5.x 股息率(%) 0.0% 1.5% 1.2% 1.6% 2.4% 股本回报率(%) 27.3% 8.4% 11.5% 15.0% 19.5% 资料来源：公司资料、招商证券（香港）预测
彭博终端报告下载: CMHK
Investment thesis Both main businesses cater grind mass market. 1) It provides casino services (81% of FY14E revenue) in Kam Pek, Waldo and other casinos under the gaming license of SJM and Galaxy. The company targets grind mass only, which is more defensive from political and economic risks than VIP and premium mass. 2) Gaming system business (19% of FY14E revenue) is about LMG distribution in Macau and overseas, enabling grind mass players to bet for table games with lower minimum bet. The company is the sole distributor of LMGs in Macau, protected by Casino services are growing patent. ahead of its peers due to grind mass market Casino services: Strong ramp-up of Waldo brings surprise positioning. Focus on grind mass will surprise with outperforming results. Macau gaming sector has been suffering from weak demand from VIP and premium mass players due to on-going anti-bribery campaign. However, its flagship casino Kam Pek recorded historic high GGR in July 2014 of HK$165.3mn, while the sector suffered from 3.6% YoY contraction. The management expects further expansion of Kam Pek’s GGR in 2H14E. Waldo records rapid growth of table yield. After the handover to the company in Feb 2014, Waldo changed its marketing strategy from high- end to grind mass with minimum bet of c.MOP500. Timing of transition coincides with weakening VIP and premium mass market of Macau, LMG: solution for casinos helping its casino service business outperform the market in 2H14E. for gaming table and labour shortage. LMG business: Cotai expansion brings better visibility Table and labour shortage in Macau brings opportunity. Upcoming properties in Cotai are raising market’s concern on the shortage of gaming tables and hiking labour cost. We expect new casinos to get half of originally designed gaming table capacity due to the current table cap policy. It implies high probability for casino operators to install LMGs in remaining gaming area. Moreover, it will enable casinos to cater players with less employees (1 dealer can serve 100 LMG terminals). Gradual exposure to overseas with global partners. It signed partnership with IGT and Ainsworth for its LMG distribution in the US and Australia respectively, another critical earnings driver in the future.
Strong fundamentals likely to support rally ahead of casino moguls Outperforming 2H14E results Recent collapse in share price due to weak 1H14 results: 1) less than will trigger re-rating ahead of expected LMG deployment and 2) net margin decline due to early Macau casino operators. redemption loss of promissory note. Apart from these company-specific factors, we believe sector-wide weak GGR was a reason. Worst has gone. Outperforming GGR growth will trigger re-rating. As a unique Macau company focusing solely on grind mass market, Paradise Entertainment keeps recording YoY expansion of monthly GGR YTD in both Kam Pek and Waldo. As a result, we believe it will bring the rally ahead of other casino operators who are suffering from weak high-end demand. Moreover, LMG sales in 2H14E will be stronger with contribution from overseas partners such as IGT and Ainsworth. Valuation gap with peers will narrow gradually. The company currently trades at 0.4x FY15E PEG/3-year EPS CAGR, at a discount to Macau casino operators 0.6x and global gaming machine suppliers 0.7x. The valuation gap will narrow with 1) resilient earnings growth of 38.7%/42.7% in FY14E/15E and 2) stabilization of margin with adoption of daily fee model in LMG business.
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Focus charts Figure 1: 16.2% FY13-18E CAGR for no. of slot Figure 2: No. of LMG sales to grow at 16.8%
machines and ETGs installed in Macau FY13-18E CAGR in Macau
FY18E FY18E
FY17E FY17E Lisboa Palace, Galaxy Macau 3&4 FY16E FY16E MGM Cotai, Wynn Palace, FY15E Parisian FY15E Galaxy Macau 2, Studio City FY14E FY14E
FY13 FY13
FY12 FY12 0 5,000 10,000 15,000 20,000 25,000 30,000 - 500 1,000 1,500 2,000 2,500 Source: Company data, CMS (HK) estimates Source: Company data, CMS (HK) estimates
Figure 3: Profitability to improve with economies of Figure 4: ROA and ROE improve after bottoming in
scale FY13E due to setting up the US office 70% 30%
60% 25%
50% 20% 40% 15% 30% 10% 20%
10% 5%
0% 0% FY12 FY13 FY14E FY15E FY16E FY12 FY13 FY14E FY15E FY16E Gross margin Operating margin Net margin ROE ROA Source: Company data, CMS (HK) estimates Source: Company data, CMS (HK) estimates
Figure 5: Revenue from gaming system will grow Figure 6: EBITDA contribution from gaming system
stronger than casino services. increases with more LMG orders and higher margin 1,600 450
1,400 400
1,200 350 300 1,000 250 800
HK$mn 200 600 HK$mn 150 400 100 200 50 0 0 FY12 FY13 FY14E FY15E FY16E FY12 FY13 FY14E FY15E FY16E Casino Services Gaming System Casino Services Gaming System Source: Company data, CMS (HK) estimates Source: Company data, CMS (HK) estimates
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Contents
Investment thesis ...... 3 Focus charts ...... 4 Company background ...... 6 Resilient earnings growth of 39%/43%/46% in FY14E/15E/16E ...... 7 Casino services (81% of FY14E revenue): right time, right segment ...... 8 Gaming system (19% of FY14E revenue): right time, right product ...... 11 Financial analysis ...... 18 Valuation ...... 20 Risks ...... 20 Peer valuation table ...... 21 Scenario analysis on different LMG sales volume assumptions ...... 22 Sensitivity analysis on number of LMGs deployed in new gaming properties ...... 23 Sensitivity analysis on daily fee ...... 24 Introduction of the management ...... 25 1H14 results review: soft but encouraging ...... 27 Appendix 1: Details of patents ...... 29 Appendix 2: Location of casinos ...... 30 Appendix 3: Pipeline integrated resorts scheduled to open by 2018 ...... 31
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Company background Provides sales, marketing, promotion, player development and other services in Macau. It currently manages 1) Casino Kam Pek Paradise, 2) Waldo Casino, 3) LMG Terminal Zone of Lisboa Casino, and 4) Macau Jockey Club Casino. All casinos under the company cater to mass market gamers, major generator of gaming revenue growth in Macau in recent years. Sole supplier of LMGs in Macau. The company develops and sells Live Multi Game machines (LMG), which is an electronic gaming system that allows users to bet electronically against live dealers and to play many different games at the same time. The electronic betting system greatly enhances the speed and efficiency of a game. The company holds various patents within Macau and the US. . The patents in Macau give them the right as the sole supplier of computerized systems to play multiple table games and wagering through an electronic system. . The US patents also give them the right to use a computerized system to play multiple table games and wagering through an electronic system, and also their jackpot method and insurance betting option. Shareholding structure Figure 7: Shareholding structure Bridger Jay CHUN SHAN Shiyong Others Management LLC
59.3% 2.5% 3.2% 33.0%
Paradise Entertainment (1180.HK)
100% 82%
LT (Macau) Limited LT Game Limited
Casino Management Business Electronic Gaming Business Source: Company data, CMS(HK) 2H14E guidance by the management Order book for 2H14E LMG sales encouraging. Management highlighted 2H14E LMG sales in Macau will be mostly from delayed delivery of products, previously scheduled in 1H14. Changes in LMG design and interface are in progress and the management expects strong sales growth in Macau. We believe visibility of its business in the US and Australia is improving, after signing partnership with IGT and Ainsworth. The company currently guides deployment of 1,000 LMGs in 2H14E. By the end of 1H14, reported inventory on gaming system was up 78.9% YoY, 71.4% HoH to HK$25.0mn, partially implying strong order book ahead. Casinos keep delivering strong GGR. Thanks to its low-end market positioning catering visitors of PRC’s middle income group, its casino properties are less impacted by political and economic factors. Despite the tough business environment, Kam Pek saw a record-high GGR of HK$165.3mn in July 2014. It implies 29.2% MoM growth vs. 1.6% of Macau’s GGR. Revenue from casino service was guided to grow at mid-teens in 2H14E. Figure 8: Comparison of GGR YoY growth 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Kam Pek GGR YoY Macau GGR YoY Source: DICJ, Company data, CMS(HK) estimates
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Resilient earnings growth of 39%/43%/46% in FY14E/15E/16E Revenue growth driven by increasing orderflow for LMG We expect 41%/32%/34% FY14E/15E/16E overall revenue growth. We believe growth of gaming system segment will outperform casino services segment, backed by new demand from pipeline casinos scheduled to open from FY15E. Revenue from casino services will keep growing mainly on the ramp-up of properties that were newly added to Paradise Entertainment’s portfolio: Waldo, LMG lounge of Lisboa and MJC. More sustainable revenue/earnings with daily fee income Daily fee model spreads out P&L evenly. Paradise Entertainment is adopting daily fee income model from one- off sales for LMG. It is equivalent to LMG leasing model at US$35 per day at zero installation cost for casino operators. We believe the impact on margin is limited while more sustainable income flow and earnings recognition will be welcomed by long-term investors. We expect the contribution of daily fee as a % of total revenue will increase from 0% in FY13 to 0.4%/5.9%/15.6% in FY14E/15E/16E. Margin expansion on economies of scale We project expansion of operating margin from 11.6% in FY13 to 13.8%/13.3%/15.8% during FY14E/15E/16E. Slight pullback in FY15E will be due to gaming system business. In terms of EBITDA margin, we project 21.7%/20.3%/23.0% for FY14E/15E/16E. . Gaming system is the major beneficiary of scale business. Improving order flow for LMGs from Macau is the major business driver and we assume upcoming properties in Macau will install LMGs at daily fee model (US$35 per day). We assume lower 1-year margin for daily fee LMG sales than one-off LMG sales. Therefore, we expect a slight cut in operating margin for LMG sales in FY15E, which is mostly driven by new properties (400 LMGs for each Galaxy Macau Phase 2 and Macau Studio City). . Casino services segment has room to improve in Waldo through driving up daily traffic and daily table yield. . Blended margin expansion on increasing contribution from high-margin LMG sales. Protected by patents, we believe the company’s top-line of gaming system segment (LMG sales) is a derivative for the increasing supply of Macau casino properties. Patent also protects its high margin in Macau, in our view. As a result, we believe the increasing contribution from LMG sales benefits both revenue growth and margin expansion of Paradise Entertainment.
Figure 9: Segment revenue breakdown Figure 10: Segment EBITDA margin 100% 45% 90% 16.6% 18.7% 25.3% 25.3% 40% 31.4% 80% 35% 70% 30% 60% 25% 50% 20% 40% 83.4% 81.3% 74.7% 74.7% 68.6% 15% 30% 20% 10% 10% 5% 0% 0% FY12 FY13 FY14E FY15E FY16E FY12 FY13 FY14E FY15E FY16E Gaming System Casino Services Casino Services Gaming System Source: Company data, CMS(HK) estimates Source: Company data, CMS(HK) estimates
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Casino services (81% of FY14E revenue): right time, right segment Figure 11: The company’s casino revenue projection Figure 12: Casino EBITDA and margin projection 450 30% HK$mn 1,600 MJC LMG 400 25% 1,400 29.7% CAGR MJC slots 350 1,200 MJC mass 300 20% Lisboa LMG 1,000 250 15% Waldo LMG 200 800 HK$mn Waldo slots 150 10% 600 Waldo mass 100 400 Kam Pek LMG 5% 50 200 Kam Pek slots 0 0% 0 Kam Pek mass FY12 FY13 FY14E FY15E FY16E FY12 FY13 FY14E FY15E FY16E EBITDA EBITDA margin Source: Company data, CMS(HK) estimates Source: Company data, CMS(HK) estimates Driver #1: Kam Pek keeps outperforming the market One of the best performing Peninsula casino. Kam Pek delivered record-high daily table yield of HK$75,127 in 1H14 (up 13.5% YoY and 9.6% QoQ), compared with HK$66,190 in 1H13 and HK$68,520 in 2H13. It is in line with Grand Lisboa’s daily mass table yield of HK$79,499 in 1H14, which is one of the high yielding casinos in Macau Peninsula. While Peninsula is experiencing market share loss to Cotai properties, we believe Kam Pek will continue grasping market share of other old boutique casinos in Peninsula. Keeps improving table yield. Wynn Macau and MGM Grand recorded daily mass table yield of HK$140,000 in 2Q14, c.80% higher than Kam Pek’s daily table yield. We believe Kam Pek can continue lifting table yield through 1) increasing contribution from Baccarat gaming tables and 2) increasing traffic flow. We project 10.0%/10.0%/5.0% YoY increase in daily table yield during 1H14E/FY15E/16E, without factoring in the potential increase of minimum bet. Introduction of new LMGs with better user interface will lift frequency of games/machine. Kam Pek is Macau’s flagship LMG casino with 800 LMGs installed. Most of its machines were installed four years ago, while machine replacement cycle ranges 3-4 years. As a result, we expect Kam Pek will replace current LMGs with new generation machines in FY15E with better user interface: players at LMG terminal can monitor and bet for c.10 games simultaneously (vs. LMG under current use can open 1 game at a time), enhancing games/machine and GGR/machine. GGR per LMG terminals at Kam Pek recorded 36.3% YoY growth in 1H14 to HK$1,777 and we project YoY growth at 35.0%/30.0%/20.0% for 2H14E/FY15E/FY16E. Driver #2: Waldo provides a big upside, near-term catalyst for share price FY14E: a year of transformation. After Waldo was officially handed over to Paradise Entertainment for operation in Feb 2014, the company transformed the property to cater low-end grind mass market from VIP and premium mass in the past. As a result, Waldo achieved 100.2% YoY jump in daily table yield to HK$48,563 in 1H14 vs. HK$24,260 in 1H13 and HK$38,742 in 2H13. Moreover, Waldo installed 138 LMG terminals and we expect Waldo to become No.2 high yield LMG property after Kam Pek in the future. Advantage over Kam Pek: 162 hotel rooms. While the hotel operation is not under Paradise Entertainment, we believe the offering of accommodation will be appealing for PRC overnight gamblers, impacting GGR by 1) longer length of stay in casino property and 2) more traffic flow into property than Kam Pek. Significant improvement in profitability. On-going table yield improvement is a result of change in marketing strategy from high-end to low-end. Since grind mass requires less marketing and promotional expenses (F&B coupons but no complimentary accommodation), we believe most of the boosted table yield is directly aggregated to operating profit, implying operating margin expansion. We believe Waldo will become operationally profitable in FY14E (vs. operating loss in FY13). Assume three years to reach Kam Pek’s table yield. In FY13, daily mass table yield of Waldo was 53.2% lower than Kam Pek. We believe this gap will narrow gradually to 29.2%/13.3%/5.3% in FY14E/15E/16E with the change in market positioning.
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Figure 13: Key operational figures of Kam Pek and Waldo
FY12 FY13 FY14E FY15E FY16E Casino services revenue (HK$mn) 544.5 859.2 1,104.7 1,355.9 1,519.1
Kam Pek
No. of mass gaming tables (unit) 37 37 37 37 37 Mass table gaming win per unit per day (HK$) 56,119 67,364 75,250 82,775 86,914 No. of slot machines (unit) 200 200 200 200 200 Slot machine gaming win per unit per day (HK$) 778 1,020 1,221 1,404 1,530 No. of LMGs (unit) 595 800 800 800 800 LMG gaming win per unit per day (HK$) 1,340 1,258 1,833 2,382 2,859
Waldo No. of mass gaming tables (unit) - 30 29 27 27 Mass table gaming win per unit per day (HK$) - 31,560 53,286 71,798 82,348 No. of slot machines (unit) - - - 200 200 Slot machine gaming win per unit per day (HK$) - - - 843 969 No. of LMGs (unit) - - 198 258 258 LMG gaming win per unit per day (HK$) - - 161 381 623
Source: Company data, CMS(HK) estimates Mass-focusing strategy is unique to cater low-end mass gamblers No VIP halls: With increasing supply of high-end integrated resorts with a variety of non-gaming facilities, aged boutique-style casinos in Peninsula kept losing market share to Cotai, especially in VIP gaming which has tougher client request about the quality of facilities and services. As a solution to survive, Paradise Entertainment used a business model of pure mass floor gaming, to cater low-end mass gamblers. Provided that big Cotai casinos are crowded by tourists and minimum bets are relatively high, the company targets a group of price-sensitive gamblers. In the long term, we think this mass is the main driver for the Macau gaming sector, rather than VIP gaming. As a result, we think Paradise Entertainment is well-positioned to ride on this boom. Crowd brings crowd: Kam Pek, flagship casino of Paradise Entertainment, follows the rationale of “people gather in crowded table.” 30% of traffic to Kam Pek is coming from local residents, who are attracted by F&B coupons or other promotional activities. These locals keep the casino busy while main contributors of gaming revenue are tourists from the PRC. The company is replicating same strategy in Waldo this year, and we expect it to drive daily gaming revenue per table up 68.8% YoY to HK$53,286 successfully.
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Figure 14: Revenue model of casinos under Paradise Entertainment
Kam Pek Waldo Lisboa (LMG) MJC Gaming license of SJM Galaxy SJM SJM
Mass table gaming
Gross gaming revenue 100% 100% N/A 100% -) Gaming tax and levies 40% 40% N/A 40% -) Commission to licensee 5% 4% N/A 5% Casino services revenue as % of GGR…(1) 55% 56% N/A 55%
Slot machines gaming Gross gaming revenue 100% N/A N/A 100% -) Gaming tax and levies 40% N/A N/A 40% -) Commission to licensee 20% N/A N/A 20% Casino services revenue as % of GGR…(2) 40% N/A N/A 40%
LMG gaming Gross gaming revenue 100% 100% 100% 100% -) Gaming tax and levies 40% 40% 40% 40% -) Commission to licensee 5% 4% 5% 5% Casino services revenue as % of GGR…(3) 33% 34% 33% 33% Gaming system revenue as % of GGR…(4) 22% 22% 22% 22%
The company’s casino services revenue = (1)+(2)+(3) The company’s gaming system revenue = (4)+ other LMG sales revenue
Source: Company data, CMS(HK) estimates
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Gaming system (19% of FY14E revenue): right time, right product Strong bargaining power in Macau: the only supplier of LMG High margin business. The patent in Macau is valid until 2026. After the approval of the patent, Shuffle Master (a major competitor for LMG distribution in the past) can no longer promote its competiting product. For LMGs sold in FY13, ASP was c.US$17,500 for Macau casino operators, while Paradise Entertainment bought from supplier at c.US$5,000. It implies high gross margin of c.70%. EBITDA margin for gaming system segment was 50.0%/44.0%/6.0% during FY11/12/13: relatively high except FY13 which was negatively impacted by admin expenses for setting up the US office. Economies of scale to kick in. We expect new generation LMGs will be sold at similar ASP (c.US$18,000) with similar gross margin. With increasing order flow (demand from new properties in Cotai, replacement demand in Macau, and order from the US and Australia partners) we believe the company can enjoy improvement in operating efficiency. We currently expect EBITDA margin of 35.1%/33.3%/39.2% during FY14E/15E/16E, compared with 56.7%/33.0% in FY12/13. Slight drop in FY15E will be due to increased contribution from daily fee model, which has lower first-year margin but more sustainable earnings stream than one-off LMG sales model. Figure 15: Porter’s 5 forces model (Macau market)
New entrants • Have patents restriction • Requires economies of scale
Suppliers Existing rivalry Customers • Existing patents in Macau gives • Simple manufacturing Paradise Entertainment a • Casinos are less LMG price process. monopoly in the LMG market. sensitive • Fragmented market • Majority of payment made before delivery
Substitutes • Electronic table games without live dealer • Slot machines
Source: CMS(HK) estimates
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What is live multi game (LMG)?
High volume betting system that links up many players on their own betting terminals to traditional table games played by live dealers. Live games played on traditional gaming tables are broadcasted to surrounding terminals where players view the games in real time and can place bets using the large 26” touch screen of the terminal. Different game modes such as baccarat, roulette, and Sic Bo are available to the player who can bet at multiple different games at the same time. Every game is under a betting timer of 27 seconds, making the game turnover rate much quicker than traditional table games. Each terminal has a writing area for the players to take notes, preserving the traditional way of playing baccarat. Figure 16: Illustration of LMG system Figure 17: Illustration of LMG terminal
Source: Company data, CMS(HK) Source: Company data, CMS(HK) Why is LMG unique? Live dealer interactions are preserved using LMG. The presence of a live dealer dealing cards may provide players with a more enjoyable experience as they previously may not have been comfortable with playing against a programmed computer. In addition, LMG provides players with a unique experience because: . Lower minimum bets compared to traditional table games makes LMG a very attractive option for mass market gamers (ranges MOP20-300 vs. MOP500-2,000 in mass floors). . Comfort and privacy of their own station allow players to write their analyses without the fear of other players copying their tactics. More players per traditional table amid Macau’s cap on number of traditional tables is an important consideration for casino operators to introduce LMGs. Other benefits for casinos include: . Errorless payouts because they are calculated using a computer, ruling out human errors. . Automated accounting as accurate information can automatically be used to calculate the casino’s financial situation. High speed simultaneous games allow players to bet at a volume and intensity like never before. . Less manpower as only one dealer is needed per traditional table which could service up to 100 terminals. . Lower entry barrier and wage for the dealer because s/he needs neither calculating payouts nor getting stressed by confronting players face-to-face.
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Figure 18: Illustration of different generations of LMGs
Source: Company data, CMS(HK)
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Driver #1: Big necessity coming from big Cotai expansion during FY15E-FY18E We assume 400 LMGs to be bought per new property. Kam Pek is running 800 LMGs. Galaxy Macau and Sands Cotai Central (SCC) have placed 150 and 410 LMGs in their properties after their opening. Given that most new properties have relatively big gaming space designed, our base-case sceneario assumes 400 LMGs per pipeline projects, while we also provide sensitivity analysis on number of LMGs sold for new properties. We believe our base case reflects well the demand of new properties and their casino operators: operators are likely to relocate a part of gaming tables from existing properties to new ones, creating demand for LMGs in both existing and new properties. Therefore, assumption for 400 new LMGs is not challenging, in our view, including potential use in existing properties. Figure 19: Projection of number of gaming tables in Macau
5,500 7,392 FY18E
FY17E Lisboa Palace, Galaxy Macau 3&4 FY16E MGM Cotai, Wynn Palace, Parisian FY15E Galaxy Macau Phase 2, Studio City FY14E
FY13
FY12
5,000 5,500 6,000 6,500 7,000 7,500 8,000 Source: CMS(HK) estimates Demand for LMGs is likely to outpace other machines. We assume 16.2% CAGR for slot machines and ETGs in Macau during FY13-18E, while we project 31.3% 5-year CAGR for Paradise Entertainment’s LMG sales. During FY14E-17E, we expect 40.0% 3-year CAGR in the company’s LMG sales. It mainly bases on 1) table games are the most preferred games by PRC tourists to Macau and LMGs are the best products to offer similar entertainment experience among electronic terminals, and 2) LMGs generate better yield per unit than other slot machines, implying better operating efficiency and interests for casino operators. Figure 20: Projection of number of slot machines and ETGs (including LMGs) in Macau
FY18E
FY17E Lisboa Palace, Galaxy Macau 3&4 FY16E MGM Cotai, Wynn Palace, Parisian FY15E Galaxy Macau Phase 2, Studio City FY14E
FY13
FY12
0 5,000 10,000 15,000 20,000 25,000 30,000 Source: CMS(HK) estimates
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Driver #2: LMG replacement cycle kicks in from FY15E Strong replacement demand. LMGs depreciate in four years, implying its product life cycle. Casinos keep renewing its machines earlier than it, mainly in order to 1) introduce new generation machines with better interface and 2) enhance user experience and gaming revenue per table by avoiding unnecessary slowdown of the aged system. We observed replacement demand for new LMGs in 1H14 from MGM China and Wynn Macau, which purchased their first LMGs in FY12. As a result, we assume replacement cycle to be three years in our model. Figure 21: Projection of LMGs sales by Paradise Entertainment in Macau
FY16E
FY15E
FY14E Venetian Macau Sands Macau Sands Cotai Central City of Dreams Grand Emperor Casa Real Resort MGM Grand Wynn Macau Galaxy StarWorld Grand Lisboa Fisherman's Wharf FY13 Jimei Kam Pek Lisboa Waldo Casino Macau Jockey Club New Century Greek Mythology Grandview Macao Studio City Parisian FY12 MGM Cotai Wynn Palace Lisboa Palace Australia US Others - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Units of LMG sold Source: Company data, CMS(HK) estimates Driver #3: Tight labour supply in Macau likely to lead casinos to adoption of more LMGs. Upcoming casinos are in short of employees under the current employment policy. Macau has an unemployment rate of 1.7%, at historic low. Given that there are less than 6,500 unemployed persons in Macau, Macau will have only 13,000 employees from both local and non-local residents. So, we expect labour costs will keep hiking in Macau and new casinos will be forced to install more LMG terminals: 1) LMG requires less staff attendence than gaming tables and 2) LMGs are more popular among players than slot machines. It is not one-off sales: sustainable revenue stream Daily fee. Apart from one-off machine sales revenue, the company is shifting its business model to daily fee model. Currently it contracts US$35 per machine on a daily basis, to be renewed after three years. We like this model since it provides a stable income/cash stream for investors by lowering sensitivity to number of LMGs sold per year. We see limited downside during renewal: 1) daily fee is below industry standard which pays 30% of net win (about US$50), and 2) overall fee as % of net win is below 30%, vs. industry level of 50%. Figure 22: Daily fee and other revenue Figure 23: Comparison of daily maintenance fee 2,500 Paradise US$ WMS Aristocrat Entertainment 2,000 Initial Payment Fee - 15,553 15,194 1,500 Daily Fee 35.0 66.0 41.6
1,000HK$mn Daily Net Win 180.6 122.2 122.2
500 Fee as % of net win 19.4% 65.6% 45.4%
0 Initial payment fee spread over the lifespan of each machine (assumed 3 years) and FY12 FY13 FY14E FY15E FY16E Assumptions Daily fee Other revenue added to daily fee to calculate fee as % of net win.
Source: CMS(HK) estimates Source: CMS(HK) estimates
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Pipeline products are creative and friendly for players, casino operators and government authorities Paradise Entertainment displayed its new products in MJC, the first gaming area without chips in Macau. Players insert banknotes and/or prepaid cards into the system installed in gaming table seats and/or LMG terminals, in order to bet on games. When players want to leave and exit the system, it will issue a ticket with final balance printed. Players can use the ticket to get the remaining balance in cash from ATMs (again, the product of Paradise Entertainment) in the gaming area. Non-chip casino with ATM: Players and casino operators are both happy because they can save time and reduce the possibility of miscalculation. We believe it can effectively increase the betting frequency, while the sensation of holding the chips will disappear from players’ point of view. More efficient to monitor the market from related government authorities: Currently, Macau gaming authority is collecting the gaming revenue data on a daily basis, reported by casino operators. By introducing chip-less casinos, the system could be designed to report the cash-flow directly, increasing the transparency of mass-market gaming business. As a result, we believe it will get a good response from authorities in sense of enhancing regulating to the gaming industry. Driver #4: Greenfield: competitive in the US market Successful trial in Las Vegas: The company completed its LMG system trial at the Palazzo Casino in Las Vegas and received formal approval from the Nevada Gaming Control Board for installation on Jun 30, 2014. We believe it has opened a door to get into the US gaming market. Partnership with IGT connects to broad market: the US. LT Game, subsidiary of Paradise Entertainment, signed a three-year agreement with IGT on Aug 14, 2014, regarding distribution of gaming machines: IGT will be exclusive distributor of LT Game’s live and electronic table game system in the US and Canada, while LT Game will distribute IGT’s slot machines in Macau. We like its wholesale model in the US. The company set up its US headquarter in FY13, incurring a big 36.2% YoY increase in administrative expenses. Currently, Paradise Entertainment has two salesmen in the US and expects no much increase in salesforce by relying on distribution channel of IGT. We expect insignificant margin difference in Macau and the US market, and both Paradise Entertainment and IGT can benefit from partnership by leveraging on each other’s local sales network. From IGT’s view, exclusive distributorship for LT Game’s machine enabled it to compete against Scientific Games which has LMG machines from Shuffle Master. Figure 24: Comparison with major competitor: LMG from Scientific Games (through acquisition of Bally)
Source: CMS(HK) estimates We project 332/1,500/1,800 LMGs to be sold in FY14E/15E/16E in overseas market. It represents 23.5%/44.2%/48.9% of overall LMGs sales of Paradise Entertainment. Our base case projects the company delivers 50% of the current delivery schedule to overseas in FY14E, taking potential delay in shipment into account. As a result, if the company completes FY14E delivery without delay, we are likely to see 10.3% upside from our current earnings projection on FY14E EPS.
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Other markets could be a surprise to us (Australia and Southeast Asia): We believe major upside in overseas LMG sales lies on the US market with cooperation with IGT (200/800/1,000 LMG sales in FY14E/15E/16E). We have relatively conservative view on cooperation with Ainsworth for Australia sales (0/500/600 LMG sales in FY14E/15E/16E). We believe the business environment is tougher outside Macau and the US, because Paradise Entertainment should compete with other machine suppliers legally and also on pricing. As a result, any better than expected sales record in Australia and other overseas market will have upside risk from our forecast. Figure 25: Porter’s 5 forces model (Overseas market)
New entrants • Requires reputation and economies of scale
Suppliers Existing rivalry Customers • Technology is not hard to • Simple manufacturing • Other LMG options available process. Fragmented Market emulate. • Some casinos are price • Similar product already exists sensitive (SHFL Entertainment)
Substitutes • Electronic table games without live dealer • Slot machines
Source: CMS(HK) estimates
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Financial analysis Profit and loss analysis HK$ mn FY12 FY13 FY14E FY15E FY16E Casino Services 544 859 1,105 1,356 1,519 Gaming System 184 171 255 459 696 Total Revenue 729 1,030 1,360 1,815 2,215 Cost of sales and services (264) (445) (530) (764) (927) Gross Profit 465 585 829 1,051 1,288 Other Income 2 3 3 3 3 Staff costs (71) (95) (117) (152) (183) Cost of inventories recognized as expenses (40) (36) (16) (28) (43) Depreciation of PPE (28) (36) (37) (57) (90) Amortization for intangible assets (12) (42) (70) (70) (70) Other marketing and admin expenses (164) (259) (405) (506) (555) Operating Profit 152 120 188 241 350 Income from disposal of disposed group 21 - - - - Impairment Loss (0) (0) - - - Share-based payments - - - - - Loss on early redemption of promissory note (13) - (35) - - Finance costs (10) (16) (5) (5) (6) Pre-tax Profit 149 104 149 236 344 Income tax expense (26) (0) (4) (28) (41) Non-controlling interests (17) (7) (10) (16) (23) Net Profit 106 97 134 191 280
Growth
Total Revenue 34% 41% 32% 33% 22% Gross Profit 60% 26% 42% 27% 23% Operating Profit 69% -21% 57% 28% 45% Net Profit 199% -9% 39% 43% 46%
Revenue breakdown
Casino Services 75% 83% 81% 75% 69% Gaming System 25% 17% 19% 25% 31%
As % of revenue
COGS 36% 43% 39% 42% 42% Staff costs 10% 9% 9% 8% 8% Cost of inventories recognized as expenses 5% 3% 1% 2% 2% Depreciation of PPE 4% 3% 3% 3% 4% Amortization for intangible assets 2% 4% 5% 4% 3% Other marketing and admin expenses 23% 25% 30% 28% 25% Income tax expense 4% 0% 0% 2% 2%
Margin
Gross margin 63.8% 56.8% 61.0% 57.9% 58.1% Operating margin 20.8% 11.6% 13.8% 13.3% 15.8% Net margin 14.6% 9.4% 9.9% 10.5% 12.6% Source: Company data, CMS(HK) estimates
Regarding revenue, we expect contribution from gaming system through LMG sales will increase from 17% in FY13 to 19%/25%/31% in FY14E/15E/16E. COGS as % of revenue will increase slightly due to increasing contribution from gaming systems, which will be offset by improvement in operation margin. Operating expenses. Although its Macau peers are likely to be impacted by hiking labour cost, we expect Paradise Entertainment will suffer less because 1) LMG products are manufactured by third parties in Taiwan and R&D expenses are occurred in the PRC, and 2) contribution from LMG sales will increase gradually. Admin expenses as % of revenue in FY13E/14E was slightly higher than historic average because of costs associated
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with expanding overseas LMG sales network, such as opening the US office. We believe margin will gradually improve on economies of scale, with increasing no. of LMGs sold inside and outside Macau. Balance sheet and cash flow analysis HK$ mn FY12 FY13 FY14E FY15E FY16E Cash & equivalents 196 267 263 358 511 Account receivables 106 249 321 419 502 Inventories 5 15 22 39 59 Account payables 84 153 182 262 318 Borrowings - 126 67 75 84
Operating cash flow 195 107 240 304 422 Investing cash flow (35) (127) (71) (147) (178) Financing cash flow (91) 90 (173) (62) (91) Net change in cash 70 71 (4) 95 153 Source: Company data, CMS(HK) estimates
Cash balance is expected to grow in FY15E/16E, while FY14E is impacted by early redemption of promissory note (HK$106mn out of HK$200mn). Currently, Paradise Entertainment has neither short-term nor long-term borrowing, but promissory note of HK$94mn expiring in FY17E. The company maintained its strong balance sheet with HK$141mn net cash in FY13, which will further improve to HK$196mn/HK$283mn/HK$427mn in FY14E/15E/16E. CAPEX. We expect 105.7%/21.5% YoY increase in CAPEX in FY15E/16E to HK$147mn/HK$178mn, when Paradise Entertainment adopts daily fee model for LMG sales. For breakdown, we project HK$50mn maintenance CAPEX per year, and the remaining used for LMG daily fee model. We assume the company to recognize new machines purchased as fixed assets, depreciating in the following four years. It is in line with the LMG replacement cycle, ranging 3-4 years. No significant needs for fund-raising. Major changes of balance sheet in FY13 and FY14E are due to the injection of the US patent at HK$740mn from Mr. Jay CHUN (HK$60mn in cash, HK$200mn in promissory note and HK$480mn by new shares). We expect no significant needs for fund-raising in a foreseeable future, given 1) most of patents of Mr. Jay CHUN have been already injected into Paradise Entertainment giving him presence as the major shareholder and 2) Most of R&D and patent-related expenses have already been incurred, leaving Paradise Entertainment to generate cash from LMG sales as the sole supplier in Macau, 3) Kam Pek and Waldo are stable cash-cow business, and 4) the company’s net cash keeps increasing.
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Valuation PEG as valuation methodology. We approach the Macau gaming sector as a China consumer discretionary. We target fair valuation of Macau casino operators with 0.9x-1.1x forward PEG for 3-year EPS CAGR. We believe this valuation methodology fits Paradise Entertainment too since 1) the company has big earnings exposure to casino operation and 2) gaming system business grows along with Macau’s mass market gaming segment. We believe PEG provides an appropriate way for our investors to capture the high growth story. We initiate coverage of Paradise Entertainment with BUY rating and TP of HK$4.70. Our 12-month TP is based on 0.6x FY15E PEG on our FY14E-17E EPS CAGR forecast. It translates into 26x FY15E PER given 43.9% EPS CAGR during FY14E-17E. Our target valuation is at 33%-45% discount to our target for Macau casino operators to factor in 1) smaller market cap with less liquidity and 2) management track record is not as strong as casino licensees in Macau. Additionally, our 0.6x target is in line with the current market valuation for overseas gaming machine suppliers. Recent sell-off provides a good entry point. Major reason for weak share price was earnings miss in 1H14 on 1) less than expected LMG deployment and 2) net margin decline due to early redemption loss of promissory note. We believe market will regain confidence gradually along with 1) stronger LMG deployment in 2H14E and 2) ramp- up of Waldo outperforming the overall Macau gaming sector. Risks Heavy reliance on patents. It is relatively easy to copy know-hows and technology of LMGs. There are some LMG suppliers in the market. As a result, Paradise Entertainment relies on its patents heavily to 1) protect its sales volume and 2) stay away from price competition. When patents expire or become invalid, we think the company’s business model will be negatively impacted due to competition from other LMG suppliers. Substantial cut of minimum bet in Cotai competitors. Paradise Entertainment caters the lowest-end market, which helps the company outperform overall Macau gaming market during the current headwind over VIP and premium mass. Despite the tough environment, popular Cotai properties have more proportion of gaming tables with minimum bet >MOP1,000 while most of tables of Kam Pek and Waldo have minimum bet of MOP500. Substantial cut in minimum bet from Cotai properties will lead to the shift of low-end clients from relatively old boutique casinos to new Cotai properties. It will cause worse than expected growth of casino services business of Paradise Entertainment. Corporate governance. Track record showed frequent changes in composition of board members. While it appears to be stabilizing after its disposal of biopharmaceutical business in 2012, we think it could be a concern from long-term investors’ point of view.
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Peer valuation table
Current Market Avg FY15E PEG/ P/E (x) EV/EBITDA (x) Price 52-Wk Price Company Ticker Cap Turnover FY14E-17E (local (local crncy) FY15 (US$mn) (US$mn) CAGR (x) FY13 FY14E FY15E FY13 FY14E crncy) E Paradise Ent. 1180 HK 3.28 450 1.74 / 7.85 2.1 0.4 21.7 26.0 18.2 16.9 11.4 9.1
Casino Operators
Macau Legend 1680 HK 4.09 3,396 3.18 / 10.00 4.9 0.3 46.0 36.2 19.2 36.6 25.6 14.3 Galaxy 27 HK 48.00 26,280 45.35 / 82.81 96.7 0.4 20.1 16.6 12.4 15.3 12.7 9.7 SJM 880 HK 15.76 11,501 15.06 / 27.60 22.4 0.8 11.4 10.8 9.5 9.2 8.4 7.4 Wynn Macau 1128 HK 25.55 17,128 23.85 / 38.80 25.6 0.7 17.2 17.1 15.0 14.7 13.6 11.6 Sands China 1928 HK 42.45 44,181 40.30 / 68.00 117.5 0.8 19.9 15.8 13.5 15.7 12.8 11.1 MGM China 2282 HK 22.85 11,204 21.60 / 35.04 22.1 0.4 16.3 14.6 12.9 13.0 11.4 9.6 Melco Crown 6883 HK 68.60 14,704 66.50 / 125.64 0.6 0.6 22.9 20.6 15.5 12.3 12.5 8.8 Simple Avg 0.6 22.0 18.8 14.0 16.7 13.9 10.3
Mkt Cap Avg 0.6 19.5 16.7 13.4 14.8 12.7 10.2
Gaming Machine Suppliers
Bally BYI US 80.52 3,085 56.5 / 84.66 72.0 0.6 22.8 31.5 16.3 11.2 10.0 7.7 Aristrocrat Leisure ALL AU 5.83 3,445 4.22 / 5.97 15.8 0.8 29.9 27.8 19.7 21.5 19.9 11.4 IGT IGT US 16.94 4,188 12.14 / 20.28 101.7 n.a. 16.3 16.5 15.3 6.9 8.2 7.7 Scientific Games SGMS US 11.38 963 6.97 / 19.48 17.1 n.a. n.a. n.a. n.a. 19.3 8.2 7.8 Simple Avg 0.7 23.0 25.2 17.1 14.7 11.6 8.6
Mkt Cap Avg 0.7 20.7 22.4 15.6 13.4 12.1 8.8
Overall Simple Avg 0.6 22.3 20.7 14.9 16.0 13.0 9.7
Overall Mkt Cap Avg 0.6 19.6 17.2 13.6 14.7 12.6 10.1
Net Debt/ Dividends Yield (%) ROE (%) P/B (x) Company Ticker Asset (%)
FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 Paradise Ent. 1180 HK 1.5 1.2 1.6 8.4 11.5 15.0 1.8 3.0 2.7 NetCash
Casino Operators
Macau Legend 1680 HK - - - 9.3 10.3 17.3 4.6 3.8 3.2 NetCash
Galaxy 27 HK 1.5 1.8 2.4 31.0 30.0 30.8 6.2 5.0 3.8 NetCash
SJM 880 HK 6.3 6.9 7.9 32.9 32.0 32.6 3.7 3.5 3.1 NetCash
Wynn Macau 1128 HK 5.8 5.3 5.7 83.6 65.2 64.3 14.4 11.2 9.7 NetCash
Sands China 1928 HK 5.9 5.0 5.9 34.3 41.8 42.2 6.8 6.6 5.7 2.5
MGM China 2282 HK 6.6 6.5 7.0 82.0 88.3 86.8 13.4 12.9 11.2 NetCash
Melco Crown 6883 HK 1.3 1.5 1.9 12.9 13.5 16.2 3.4 3.2 2.8 13.1
Simple Avg 4.1 4.0 4.6 36.8 36.6 38.1 6.8 6.1 5.3 7.8
Mkt Cap Avg 4.4 4.2 4.8 41.1 41.6 42.2 7.6 6.7 5.7 2.4
Gaming Machine Suppliers
Bally BYI US - - - 89.6 60.7 52.3 26.2 15.2 8.5 55.3
Aristrocrat Leisure ALL AU 1.3 2.8 3.3 32.6 24.0 24.9 8.5 5.0 4.5 23.8
IGT IGT US 2.0 2.6 2.8 22.2 21.8 19.8 3.5 3.4 2.8 30.2
Scientific Games SGMS US - - - n.a. n.a. n.a. 2.6 3.8 4.8 71.6
Simple Avg 1.6 2.7 3.1 48.2 35.5 32.3 10.2 6.8 5.1 45.2
Mkt Cap Avg 1.1 1.8 2.0 41.3 30.9 28.2 10.9 7.0 5.0 38.4
Overall Simple Avg 3.8 4.1 4.6 43.1 38.8 38.7 8.5 6.7 5.4 32.8
Overall Mkt Cap Avg 4.1 4.0 4.6 41.1 40.7 41.0 7.8 6.7 5.6 5.4
Source: Company data, Bloomberg, CMS (HK) estimates
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Scenario analysis on different LMG sales volume assumptions
FY14E Very bearish Bearish Base Bullish Very bullish Completes sales Completes Exceeds sales Exceeds sales No LMG sales in target in Macau, overall sales target by 20% in target by 20% in Scenarios 2H14E no overseas sales target (company overseas in Macau and in 2H14E guidance) 2H14E overseas in 2H14E Assumptions LMG one-off sales in Macau (unit) 88 588 588 588 706 LMG one-off sales in overseas (unit) 34 34 262 314 314 LMG sales by daily fee and revenue sharing (unit) 500 500 500 500 500 Gaming system EBITDA margin 34.1% 34.6% 35.1% 35.6% 36.1%
Profit and loss Total LMG sales (unit) 622 1,122 1,350 1,402 1,520 ASP (HK$) 134,576 134,576 134,576 134,576 134,576
Revenue from one-off sales (HK$mn) 16.4 83.7 114.4 121.4 137.3 Revenue from daily fee (HK$mn) 5.5 5.5 5.5 5.5 5.5 Revenue from revenue sharing (HK$mn) 134.9 134.9 134.9 134.9 134.9 Gaming system revenue (HK$mn) 156.8 224.1 254.8 261.8 277.7
Gaming system EBITDA (HK$mn) 53.5 77.6 89.5 93.3 100.3 Casino service EBITDA (HK$mn) 267.1 267.1 267.1 267.1 267.1
Company net profit (HK$mn) 98.1 122.2 134.1 137.9 144.9
EPS (HK$) 0.09 0.11 0.13 0.13 0.14 Upside/downside from base case -26.8% -8.9% 0.0% 2.8% 8.1%
FY15E Very bearish Bearish Base Bullish Very bullish 20% more than 20% more than 50% of expected No overseas Macau and expected expected demand Scenarios sales in Macau, sales overseas sales demand from from Macau and no overseas sales Macau overseas Assumptions
LMG one-off sales in Macau (unit) 468 936 936 1,123 1,123 LMG one-off sales in overseas (unit) - - 400 400 480 LMG sales by daily fee and revenue sharing (unit) 2,058 2,058 2,058 2,058 2,058 Gaming system EBITDA margin 32.3% 32.8% 33.3% 33.8% 34.3%
Profit and loss Total LMG sales (unit) 2,526 2,994 3,394 3,581 3,661 ASP (HK$) 130,103 130,103 130,103 130,103 130,103
Revenue from one-off sales (HK$mn) 60.9 121.8 173.8 198.2 208.6 Revenue from daily fee (HK$mn) 106.3 106.3 106.3 106.3 106.3 Revenue from revenue sharing (HK$mn) 178.6 178.6 178.6 178.6 178.6 Gaming system revenue (HK$mn) 345.8 406.7 458.7 483.1 493.5
Gaming system EBITDA (HK$mn) 111.8 133.5 152.9 163.4 169.4 Casino service EBITDA (HK$mn) 342.1 342.1 342.1 342.1 342.1
Company net profit (HK$mn) 150.3 172.0 191.4 201.9 207.9
EPS (HK$) 0.14 0.16 0.18 0.19 0.20 Upside/downside from base case -21.5% -10.1% 0.0% 5.5% 8.6% Source: Company data, CMS (HK) estimates
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Sensitivity analysis on number of LMGs deployed in new gaming properties
FY15E (No new casino in FY14E) Very bearish Bearish Base Bullish Very bullish
New casinos New casinos New casinos New casinos New casinos Scenarios purchase 200 purchase 300 purchase 400 purchase 500 purchase 600 LMGs LMGs LMGs LMGs LMGs Assumptions No. of new casino openings in FY15E 2 2 2 2 2 LMG Sales in new Macau casinos (unit) 400 600 800 1,000 1,200 LMG Sales in existing Macau and overseas casinos (unit) 2,594 2,594 2,594 2,594 2,594 Gaming system EBITDA margin 32.3% 32.8% 33.3% 33.8% 34.3%
Profit and Loss Total LMG sales (unit) 2,994 3,194 3,394 3,594 3,794 ASP (HK$) 130,103 130,103 130,103 130,103 130,103
Revenue from one-off sales (HK$mn) 173.8 173.8 173.8 173.8 173.8 Revenue from daily fee (HK$mn) 83.9 95.1 106.3 117.5 128.7 Revenue from revenue sharing (HK$mn) 178.6 178.6 178.6 178.6 178.6 Gaming system revenue (HK$mn) 436.3 447.5 458.7 469.9 481.1
Gaming system EBITDA (HK$mn) 141.0 146.9 152.9 158.9 165.1 Casino service EBITDA (HK$mn) 342.1 342.1 342.1 342.1 342.1
Company net profit (HK$mn) 179.6 185.4 191.4 197.5 203.6
EPS (HK$) 0.17 0.17 0.18 0.19 0.19 Upside/downside from base case -6.2% -3.1% 0.0% 3.2% 6.4%
FY16E Very bearish Bearish Base Bullish Very bullish New casinos New casinos New casinos New casinos New casinos Scenarios purchase 200 purchase 300 purchase 400 purchase 500 purchase 600 LMGs LMGs LMGs LMGs LMGs Assumptions No. of new casino openings in FY16E 3 3 3 3 3 LMG Sales in new Macau casinos (unit) 600 900 1,200 1,500 1,800 LMG Sales in existing Macau and overseas casinos (unit) 2,478 2,478 2,478 2,478 2,478 Gaming system EBITDA margin 38.2% 38.7% 39.2% 39.7% 40.2%
Profit and Loss Total LMG sales (unit) 3,078 3,378 3,678 3,978 4,278 ASP (HK$) 123,971 123,971 123,971 123,971 123,971
Revenue from one-off sales (HK$mn) 133.6 133.6 133.6 133.6 133.6 Revenue from daily fee (HK$mn) 235.9 290.4 344.8 399.3 453.7 Revenue from revenue sharing (HK$mn) 217.8 217.8 217.8 217.8 217.8 Gaming system revenue (HK$mn) 587.4 641.8 696.3 750.7 805.2
Gaming system EBITDA (HK$mn) 224.5 248.5 273.1 298.2 323.9 Casino service EBITDA (HK$mn) 397.8 397.8 397.8 397.8 397.8
Company net profit (HK$mn) 231.0 255.1 279.6 304.7 330.4
EPS (HK$) 0.22 0.24 0.26 0.29 0.31 Upside/downside from base case -17.4% -8.8% 0.0% 9.0% 18.2% Source: Company data, CMS (HK) estimates
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Sensitivity analysis on daily fee FY15E (Insignificant contribution in FY14E) Very bearish Bearish Base Bullish Very bullish Charges Charges Charges Charges Charges US$15 daily US$25 daily US$35 daily US$45 daily US$55 daily Scenarios fee in new fee in new fee in new fee in new fee in new casinos casinos casinos casinos casinos Assumptions Daily fee (US$) 15 25 35 45 55 LMGs deployment under daily fee model in FY15E (unit) 1,900 1,900 1,900 1,900 1,900
Profit and Loss Revenue from one-off sales (HK$mn) 173.8 173.8 173.8 173.8 173.8 Revenue from daily fee (HK$mn) 45.6 75.9 106.3 136.7 167.1 Revenue from revenue sharing (HK$mn) 178.6 178.6 178.6 178.6 178.6 Gaming system revenue (HK$mn) 397.9 428.3 458.7 489.1 519.5
Gaming system EBITDA (HK$mn) 92.1 122.5 152.9 183.2 213.6 Casino service EBITDA (HK$mn) 342.1 342.1 342.1 342.1 342.1
Company net profit (HK$mn) 130.6 161.0 191.4 221.8 252.1
EPS (HK$) 0.12 0.15 0.18 0.21 0.24 Upside/downside from base case -31.7% -15.9% 0.0% 15.9% 31.7%
FY16E Very bearish Bearish Base Bullish Very bullish Charges Charges Charges Charges Charges US$15 daily US$25 daily US$35 daily US$45 daily US$55 daily Scenarios fee in new fee in new fee in new fee in new fee in new casinos casinos casinos casinos casinos Assumptions Daily fee (US$) 15 25 35 45 55 LMGs deployment under daily fee model in FY16E (unit) 2,500 2,500 2500 2,500 2,500
Profit and Loss Revenue from one-off sales (HK$mn) 133.6 133.6 133.6 133.6 133.6 Revenue from daily fee (HK$mn) 147.8 246.3 344.8 443.4 541.9 Revenue from revenue sharing (HK$mn) 217.8 217.8 217.8 217.8 217.8 Gaming system revenue (HK$mn) 499.2 597.8 696.3 794.8 893.3
Gaming system EBITDA (HK$mn) 76.0 174.6 273.1 371.6 470.1 Casino service EBITDA (HK$mn) 397.8 397.8 397.8 397.8 397.8
Company net profit (HK$mn) 82.6 181.1 279.6 378.2 476.7
EPS (HK$) 0.08 0.17 0.26 0.36 0.45 Upside/downside from base case -70.5% -35.2% 0.0% 35.2% 70.5% Source: Company data, CMS (HK) estimates
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Introduction of the management Management profile Mr. Jay CHUN, 49, is currently the Chairman and Managing Director of the company. Mr. Chun is a major shareholder in Paradise Entertainment with over 59% ownership. He holds several gaming system-related patents in the US. He holds a bachelor degree in computer science from the Shanghai University of Science and Technology and also an MBA from the W.P. Carey School of Business of Arizona State University. He currently holds the position of Independent Non-Executive Director of FT Holdings, and previously held the same position in Guocang Group, Jung Yang Solar Power, Hua Yi Copper Holdings, and HK Health Check and Laboratory Holdings. Mr. SHAN Shiyong, 50, is currently the Executive Director of the company, having previously tenured as Chairman from May 1999 to Jul 2002. Mr. Shan completed his bachelor degree in economics at the University of Agriculture of Shandong. He then started his own business in manufacturing and export and subsequently diversified into trading, property development, and venture capital investment. Company history . Founded in 1986 as Yip’s Pota International and listed on HKEx in 1997. Manufacturer of souvenirs, promotional items, and toys using polyvinyl chloride (PVC). . LifeTec Group did backdoor listing through Yip’s Pota International in October 1998 and entered the biopharmaceutical business. Mr. SHAN Shiyong was named as executive director at the time of the change and was then appointed as Chairman in May 1999. . In 2001, LifeTec Group decided to wind down its PVC and medical technology operations and focus on the biopharmaceutical division. . In July 2002, Mr. SHAN Shiyong resigned from his chairmanship and was replaced by Mr. Jay CHUN. . At the start of 2005, LifeTec Group set up a subsidiary in Macau to begin the development of live baccarat gaming systems and filed patents in the US and Macau. . LifeTec Group’s live baccarat system was installed in 4 casinos in Macau and achieved success in attracting large numbers of players, with each live baccarat table dealing over 1,000 games/day (vs. 600/day with traditional tables). . In May 2007, LifeTec Group changed its name to Paradise Entertainment. . In December 2007, it launched its flagship electronic table casino in Kam Pek. . In 2008, the company expanded its operations in Casino Kam Pek Paradise to providing casino services to the whole casino, including traditional tables and slot machines. . In 2012, the company disposed its biopharmaceutical division to focus on the gaming division. . In 2013, it started providing casino services to Waldo Casino and the LMG Terminals Zone of Lisboa Casino. . In 2013, it started a trial of the LMG terminals in Palazzo Casino in Las Vegas and received written approval from the Nevada Gaming Control Board to install LMGs throughout Nevada in June 2014. . In 2014, Paradise Entertainment started providing casino services to the Macau Jockey Club Casino.
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Corporate governance and others Board members. Led by Jay CHUN, it consists of 3 executive directors and 3 independent non-executive directors. Name Duty Appointed Resigned 1 Mr. Jay CHUN* Chairman and Managing Director Nov 1999 2 Mr. SHAN Shiyong^ Executive Director Oct 1998 3 Mr. HU Liming Executive Director Nov 2010 4 Mr. KAI Shing Tao Independent Non-Executive Director Apr 2014 5 Mr. LI John Zongyang Independent Non-Executive Director Sep 2007 6 Ms. Tang Kiu Sam Alice Independent Non-Executive Director Apr 2014 - Mr. KUAN Hin Meng Independent Non-Executive Director Jun 2010 Apr 2014 - Mr. Frank HU Independent Non-Executive Director Jul 1999 Apr 2013 - Dr. MA Xianming Executive Director Sep 2001 Nov 2010 - Mr. HU Wenxiang Independent Non-Executive Director Nov 2008 Jun 2010 - Mr. PARK Aaron Changmin Executive Director Apr 2007 Dec 2008 - Ms. MA Shiwei Independent Non-Executive Director Sep 2004 Nov 2008 - Mr. LAW Wing Kit, Stephen Executive Director Sep 2007 Aug 2008 - Mr. WANG Faqi Independent Non-Executive Director Aug 2003 Sep 2007 - Mr. WANG Xi Gang Executive Director Dec 1998 Aug 2003 *Mr. CHUN joined the group as managing director and was subsequently appointed as chairman and has held both positions since 2002. Mr. CHUN is a majority shareholder of the company with over 59.2% ownership. ^Mr. SHAN Shiyong joined the group as an executive director and was chairman from 1999 to 2002, before returning to being executive director. Mr. SHAN was a major shareholder of the company with over 9.7% ownership in 2010 and currently has 2.5% ownership.
Auditor. The company employs Pan-China (H.K.) CPA Limited (“Pan-China”). It provides its audit, assurance, and business advisory services to nearly 30 listed companies in Hong Kong. Their clientele includes companies such as China Liansu (2128 HK) and New City (China) Development (0563 HK). . Deloitte Touche Tohmatsu (1997-2004) . RSM Nelson Wheeler (2005-2007) . SHINEWING (2008) . PAN CHINA (2009-now)
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1H14 results review: soft but encouraging Net profit up 13.5% YoY to HK$45.6mn, lower than market expectation Strong EBITDA but early redemption loss of HK$34.9mn. On resilient performance of Kam Pek and strong ramp-up of Waldo, company’s EBITDA was boosted by 44.1% YoY to HK$113.0mn. By segment, casino services recorded HK$125.3mn EBITDA (up 89.2% YoY) and gaming system, HK$35.5mn (up 59.7% YoY). However, Paradise Entertainment booked HK$34.9mn non-operating loss on early redemption of HK$106mn for HK$200mn promissory note issued in FY13. It dragged overall bottom line growth to 13.5% YoY. As a result, net margin narrowed from 9.9% in 1H13 to 7.5% in 1H14, while net margin excluding the impact of early redemption would be 13.2% in 1H14. 1H14 basic EPS of HK$0.04 with DPS of HK$0.02. Due to partial equity financing for acquisition of Macau and US patents, basic earnings per share was down by 64.8% YoY. The company began paying interim DPS with 46% payout ratio. Its financial position became stronger with net cash of HK$277.0mn by the end of 1H14 vs. net cash of HK$140.5mn by the end of FY13.
Figure 26: Revenue breakdown Figure 27: Outperformed industry growth 700 70%
600 60%
500 50%
400 40%
HK$mn 300 30%
200 20%
100 10%
0 0% 1H13 2H13 1H14 2H14E 1H13 2H13 1H14 2H14E Casino Services Gaming System Gross Margin Operating Margin Net Margin Source: Company data, CMS(HK) estimates Source: Company data, CMS(HK) estimates 50.7% YoY revenue growth to HK$610.4mn Casino services’s revenue jumped 68.2% YoY to HK$530.4mn, due to Waldo’s HK$146.0mn. Waldo began contributing Paradise Entertainment since 2H13 on P&L. After Waldo’s handover to the company, market positioning shifted from high to low-end mass market. It helped Waldo grasp market share from its neighbour old boutique casinos, doubling daily table yield from HK$24,260 in 1H13 to HK$48,563 in 1H14. Flagship casino Kam Pek outperformed with 21.6% YoY revenue increase to HK$378.4mn. It compares with industry’s 12.6% YoY GGR growth, which began recording YoY decline since June 2014. Anti-bribery campaign is casting shadow on VIP and premium mass market, where Kam Pek has no exposure. Grind mass keeps growing strongly, which Kam Pek and Waldo targets. Kam Pek’s daily table yield was up 13.5% YoY to HK$75,127. LMG’s performance was more impressive with 36.3% YoY daily yield improvement to HK$1,777 despite the increase of LMGs from 685 units in 1H13 to 800 units in 1H14. Gradual ramp-up of Lisboa LMG lounge and Macau Jockey Club (MJC). Operation from both properties contributed c. HK$6.0mn revenue, which are new contributors since 2H13 and 1H14 respectively. 1H14 LMG sales not impressive: mostly year-end loaded EBITDA up 59.7% YoY to HK$35.5mn despite 11.0% drop in revenue to HK$80.0mn. Paradise Entertainment deployed 432 units in 1H14 vs. 592 in 1H13. Most of them were installed in Waldo and MJC. Aggregating deployment in other properties in Macau (MGM Grand, Wynn Macau, etc.), LMG sales were below market expectation. However, on gradual cost optimization with tighter relationship with suppliers, EBITDA margin kept improving to 44.4% in 1H14 from 24.7% in 1H13.
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Financial summary
Balance sheet Profit & loss statement HKD mn FY12 FY13 FY14E FY15E FY16E HKD mn FY12 FY13 FY14E FY15E FY16E Current assets 307 530 606 817 1,072 Total revenue 729 1,030 1,360 1,815 2,215 Cash & equivalents 196 267 263 358 511 COGS (264) (445) (530) (764) (927) Account receivables 106 249 321 419 502 Gross profit 465 585 829 1,051 1,288 Inventories 5 15 22 39 59 Other income 2 3 3 3 3 Other current assets - - - - - Marketing & selling costs (134) (196) (275) (391) (489) Non-current assets 306 952 917 937 955 Admin & other OP costs (181) (272) (369) (423) (453) Property, Plant & Eqt. 152 183 217 307 395 Operating profit 152 120 188 241 350 Intangible assets 154 769 699 629 559 Finance costs (10) (16) (5) (5) (6) Other non-current assets - - - - - Other non-op items 8 (0) (35) - - Total assets 613 1,482 1,522 1,753 2,027 Pre-tax profit 149 104 149 236 344 Current liabilities 104 169 238 335 418 Income tax expenses (26) (0) (4) (28) (41) ST borrowings - - - - - After-tax profit 123 104 144 207 303 Account payables 84 153 182 262 318 Minority interests (17) (7) (10) (16) (23) Other current liabilities 20 16 56 74 100 Net Profit 106 97 134 191 280 Non-current liabilities 100 138 80 88 96 EPS (HKD) 0.04 0.15 0.13 0.18 0.26 LT borrowings - - - - - DPS (HKD) - 0.05 0.04 0.05 0.08 Promissory note - 126 67 75 84 Other non-current liabilities 100 12 12 12 12 Financial ratios Total liabilities 204 307 317 423 513 FY12 FY13 FY14E FY15E FY16E Share capital 284 1 1 1 1 YoY growth rate Reserves 104 1,147 1,166 1,276 1,436 Total revenue 33.6% 41.4% 31.9% 33.5% 22.1% Minority interests 20 28 38 54 77 Gross profit 59.6% 25.8% 41.8% 26.7% 22.6% Shareholders’ equity 409 1,175 1,205 1,331 1,514 Operating profit 68.8% -21.0% 56.9% 28.0% 45.4% Total equity and liabilities 613 1,482 1,522 1,753 2,027 Net profit 198.7% -8.9% 38.7% 42.7% 46.1% Profitability Cashflow statement Gross margin 63.8% 56.8% 61.0% 57.9% 58.1% HKD mn FY12 FY13 FY14E FY15E FY16E Operating margin 20.8% 11.6% 13.8% 13.3% 15.8% Operating cashflow 195 107 240 304 422 Net margin 14.6% 9.4% 9.9% 10.5% 12.6% Net income before tax 170 104 149 236 344 ROE 27.3% 8.4% 11.5% 15.0% 19.5% Deprec & Amort. 40 78 107 127 160 ROIC 17.3% 6.5% 8.8% 10.9% 13.8% Finance costs 10 16 5 5 6 Liquidity Working capital chg (17) (89) (50) (36) (47) Debt / asset 0.0% 8.5% 4.4% 4.3% 4.1% Other operating cashflow (8) (2) 30 (28) (41) Net Debt / asset NetCash NetCash NetCash NetCash NetCash Investing cashflow (35) (127) (71) (147) (178) Current ratio 2.9x 3.1x 2.5x 2.4x 2.6x Capital expenditure (32) (127) (71) (147) (178) Quick ratio 2.9x 3.1x 2.5x 2.3x 2.4x Proceeds from disposals - - - - - Operating efficiency Interest received 0 0 0 0 0 Asset turnover 1.2x .7x .9x 1.x 1.1x Other investing cashflow (2) - - - - Inventory turnover 54.9x 30.5x 24.4x 19.5x 15.6x Financing cashflow (91) 90 (173) (62) (91) AR turnover 6.9x 4.1x 4.2x 4.3x 4.4x Net proceeds from borrowings (84) - (94) 8 8 AP turnover 3.1x 2.9x 2.9x 2.9x 2.9x Net proceeds from share issue - 95 - - - Valuation ratios Dividend paid - - (74) (65) (93) P/E 87.8x 21.7x 26.x 18.2x 12.5x Other financing cashflow (7) (5) (5) (5) (6) P/B 24.x 1.8x 3.x 2.7x 2.4x Forex adjustment 0 0 - - - EV/EBITDA 17.4x 16.9x 11.4x 9.1x 6.6x Net change in cash 70 71 (4) 95 153 Dividend yield 0.0% 1.5% 1.2% 1.6% 2.4%
Source: Company data, CMS (HK) estimates
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Appendix 1: Details of patents
Expiration Patent No. Location Name Description Total consideration Filing Date Status Date A system for participants to play electronic baccarat table games. The system is capable of I/150 Macau automated betting and bet settlement, whilst using a live dealer. A computerized system that allows the HK$280mn participants to play multiple and different live - HK$30mn in cash Gaming table games with real dealers at the same time. - HK$250mn in a I/380 Macau Terminal and 24/10/2006 24/10/2026 Active Participants will be able to wager through this promissory note, System electronic platform with the privacy of a betting issued on 20/09/10 terminal. and paid over 4 years Methods and systems for playing A new form of baccarat where after the player baccarat bets in a traditional baccarat game, an insurance 7,914,368 U.S. 5/8/2005 5/8/2025 Active jackpot with bet is available to the player depending on the an option for sum of both player's cards. insurance betting Methods and systems for A jackpot method that includes card combinations playing that has at least one zero-point-card. There is baccarat also an initial jackpot contribution from the banker 7,918,723 U.S. 24/01/2005 17/09/2026 Active jackpot with who operates the baccarat game. A software an option for program is provided to carry out this new insurance calculation. betting Betting A system linking multiple terminals allowing 7,922,587 U.S. Terminal and players to simultaneously play and place bets on 1/8/2006 17/09/2026 Active System different tables. A method of playing baccarat or felt table game that allows the player to bet on jackpots. This Methods and includes, dealing cards to a player and a bank systems for hand, allowing players to bet on the hands as well 8,182,321 U.S. playing 31/10/2007 5/8/2025 Active as the jackpot. The outcome of the game is baccarat determined using conventional baccarat rules and jackpot the outcome of the jackpot depends on the combinations of cards. A jackpot method that includes card combinations Methods and that has at least one zero-point-card. There is systems for HK$740mn also an initial jackpot contribution from the banker 8,210,920 U.S. playing - HK$60mn in cash 17/10/2007 14/02/2028 Active who operates the baccarat game. A software baccarat - HK$200mn in a program is provided to carry out this new jackpot promissory note calculation. issued on 19/06/13 to Cards are dealt to the player and bank Jackpot be paid over 4 years accordingly to conventional rules. Giving certain 8,668,564 U.S. method and - HK$480mn by the 12/11/2007 12/11/2027 Active players the right of first refusal to place a bet on System new shares to Jay the jackpot. CHUN A jackpot method that includes card combinations Methods and that has at least one zero-point-card. There is systems for also an initial jackpot contribution from the banker Patent 11/198218 U.S. playing 5/8/2005 - who operates the baccarat game. A software Pending baccarat program is provided to carry out this new jackpot calculation. A jackpot method that includes card combinations Methods and that has at least one zero-point-card. There is systems for also an initial jackpot contribution from the banker Patent 12/984558 U.S. playing 4/1/2011 - who operates the baccarat game. A software Pending baccarat program is provided to carry out this new jackpot calculation. Methods and systems for A jackpot method that includes card combinations playing that has at least one zero-point-card. There is baccarat also an initial jackpot contribution from the banker Patent 13/033543 U.S. 23/02/2011 - jackpot with who operates the baccarat game. A software Pending an option for program is provided to carry out this new insurance calculation. betting Betting A system linking multiple terminals allowing Patent 13/042633 U.S. Terminal and players to simultaneously play and place bets on 8/3/2011 - Pending System different tables. A jackpot method that includes card combinations Methods and that has at least one zero-point-card. There is systems for also an initial jackpot contribution from the banker Patent 13/483803 U.S. playing 30/05/2012 - who operates the baccarat game. A software Pending baccarat program is provided to carry out this new jackpot calculation. Source: Company data, U.S. Patent Office
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Appendix 2: Location of casinos Casinos managed by Paradise Entertainment 1. Kam Pek Paradise Casino • 37 Traditional Tables • 200 Slot Machines • 800 LMGs 2. Waldo Casino • 30 Traditional Tables • 200 Slot Machines • 300 LMGs 3. Macau Jockey Club Casino • 3 Traditional Tables • 100 Slot Machines • 170 LMGs 4. Lisboa Casino LMG Zone • 200 LMGs
Source: Company data, CMS(HK) estimates
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Appendix 3: Pipeline integrated resorts scheduled to open by 2018
Opening time Opening time Project Progress as guidance (CMS estimate)
Mid 2015 1H15 Galaxy - Galaxy Macau Phase 2 Mostly completed. Roofing and interior decoration now.
Mid 2015 Mid 2015 Melco Crown - Macau Studio City Tower construction.
Early 2016 1H16 MGM China - MGM Cotai Recently began tower construction.
Late 2015 1H16 Sands China - St Regis Superstructure was complete. Interior decoration on the way.
Late 2015 1H16 Sands China - The Parisian Tower construction
1H16 1H16 Wynn Macau - Wynn Palace Tower construction
Early 2017 1H17 Melco Crown - City of Dreams expansion Design completed
2017 2017 SJM - Lisboa Palace Foundation work is in progress.
2016-2018 2016-2018 Galaxy - Galaxy Macau Phase 3 & 4 Still green field.
Opening time Opening time Gaming GFA Land Project Rooms Budget as guidance (CMS estimate) capacity (sqm) (sqm)
500 tables Mid 2015 1H15 Galaxy - Galaxy Macau Phase 2 1,350 US$2.6bn 450,000 n.a. 1,000 slots 500 tables Mid 2015 Mid 2015 Melco Crown - Macau Studio City 1,600 US$2.9bn 707,078 130,789 1,500 slots 500 tables Early 2016 1H16 MGM China - MGM Cotai 1,600 US$2.6bn 391,750 71,833 2,500 slots
Late 2015 1H16 Sands China - St Regis 400 US$0.7bn N/A
450 tables Late 2015 1H16 Sands China - The Parisian 3,000 US$2.7bn n.a. 60,479 2,500 slots 500 tables 1H16 1H16 Wynn Macau - Wynn Palace 1,700 US$4.0bn 636,737 205,797 1,000 slots
Early 2017 1H17 Melco Crown - City of Dreams expansion 783 150,000
700 tables 2017 2017 SJM - Lisboa Palace 1,990 US$3.9bn 521,435 70,500 1,000 slots 1,000 tables 2016-2018 2016-2018 Galaxy - Galaxy Macau Phase 3 & 4 4,200 US$6.5-7.7bn 1,280,000 n.a. 3,000 slots Source: Company data, CMS(HK) estimates
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Investment Ratings Rating Definition BUY Expected to outperform the market index by >10% over the next 12 months NEUTRAL Expected to outperform or underperform the market index by 10% or less over the next 12 months SELL Expected to underperform the market index by >10% over the next 12 months
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