February 27, 2018 Initiation of Coverage Gaming & Leisure VIP Transitions to Mass Growth: The House Still Wins
▪ We initiate coverage with a positive outlook on the Macau gaming sector, based on a forecast property EBITDA CAGR of 14% over 2017-19, driven in turn by an 12% CAGR for gross gaming revenue (GGR) as well as margin improvement. ▪ We see a variety of catalysts for outperformance on the road ahead, including: 1) 1Q18E earnings upgrades from the Street, 2) the opening of the HK-Zhuhai-Macau Bridge in 2H18E, and 3) potential relaxation of China visa policies. ▪ Our top picks are Galaxy (27 HK) and Melco Resorts (MLCO), both rated BUY. We also initiate at BUY on Melco International (200 HK), Sands China (1928 HK) and Wynn Macau (1128 HK). We rate MGM China (2282 HK) and SJM (880 HK) Hold. Year of inflection: VIP strength to evolve into mass growth story In line with China’s business upcycle, we expect Macau gaming’s rally to resume in 2018, following the recent correction, driven first by VIP growth in 1H18E and then mass growth in 2H18E. We believe the acceleration of high-margin mass gaming growth in 2H18 will surprise the market from the margin side. We project 2018 Macau GGR to grow 15% (vs 19% in 2017), driven by VIP growth of 13% (27% in 2017) and mass growth of 17% (10% in 2017). With an increasing contribution from mass business, we project Macau’s property EBITDA to record 19% y-y growth, on the back of the recent property launches from MGM China and Wynn Macau. Recent weakness offers entry point; top picks: Galaxy, Melco Resorts We believe the recent correction was necessary and inevitable as: 1) it was part of overall stock market profit-taking after January’s rally, 2) pre-CNY weakness is a seasonality issue for Macau gaming, 3) delayed launch of MGM Cotai hurt market confidence, and 4) management uncertainty at Wynn Macau created volatility. However, given the potential catalysts above—Street upgrades, bridge opening, visa relaxation —we see upside of 3%-49% to our target prices. We like Galaxy for: 1) the well- rounded Galaxy Macau capturing both VIP and mass upside, and 2) Phases 3 & 4 expansion plans for long-term growth. We also prefer Melco Resorts for potential earnings recovery at City of Dreams, driven by a fifth tower contribution (Morpheus from 2H18E) and organic growth after management reshuffling. Risks to our investment views and target prices include: 1) Political and regulatory actions, which hurt VIP the most, 2) sharp economic deterioration hurting high roller demand, 3) VIP table yield impacted by smoking ban from 2019, 4) regional competition, and 5) uncertainty around concessions renewals.
Rating PT Revenue (MM) ($) EBITDA (MM) ($) EPS ($) Curr Yr Next Yr Curr Yr Next Yr Curr Yr Next Yr 27 HK BUY HK$79.0 9,033 9,471 2,144 2,262 0.38 0.41 200 HK BUY HK$34.7 6,001 6,585 0.61 0.85 0.61 0.85 MLCO US BUY $37.2 5,873 6,444 1,480 1,755 1.20 1.71 Research Team 2282 HK HOLD HK$24.5 3,084 3,597 688 853 0.09 0.15 Angela Han Lee 1928 HK BUY HK$51.3 8,505 8,895 2,908 3,145 0.25 0.28 [email protected] 880 HK HOLD HK$7.8 5,607 6,773 438 494 0.04 0.04 Nate Deng 1128 HK BUY HK$31.3 5,457 5,706 1,411 1,535 0.16 0.19 [email protected] Source: China Renaissance Securities (Hong Kong) Inc.
China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A China Renaissance Securities (Hong Kong) Limited 1 February 27, 2018 Initiation of Coverage
Table of Contents Investment Thesis 3 In the middle of sector upcycle 4 Valuation 6 Sector’s past 5-year performance 10 Booming China outbound tourism industry 12 Evolution of a modern gaming hub 15 Macau gaming flowchart 17 Translating HK$100 lost by player into casino EBITDA 18 VIP gaming segment 19 Mass gaming segment 24 Non-gaming segment 28 Peer Comparison: Macau, Las Vegas and Singapore 29 CRSHK vs consensus & scenario analysis 31 Sector risks 32 Galaxy Entertainment Group 35 SJM Holdings 45 Wynn Macau 53 Sands China 62 MGM China 71 Melco Resorts 79 Melco International 88 Appendix 96
Comp Table
Current Px EV/EBITDA P/E Dividend yield Company name Ticker Rating Target Px 2/23/2018 FY18E FY19E FY18E FY19E FY18E FY19E Galaxy 27 HK BUY HK$ 79.00 HK$ 67.40 17 16 23 21 1% 1% SJM 880 HK HOLD HK$ 7.80 HK$ 7.60 11 10 26 23 2% 3% Wynn Macau 1128 HK BUY HK$ 31.30 HK$ 27.20 15 14 23 19 2% 3% Sands China 1928 HK BUY HK$ 51.30 HK$ 44.00 17 16 23 21 5% 5% MGM China 2282 HK HOLD HK$ 24.50 HK$ 23.20 19 15 33 21 1% 2% Melco Resorts MLCO US BUY US$ 37.20 US$ 28.27 11 9 24 17 2% 2% Melco International 200 HK BUY HK$ 34.70 HK$ 23.35 6 5 5 4 1% 1% Source: Bloomberg, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 2 February 27, 2018 Initiation of Coverage Investment Thesis Long-term growth outlook intact, backed by favourable policies
Macau’s ties to mainland China continue to tighten, both politically and economically. At China’s 19th National Congress, the Greater Bay Area Integration Scheme was also mentioned, and for the first time it was stated that Hong Kong and Macau should be included in China’s long-term development plan. Key factors driving Macau’s inbound tourism and gaming from China include: 1) increasing train connections from mainland China to Macau, 2) trial operations of the HK-Zhuhai-Macau Bridge in 1H18E, 3) visa relaxations as part of the Greater Bay Area Integration Scheme, and 4) Hengqin Island as a backyard of Macau, creating smoother and more natural access to Macau for mainland tourists.
Near term, Macau’s growth will continue to surprise the market
There are three key gaming business segments in Macau: VIP gaming, mass gaming and non-gaming. While we expect 1H18 revenue and earnings growth to be well supported by VIP, high-margin mass gaming’s growth looks set to accelerate from 2H18E, surprising the market from the margin side. We currently project 2018E Macau GGR to grow 15%, driven by VIP’s 13% growth and mass’s 17%. With an increasing contribution from mass, we project Macau casinos’ EBITDA to record 19% y-y growth, led by MGM China and Wynn Macau.
Feb weakness offers good entry point; we launch coverage with a positive view
We believe Macau gaming is in the middle of an upcycle, driven by the recovery of China economic growth in late 2016. We see 2018 as an inflection year in which VIP- led growth switches to mass-driven growth, causing the profitability of casino operators to jump. We believe recent weakness is more technical than fundamental for the following reasons: 1) the overall stock market saw profit-taking after January’s rally, 2) Macau suffered from pre-CNY weakness, which is a seasonality issue, 3) MGM Cotai’s opening was delayed, hurting market sentiment, and 4) Steve Wynn’s stepping down from the top roles at Wynn Resorts and Wynn Macau created volatility. We are confident that Macau’s growth trend is yet to finish, and have a positive view on the sector’s performance prospects in 2018.
Top picks: Galaxy Entertainment and Melco Resorts
Stock-picking is becoming more critical, with increasing divergence between different operators. We see significant upside in Galaxy and Melco Resorts, our two top picks. We have high conviction on our top pick Galaxy for 1) the well-rounded Galaxy Macau offering, which captures both VIP and mass, and 2) Galaxy Macau Phases 3 & 4 expansion plan for long-term growth. We like our other top pick, Melco Resorts, along with parent proxy Melco International, for the potential earnings recovery at City of Dreams, driven by the future fifth hotel/casino tower Morpheus’s contribution from 2H18E and organic growth after management reshuffling. We also rate Sands China BUY for its solid earnings portfolio and dividend yield, supported by mass business. We think Wynn Macau’s FY18E valuation is attractive as well, providing investors an opportunity to accumulate after the departure of Steve Wynn from the chairman/CEO roles; the introduction of a suitable strategic investor could be a re-rating catalyst. We see MGM China as this year’s dark horse candidate, with the gradual ramp-up of MGM Cotai quadrupling MGM China’s hotel offerings, but we rate the shares Hold due to short-term earnings volatility from the disproportionate increase in opex. We rate SJM Hold – it is our least preferred name at the moment due to market share loss and earnings volatility ahead of the opening of Lisboa Palace in 1H19E.
China Renaissance Securities (Hong Kong) Limited 3 February 27, 2018 Initiation of Coverage In the middle of a sector upcycle
High base is kicking in, but upcycle should extend longer still Analysing the 10-year trend of Macau GGR, we believe that we are still in the middle of a sector upcycle.
• After the previous downcycle ended in 2009, Macau entered an upcycle driven by the VIP segment. The Rmb4trn Chinese economic stimulus package fuelled an economic boom that not only saw explosive growth in fixed asset investment and luxury consumption, but also… • … the gradual rise of mass consumption, which translated into the outperformance of mass GGR growth for another two years. • The gaming centre entered a trough as the economy weakened and anti- corruption efforts progressed. As the political environment stabilized and the central government turned its attention to boosting the economy in the run- up to the 19th National Congress… • … Macau’s high roller business rallied along with China luxury consumption names, such as the high-end alcohol and automobile markets. We believe we are now at the tail end of this VIP-driven upcycle, which will be followed by… • … a mass-driven rally in 2H18E, supported by: 1) the wealth effect for China’s middle-class outbound tourists, 2) policies such as visa relaxation, and 3) longer visitor stays backed by non-gaming amenity growth.
Exhibit 1: Macau VIP and mass GGR growth history
120%
90% VIP-driven upcycle Mass-driven 60% VIP-driven Mass-driven upcycle upcycle upcycle Downcycle 30%
Downcycle 0%
-30%
-60% 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18E VIP gaming YoY Mass market gaming YoY
Source: DICJ, CRSHK estimates
VIP growth will be slow but healthy: 13%/10% in 2018E/19E vs 27% in 2017 The sharp contraction of the VIP market during the anti-corruption campaign remains a painful memory, but we argue that current VIP market growth is different:
• Junket consolidation: This facilitated onshore and offshore settlement of junket operators: money won by client A can now be paid onshore with money lost by client B. This lowered significantly the total amount of funds transferred between onshore and offshore when high rollers win/lose.
China Renaissance Securities (Hong Kong) Limited 4 February 27, 2018 Initiation of Coverage • Lower leverage and more cautious credit policies of junket operators: Junkets are now more cautious in lending chips to clients as methods of seeking loan repayment become more sophisticated by necessity. The larger operators now have: 1) strict account opening policies to lower credit risk, and 2) tight control on payback days, which is normally 20 days now. • Volume-driven rather than ASP-driven: Super VIPs who made easy money in the past mostly disappeared from Macau during the crackdown. The current VIP market is driven by an increasing number of low and mid- end VIP clients, and is more diversified in terms of industry/geographic location. We believe this makes the current VIP market more immune to changes in the political environment. We see several factors driving healthy growth in the VIP segment in 2018E:
• Large and mid-size junket expansion to new properties in Cotai, as high rollers will be interested to try new products. • The political environment is more favorable to economic growth and consumption. Corruption cases filed by the central government against provincial and higher level officials continues to decline: 226 cases in 2017 vs. 346/268 cases in 2015/2016. • China export growth is accelerating on the overall improvement in the global economy: 10% y-y growth in 4Q17 China exports, vs 6% in 3Q17.
Big story will be faster mass market growth: 17% in 2018E vs 10% in 2017 In line with the phases of the business cycle, the mass consumption trend follows the recovery of luxury consumption. While 2017 was a strong year for VIP, we believe the baton of accelerated growth will be passed to mass in mid-2018E for the following reasons:
• Wynn Palace and Parisian should finally start to attract premium mass clients as word-of-mouth marketing starts taking effect. • Increased non-gaming amenities at MGM Cotai and Morpheus should attract more cash players to the Cotai side. MGM China and Melco Resorts are strong in the premium mass segment. • Increased influx of visitor arrivals from China with the potential relaxation of visa policies along with the opening of the HK-Zhuhai-Macau Bridge after operational trials in 1H18E.
China Renaissance Securities (Hong Kong) Limited 5 February 27, 2018 Initiation of Coverage Valuation
EV/EBITDA as key valuation methodology Gaming is an industry with high entry barriers because: 1) the number of operators is limited by gaming licenses, and 2) it requires heavy capital expenditure with substantial initial investment and large depreciation before generating any revenue. We believe EV/EBITDA is the most suitable valuation methodology, given that 1) Macau is at an investing stage for expansion and renovations, 2) the impact from depreciation remains material during new properties’ ramp-up stage, and 3) it offers a longer record for historical comparison.
We also cross-check with other valuation methodologies: 1) P/E ratio is a universal valuation method, especially for comparing the sector against other China consumer discretionary names. 2) Dividend yield is also a key methodology for long-term investors looking for yield names in the China outbound tourism space. 3) Free cashflow yield (to firm) is a way to estimate how much free cash the firm is generating, which can be invested in other long-term projects or distributed as dividends in the future. 4) Net gearing and ROE are also matrices we pay attention to, for monitoring the balance between financial leverage and return on equity.
Exhibit 2: 1-year forward industry EV/EBITDA Exhibit 3: 1-year forward industry P/E 26 38
22 33
28 18 23 14 18
10 13 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd EV/EBITDA Mean 1-yr fwd IP/E Mean Mean+1SD Mean-1SD Mean+1SD Mean-1SD Source: Bloomberg, CRSHK estimates Source: Bloomberg, CRSHK estimates
Current valuation offers potential upside thanks to margin improvement The Macau gaming sector is currently trading at 15x FY18E EV/EBITDA, slightly lower than its five-year historical average of 16x. Macau gaming has seen volatility MTD due to: 1) overall profit-taking sentiment in the stock market after the rally in January, and 2) weakened weekly tracking GGR due to seasonal quietness ahead of Chinese New Year. We believe this moment offers a good entry point for Macau gaming exposure, ahead of potential market earnings upgrades for strong 1Q18E results.
Top picks: Galaxy and Melco Resorts We assign five-year historical mean EV/EBITDA multiples to derive our target prices for SJM, Wynn Macau and Melco Resorts. We assign a one standard deviation (1-SD) premium to Galaxy (long-term expansion plan plus less uncertainty in license renewal), Sands China (large mass exposure plus good dividends) and MGM China (capture accelerated earnings growth since 2H18E). For Melco International, we use five-year historical mean discount to estimated NAV to derive our target price.
China Renaissance Securities (Hong Kong) Limited 6 February 27, 2018 Initiation of Coverage Looking at casino operators in the 12x-20x FY18E EV/EBITDA range, the divergence between operators continues to increase, especially as license renewal timing approaches. Longer term, we see potential for meaningful upside in Galaxy and Melco Resorts, our two top picks. We like Galaxy for: 1) the well-rounded Galaxy Macau offering, which captures both VIP and mass, and 2) Galaxy Macau Phases 3 & 4 expansion plan for long-term growth. We like Melco Resorts, along with parent Melco International, for the potential earnings recovery at City of Dreams, driven by the future fifth hotel/casino tower Morpheus’s contribution from 2H18E and organic growth after management reshuffling. We also rate Sands China BUY for its solid earnings portfolio and dividend yield, supported by mass business. We think Wynn Macau’s FY18E valuation is attractive as well, providing investors an opportunity to accumulate after the departure of Steve Wynn from the chairman/CEO roles; the introduction of a suitable strategic investor could be a re-rating catalyst. We see MGM China as this year’s dark horse candidate, with the gradual ramp-up of MGM Cotai quadrupling MGM China’s hotel offerings, but we rate the shares Hold due to short-term earnings volatility from the disproportionate increase in opex. We rate SJM Hold – it is our least preferred name at the moment due to market share loss and earnings volatility ahead of the opening of Lisboa Palace in 1H19E.
Exhibit 4: Our Macau gaming coverage universe
Target Company name Ticker Rating Rationale price Good company with local background. Best pick for LT investors, in our view. Well committed with a large land bank for Galaxy Macau phases 3 & 4 Galaxy 27 HK BUY HK$79.00 expansion. Hengqin landbank offers more upside, in line with Greater Bay Area Integration Scheme. Our TP represents 18x FY18E EV/EBITDA, implying 27x FY18E P/E. Attractive valuation supports this stock call. The market was disappointed by weakening premium mass at CoD, but we expect this to recover from 2H18E, Melco Resorts MLCO US BUY US$37.20 driven by Morpheus. Our TP is set at 14x FY18E EV/EBITDA, implying 31x FY18E P/E. Conglomerate serving as a proxy for Melco Resorts for HK stock market Melco 200 HK BUY HK$34.70 investors. Our TP is set at a 34% holding company discount to our FY18E NAV International estimate. The most stable company from an earnings perspective due to large exposure to mass gaming. Laggard in 2017, but likely to benefit in 2018 from mass rally. Sands China 1928 HK BUY HK$51.30 Strong dividend yield is another key factor for yield lovers. Our TP is set at 20x FY18E EV/EBITDA, implying 26x FY18E P/E. Strong operation with further upside potential from ramp-up of premium mass in FY18E. Steve Wynn’s departure is a concern but the introduction of a suitable Wynn Macau 1128 HK BUY HK$31.30 strategic investor could be a re-rating catalyst. Our TP is set at 17x FY18E EV/EBITDA, implying 26x FY18E P/E. Strong execution has always been the key for investors. Its hotel room capacity will quadruple from the Cotai expansion, but it takes time to ramp up. LT positive MGM China 2282 HK HOLD HK$24.50 backed by strong management team. Our TP is set at 19x FY18E EV/EBITDA, implying 35x FY18E P/E. Relatively complicated corporate structure is a negative factor. All openings in the market will likely continue to drag SJM’s market share until Lisboa Palace SJM 880 HK HOLD HK$7.80 opens in 1H19E. Our TP is set at 12x FY18E EV/EBITDA, implying 27x FY18E P/E. Source: CRSHK
China Renaissance Securities (Hong Kong) Limited 7 February 27, 2018 Initiation of Coverage Exhibit 5: Comparable companies
Current Px +/- Market Cap Avg T/O EV/EBITDA Company name Ticker Rating Target Px 2/23/2018 side (US$ mn) (US$ mn) FY17 FY18E FY19E Macau gaming Galaxy 27 HK BUY HK$ 79.00 HK$ 67.40 17% 37,515 116.0 20x 17x 16x SJM 880 HK HOLD HK$ 7.80 HK$ 7.60 3% 5,549 17.7 12x 11x 10x Wynn Macau 1128 HK BUY HK$ 31.30 HK$ 27.20 15% 18,236 45.0 20x 15x 14x Sands China 1928 HK BUY HK$ 51.30 HK$ 44.00 17% 45,842 90.3 20x 17x 16x MGM China 2282 HK HOLD HK$ 24.50 HK$ 23.20 6% 11,377 30.0 24x 19x 15x Melco Resorts MLCO US BUY US$ 37.20 US$ 28.27 32% 13,908 80.7 13x 11x 9x Sector mean 18x 15x 13x Sector median 20x 16x 15x Conglomerate Melco International 200 HK BUY HK$ 34.70 HK$ 23.35 49% 4,629 14.4 8x 6x 5x Las Vegas gaming Las Vegas Sands LVS US NC n.a. US$ 74.33 n.a. 58,638 261.0 14x 13x 12x MGM Resorts MGM US NC n.a. US$ 35.38 n.a. 20,035 273.3 12x 11x 10x Wynn Resorts WYNN US NC n.a. US$ 167.13 n.a. 17,178 624.5 14x 12x 10x Sector mean 13x 12x 11x Sector median 14x 12x 10x
P/E FCF yield Dividend yield Company name Ticker FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Macau gaming Galaxy 27 HK 28x 23x 21x 4% 5% 5% 1% 1% 1% SJM 880 HK 28x 26x 23x -5% -2% 9% 2% 2% 3% Wynn Macau 1128 HK 38x 23x 19x 5% 6% 6% 2% 2% 3% Sands China 1928 HK 29x 23x 21x 5% 4% 4% 5% 5% 5% MGM China 2282 HK 38x 33x 21x 0% 8% 4% 1% 1% 2% Melco Resorts MLCO US 40x 24x 17x 5% 6% 8% 1% 2% 2% Sector mean 33x 25x 20x 2% 4% 6% 2% 2% 2% Sector median 33x 23x 21x 4% 5% 6% 2% 2% 2% Conglomerate Melco International 200 HK 13x 5x 4x 10% 9% 12% 0% 1% 1% Las Vegas gaming Las Vegas Sands LVS US 21x 23x 21x 5% 6% 6% 4% 4% 4% MGM Resorts MGM US 33x 25x 19x 0% 4% 5% 1% 1% 1% Wynn Resorts WYNN US 23x 22x 18x 4% 5% 6% 1% 1% 1% Sector mean 25x 23x 19x 3% 5% 6% 2% 2% 2% Sector median 23x 23x 19x 4% 5% 6% 1% 1% 1%
Note: NC = Not Covered. Source: Bloomberg for NC companies, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 8 February 27, 2018 Initiation of Coverage Exhibit 6: Key matrix of Macau gaming stocks Melco Galaxy SJM Wynn Macau Sands China MGM China Melco Resorts International Bloomberg ticker 27 HK 880 HK 1128 HK 1928 HK 2282 HK MLCO US 200 HK Mkt cap (US$mn) 37,515 5,549 18,236 45,842 11,377 13,908 4,629
Pricing currency HK$ HK$ HK$ HK$ HK$ US$ HK$ Share price 67.40 7.60 27.20 44.00 23.20 28.27 23.35 CRSHK TP 79.00 7.80 31.30 51.30 24.50 37.20 34.70 CRSHK rating BUY HOLD BUY BUY HOLD BUY BUY
2018E YoY growth Revenue 13% 5% 18% 10% 56% 11% 13% EBITDA 18% 11% 27% 17% 28% 15% 46% Net profit 25% 7% 70% 26% 15% 70% 142%
Macau VIP:mass 66:34 56:44 71:29 32:68 49:51 56:44 -
Macau share 22% 15% 17% 22% 9% 16% - Macau VIP share 26% 15% 22% 13% 8% 16% - Macau mass share 16% 14% 11% 34% 10% 15% -
Profitability EBITDA margin 24% 8% 26% 34% 22% 25% 32% Net profit margin 18% 4% 15% 26% 11% 10% 16% ROA 15% 4% 14% 18% 6% 7% 7% ROE 20% 6% 109% 45% 26% 18% 26%
2018E valuation EV/EBITDA 17x 11x 15x 17x 19x 11x 6x P/E 23x 26x 23x 23x 33x 24x 5x Dividend yield 1% 2% 2% 5% 1% 2% 1% FCF yield 5% -2% 6% 4% 8% 6% 9% Net gearing (cash) -50% -14% 376% 73% 64% 56% 10%
Macau gaming Jun, 2022 Mar, 2020 Jun, 2022 Jun, 2022 Mar, 2020 Jun, 2022 - concession expiry
Major shareholder Lui Family STDM Wynn Resorts Las Vegas MGM Resorts Melco Lawrence Ho Sands International Shareholding % 42% 54% 72% 70% 56% 51% 53%
Company Well known Oldest casino Currently First settler of Currently Focuses on Holding background for Galaxy operator in operates Cotai. Mass- operates young affluent company of Macau and Macau. Well Wynn Macau focused MGM Macau premium Melco Starworld. known for and Wynn operator with and MGM mass. Well Resorts, Galaxy Macau Grand Lisboa Palace. Solid very large Cotai, with known for City which Phase 3 is and small positioning in properties strong focus of Dreams represents under historic high-end such as on premium (CoD) and 90% of Melco construction, casinos in gaming for Venetian and mass Studio City in International's while Galaxy Peninsula. outstanding Parisian. segment. Macau. It also NAV. Melco has more land Lisboa Palace hardware and Cotai Central Opened in operates CoD International bank such as is under services. is pending Feb 2018, Manila. has a license Galaxy Macau construction rebranding as MGM Cotai is Macau CoD's to expand its Phase 4 and in Cotai: Londoner. the only new fifth tower, gaming land for a expect to standalone Morpheus, is business in resort in open in casino expected to Cyprus. Hengqin. 1H19E. property in open in 2018. 2Q18E. Source: Company data, Bloomberg, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 9 February 27, 2018 Initiation of Coverage Sector’s past 5-year performance
Explosive growth era: early 2012-early 2014 Year-on-year growth itself was lower than the growth rate in 2010, which was a recovery after IVS (individual visit scheme) tightening in 2008 and the financial crisis. However, growth during early 2012-early 2014 was consistently at an accelerated level, driven by both increasing betting size and the number of high rollers thanks to the booming property market and the whole China economy.
Exhibit 7: Change of market capitalization and Macau GGR in the past 5 years
US$bn VIP GGR growth 250 slowed, but 120% sentiment still Downcycle Recovery strong due to surge Junket theft, Macau ATM of high-margin reflecting junket installed premium mass liquidity issues Mainland ID 90% 200 business New card scanning Tightened UnionPay device for UnionPay cash transit visa ATM cash 60% policy withdrawal withdrawals 150 Mass limit smoking ban Transit visa 30% policy 100 relaxed Banned Start of back phone crackdown on betting 0% corruption, including luxury 50 catering and -30% entertainment services
0 -60% Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Macau big-6 market cap (LHS) Macau big-6 market cap YoY (RHS) Macau GGR YoY (RHS) Source: DICJ, Bloomberg, CRSHK
Most severe downtrend: early 2014-late 2015 It has never been worse than this: Revenue halved, costs hiked, but construction must go on. As a result, market caps of Macau’s six casino operators dropped 70% from the peak.
The impact on revenue came from all directions:
• Anti-corruption campaign from the central government, dragging luxury consumption in China. • Junket liquidity problems started to break out, due to over-leverage during the VIP expansion era. • Local authority tightened the transit visa policy, in order to discourage high rollers from using transit visas illegally to visit Macau. • Mass gaming areas implemented the smoking-ban policy.
China Renaissance Securities (Hong Kong) Limited 10 February 27, 2018 Initiation of Coverage Opex was sticky with requirements for consistent increases regardless of revenue falls:
• Gaming operators were reluctant to cut headcounts, in order to 1) prepare for upcoming new openings and 2) show commitment to local society in difficult times, which could prove beneficial during license renewal. • Employees protested for salary hike and all casino operators raised pay and committed to pay bonuses. All operators were in tight conditions with new integrated resorts under construction:
• 1H11: Melco Resorts took over Macau Studio City, which suffered long construction delays. • 1H12 ground-breaking: Galaxy Macau Phase 2 and Wynn Palace • 1H13 ground-breaking: Parisian Macao and MGM Cotai • 1H14 ground-breaking: Lisboa Palace
Worst is over and gradual recovery follows: early 2016-now New integrated resorts started to kick off, attracting both VIP and mass clients with new and upgraded non-gaming products. Ultra-high rollers, who are more politically sensitive, were wiped out during the crackdown on corruption, but, new VIP clients started to visit Macau. These new clients do not spend as much as the ultra-high rollers, but they support the Macau VIP segment in a healthier way, in our view.
From now, we believe premium mass and grind mass are starting to pick up, and we expect this cash business to deliver accelerated growth. We will discuss our rationale in the coming sections.
China Renaissance Securities (Hong Kong) Limited 11 February 27, 2018 Initiation of Coverage Booming China outbound tourism industry Ever since Guangdong province first allowed package tours to Hong Kong/Macau in 1983, outbound tourism has been gradually adopted by Chinese people as a leisure activity. China outbound travel has been stimulated in recent decades by: 1) the rapid development of the China economy, which enables its citizens to accumulate wealth, and 2) more relaxed visa policies adopted by the central government.
Exhibit 8: China outbound tourism industry development
Stage Pilot Stage Early Stage Growth Stage
Destination HK & Macau Cross-border Overseas
Travel purpose Visit friends & relatives Various purposes incl. sightseeing, vacation and shopping business trips
Policy Limited support, out of Moderate support, More support, relaxed visa policy guidance political purposes but more focus on domestic tourism
Feature Package tours only Individual tours appeared Internet support Various tour products, online to offline
Specifics Only More Traditional travel agent Online booking, Individual tours, themed opened to destinations information go online. information checking tours, customized tours citizens in to choose become new fashion Guangdong
Period 1983 1988 1997 2004 2012 Source: China National Tourism Administration, iResearch, CRSHK
In 2012, China replaced the US as the largest outbound travel source market and has been in the leading position ever since. Although as the base number increases, percentage growth in the number of outbound trip seems to have declined; the China outbound market is still able to add c.7mn more trips each year. In addition, statistics from the China National Tourism Administration show the average traveller spending per outbound trip increased from US$838 in 2014 to US$900 in 2016. The ASP increase plus volume growth continues to drive China outbound tourism market growth.
Exhibit 9: Number of outbound trips from China (mn times) 150 20% 129 18.0% 107 117 122 120 16% 98 90 12% 9.3% 60 9.0% 8% 5.7% 30 4.3% 4%
0 0% 2013 2014 2015 2016 2017 Number of Chinese outbound trips YoY Growth
Source: China National Tourism Administration, CRSHK
China Renaissance Securities (Hong Kong) Limited 12 February 27, 2018 Initiation of Coverage We are optimistic about the future growth of China outbound tourism market given that:
1) Leisure travel as an “escape” cannot be substituted. Even though the Internet era offers various new “distractions” for people to kill time, we believe leisure travel as a unique experience for people to escape stress and daily routines cannot be replaced. 2) Consumption upgrade as a catalyst. Consumption upgrade has been and will continue to be a main theme of China economy given that: - Per capita disposable income keeps rising at c.8% per annum. - Chinese consumers spend more on services. - The Chinese government aims to transform China into a service-driven economy. As one of the main beneficiaries of consumption upgrades, we are positive on the outlook of the outbound travel market.
Exhibit 10: Per capita disposable income of urban Exhibit 11: Increasing Chinese consumer expenditure on residents in China service products
(RMB) (RMB) 40,000 9.5% 3,000 11.6% 36,396 2,638 9.0% 33,616 31,195 2,383 11.4% 28,844 9.0% 2,142 30,000 11.2% 26,467 1,988 11.1% 2,000 8.5% 20,000 8.3% 10.8% 8.2% 10.8% 10.7% 8.0% 1,000 7.8% 10,000 10.4% 7.5%
0 7.0% 0 10.0% 2013 2014 2015 2016 2017 2013 2014 2015 2016 Per Capita disposable income of urban residents Per Capita expense on edu/culture/entertainment YoY Growth as a % of total expense
Source: National Bureau of Statistics of the PRC, CRSHK Source: National Bureau of Statistics of the PRC, CRSHK
3) “New tourism eco-system” boosted by “New Economy” enterprises. The rapid development of Internet society in China has also facilitated development of the tourism industry. New economy enterprises reshaped the tourism industry with better accessibility to destinations, transparency of information, convenience in hotel booking, high frequency information exchange over social media, etc. We believe the self-evolving tourism ecosystem will continue to support tourism demand.
China Renaissance Securities (Hong Kong) Limited 13 February 27, 2018 Initiation of Coverage Exhibit 12: “New Economy” enterprises make travel easier
Preparation Booking Transportation Accommodation Entertainment Post-trip
Meta Search OTAs Inter-cities Local Lodging Resorts Social Media
Casino www.mafengwo.com Social Media
Catering Sightseeing Payment Shopping Map www.mafengwo.com Show
•••
Source: CRSHK
China Renaissance Securities (Hong Kong) Limited 14 February 27, 2018 Initiation of Coverage Evolution of a modern gaming hub Handover and new order. The handover of Macau in Dec 1999 from Portugal to China enabled the city to build a solid foundation for the development of the tourism and gaming industries. Prior to this, Macau was plagued by violence and gangster activities.
Exhibit 13: Violent activities in Macau prior to handover
Date Violent Activities Nov-96 A motorcycle gunman shot Antonio Apolinario, the 2nd-ranking figure in the Gambling Inspectorate May-97 Two motorcycle gunmen shot dead three alleged 14K triad members in a busy street Sep-97 A gambling inspector was shot in the face but luckily survived Oct-97 Three business sites where gambling inspectors worked were firebombed Mar-98 The No.3 figure in the Gambling Inspectorate was shot dead Jun-98 The then-police chief Antonio Baptista was targeted by an unsuccessful car-bomb assassination
Source: South China Morning Post, CRSHK
After the handover, China’s central government and the Macau Special Administrative Region (SAR) together adopted a series of measures against gangster activity that proved highly effective. In one year, the number of murder case decreased 70% and gangster organizations gradually disappeared. A safer society laid the foundation for the development of tourism industry.
Macau also regulated its gaming industry, making it more transparent and dynamic. In 2002, the Macau SAR granted casino concessions to SJM, Galaxy and Wynn Macau. The three operators then issued sub-concessions to MGM, Sands and Melco separately. With six powerful gaming companies operating in a transparent regulatory environment, the quality of Macau’s gaming supply reached new heights.
Exhibit 14: Gaming concessions granted in Macau
Concession Sub-concession
2002 2005 US$200mn
2002 2002 Macau SAR No Charge
2002 2006 US$900mn
Source: DICJ, CRSHK
Fuelled by IVS, ignited by VIP. In July 2003, the China Central Government introduced the Individual Visit Scheme (IVS) to help HK and Macau recover from the economic losses caused by the SARS epidemic. Since then, visitors from mainland China have dominated Macau’s tourism and gaming industry. According to DSEC (Direcção dos Serviços de Estatística e Censos, the statistics and census service department in Macau), visitors from China to Macau increased from 5.7mn in 2003 to 22.2mn in 2017, representing 48% and 68% of total visits, respectively. China Renaissance Securities (Hong Kong) Limited 15 February 27, 2018 Initiation of Coverage
Exhibit 15: Macau visitor arrivals (mn arrivals) 60 80%
50 60% 40
30 40%
20 20% 10
0 0% 2003 2005 2007 2009 2011 2013 2015 2017 Total visitor arrivals From mainland % from mainland
Source: DSEC, CRSHK
Chinese visitors enabled a vast quantity of money to flow from the north. Thanks to the fast-growing economy, some Chinese people made fortunes and soon dominated the VIP market in Macau. Pushed by Chinese high rollers, GGR in Macau increased at a surprising speed up until 2014, when the austerity and anti-corruption campaign started.
Bottomed, with healthier business mix. As Macau’s gaming industry was impacted by the political turmoil in China, industry GGR decreased from the peak of MOP361bn (MOP = Macau patacas) in 2013 to MOP223bn in 2016. The dramatic decrease was led by the VIP sector, which decreased from MOP239bn to MOP119bn in the same period. By 2017, the gaming industry had recovered with GGR increases in both VIP and mass. Even though the VIP sector led the rebound, the increasing share of mass market gaming revenue and non-gaming sector revenue have made Macau gaming and tourism industry much healthier.
Exhibit 16: Macau GGR breakdown (MOPbn) 400
300 122 139
200 115 103 104 239 100 213 151 128 119
0 2013 2014 2015 2016 2017 VIP GGR Mass Market GGR
Source: DICJ, CRSHK
China Renaissance Securities (Hong Kong) Limited 16 February 27, 2018 Initiation of Coverage Macau gaming flowchart
Exhibit 17: Macau gaming flowchart
Economic growth Junket liquidity Political issues Infrastructure Visa policy Non-gaming
- China export - Number of junkets - Anti corruption - HK-ZH-Macau - IVS policy - Shows & - China property - Junket regulation campaign Bridge entertainment market - Capital control - Macau light rail - Lodging - More high-speed- - MICE rail coverage
VIP players Mass players Definition: credit Definition: cash players players
By source of credit By client tier
Direct VIP Junket VIP Premium mass Grind mass Casino gives credit. Junket gives credit. Major Active members with Tourists with small betting Clients have relatively source of VIP clients in casino loyalty size. good track record. Served Macau. Junkets serve membership cards. by in-house VIP hosts. clients and collects debts. Served by in-house hosts.
VIP Mass gross gaming revenue gross gaming revenue (VIP GGR) (Mass GGR)
One of the highest gaming taxation Gaming tax rates in the world. Corporate tax Gaming tax (40% of GGR) has been waived traditionally (40% of GGR)
VIP marketing expenses are far higher: Junket commission Involves outsourced client-sourcing Marketing expenses including cash rebate and and credit providing: junkets. including cash rebate and non-gaming subsidies Junket commissions are non-gaming subsidies (45% of GGR) capped at 1.25% of rolling (10% of GGR)
Mass table yield is 1/3 of VIP Labor cost, utilities, etc Labor cost, utilities, etc Mass needs 3x opex to generate (5% of GGR) (15% of GGR) same GGR as of VIP
VIP EBITDA Mass EBITDA (10% of GGR) (35% of GGR)
Source: CRSHK
China Renaissance Securities (Hong Kong) Limited 17 February 27, 2018 Initiation of Coverage Translating HK$100 lost by player into casino EBITDA How HK$100 gross gaming revenue translates into EBITDA is different between the VIP and mass segments, given that junket operators are involved in the VIP business chain.
Exhibit 18: When a junket VIP player loses HK$100 Exhibit 19: When a mass player loses HK$100
40 40
10 100 100 15 45
35 5 10 VIP GGR Gaming tax Junket Other opex VIP EBITDA Mass GGR Gaming tax Marketing Other opex Mass commission expenses EBITDA Source: CRSHK estimates Source: CRSHK estimates
As the charts above show, out of the HK$100 VIP GGR, HK$40 is subject to gaming tax, HK$45 taken by junkets, HK$5 covers operating expenses, leaving HK$10 EBITDA or 10% VIP EBITDA margin.
The 35% EBITDA margin of the mass gaming sector is higher than the VIP sector as no junket commission is involved. In comparison, casinos spend more on marketing expense to attract mass market visitors. The operating expense is also higher than VIP due to larger space and more service staff.
China Renaissance Securities (Hong Kong) Limited 18 February 27, 2018 Initiation of Coverage VIP gaming segment VIP is the largest segment of the Macau gaming industry in terms of gross gaming revenue. Unlike mass market gamblers who walk directly onto the gaming floor, VIP customers are served by two important parties – junket and junket operator. Junkets are salespersons who build relationships and develop VIP customers, provide them customized services. Junket operators provide VIP rooms on behalf of casinos and offer VIP customers rolling chips on credit. The detailed relationship is outlined below.
Exhibit 20: Value chain of VIP business VIP lose - apply for extra credit from Casino Sell discounted rolling chips on credit junket operators
VIP win - win non-rolling chips Settle the outstanding account which can be cashed out from casino with casino each month
VIP Settle outstanding debt Junket Customers Operators Provide rolling chips on credit
Find Junkets to Gamble Provide customer source
Solicit affluent clients to gamble Junkets Offer VIP rooms, rolling chips to and provide VIP services customers brought by Junkets
Source: CRSHK
Exhibit 21: Risks and rewards for different parties on the VIP value chain Reward: Risk:
Casino - average 2.9% VIP win rate - political risk, business risk, etc.
- gamble in VIP room with credit - huge gambling losses VIP Customers - enjoy other VIP services
- unable to solicit enough VIP customers Junkets - junket operator shares profits with junkets
- profit from selling rolling chips - unable to collect debt from VIP clients Junket Operators (max. 1.25% of turnover) - unable to disseminate enough rolling chips
Source: CRSHK
The VIP segment is the primary driver of the Macau gaming industry. However, the sector is also volatile and highly sensitive to political and policy related activity in China. Recent data from DICJ (Direcção de Inspecção e Coordenação de Jogos, Gaming Inspection & Coordination Bureau, Macau SAR) reveals that the VIP sector bottomed from its trough in 2016, with its GGR increasing 27% in 2017 and 22% in 4Q17.
China Renaissance Securities (Hong Kong) Limited 19 February 27, 2018 Initiation of Coverage
Exhibit 22: Macau VIP sector annual GGR Exhibit 23: Macau VIP sector quarterly GGR
(MOPbn) (MOPmn) 300 80% 50,000 60% 66% 40% 60% 60% 40,000 200 55% 57% 20% 53% 30,000 40% 0% 239 20,000 100 213 -20% 151 20% 128 119 10,000 -40%
0 0% - -60% 2013 2014 2015 2016 2017 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17
VIP GGR VIP GGR as % of total GGR VIP GGR YoY growth
Source: DICJ, CRSHK estimates Source: DICJ, CRSHK estimates
Drivers of the VIP sector
We believe the VIP sector is influenced primarily by China economic growth, junket liquidity and the political environment. Key drivers worth tracking include: export value/coal price/property sales in China, junket regulations and China’s political climate.
1. Economic growth of China
The VIP market is highly correlated to the Chinese economy. In fact, most of the high rollers are from industries like exports, coal and real estate, who accumulated enormous wealth along with the fast-growing China economy. Historical experience indicates that the rapid growth of China exports, the rise of the property market and similar economic booms directly benefit Macau’s VIP gaming segment.
Statistics from the National Bureau of Statistics reveal that China exports rebounded in 2017, the coal price has rallied since mid-2016, and monthly property sales have showed signs of recovery since Oct. 2017. Taken together, we believe these signs indicate a positive VIP outlook.
China Renaissance Securities (Hong Kong) Limited 20 February 27, 2018 Initiation of Coverage Exhibit 24: China export value and y-y growth
(US$bn) 250 20%
200 10%
150 0%
100 -10%
50 -20%
0 -30% Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17
China total value of export YoY growth
Source: National Bureau of Statistics, CRSHK
Exhibit 25: China Qinhuangdao port thermal coal 5500 kcal/kg FOB spot price daily
(RMB) 900 750 600 450 300 150 0 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 China Qinhuangdao Port Thermal Coal 5500 kcal/kg FOB Spot Price Daily
Source: Bloomberg, CRSHK
Exhibit 26: China monthly property sales
(RMBbn) 2,000 80%
1,600 60%
1,200 40%
800 20%
400 0%
0 -20% Jan&Feb-16 Jun-16 Oct-16 Mar-17 Jul-17 Nov-17 China monthly property sales YoY growth
Source: National Bureau of Statistics, CRSHK
2. Junket liquidity
Junket liquidity also affects the VIP segment. Better liquidity enables junkets to develop more VIP customers and settle outstanding debt in time. In recent years, we have seen the junket market getting more consolidated. Both the number of junket companies and the number of individual junkets have decreased. In addition, the
China Renaissance Securities (Hong Kong) Limited 21 February 27, 2018 Initiation of Coverage regulator has also tightened junket regulations with more accounting disclosure requirements, higher minimum deposit, etc.
We believe junket consolidation facilitates onshore & offshore settlement of junket operators given that:
1) By merging small junkets into bigger ones, junkets are able to consolidate their resources and improve their liquidity, enabling them to develop more VIP customers.
2) With more customers on hand, junket operators can do more internal settlements – money won by client A can be paid onshore with money lost by client B – this significantly lowers the total amount of funds transferred between onshore and offshore when a high roller wins/loses.
3) Tighter junket regulations help wipe out disqualified junkets, making the market more transparent and healthy.
Exhibit 27: Number of junket companies and individual junkets
250 202 200 189 158 150 120 110 98 100
50 33 28 25 20 16 10 0 2013 2014 2015 2016 2017 2018 Junket company Individual junket
Source: DICJ, CRSHK
Exhibit 28: Junket regulations have tightened since 2016
Date Junket Regulation Jan-16 DICJ announced it would not renew licenses for 35 of 176 junket operators for failing to deliver sufficient accounting info Macau gaming regulators discussed possibilities to raise the required cash deposit by 100 times (MOP100k to Apr-16 MOP10mn) for new junket operators DICJ banned proxy betting at VIP tables through mobile phones. VIP operations will only accept bets from gamblers who May-16 are physically present on the premises Oct-17 DICJ head announced that new laws on junket regulations would be submitted to the Macau Legislature in mid-2018 Dec-17 DICJ head announced tighter regulations for gaming promoters would be forthcoming.
Source: Macau Daily, GGR Asia, CRSHK
3. Political environment
The VIP sector is highly sensitive to the political environment in mainland China. Political activity, like increased controls over public funds spent by officials, anti- corruption campaign, and tightening of money outflows, can significantly influence the VIP sector.
We discussed earlier how VIP market GGR was halved within a year due to the anti- corruption campaign. However, it seems that the impact of the anti-corruption drive on the Macau gaming industry has slowed as the number of anti-corruption cases filed by the Central Commission for Discipline Inspection has declined. China Renaissance Securities (Hong Kong) Limited 22 February 27, 2018 Initiation of Coverage Exhibit 29: Number of anti-corruption cases filed by the Central Commission for Discipline Inspection of CPC
400 16
300 34 5 22 9 200 18
296 241 100 199
0 2015 2016 2017 Provincial level State level SOE (state level)
Source: Central Commission for Discipline Inspection of CPC, CRSHK Even though the market seems to have recovered from the political turmoil, the political climate in mainland China still needs to be watched carefully. To what extent the VIP market can regain its losses remains to be seen.
China Renaissance Securities (Hong Kong) Limited 23 February 27, 2018 Initiation of Coverage Mass gaming segment Mass market gamblers play on the gaming floor. They buy non-rolling chips at the casino counter with cash. Although mass market gamblers on average bet little compared with VIP gamblers, the growing volume as well as increasing bet per person has made the mass market a potentially major driver to the gaming sector.
Mass market is more stable than the VIP market and less sensitive to political activity in mainland China. The sharp decline of the VIP segment during the last few years enabled the mass segment to take more share of total GGR. Mass GGR rose 10% in 2017 and 17% in 4Q17.
Exhibit 30: Macau mass market annual GGR Exhibit 31: Macau mass market quarterly GGR
160 47% 50% 30,000 30% 45% 40% 43% 20% 34% 40% 120 10% 30% 80 20,000 0% 139 20% 122 115 103 104 -10% 40 10% -20%
0 0% 10,000 -30% 2013 2014 2015 2016 2017 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17
Mass Market GGR As a % of total GGR Mass market gaming GGR YoY growth
Source: DICJ, CRSHK estimates Source: DICJ, CRSHK estimates
Drivers of the mass sector
We believe the mass sector is influenced primarily by infrastructure building, visa policy and non-gaming amenities. Key drivers would thus include: the opening of the HK-Zhuhai-Macau Bridge, IVS policy changes, and non-gaming shows/entertainment offerings.
1. Infrastructure
Infrastructure development is key for destinations to attract mass market visitors. In recent years, the completion of the Guangzhou-Zhuhai intercity railway and expansion of the Gongbei border gate have given mainland visitors better access to Macau by land. The opening of Taipa Pac On ferry terminal enlarged Macau’s capacity in receiving customers traveling by sea.
China Renaissance Securities (Hong Kong) Limited 24 February 27, 2018 Initiation of Coverage Exhibit 32: Infrastructure projects around Macau
Infrastructure – Around Macau Completion Date Merits Guangzhou-Zhuhai Intercity Railway Jan-13 Travel time between Guangzhou and Zhuhai reduced from 150min to 45min Gongbei Border Gate Expansion Jun-13 Capacity increased from 150,000 entries per day to 350,000 per day Directly link Zhuhai, Macau and Hong Kong. Drive time between Zhuhai and HK-Zhuhai-Macau Bridge est. 1H18 Hong Kong will be shorten from 3+ hours to less than 30 min
Guangzhou-Zhuhai Intercity Railway Phase I: est. 1H18 Phase I: connect Gongbei Gate to Chimelong Ocean Park Extension Line Phase II: est. 2022 Phase II: connect Chimelong Ocean Park to Zhuhai Airport Guangdong-Macau New Route/Qingmao Border est. 2019 Plan to add a new border gate to ease the pressure from other gates. 15 new light rail lines with total mileage of 1430 km, further enhancing traffic 15 Light Rail Lines in Pearl River Delta By 2020 in the Pearl River Delta Directly link the east & west sides of Guangdong province, improving Shenzhen-Zhongshan tunnel est. 2024 accessibility to Zhongshan, Zhuhai etc. by land
Source: Southern Daily, Guangdong News, CRSHK
Exhibit 33: Infrastructure projects in Macau
Infrastructure – In Macau Completion Date Merits 16 400-passenger berths plus 3 1,200-passenger berths. Able to handle Taipa Pac On Ferry Terminal May-17 400,000 passengers per day
Taipa: est. 2019 20 km light rail system with 21 stops. Able to connect and integrate Macau Macau Light Rail System Peninsula: est. 2022 Peninsula, Taipa and Cotai. Macau government applied to the Central government to expand the Macau International Airport Expansion Pending approval airport with sea reclamation.
Source: GGRAsia, CRSHK
Looking ahead, we believe the project pipeline listed above will further boost Macau’s tourism and gaming industry. Short term, the HK-Zhuhai-Macau Bridge, which is due to be completed by 1H18, should be a catalyst to the gaming sector. Longer term, the Macau light rail system, new Qingmao border and more connected transportation systems in the Greater Bay Area will further drive mass market with better accessibility.
2. Visa relaxation
Visa policies influence mass market visitor volume. As discussed above, the number of visitors from mainland China has risen steadily since IVS was introduced. Historically, the tightening of IVS policy directly resulted in visitor volume drop while the loosening of IVS policy boosted volumes.
China Renaissance Securities (Hong Kong) Limited 25 February 27, 2018 Initiation of Coverage Exhibit 34: IVS policy changes
Date IVS Policy Changes May-08 Limited visits to HK/Macau from max. 2 times to 1 time each month Jul-08 Limited to 1 visit every 2 months Tighten Aug-08 Allowed up to 7-day stay in Macau vs. 14 days maximum before Sep-08 Forbade entering Macau from HK with HK visa Oct-08 Limited to 1 visit every 3 months Feb-09 Guangdong applied to grant multiple-entry HK/Macau visa to its residents Aug-09 Residents from Guangdong were permitted to visit Macau every 2 months Jul-14 The length of stay of transit visa holders was reduced from 7 days to 5 days Loosen Jul-15 Transit visa holders can stay up to 7 days Jan-16 Residents from 9 provinces can renew their HK & Macau Pass on WeChat The application fee for HK & Macau Pass booklet as well as application fee Jul-17 (both single & multiple entries) cut by around 20%
Source: Shenchuang.com, Sohu.com, CRSHK
Exhibit 35: IVS policy changes influence visitor arrivals from China
25
IVS Loosen 20 IVS Tighten
15
10
5
0 2003 2005 2007 2009 2011 2013 2015 2017 No. of Chinese Visitors
Source: DSEC, CRSHK
In the long term, we believe IVS policies will be further relaxed, given that:
• Looser visa policies need to be adopted in coordination with the completion of mega projects like the HK-Zhuhai-Macau Bridge, so as to maximize the usage of infrastructure.
• A looser visa policy between the mainland, HK and Macau is the prerequisite for building an integrated Great Bay Area, which has been called for by the central government.
China Renaissance Securities (Hong Kong) Limited 26 February 27, 2018 Initiation of Coverage 3. Non-gaming drivers
Non-gaming amenities and activities are also an attraction for mass market visitors. We believe the opening of new properties, including MGM Cotai (Feb. 2018) and Morpheus (2Q18E), will attract more mass market visitors by offering new non-gaming amenities. Meanwhile, as word-of-mouth marketing takes effect, we would expect to see more visitors to “must-see” attractions such as the scale Eiffel Tower at the Parisian and the performance lake show at Wynn Palace.
Different casino properties have different non-gaming offerings. For example, the Venetian Macau (Sands China) is known for holding live concerts; Galaxy Macau (Galaxy Entertainment) is famous for its water attractions and restaurants; City of Dreams (Melco Resorts) has the popular show “House of Dancing Water”; Wynn Macau and Wynn Palace (Wynn Macau) offer art galleries. Detailed analysis of the non-gaming sector is discussed in the following section.
Exhibit 36: Non-gaming amenities offered by different casino properties
Other amenities, stage shows & exhibitions Live Concerts Grand Lisboa Crazy Paris Show Sands Cotai Central Monkey King The Venetian Macau Valentine's Day Concert; MayDay Life Tour; Ballet - Swan Lake Daniel Chan World Tour; Siu Fay Live; Qing Shan & Poon Sow Keng; G.E.M. World Tour; Eric Moo Asia Tour; Bruno Mars World Tour; Celine Dion The Parisian Macau Legends in Concert Galaxy Macau Water Wonderful World;
China Rouge & other house musicians; Broadway Macau VIVA LA Broadway Daily Show Wynn Macau Art Gallery; Artificial Landscape (performance lake, dragon of fortune, tree of prosperity, moon jelly aquarium); Wynn Palace Art Gallery; Artificial landscape (Skycab, performance lake, floral creation) City of Dreams Macau The House of Dancing Water Studio City Macau Golden Reel; Jessica on Cloud mini concerts; Batman Dark Flight Joyce Chu Asia tour MGM Macau Multiple art collections & exhibitions
Source: Company websites, CRSHK
China Renaissance Securities (Hong Kong) Limited 27 February 27, 2018 Initiation of Coverage Non-gaming segment The non-gaming sector includes hotel, food and beverage, shopping, show and other entertainment. Compared with the gaming sector, it is more resilient and less impacted by political issues.
Exhibit 37: Total non-gaming expenditure in Macau by visitors
20,000 40%
16,000 20%
12,000 0% 8,000
-20% 4,000
- -40% 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
Visitor total non-gaming expenditure in Macau YoY growth
Source: DSEC, CRSHK
The Macau government has targeted the development of the non-gaming segment for years as a way to diversify the economy. Data reveals that the segment has become increasingly important. According to DSEC, Macau visitors’ non-gaming expenditure as a percentage of total expenditure increased from 13% in 1Q14 to 19% in 3Q17. Meanwhile, data from the six listed Macau casino operators reveal that non-gaming revenue has gradually increased its weighting in total revenue.
Exhibit 38: Macau visitor non-gaming expenditure as % Exhibit 39: Non-gaming revenue as % of total revenue – of total expenditure data from six listed Macau casino operators
25% 100% 7% 9% 11% 20% 80% 21% 19% 19% 60% 15% 17% 17% 17% 16% 93% 91% 40% 89% 10% 13% 20% 5% 0% 0% 2014 2015 2016 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 % of revenue from non-gaming activities % of revenue from gaming activities Macau visitor non-gaming expenditure as % of total expenditure
Source: DSEC, CRSHK Source: DSEC, CRSHK
China Renaissance Securities (Hong Kong) Limited 28 February 27, 2018 Initiation of Coverage Peer comparison: Macau, Las Vegas and Singapore In this section we compare the non-gaming offerings of Macau with Las Vegas and Singapore. We believe the result shows there is abundant room for Macau to grow its non-gaming segment, especially in the lodging and MICE industry.
1. Lodging Industry
DSEC data shows that the number of overnight visitors and the percentage of overnight visitors to total visitors have both increased in recent years.
Exhibit 40: Number of overnight visitors and percentage in Macau
(mn )
20 56%
16 52%
12 48% 8
44% 4
0 40% 2011 2012 2013 2014 2015 2016 2017
Number of overnight visitors in Macau Number of overnight visitors as % of total visitors
Source: DSEC, CRSHK
Although more visitors choose to stay overnight in Macau, the city offers fewer rooms in comparison with the Las Vegas Strip and Singapore. On the contrary, the city has an imbalanced supply of gaming tables.
Exhibit 41: Hotel room, gaming table, slot machine number comparison
Macau Las Vegas Strip Singapore No. of visitors arrival (‘000) 30,950 42,936 16,404 No. of 4&5 star hotel rooms 29,518 81,170 36,511 No. of gaming tables 6,287 2,664 1,050 No. of slot machines 13,826 31,222 4,700
Source: DICJ, Las Vegas Convention & Visitors Authority, Singapore Tourism Board, CRSHK
Exhibit 42: Hotel room, gaming table, slot machine ratio comparison
Macau Las Vegas Strip Singapore Visitor : hotel room 1,049:1 529:1 449:1 Visitor : gaming table 4,923:1 16,117:1 15,623:1 Room : gaming table 5:1 31:1 35:1 Room : slot machine 2:1 3:1 8:1
Source: DICJ, Las Vegas Convention & Visitors Authority, Singapore Tourism Board, CRSHK
China Renaissance Securities (Hong Kong) Limited 29 February 27, 2018 Initiation of Coverage The reason why there are more gaming tables and slot machines than hotel rooms in Macau can be justified by the large number of same-day visitors. However, given the current high hotel prices and occupancy rates, we believe more hotel supply will help turn some same-day visitors into overnight visitors. In addition, as more non-gaming entertainments have been introduced, we anticipate higher demand for hotel rooms.
2. Meetings, Incentives, Conventions & Exhibitions (MICE)
Apart from the lodging sector, we believe there is also huge potential for Macau to grow its business travel sector, particularly the MICE industry. Statistics from 2016 show that only 5% of travellers visit Macau for business vs. 15% business travellers in Las Vegas.
Exhibit 43: Visitor purpose comparison, Macau vs. Las Vegas (2016)
21% 29%
50% 52% 17%
15% 5% 7% 4%
Vacation Gaming Business Transit Others
Source: DICJ, Las Vegas Convention & Visitors Authority, CRSHK Las Vegas is a more mature MICE destination. The total number of MICE events held in Las Vegas was 21,864 in 2016, vs. 1,276 events in Macau. Total attendance at MICE events in Las Vegas reached 6.3mn vs. 1.7mn in Macau.
Exhibit 44: MICE events held in 2016 Macau Las Vegas MICE event held 1,276 21,864 MICE attendance (‘000) 1,721 6,311
Attendance per event 1,349 304 Source: DSEC, Las Vegas Convention and Visitors Authority, CRSHK
The chart above also shows that MICE events in Macau are relatively bigger in size. The average attendance per MICE event is 1,349 in Macau, vs. 304 in Las Vegas. We believe this suggests there is still enough room for Macau to grow its MICE sector, especially the small & mid-scale MICE sector.
China Renaissance Securities (Hong Kong) Limited 30 February 27, 2018 Initiation of Coverage CRSHK vs consensus & scenario analysis We are more optimistic than the street on Galaxy, Wynn Macau and Melco Resorts. Our earnings projections for Sands China are relatively in line with consensus, while we hold a more conservative view on MGM China and SJM.
Exhibit 45: CRSHK estimates vs consensus
CRSHK EBITDA Consensus EBITDA Diff (%) Company name Ticker Currency FY18E FY19E FY18E FY19E FY18E FY19E Galaxy 27 HK HK$ 16,614 17,529 15,494 16,648 7% 5% SJM 880 HK HK$ 3,392 3,831 3,398 4,524 0% -15% Wynn Macau 1128 HK HK$ 10,931 11,899 10,394 11,405 5% 4% Sands China 1928 HK US$ 2,908 3,145 2,876 3,170 1% -1% MGM China 2282 HK HK$ 5,331 6,608 5,770 7,374 -8% -10% Melco Resorts MLCO US US$ 1,480 1,755 1,453 1,624 2% 8%
CRSHK EPS Consensus EPS Diff (%) Company name Ticker Currency FY18E FY19E FY18E FY19E FY18E FY19E Galaxy 27 HK HK$ 2.97 3.18 2.63 2.90 13% 10% SJM 880 HK HK$ 0.29 0.34 0.33 0.32 -10% 6% Wynn Macau 1128 HK HK$ 1.21 1.44 1.16 1.36 4% 6% Sands China 1928 HK US$ 0.25 0.28 0.25 0.28 2% -1% MGM China 2282 HK HK$ 0.70 1.13 0.75 1.15 -6% -2% Melco Resorts MLCO US US$ 1.20 1.71 1.09 1.37 11% 25% Source: Bloomberg, CRSHK estimates
Our scenario analysis illustrates how our FY18E EBITDA projections and target prices change when we adjust top-line forecasts.
• Bull case: VIP/mass is 10%/5% more than base case VIP/mass GGR • Bear case: VIP/mass is 10%/5% less than base case VIP/mass GGR
Exhibit 46: Scenario analysis
Company Name EV/EBITDA Total Adj. EBITDA(mn) Target Price %TP upside/downside Target Bull Base Bear Bull Base Bear Bull Base Bear Galaxy (HK$) 18x 17,649 16,614 15,579 83.50 79.00 74.60 5.7% 0.0% -5.7% SJM (HK$) 12x 3,634 3,392 3,151 8.30 7.80 7.30 6.6% 0.0% -6.6% Wynn Macau (HK$) 17x 11,741 10,931 10,122 33.90 31.30 28.70 8.4% 0.0% -8.4% Sands China (US$) 20x 3,073 2,908 2,744 54.40 51.30 48.20 6.0% 0.0% -6.0% MGM China (HK$) 19x 5,677 5,331 4,985 26.20 24.50 22.80 6.9% 0.0% -6.9% Melco Resorts (US$) 14x 1,581 1,480 1,379 40.00 37.20 34.30 7.7% 0.0% -7.7% Melco International (HK$) - - - - 37.00 34.70 32.30 6.6% 0.0% -6.9% Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 31 February 27, 2018 Initiation of Coverage Sector risks
1. Political and regulatory risks Gaming is a highly regulated industry with strong oversight by local authorities. The risks can be classified into three categories: risks to gaming, risks to tourism and risks to others.
For gaming:
• Assigning fewer gaming tables than expected to casino operators when they launch a new casino. • Lowering the threshold amount of chips bought for client record, which might discourage players and increase the expenses of casinos. • Crackdown on local pawnshops. For tourism:
• Tightening visa policies to travel to Macau and/or Hong Kong. For others:
• Anti-corruption campaign resulting in slowdown of economic activities and contraction of government spending. • Tightening control on capital outflow such as crackdown on underground banks, which increases money-transferring cost for junkets.
2. Economic risks Mass gaming is less cyclical than VIP, so less sensitive to short-term economic volatility. Potential negative economic impacts on the VIP side include:
• Sudden cool-down of China’s property market. Fewer property transactions in China would create liquidity constraints for property developers, which would adversely impact high rollers with property market backgrounds. • Sudden price drops for commodities such as coal. This would impact the worth of coal miners, and thus junkets’ willingness to extend them credit. • Deterioration of export environment would reduce the need for travel for Guangdong export-driven businessmen. • RMB depreciation would impact high rollers’ consumption power, but as wealthy people do tend to transfer more onshore money to offshore, Macau could see short-term benefits from increasing transactions.
3. Smoking ban The major rationale for the smoking ban was to protect dealers’ health from second- hand smoke. The implementation timeline of this policy in Macau is:
Oct 2014: Smoking forbidden in most areas in casinos except smoking lounges and some VIP rooms, which obtained approvals before the release of smoking-free policy. • VIP players need to go to smoking lounges if their VIP room was not approved for smoking before 2014. • All mass gaming areas in casinos smoking-free except smoking lounges. Jan 2019: Smoking will be forbidden in already-approved VIP rooms. • All VIP and mass gaming areas in casinos will become smoking-free except smoking lounges.
China Renaissance Securities (Hong Kong) Limited 32 February 27, 2018 Initiation of Coverage We think the impact of the smoking ban Macau will be as follows:
• Integrated resorts opened since Oct 2014 will finally be positioned to compete fairly against older properties in attracting high rollers who smoke. • We do not expect high rollers to change gambling destinations from Macau to others just because they cannot smoke at tables but in smoking lounges only. • VIP table yield might be impacted negatively. Smoking provides a way for gamblers to relax when they increase betting size. If they leave the gaming table to visit the smoking lounge, they might lose their desire to keep placing large bets. Therefore, it would take longer for a high roller to lose the same amount of money at the table. Major risks to our forecasts in FY19 and later include: 1) stronger-than-expected reaction from smoking high rollers, who choose other destinations than Macau, and 2) potential hike in operating expenses if casinos pay smoking penalties to the government on behalf of smoking VIP patrons.
4. Regional competition We believe the key characteristics of a successful gaming centre are:
1. Infrastructure: a. Convenient transportation: short time spent on flights and commuting from airport to resorts b. Casino and lodging options: sufficient and decent hotel rooms to attract quality gamblers c. Cluster effect, with at least three casinos 2. Service well embedded in clients’ culture a. Local food b. Local service 3. Regulatory environment a. Safety of gamblers: people can leave safely after winning bets b. Local government support: better for people lose money under their own regime than in foreign territory We believe Macau continues to be the most attractive gaming and leisure destination for Chinese people, among all other destinations in Asia, given the criteria above. However, potential risks to Macau could emerge from:
South Korea: 1) Newly emerging integrated resorts could form a cluster to attract Chinese VIP gamblers, and 2) if relations between China and South Korea improve significantly, visa policy relaxation could induce Chinese people to travel to South Korea.
Vladivostok: 1) NagaCorp (3918 HK, Not Covered) and other gaming licensees, on completion of construction, could form cluster with Tigre de Cristal casino, and 2) tightening economic activities between the Russian Far East and China could see more Chinese businessmen travel to the area.
Manila: 1) If the security situation were to improve, international travellers might have fewer safety concerns, and 2) if better infrastructure were to shorten traveling times between the airport to resorts.
Japan: Once Japan’s integrated resorts are built, they could prove a formidable competitor to Macau casinos, but this is still a distant concern. Japan has yet to identify which cities should have gambling areas, implying the earliest possible time to open a resort is at least four years away.
China Renaissance Securities (Hong Kong) Limited 33 February 27, 2018 Initiation of Coverage 5. Renewal of gaming concessions The current gaming concessions of casino operators will expire as follows:
• SJM, MGM China: Mar 2020 • Galaxy, Sands China, Wynn Macau, Melco Resorts: Jun 2022 We expect all six operators to have their gaming concession renewed. The second wave of mega integrated resorts’ started to open in 2015 with Galaxy Macau’s Phase 2 expansion, implying these new properties would have operated for less than seven years when their license expires. Operators continue to reinvest in Macau through resort expansions, and we consider it unlikely that the local authority would not renew their licenses when they have yet to break even.
Potential risks include:
• Shorter concession periods than the 20 years that was given previously • Lump-sum tax for license renewal • Introduction of additional casino operators • Additional requirements such as cap on dividend payments (some names have been paying more than 100% of net profit), introducing Chinese strategic investors, new capital expenditure commitments, etc.
China Renaissance Securities (Hong Kong) Limited 34 February 27, 2018 Initiation of Coverage Galaxy Entertainment Group Ltd (27 HK, BUY, TP: HK$79.0)
BUY HOLD SELL Large Landbank Offers LT Upside: Initiate at BUY
▪ We initiate coverage at BUY on Galaxy Entertainment, the gaming concessionaire Target Price: HK$79.0 Current Price: HK$67.40 best known for the popular Galaxy Macau, which captures both VIP and mass for its 52-Week High (MM) HK$70.70 extensive non-gaming offerings, as well as Starworld and Broadway Macau. 52-Week Low (MM) HK$36.50 EV (MM) $279,691 ▪ We forecast EBITDA to grow 18%/6% in FY18/19, 7%/5% higher than consensus. Market Cap (MM) $290,743 We believe Galaxy Macau’s growth will be solid despite competition from MGM Cotai. Shares Outstanding (MM) 4,314 ▪ Galaxy currently trades at 17x FY18E EV/EBITDA, 23x P/E with a 1% dividend yield. Average Daily Trading Volume (M) 13.8 Our 12-month TP of HK$79, based on 18x FY18E EV/EBITDA, 1-SD above its five- Source: Factset year average, represents 17% potential upside.
Revenue/EBITDA to grow 13%/18% in FY18E Price Performance We believe Galaxy's revenue growth is broadly in line with Macau GGR; Wynn Palace 80 and MGM Cotai might form a cluster of high-end gaming on the east side of Cotai, but we believe Galaxy Macau will continue to grow on the west side. Galaxy Macau 68 outperformed last year on the rally in the VIP trade, and growth will likely continue this 55 year on mass. Starworld has seen some success in its efforts to attract mass. On stable 42 opex, we project company EBITDA to grow faster at 18% y-y to HK$16,614mn. 30 Long-term growth backed by both local and Hengqin expansion Feb-17May-17 Aug-17 Nov-17 Feb-18 After SJM’s Lisboa Palace, Galaxy is the only casino operator with 1.3mn sqm of 27-HK landbank for Galaxy Macau Phases 3 & 4. Galaxy started Phase 3 construction quietly Hang Seng (rebased) in mid-2017. Given its prudent track record in product design, we believe Phase 3 will be well positioned to succeed. 2) Galaxy is also the only operator with land in Hengqin, Source: FactSet which is a 20- to 30-minute drive from Cotai. Galaxy plans to build a low-density non- gaming resort, possibly with shuttle service to Galaxy Macau. Greatest earnings visibility with least risk in license renewal We believe Galaxy faces the least uncertainty during the concession renewal process for the following reasons: 1) Phases 3 and 4 are likely to be completed in FY19 or later, with three years left to license expiry. In our view, the local authority is unlikely to let Galaxy quit after such a short period of operation. 2) Its Hengqin project is in line with Greater Bay Area Integration Scheme . 3) Galaxy tries to re-invest its earnings into Macau, rather than drawing out as cash dividends, implying a strong commitment. Risks to our EV/ EBITDA-based TP of HK$79, which is equivalent to 27x FY18E P/E, include: 1) greater- than-expected cannibalization of the Cotai market from Wynn Palace and MGM Cotai, and 2) greater-than-expected increase in marketing expenses to promote the VIP and retail businesses. Summary financial data Highlights 2017E 2018E 2019E 2020E Revenue (MM) (HK$) 62,084 70,005 73,404 78,132 EBITDA (MM) (HK$) 14,110 16,614 17,529 18,502 Research Team EPS (HK$) 2.37 2.97 3.18 3.39 Angela Han Lee EV/EBITDA 20x 17x 16x 15x [email protected] P/E 28x 23x 21x 20x Nate Deng FCF yield 4% 5% 5% 5% [email protected] Dividend yield 1.0% 1.0% 1.0% 2.0% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 35 February 27, 2018 Initiation of Coverage Company introduction
Company background One of the six gaming concessionaires in Macau, Galaxy Entertainment was previously a construction materials company named K Wah Construction. The Lui family, headed by Lui Che-woo, injected gaming concession into the company and changed the name to Galaxy Entertainment in 2005. Its gaming concession expires in Jun 2022.
There are six casinos under Galaxy’s license currently. Galaxy operates Starworld in the Peninsula and Galaxy Macau in Cotai. It acquired Grand Waldo in Cotai in 2013 and relaunched it as Broadway Macau after renovations. Together with its “City Club” casinos—Waldo Casino, President Casino and Rio Casino, located in hotels of the same name—Galaxy had 22% market share in 2017.
Galaxy also actively pursues business expansion. Projects currently under way include Galaxy Macau Phases 3 and 4 in Macau, a low-density resort in Hengqin, a casino project in the Philippines and potential expansion into the Japan gaming market.
Auditor. The company employs PricewaterhouseCoopers as its auditor.
Exhibit 1: Ownership structure
Francis Lui Others
42% 58% Galaxy (27 HK)
100% 100% 100% GGR sharing Galaxy Macau Broadway Macau Starworld Satellite casinos
Macau Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 36 February 27, 2018 Initiation of Coverage Properties
Galaxy Macau The No. 1 property in Macau by market share in FY18E, Galaxy Macau opened in 2011, followed by phase 2 expansion in 2015. It offers 750 gaming tables, 2,900 slot machines and 3,429 hotel rooms. It is one of the more popular integrated resorts in Cotai, in our view, with abundant non-gaming offerings targeted across all client categories: high rollers like the property’s high-end hotels such as Ritz Carlton and Banyan Tree, premium mass gamblers like the casino layout and wide range of dining options, and family-oriented tourists like the artificial beach and water attractions. Although Cotai faces new supply in FY18E, such as the MGM Cotai and Morpheus, we believe Galaxy Macau’s revenue/EBITDA will continue to grow at 14%/18% in FY18E.
Exhibit 2: Galaxy Macau (after Phase 2 expansion) Exhibit 3: FY18E revenue and property EBITDA
(HK$mn)
60,000 3,056
40,000 20,670
20,000 26,739 13,093 - Revenue Adj. EBITDA
VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company data Source: CRSHK estimates
Broadway Macau Located next to Galaxy Macau, this was previously the Grand Waldo, a “City Club” casino of Galaxy. Galaxy acquired the property in 2013 and rebranded it as Broadway Macau with a footbridge connected to Galaxy Macau. It offers 10 gaming tables, 210 slot machines and 314 hotel rooms. Under the Galaxy Macau umbrella, Broadway Macau represents the lowest-end hotel with a HK$700 room rate on weekdays. Revenue and earnings contribution to Galaxy is negligible, because tourists sleep in Broadway Macau but spend more time in Galaxy Macau for gambling and entertainment.
China Renaissance Securities (Hong Kong) Limited 37 February 27, 2018 Initiation of Coverage
Exhibit 4: Broadway Macau Exhibit 5: Connection to Galaxy Macau by footbridge
Source: Company data Source: Booking.com
Starworld One of the best yielding properties in the Peninsula, Starworld opened in 2006 offering 255 gaming tables, 362 slot machines and 509 hotel rooms. Starworld’s clients are of a different kind from Galaxy Macau: located in the Peninsula and with a longer history, Starworld is well positioned among day trippers. It focused on junket players in the past, but now targets mass as well, by adding live multi gaming machines in 2Q17. Starworld’s performance has started to improve since then, and we expect Starworld’s revenue/EBITDA to continue to grow at 9%/9% in FY18E.
Exhibit 6: Starworld Exhibit 7: FY18E revenue and property EBITDA
(HK$mn)
20,000 203 15,000 6,270 10,000
5,000 9,158 3,272 - Revenue Adj. EBITDA
VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Booking.com Source: CRSHK estimates
“City Club” casinos Galaxy has three “City Club” casinos, which are operated by third parties under Galaxy’s gaming license: President Casino, Waldo Casino and Rio Casino. Galaxy does GGR-sharing with these casinos, but the contribution is small, with HK$116mn FY18E EBITDA. “City Club” casinos are relatively old and small with limited non-
China Renaissance Securities (Hong Kong) Limited 38 February 27, 2018 Initiation of Coverage gaming offerings, so we expect earnings at these properties to remain stagnant in the future, losing market share to Cotai integrated resorts.
Under development – Galaxy Macau Phases 3 & 4 Galaxy is the only gaming concessionaire with a large landbank for expansion: Galaxy Macau can be doubled in size, offering an additional 4,200 hotel rooms and MICE facilities. Phases 3 & 4 should also have gaming areas, while the number of gaming tables will be confirmed right before the opening after DICJ’s approval.
In terms of timeline, Galaxy has already kicked off the construction of Phase 3 in mid-2017. We project Phases 3 & 4 to be added in stages from 2H19E.
Exhibit 8: Location of Phases 3 & 4
Galaxy Macau 1 City of Dreams Broadway Venetian 460m Wynn Palace Macau Galaxy Macao Macau 2 500m Plaza Sands MGM Macao Cotai Cotai Galaxy Macau 3&4 Central 2H19E Parisian Macao 600m 750m Lisboa Palace 1H19E
Studio City
Lotus Bridge
Border Gate Source: CRSHK
Exhibit 9: Construction site (1) Exhibit 10: Construction site (2)
Source: CRSHK Source: CRSHK
China Renaissance Securities (Hong Kong) Limited 39 February 27, 2018 Initiation of Coverage Landbank – Hengqin Island Galaxy is the only operator with a landbank in Hengqin Island, for low-density resort construction. A comprehensive plan has not been released yet. When completed, the resort will likely be another growth driver for Galaxy Macau. The property is only a 20- to 30-minute drive from Galaxy Macau; gaming is not allowed in Hengqin Island, as a part of mainland China.
China Renaissance Securities (Hong Kong) Limited 40 February 27, 2018 Initiation of Coverage Project EBITDA CAGR of 11% over FY17-19E
Expect FY18E/19E revenue to grow 13%/5% We project Galaxy’s top line to grow steadily in FY18E, organically. We expect VIP GGR to grow at 16% y-y in FY18E, faster than the Macau’s overall VIP GGR growth. Mass GGR growth will likely also be strong at 10% y-y, although there is no additional supply in Galaxy.
Exhibit 11: Revenue projection Exhibit 12: Revenue breakdown by properties
(HK$mn) (HK$mn)
100,000 20% 60,000
80,000 16% 45,000
60,000 12% 30,000 40,000 8%
15,000 20,000 4%
0 0% 0 FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E StarWorld Galaxy Macau 1&2 Broadway Macau Total revenue y-y Galaxy Macau 3&4 Cityclub casinos
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
Expect FY18E/19E EBITDA to grow 18%/6%, on operating leverage Without new supply, we expect steady opex for Galaxy’s properties, which results in faster growth of EBITDA than top line. Despite the competition from Cotai east side, we are confident that Galaxy Macau’s market-leading position will not be impacted, as its cluster will expand when Phases 3 & 4 opens later.
Exhibit 13: Property EBITDA projection Exhibit 14: EBITDA breakdown by properties
(HK$mn) (HK$mn) 20,000 40% 15,500
16,000 30% 11,500
12,000 20% 7,500 8,000
10% 3,500 4,000
(500) 0 0% FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E StarWorld Galaxy Macau 1&2 Broadway Macau Adjusted EBITDA y-y Galaxy Macau 3&4 Cityclub casinos
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 41 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis We expect Galaxy’s operating cashflow to continue growing steadily, on stable growth of Galaxy Macau and faster growth of Starworld after some parts transform into mass-focused areas for day trippers. Although construction of Galaxy Macau Phase 3 is currently under way, we see limited impact from this on free cashflow’s growth.
For dividend payment, we model a 30% payout ratio, as management has a relatively conservative payout policy compared to peers. Galaxy prefers to keep cash in hand for Phases 3 & 4 construction and a potential footprint in Hengqin. Galaxy is currently sitting on net cash, which we expect to grow from HK$22bn in FY17E to HK$50bn in FY20E.
Exhibit 15: Key financials of cashflow and balance sheet
HK$mn FY16 FY17E FY18E FY19E FY20E Operating cashflow 12,732 15,028 17,680 18,092 19,466 Net income 6,283 10,105 12,652 13,568 14,483 Depreciation and amortisation 3,573 3,635 3,639 3,783 3,940 Change in working capital 2,693 1,095 1,205 566 876 Others 183 193 184 175 167
Investing cashflow (17,337) (3,354) (4,565) (4,630) (3,969) CAPEX (1,221) (3,709) (5,096) (5,347) (4,864) Others (16,116) 356 531 717 896
Financing cashflow 2,430 (3,453) (4,391) (5,072) (5,503) Net proceeds from banks and others 4,714 (834) (986) (1,150) (1,308) Dividend paid (1,408) (2,625) (3,414) (3,933) (4,208) Others and forex adjustment (876) 6 9 11 13
Net change in cash (2,176) 8,222 8,724 8,390 9,994 Free cashflow 11,821 11,496 12,724 12,748 14,513
Cash at year-end 19,956 28,178 36,902 45,292 55,287 Borrowings 6,135 5,849 5,577 5,319 5,074 Net debt (cash) (13,821) (22,329) (31,325) (39,973) (50,213) Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 42 February 27, 2018 Initiation of Coverage Valuation
Currently trading at 17x FY18E EV/EBITDA The company is currently trading at 17x FY18E EV/EBITDA, 23x P/E and 1% dividend yield. It is trading at a slightly premium to its Macau peers’ average: it used to trade at a discount to peers due to its relatively shorter track record, but the discount has been narrowed gradually, thanks to its strong execution and solid net cash balance.
Exhibit 16: 1-year forward EV/EBITDA Exhibit 17: 1-year forward P/E
25 42
20 34
15 26
10 18
5 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 10 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd EV/EBITDA Mean 1-yr fwd P/E Mean
Source: Bloomberg, company data, CRSHK estimates Source: Bloomberg, company data, CRSHK estimates
Initiating coverage at BUY with TP of HK$79 Our 12-month TP is based on 18x FY18E EV/EBITDA, 1-SD above its five-year historical trading average to reflect: 1) upside from Galaxy Macau Phases 3 & 4 and 2) solid net cash position for future investment, implying more commitment to Macau society and a higher likelihood of getting its license renewed. Our TP implies 27x/25x FY18E/19E P/E and 1%/1% dividend yield. We believe our target valuation is well backed by continued margin expansion at Galaxy Macau. Our earnings do not reflect any contribution from Galaxy Macau Phases 3 & 4 and the Hengqin project. We see strong upside in Galaxy’s share price to our TP, and believe Galaxy is one of the best companies for long-term investors looking for sustainable business growth plus greater certainty in license renewal.
Catalysts 1) Updates on Galaxy Macau Phase 3, and 2) continued improvement of high-end consumption from China, backing VIP and premium mass growth in Macau.
Risks 1. Cannibalization of Cotai market from Wynn Palace and MGM Cotai is a concern. Both competitors target the high-end market, where Galaxy’s major profits come from. 2. Potential hike in marketing expenses. With more peers joining the Cotai market, Galaxy might try to keep its hard-core gamblers by increasing cash rebate and complimentary services for VIP and premium mass gamblers, dragging its margin.
China Renaissance Securities (Hong Kong) Limited 43 February 27, 2018 Initiation of Coverage Financial statements
Balance Sheet Income statement HK$ mn FY17E FY18E FY19E FY20E HK$ mn FY17E FY18E FY19E FY20E Current assets 30,560 39,536 48,034 58,189 Total revenue 62,084 70,005 73,404 78,132 Cash & equivalents 28,178 36,902 45,292 55,287 Gaming tax and levy (21,895) (24,800) (26,058) (27,656) Account receivables 1,861 2,098 2,200 2,342 Employee benefit expenses (7,248) (7,611) (7,991) (8,790) Inventories 188 201 208 227 D&A (3,635) (3,639) (3,783) (3,940) Other current assets 334 334 334 334 Other operating expenses (19,233) (21,487) (22,369) (23,801) Non-current assets 44,303 45,760 47,323 48,247 Adjusted EBITDA 14,110 16,614 17,529 18,502 PPE 33,837 35,529 37,305 38,425 Operating profit 10,072 12,469 13,203 13,945 Leasehold land 4,966 4,877 4,788 4,699 Interest expense (193) (184) (175) (167) Intangible assets 966 820 696 591 Interest income 355 531 717 896 Other non-current assets 4,533 4,533 4,533 4,533 Other non-operating items - - - - Total assets 74,863 85,295 95,357 106,436 Pre-tax profit 10,235 12,816 13,744 14,673 Current liabilities 19,443 20,633 21,054 21,850 Income tax expense (124) (155) (166) (177) ST borrowings 5,328 5,062 4,809 4,568 After-tax profit 10,111 12,661 13,578 14,496 Account payables 14,061 15,518 16,192 17,229 Non-controlling interests (6) (9) (11) (13) Other current liabilities 53 53 53 53 Net profit to S/H 10,105 12,652 13,568 14,483 Non-current liabilities 1,071 1,066 1,061 1,056 Basic EPS (HK$) 2.37 2.97 3.18 3.39 LT borrowings 521 516 510 505 DPS (HK$) 0.71 0.89 0.95 1.02 Other non-current liabilities 551 551 551 551 Total liabilities 20,514 21,699 22,115 22,906 Common stock – par value 20,106 20,106 20,106 20,106 Ratios Reserves 33,719 42,958 52,592 62,868 FY17E FY18E FY19E FY20E Non-controlling interests 524 533 543 556 y-y Shareholders’ equity 53,826 63,064 72,699 82,974 Total revenue 18% 13% 5% 6% Total equity and liabilities 74,863 85,295 95,357 106,436 Adjusted EBITDA 36% 18% 6% 6% Op profit 63% 24% 6% 6% Net profit 61% 25% 7% 7% Statement of cash flows Profitability HK$ mn FY17E FY18E FY19E FY20E EBITDA margin 23% 24% 24% 24% Operating cashflow 15,028 17,680 18,092 19,466 OP margin 16% 18% 18% 18% Net income 10,105 12,652 13,568 14,483 NP margin 16% 18% 18% 19% D&A 3,635 3,639 3,783 3,940 ROE 19% 20% 19% 18% Finance costs 193 184 175 167 ROIC 22% 27% 28% 29% Change in working capital 1,095 1,205 566 876 Liquidity Other operating cashflow - - - - Debt/equity 11% 9% 7% 6% Investing cashflow (3,354) (4,565) (4,630) (3,969) Net debt/equity -42% -50% -55% -61% CAPEX (3,709) (5,096) (5,347) (4,864) Current ratio 1.6x 1.9x 2.3x 2.7x Interest received 355 531 717 896 Quick ratio 1.5x 1.9x 2.3x 2.6x Other investing cashflow 0 0 0 0 Operating efficiency Financing cashflow (3,453) (4,391) (5,072) (5,503) Asset turnover 0.8x 0.8x 0.8x 0.7x Net from borrowings (834) (986) (1,150) (1,308) Valuation ratios Share issue - - - - EV/EBITDA 20x 17x 16x 15x Dividend paid (2,625) (3,414) (3,933) (4,208) P/E 28x 23x 21x 20x Other financing cashflow 6 9 11 13 FCF yield 4% 5% 5% 5% Foreign exchange rate adj. - - - - Dividend yield 1% 1% 1% 2% Net change in cash 8,222 8,724 8,390 9,994 P/B 5x 5x 4x 3x Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 44 February 27, 2018 Initiation of Coverage SJM Holdings Ltd (880 HK, HOLD, TP: HK$7.8)
BUY HOLD SELL High Yield Potential but Limited Upside: Initiate at Hold
▪ SJM is Macau's oldest gaming concessionaire, operating the Grand Lisboa and Target Price: HK$7.8 Current Price: HK$7.51 other old casinos in Macau. Its Lisboa Palace integrated resort is currently under 52-Week High (MM) HK$8.68 construction in Cotai and is likely to open in 2019 52-Week Low (MM) HK$5.96 EV (MM) $33,529 ▪ We forecast EBITDA to grow 11%/13% in FY18E/19E, lower than consensus by Market Cap (MM) $42,493 0%/15%, on a more conservative ramp-up assumption Shares Outstanding (MM) 5,658 ▪ Currently trades at 11x FY18E EV/EBITDA, 26x P/E with a 2% dividend yield. We Average Daily Trading Volume (M) 19.9 initiate at Hold with a 12-month TP of HK$7.80 based on 12x FY18E EV/EBITDA, in Source: Factset line with its five-year average
FY18 result is still under pressure; we estimate GGR to grow 5% in FY18 Price Performance SJM’s self-operated and third-party casinos are located in Peninsula and have a 9.5 relatively long history. Since gaming traffic is moving from Peninsula to Cotai integrated resorts, SJM’s casinos have lost market share steadily over the past five years. We 8.5 project SJM’s market share to slide from 16% in FY17 to 15% in FY18E, despite Jai 7.5 Alai’s turnaround from loss-making to profit after its hotels became operational in 4Q17. 6.5 We forecast both VIP and mass gamblers to grow slightly at 5% y-y in FY18, resulting in EBITDA growth of 11%, thanks to operating leverage. 5.5 Lisboa Palace represents hope, with super VIPs the likely target Feb-17May-17 Aug-17 Nov-17 Feb-18 880-HK Lisboa Palace was originally guided to open in late 2018, but construction was impacted Hang Seng (rebased) by Typhoon Hato in 3Q17. We model Lisboa Palace to open in 2Q19. The property plans to have luxurious "sky casinos", which we believe could be designed partly to rival the Source: FactSet luxurious options of Wynn Palace. Therefore, we believe the opening of Lisboa Palace will enable SJM to attract and hold new Cotai high rollers, adding a much-needed new engine of growth. Shares look inexpensive, but unlikely to re-rate soon We initiate at Hold with a TP of HK$7.80, based on 12x FY18E EV/EBITDA, which we believe values SJM’s bumpy earnings fairly in the near term. Our TP is equivalent to 27x FY18E P/E with a 2% dividend yield. SJM’s strong commitment to dividends is likely to provide downside protection, but we believe underperformance against its peers and continued market share loss may trigger profit-taking on any price strength prior to Lisboa Palace’s earnings contribution. Downside risks: 1) Greater-than-expected migration of market share from Peninsula to Cotai, 2) delay of Lisboa Palace’s opening, and 3) any significant change in ownership structure or management team.
Summary financial data Highlights 2017E 2018E 2019E 2020E Revenue (MM) (HK$) 41,495 43,453 52,492 59,227 EBITDA (MM) (HK$) 3,061 3,392 3,831 4,759 Research Team EPS (HK$) 0.27 0.29 0.34 0.52 Angela Han Lee EV/EBITDA 12x 11x 10x 8x [email protected] P/E 28x 26x 23x 15x Nate Deng FCF yield NA NA 9% 9% [email protected] Dividend yield 2.0% 2.0% 3.0% 4.0% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 45 February 27, 2018 Initiation of Coverage Company introduction
Company background One of the six gaming concessionaires in Macau, SJM was the sole casino operator for 40 years until 2002, led by Stanley Ho. The Ho family continues to be the major shareholder in SJM after its concession was renewed. The current gaming concession expires in Mar 2020, the same as MGM China, but earlier than other Macau peers.
Currently, there are 22 casinos operating under SJM’s license, out of a total of Macau’s 41 casinos. Most of them are satellite casinos. SJM’s most well-known casino is Grand Lisboa. SJM had 15% market share in 2017.
SJM’s is currently focused on the construction of Lisboa Palace in Cotai, which we project should open its doors in 1H19. SJM also seeks potential expansion in the Japan gaming market.
Auditor. The company employs Deloitte as its auditor.
Exhibit 1: Ownership structure
STDM Angela Leong Others
54% 9% 37% SJM (880 HK)
100% 100% GGR sharing 100% Other self- Lisboa Grand Lisboa Satellite casinos promoted casinos Palace
Macau Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 46 February 27, 2018 Initiation of Coverage Properties
Grand Lisboa This is one of the most visited properties in Peninsula. Grand Lisboa opened in 2008 next to the old Lisboa Casino, offering 395 gaming tables, 814 slot machines and 413 hotel rooms. Grand Lisboa is SJM’s most representative property, and it is a landmark for tourists. Its dining offerings are some of the best in Macau, with several Michelin-starred restaurants. Despite competition from Cotai’s integrated resorts, we think Grand Lisboa’s revenue/EBITDA will maintain steady growth of 8%/1% in FY18E.
Exhibit 2: Grand Lisboa Exhibit 3: FY18E revenue and property EBITDA
(HK$mn) 25,000
20,000 553 15,000 5,534 10,000
5,000 10,605
- 1,750 Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company data Source: CRSHK estimates
Other self-promoted and satellite casinos Representative self-promoted casinos are the old Lisboa and Oceanus at Jai Alai. SJM’s casinos are all on Peninsula side and are relatively old and small in size. Although Jai Alai underwent renovation and re-opened in 2017, we believe the overall trend of market share loss for SJM will continue.
SJM also has satellite casinos, which are under SJM’s license but operated by third parties. The most representative one is Macau Fisherman’s Wharf, with casinos operating with two licenses under SJM’s umbrella: Casino Babylon and Casino Legend Palace. SJM does GGR-sharing with the third-party casinos without any expense sharing, which makes lending its gaming license to third parties a profitable venture, but the market for third-party casinos appears to be shrinking. Their main clients have been high rollers who have been visiting their casinos for two decades; however, we do not think newly emerging clients will be inclined to leave the Cotai integrated resorts to become their fans. Therefore, we project their market share will continue shrinking and that they will go through gradual market consolidation.
China Renaissance Securities (Hong Kong) Limited 47 February 27, 2018 Initiation of Coverage In development – Lisboa Palace SJM will finally gain a foothold in Cotai with the opening of Lisboa Palace, which we anticipate to be in 1H19. It will offer 1,990 hotel rooms under three brands: the Lisboa Palace Hotel, Palazzo Versace Macau, and the Karl Lagerfeld Hotel. The number of gaming tables and slots is still pending approval by DICJ, and we currently estimate it to have 125 new-to-market gaming tables, similar to MGM Cotai. The property likely will offer an ultra-high-end atmosphere for high rollers. We expect Lisboa Palace to generate FY19E revenue of HK$8,362mn.
Exhibit 4: Lisboa Palace impression Exhibit 5: Location
Galaxy Macau 1 City of Dreams Broadway Venetian 460m Wynn Palace Macau Galaxy Macao Macau 2 500m Plaza Sands MGM Macao Cotai Cotai Galaxy Macau 3&4 Central 2H19E Parisian Macao 600m 750m Lisboa Palace 1H19E
Studio City
Lotus Bridge
Border Gate
Source: Company data Source: CRSHK
China Renaissance Securities (Hong Kong) Limited 48 February 27, 2018 Initiation of Coverage Forecast EBITDA CAGR of 12% over FY17-19E
We expect FY18E/19E revenue to grow 5%/21% We expect SJM to face further market share loss in FY18E due to MGM Cotai’s opening and accelerating growth of Macau mass GGR in Cotai. Therefore, we believe Peninsula-only SJM is unlikely to benefit from continued Macau growth projected for 2018. However, the company should experience strong growth in FY19E, when its Cotai exposure comes onstream at Lisboa Palace.
Exhibit 6: Revenue projections Exhibit 7: Revenue breakdown by property
(HK$mn) (HK$mn) 75,000 30% 25,000
60,000 20% 20,000
45,000 10% 15,000
30,000 0% 10,000
15,000 -10% 5,000
0 -20% 0 FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Grand Lisboa Other self-promoted casinos Total revenue y-y Lisboa Palace Satellite casinos Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
Expecting FY18E/19E EBITDA to grow 11%/13% We expect operating leverage growth in FY18E: opex should stay unchanged while the GGR of SJM is likely to grow mildly at 5%. We do not expect strong growth in FY19 either, when we project EBITDA to grow slower than the top line. Lisboa Palace is a large property with 1,990 rooms and we think pre-opening input could be large.
Exhibit 8: Property EBITDA projections Exhibit 9: EBITDA breakdown by property
(HK$mn) (HK$mn) 5,000 30% 2,500
2,000 4,000 20% 1,500 3,000 10% 1,000
2,000 0% 500
0 1,000 -10% (500) 0 -20% FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Grand Lisboa Other self-promoted casinos Adjusted EBITDA y-y Lisboa Palace Satellite casinos
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 49 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis We expect SJM’s operating cash flow to start improving in FY19, after Lisboa Palace’s opening. Since the company is still in a heavy capex cycle in FY18, we expect free cash flow to be negative.
However, the company is sitting on abundant cash and management used to pay 58% of its earnings as dividends. We believe SJM will maintain its dividends, without impacting its HK$6bn net cash. With contributions from Lisboa Palace, we forecast SJM’s net cash to reach HK$8bn in FY20E.
Exhibit 10: Key financials of cashflow and balance sheet
HK$mn FY16 FY17E FY18E FY19E FY20E Operating cashflow 3,974 2,770 3,593 5,850 6,088 Net income 2,327 1,549 1,662 1,907 2,945 Depreciation and amortisation 1,114 1,160 1,509 1,709 1,769 Change in working capital 516 153 468 2,254 1,424 Others 17 (92) (47) (20) (50)
Investing cashflow (3,306) (4,794) (4,601) (2,577) (2,642) CAPEX (6,881) (4,963) (4,731) (2,687) (2,784) Others 3,575 169 131 110 142
Financing cashflow (1,529) (1,341) (976) (1,066) (1,349) Net proceeds from banks and others (198) (37) (37) (37) (37) Dividend paid (1,188) (1,290) (925) (1,014) (1,295) Others and forex adjustment (144) (14) (15) (16) (16)
Net change in cash (862) (3,365) (1,984) 2,207 2,097 Free cashflow (2,948) (1,749) (871) 3,398 3,398
Cash at year-end 9,510 6,146 4,162 6,368 8,465 Borrowings 539 539 539 539 539 Net debt (cash) (8,971) (5,607) (3,623) (5,829) (7,926) Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 50 February 27, 2018 Initiation of Coverage Valuation
Currently trading at 11x FY18E EV/EBITDA The company is currently trading at 11x FY18E EV/EBITDA, 26x P/E and a 2% dividend yield. It is trading at a discount to its Macau peers’ average, in line with its historical trend, due to continued market share migration from Peninsula casinos to the Cotai integrated resorts.
Exhibit 11: 1-year forward EV/EBITDA Exhibit 12: 1-year forward P/E
34 19
16 28
13 22 10 16 7
4 10 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd EV/EBITDA Mean 1-yr fwd P/E Mean
Source: Bloomberg, company data, CRSHK estimates Source: Bloomberg, company data, CRSHK estimates
Initiate at Hold with TP of HK$7.80 Our 12-month TP is based on 12x FY18E EV/EBITDA, in line with its five-year historical trading average. Our TP implies 27x/23x FY18E/19E P/E and 2%/3% dividend yield. We believe our historical-average target valuation is fair. Although Lisboa Palace should boost SJM’s market share and earnings in FY19E, we believe it faces another tough year of market share loss in FY18 and it will likely underperform its Macau peers.
Catalysts 1) Visibility on opening date for Lisboa Palace, and 2) increase in number of low-end mainland travellers to Peninsula side through the train station near Gongbei border gate.
Risks 1. Greater-than-expected migration of market share from Peninsula to Cotai. We currently expect Grand Lisboa to maintain its GGR with slightly positive growth in the future. However, if Cotai grabs more market share than expected, Grand Lisboa might suffer from GGR decline, which could translate into a much steeper drop in earnings than revenue due to sticky opex. 2. Unanticipated delays to the Lisboa Palace opening could cause earnings downgrades from the market. 3. Any significant change in ownership structure or reshuffling of management team represents a major risk for long-term investors.
China Renaissance Securities (Hong Kong) Limited 51 February 27, 2018 Initiation of Coverage Financial statements
Balance Sheet Income statement HK$ mn FY17E FY18E FY19E FY20E HK$ mn FY17E FY18E FY19E FY20E Current assets 11,676 9,764 12,305 14,652 Total revenue 41,495 43,453 52,492 59,227 Cash & equivalents 6,146 4,162 6,368 8,465 Gaming tax and levy (15,887 (16,624 (20,046 (22,573 ) ) ) ) Account receivables 1,470 1,539 1,860 2,098 Marketing expenses (14,828 (15,959 (19,279 (21,752 ) ) ) ) Inventories 69 72 87 98 Inventories consumed (259) (269) (325) (366) Other current assets 3,991 3,991 3,991 3,991 Other operating expenses (9,100) (9,008) (10,966 (11,630 ) ) Non-current assets 27,468 30,642 31,567 32,527 Adjusted EBITDA 3,061 3,392 3,831 4,759 PPE 23,657 26,874 27,841 28,844 Operating profit 1,420 1,593 1,877 2,906 Land use rights 2,480 2,437 2,395 2,352 Interest expense (37) (37) (37) (37) Intangible assets 2 2 2 2 Interest income 129 83 56 86 Other non-current assets 1,330 1,330 1,330 1,330 Other non-operating items 45 32 22 16 Total assets 39,143 40,406 43,873 47,179 Pre-tax profit 1,558 1,672 1,919 2,971 Current liabilities 12,870 13,410 15,999 17,672 Income tax expense (22) (24) (28) (43) ST borrowings 539 539 539 539 After-tax profit 1,535 1,648 1,891 2,929 Account payables 11,776 12,316 14,905 16,578 Non-controlling interests 14 15 16 16 Other current liabilities 555 555 555 555 Net profit to S/H 1,549 1,662 1,907 2,945 Non-current liabilities 1,187 1,187 1,187 1,187 Basic EPS (HK$) 0.27 0.29 0.34 0.52 LT borrowings - - - - DPS (HK$) 0.16 0.17 0.20 0.30 Other non-current liabilities 1,187 1,187 1,187 1,187 Total liabilities 14,057 14,596 17,185 18,859 Common stock – par value 11,238 11,238 11,238 11,238 Ratios Reserves 13,775 14,513 15,406 17,056 FY17E FY18E FY19E FY20E Non-controlling interests 74 59 44 27 y-y Shareholders’ equity 25,087 25,810 26,687 28,321 Total revenue -1% 5% 21% 13% Total equity and liabilities 39,143 40,406 43,873 47,179 Adjusted EBITDA -10% 11% 13% 24% Op profit -35% 12% 18% 55% Net profit -33% 7% 15% 54% Statement of cash flows Profitability HK$ mn FY17E FY18E FY19E FY20E EBITDA margin 7% 8% 7% 8% Operating cashflow 2,770 3,593 5,850 6,088 OP margin 3% 4% 4% 5% Net income 1,549 1,662 1,907 2,945 NP margin 4% 4% 4% 5% D&A 1,160 1,509 1,709 1,769 ROE 6% 6% 7% 10% Finance costs (92) (47) (20) (50) ROIC 5% 5% 5% 8% Change in working capital 153 468 2,254 1,424 Liquidity Other operating cashflow - - - - Debt/equity 2% 2% 2% 2% Investing cashflow (4,794) (4,601) (2,577) (2,642) Net debt/equity -22% -14% -22% -28% CAPEX (4,963) (4,731) (2,687) (2,784) Current ratio 0.9x 0.7x 0.8x 0.8x Interest received 129 83 56 86 Quick ratio 0.6x 0.4x 0.5x 0.6x Other investing cashflow 40 47 54 56 Operating efficiency Financing cashflow (1,341) (976) (1,066) (1,349) Asset turnover 1.1x 1.1x 1.2x 1.3x Net from borrowings (37) (37) (37) (37) Valuation ratios Share issue - - - - EV/EBITDA 12x 11x 10x 8x Dividend paid (1,290) (925) (1,014) (1,295) P/E 28x 26x 23x 15x Other financing cashflow (14) (15) (16) (16) FCF yield n.a. n.a. 9% 9% Foreign exchange rate adj. - - - - Dividend yield 2% 2% 3% 4% Net change in cash (3,365) (1,984) 2,207 2,097 P/B 2x 2x 2x 2x Source: Bloomberg, company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 52 February 27, 2018 Initiation of Coverage Wynn Macau Ltd (1128 HK, BUY, TP: HK$31.3)
BUY HOLD SELL Luxury Market Leader Stays the Course: Initiate at BUY
▪ We initiate coverage of luxury gaming operator Wynn Macau at BUY, as we expect Target Price: HK$31.3 Current Price: HK$27.20 its leading position in VIP to strengthen along with progress in premium mass, and 52-Week High (MM) HK$30.25 despite recent misconduct allegations against its former chairman and CEO 52-Week Low (MM) HK$13.50 EV (MM) $168,525 ▪ We forecast EBITDA to grow 27%/9% in FY18/19, 5%/4% higher than consensus. We Market Cap (MM) $141,332 expect Wynn Macau’s earnings to remain exceptional this year, thanks to the gradual Shares Outstanding (MM) 5,196 ramp-up of the premium mass business at Wynn Palace Average Daily Trading Volume (M) 17.0 ▪ The stock currently trades at 15x FY18E EV/EBITDA, 23x P/E and a 2% dividend Source: Factset yield. Our 12-month TP of HK$31.30 is based on 17x FY18E EV/EBITDA, in line with its five-year average, to reflect accelerating earnings growth
Price Performance Much credit for VIP recovery goes to Wynn Palace, and its growth has just begun 35 The launch of the highly luxurious Wynn Palace property coincided with China's economic recovery, enabling Wynn Macau to capture newly emerging high rollers. High 29 rollers at Wynn Palace are different from those client groups visiting Wynn Macau's 22 property on the Peninsula, implying the emergence of a new VIP market. We believe 16 Wynn Palace’s ramp-up is not over yet; it targets the premium mass business, too, and has recruited hosts and built a database. Since 4Q17, these efforts started to translate 10 into numbers, and we expect Wynn Palace’s FY18 net revenue and property EBITDA Feb-17May-17 Aug-17 Nov-17 Feb-18 contribution to reach 52%/50% of the company's total, from 46%/41% in FY17. 1128-HK Hang Seng (rebased) EBITDA to grow 27%/9% in FY18E/19E We project net revenue to grow faster than Macau GGR in FY18E/19E, thanks to Wynn Source: FactSet Palace. MGM Cotai might be considered as a risk, but we see less possibility of direct competition here; Wynn Palace’s products are more luxurious and thus we believe target customers are well differentiated. Departure of Steve Wynn made waves, but daily operations not impacted Wynn Macau's management team has a strong track record; now that construction of its resorts is complete, we don't foresee any major changes and thus limited impact on FY18E earnings from the recent stepping down of chairman and CEO Steve Wynn. However, long-term prospects are more uncertain, such as license renewal. We think introduction of suitable strategic investors could be a re-rating factor, which could secure its license renewal. Risks to our EV/EBITDA-based TP of HK$31.30, equivalent to 26x FY18E P/E, include: 1) Greater-than-expected competition in VIP and premium mass from MGM Cotai, 2) unfavorable litigation results driving changes to management structure, and 3) negative outcome in the upcoming license renewal process in 2022. Summary financial data Highlights 2017E 2018E 2019E 2020E Revenue (MM) (HK$) 35,843 42,293 44,218 45,890 EBITDA (MM) (HK$) 8,609 10,931 11,899 12,708 Research Team EPS (HK$) 0.71 1.21 1.44 1.65 Angela Han Lee EV/EBITDA 20x 15x 14x 13x [email protected] P/E 38x 23x 19x 17x Nate Deng FCF yield 5% 6% 6% 7% [email protected] Dividend yield 2.0% 2.0% 3.0% 3.0% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 53 February 27, 2018 Initiation of Coverage Company introduction
Company background Wynn Macau, one of the six gaming concessionaires in Macau, is a subsidiary of Wynn Resorts (WYNN US). Its gaming concession expires in Jun 2022.
There are two casinos under Wynn Macau’s license now: Wynn Macau in Peninsula (called Wynn Peninsula here to differentiate from the company name) and Wynn Palace in Cotai. Wynn Macau had 16% market share in 2017.
Auditor. The company employs Ernst & Young as its auditor.
Exhibit 1: Ownership structure
Steve Wynn Elaine Wynn Others
12% 9% 79% Wynn Resorts (WYNN US)
72%
Wynn Macau (1128 HK)
100% 100% 100% Wynn Peninsula Wynn Palace Wynn Las Vegas
Macau Casino US Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 54 February 27, 2018 Initiation of Coverage Company management in the news Recent newsflow about Wynn Macau and its parent company, Wynn Resorts, has centred on reports accusing Chairman and CEO Steve Wynn of sexual misconduct. In the wake of the allegations, Steve Wynn stepped down from his roles as Chairman and CEO of both companies, and surrendered control over his former wife Elaine Wynn’s shares. This reduced his voting power from 21% to 12%, but he remains the major shareholder.
Exhibit 2. Timeline of recent newsflow involving Steve Wynn and Wynn Macau
Date News updates Jan 27, 2018 The Wall Street Journal reported that a number of women said Steve Wynn harassed or assaulted them in separate cases Jan 28, 2018 Steve Wynn stepped down as finance chairman for the Republican National Committee Jan 29, 2018 Wynn Resorts’ board formed a committee to investigate the allegations Jan 29, 2018 Macau regulators met with Wynn Macau executives over the allegations Jan 31, 2018 The Nevada gambling board announced it would investigate the allegations Feb 1, 2018 The Massachusetts gaming panel announced it would investigate the allegations Feb 7, 2018 - Steve Wynn stepped down as Chairman and CEO of Wynn Resorts and Wynn Macau - Matthew Maddox was appointed CEO of both companies - Allen Zeman was appointed Chairman & Non-executive Director of Wynn Macau Feb 10, 2018 Steve Wynn surrendered control over his former wife Elaine Wynn’s shares, essentially reducing his stake to 12%. Elaine Wynn retains a 9% stake Feb 14, 2018 Two more sexual assault allegations filed against Steve Wynn Feb 15, 2018 Wynn Resorts announced that: - Steve Wynn is not entitled to any severance payment or other compensation - He may not sell more than 1/3 of the company shares he holds during any quarter - He will not compete against the company for 2 years Note: Dates are in Hong Kong time zone. Source: Wall Street Journal, Bloomberg, SEC, HKEx, CRSHK
Wynn Resorts is involved in a separate ongoing dispute with its co-founder, Kazuo Okada, who alleges that he was forced to sell his shares at a 30% discount to the market price and seeks legal claims. The case is scheduled for trial in April 2018. The outcome of the trial could have implications for the management and ownership structures of Wynn Resorts.
In the short to medium term, despite ongoing newsflow from the US and pending litigation, we do not expect any significant impact on Wynn Macau’s daily operations from Steve Wynn’s departure, as the Macau management team has a strong track record. We also do not expect further significant changes in the ownership and management structure beyond what has already taken place.
Longer term, we see potential for the entry of a strategic investor. Wynn Macau pays generous dividends to shareholders of the US parent company and its assets are mostly in the form of liabilities. As high leverage and high dividend payouts may not be viewed favorably by the local authority when gaming concession renewals are considered in 2022, the introduction of a suitable strategic investor could improve the probability of license renewal.
China Renaissance Securities (Hong Kong) Limited 55 February 27, 2018 Initiation of Coverage Properties
Wynn Macau (“Wynn Peninsula”) One of the best yielding properties in Peninsula, Wynn Peninsula opened in 2006 and now offers 304 gaming tables, 934 slot machines and 1,008 hotel rooms. Wynn Peninsula targets high-end VIP clients through its high-quality hardware and services. The property suffered the most during the anti-corruption campaign of FY14-16 because of its high-end positioning, and management used the opportunity to carry out refurbishment. After renovations, Wynn Peninsula started to regain market share, riding on the gradual improvement of the China economy in FY17. We believe Wynn Peninsula’s net revenue/EBITDA will continue to grow at 5%/7% in FY18E.
Exhibit 3: Wynn Peninsula Exhibit 4: FY18E revenue and property EBITDA
(HK$mn) 30,000 2,407
20,000 8,862
10,000 14,666
6,314 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company data Source: CRSHK estimates
Wynn Palace This property was a major driver of the expansion of VIP GGR share in Cotai. Wynn Palace opened in 2016, offering 309 gaming tables, 983 slot machines and 1,706 hotel rooms. Like Wynn Peninsula, Wynn Palace is one of the most luxurious properties in Macau, targeting high-end clients. However, Wynn Palace targets not only junket VIP but also premium mass gamblers, leveraging its abundant hotel room offering. FY17 was a strong year for Wynn Palace, successfully repeating the Wynn Macau formula of driving outstanding VIP business performance through new luxury product. In FY18E, we believe Wynn Palace will be a major driver of premium mass, as it builds its reputation gradually among cash players. We project Wynn Palace’s revenue/EBITDA to grow strongly at 33%/52% in FY18E.
China Renaissance Securities (Hong Kong) Limited 56 February 27, 2018 Initiation of Coverage
Exhibit 5: Wynn Palace Exhibit 6: FY18E revenue and property EBITDA
(HK$mn) 40,000
30,000 2,894
20,000 10,074
10,000 15,826 6,218 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company data Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 57 February 27, 2018 Initiation of Coverage Forecast EBITDA CAGR of 18% over FY17-19E
Expect FY18E net revenue to grow 18%, higher than industry average We project Wynn Macau’s top line to continue growing strongly in FY18E, driven by the continued ramp-up of Wynn Palace, with a new hike in table yields from the mass GGR side. We expect VIP GGR to grow 16% y-y in FY18E, while mass GGR growth will be far higher at 25% y-y on premium mass growth.
Exhibit 7: Revenue projection Exhibit 8: Revenue breakdown by properties
(HK$mn) (HK$mn) 50,000 75% 40,000
40,000 60% 30,000
30,000 45% 20,000 20,000 30%
10,000 10,000 15%
0 0% 0 FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Net revenue y-y Wynn Macau Wynn Palace
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
Expect FY18E/19E EBITDA to grow 27%/9% on margin improvement We expect 2018 to be the year when Wynn Macau transforms from a VIP-focused player into the new leader of premium mass. Wynn Palace’s products target high-end VIPs from China, which overlaps with super premium mass players of Macau. Therefore, we expect Wynn Palace to gain market share in the higher-margin premium mass segment – a bigger driver of faster EBITDA growth than the top line.
Exhibit 9: Property EBITDA projection Exhibit 10: Property EBITDA breakdown by properties
(HK$mn) (HK$mn) 15,000 80% 8,000
12,000 60% 6,000
9,000 40% 4,000 6,000
20% 3,000 2,000
0 0% 0 FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Adjusted EBITDA y-y Wynn Macau Wynn Palace Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 58 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis Due to capex pressure from the construction of Wynn Palace, Wynn Macau endured a few difficult years up to FY16. We believe the worst is over.
As Wynn Palace’s contribution to Wynn Macau started to kick in, the company’s operating cashflow rose from HK$5.8bn in FY16 to HK$8.1bn in FY17E. Wynn Macau’s capex is likely to stay at maintenance levels in the near term, with potential for hikes if the company kicks off Phase 2 construction of Wynn Palace, while the timeline has not been revealed yet. We expect free cashflow to be strong at HK$10bn- 12bn in the coming three years.
We expect Wynn Macau’s dividend payout ratio to remain attractive at 50-55% levels during FY18-20, and the company’s net debt to shrink gradually from HK$26bn in FY17 to below HK$10bn in FY20.
Exhibit 11: Key financials of cashflow and balance sheet
HK$mn FY16 FY17E FY18E FY19E FY20E Operating cashflow 5,843 8,147 10,517 11,341 12,131 Net income 1,436 3,684 6,257 7,468 8,523 Depreciation and amortisation 1,596 2,761 2,984 2,811 2,648 Change in working capital (208) 454 108 1 0 Others 3,020 1,248 1,168 1,062 960
Investing cashflow (6,757) (768) (822) (762) (692) CAPEX (6,316) (803) (1,019) (958) (901) Others (441) 35 198 196 209
Financing cashflow (3,226) (5,139) (8,172) (6,654) (5,931) Net proceeds from banks and others (124) (2,963) (3,696) (3,098) (2,019) Dividend paid (3,109) (2,176) (4,476) (3,556) (3,911) Others and forex adjustment 7 - - - -
Net change in cash (4,140) 2,240 1,524 3,926 5,509 Free cashflow (1,419) 8,260 10,020 10,941 11,807
Cash at year-end 2,591 4,832 6,355 10,281 15,790 Borrowings 32,170 30,470 27,970 25,970 24,970 Net debt (cash) 29,578 25,638 21,615 15,689 9,180 Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 59 February 27, 2018 Initiation of Coverage Valuation
Currently trading at 15x FY18E EV/EBITDA Wynn Macau is currently trading at 15x FY18E EV/EBITDA and 23x P/E with a 2% dividend yield. These represent premiums to Macau peers’ averages, which have been the norm due to global investors’ appetite for the stock. However, due to ongoing investigations into the allegations against Steve Wynn, we see potential for the market to gradually impose discounts to its peers on concerns about management change and risks surrounding gaming license renewal in FY22E.
Exhibit 12: 1-year forward EV/EBITDA Exhibit 13: 1-year forward P/E
33 50 28 42 23 34
18 26
13 18
8 10 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd EV/EBITDA Mean 1-yr fwd P/E Mean
Source: Bloomberg, company data, CRSHK estimates Source: Bloomberg, company data, CRSHK estimates
Initiate at BUY with TP of HK$31.30 Our 12-month TP is based on 17x FY18E EV/EBITDA, in line with its five-year historical trading average. Our TP implies 26x/22x FY18E/19E P/E and 2%/2% dividend yield. We believe our historical-average target valuation is fair, as positives from the ramp-up of Wynn Palace’s premium mass business should be partially offset by management structure uncertainty and investor concerns on corporate governance. At the current valuation, we believe Wynn Macau’s share price offers reasonable potential upside given the strong pick-up of existing properties and likely limited impact on daily operations from the departure of Steve Wynn. The introduction of suitable strategic investors could warrant a strong reiteration of our BUY rating and represent a re-rating catalyst for the stock.
Catalysts 1) No change in Wynn Resorts’ operation and management structure in the wake of Steve Wynn’s departure, 2) updates on Wynn Palace expansion plans, and 3) the introduction of a strategic investor who could provide constructive support in the gaming concession renewal process.
Risks 1. Competition from MGM Cotai on VIP and premium mass business might result in downside to earnings expectations. 2. Unfavourable litigation results might drive changes in management structure, adding uncertainty to operations. 3. Any increase in the likelihood of a negative outcome in the upcoming license renewal process in 2022 would impact Wynn Macau’s long-term value.
China Renaissance Securities (Hong Kong) Limited 60 February 27, 2018 Initiation of Coverage Financial statements
Balance Sheet Income statement HK$ mn FY17E FY18E FY19E FY20E HK$ mn FY17E FY18E FY19E FY20E Current assets 6,664 8,451 12,446 18,015 Net revenue 35,843 42,293 44,218 45,890 Cash & equivalents 4,832 6,355 10,281 15,790 Gaming tax and levy (16,645 (19,316 (20,279 (21,095 ) ) ) ) Account receivables 1,189 1,403 1,467 1,522 Employee benefit expenses (4,587) (5,275) (5,301) (5,327) Inventories 338 387 393 398 D&A (2,761) (2,984) (2,811) (2,648) Other current assets 306 306 306 306 Other operating expenses (6,507) (7,272) (7,272) (7,308) Non-current assets 37,000 34,865 32,852 30,955 Adjusted EBITDA 8,609 10,931 11,899 12,708 PPE 33,976 31,938 30,022 28,220 Operating profit 5,344 7,446 8,555 9,512 Goodwill 398 398 398 398 Interest expense (1,263) (1,196) (1,098) (1,019) Land use right premium 1,686 1,590 1,494 1,398 Interest income 15 28 36 59 Other non-current assets 938 938 938 938 Other non-operating items (400) - - - Total assets 43,664 43,316 45,298 48,970 Pre-tax profit 3,696 6,278 7,493 8,551 Current liabilities 8,739 9,110 9,180 9,241 Income tax expense (12) (21) (25) (29) ST borrowings - - - - After-tax profit 3,684 6,257 7,468 8,523 Account payables 2,603 2,974 3,043 3,104 Non-controlling interests - - - - Other current liabilities 6,137 6,137 6,137 6,137 Net profit to S/H 3,684 6,257 7,468 8,523 Non-current liabilities 30,963 28,463 26,463 25,463 Basic EPS (HK$) 0.71 1.21 1.44 1.65 LT borrowings 30,470 27,970 25,970 24,970 DPS (HK$) 0.60 0.66 0.73 0.80 Other non-current liabilities 493 493 493 493 Total liabilities 39,702 37,573 35,643 34,704 Common stock – par value 167 167 167 167 Ratios Reserves 3,794 5,575 9,488 14,099 FY17E FY18E FY19E FY20E Non-controlling interests - - - - y-y Shareholders’ equity 3,961 5,742 9,655 14,266 Net revenue 62% 18% 5% 4% Total equity and liabilities 43,664 43,316 45,298 48,970 Adjusted EBITDA 69% 27% 9% 7% Op profit 136% 39% 15% 11% Net profit 157% 70% 19% 14% Statement of cash flows Profitability HK$ mn FY17E FY18E FY19E FY20E EBITDA margin 24% 26% 27% 28% Operating cashflow 8,147 10,517 11,341 12,131 OP margin 15% 18% 19% 21% Net income 3,684 6,257 7,468 8,523 NP margin 10% 15% 17% 19% D&A 2,761 2,984 2,811 2,648 ROE 93% 109% 77% 60% Finance costs 1,248 1,168 1,062 960 ROIC 15% 24% 30% 35% Change in working capital 454 108 1 0 Liquidity Other operating cashflow - - - - Debt/equity 769% 487% 269% 175% Investing cashflow (768) (822) (762) (692) Net debt/equity 647% 376% 163% 64% CAPEX (803) (1,019) (958) (901) Current ratio 0.8x 0.9x 1.4x 1.9x Interest received 15 28 36 59 Quick ratio 0.7x 0.9x 1.3x 1.9x Other investing cashflow 20 170 160 150 Operating efficiency Financing cashflow (5,139) (8,172) (6,654) (5,931) Asset turnover 0.8x 1.0x 1.0x 0.9x Net from borrowings (2,963) (3,696) (3,098) (2,019) Valuation ratios Share issue - - - - EV/EBITDA 20x 15x 14x 13x Dividend paid (2,176) (4,476) (3,556) (3,911) P/E 38x 23x 19x 17x Other financing cashflow - - - - FCF yield 5% 6% 6% 7% Foreign exchange rate adj. - - - - Dividend yield 2% 2% 3% 3% Net change in cash 2,240 1,524 3,926 5,509 P/B 36x 25x 15x 10x Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 61 February 27, 2018 Initiation of Coverage Sands China Ltd (1928 HK, BUY, TP: HK$51.3)
BUY HOLD SELL More Attractive After Product Upgrades: Initiate at BUY
▪ We initiate coverage at BUY on Sands China, which commands the largest mass- Target Price: HK$51.3 Current Price: HK$44.00 market share in Cotai. Its properties top most lists of must-visit places for grind mass 52-Week High (MM) HK$49.35 tourists and now seeks to gain market share in premium mass segment. 52-Week Low (MM) HK$31.85 EV (MM) $380,117 ▪ We forecast EBITDA to grow 17%/8% in FY18/19, broadly in line with consensus. Market Cap (MM) $355,275 We expect Sands China’s earnings to improve gradually on Parisian’s ramp-up and Shares Outstanding (MM) 8,074 Venetian’s product upgrades. Average Daily Trading Volume (M) 17.1 ▪ The stock currently trades at 17x FY18E EV/EBITDA, 23x P/E with a 4% dividend Source: Factset yield. Our 12-month TP of HK$51.30 is based on 20x FY18E EV/EBITDA, 1-SD above its five-year average, to reflect accelerating earnings growth.
Price Performance Parisian’s ramp-up continues, albeit slowly 55 Since its opening in Sep 2016, Parisian’s ramp-up has happened far slower than that of competitor Wynn Palace. Parisian delivered US$89mn EBITDA in 4Q17, less than half 48 that of Wynn Palace. Wynn Palace’s initial ramp-up was accelerated by junket business, 40 where junket operators do proactive marketing to high rollers. Being a mass property, 32 Parisian: 1) needs slower word-of-mouth marketing, and 2) overlaps with the target market and design concept of Venetian, causing cannibalization. Moreover, 2017 was a 25 year of high-end consumption recovery when VIP outperformed mass. We believe mass Feb-17May-17 Aug-17 Nov-17 Feb-18 growth will accelerate in 2H18E, boosting Parisian’s ramp-up. We expect Parisian’s 1928-HK Hang Seng (rebased) FY18E net revenue/EBITDA contribution to reach 18%/15% of the company. EBITDA to grow 17%/8% in FY18E/19E Source: FactSet We project net revenue to grow 10%/5% in FY18/19, slower than Macau GGR. The China consumption upgrade story is driving Sands China’s market share loss due to its outdated product offerings. Sands China's major story now is product upgrades: 1) Parisian should attract more traffic and ramp up its premium mass after optimizing its hotel rooms (combining two rooms into a suite), and 2) Venetian should bring in more cash players with bigger bet sizes, utilizing non-gaming amenities renovated in FY16. Last year's underperformer offers decent potential upside and good yield Sands China rallied strongly in January on the back of: 1) strong 4Q17 result on sequential improvement from typhoon-hit 3Q17, and 2) investors’ appetite for valuation laggards. We believe the share price has room to rally further on accelerating mass growth. Risks to our EV/EBITDA-based TP of HK$51.30, equivalent to 26x FY18E P/E with a 4% dividend yield, include: 1) greater-than-expected competition in Cotai low-end premium mass market due to MGM Cotai, and 2) license renewal in FY22E. Summary financial data Highlights 2017A 2018E 2019E 2020E Revenue (MM) ($) 7,715 8,505 8,895 9,275 EBITDA (MM) ($) 2,491 2,908 3,145 3,405 Research Team EPS ($) 0.20 0.25 0.28 0.30 Angela Han Lee EV/EBITDA 20x 17x 16x 14x [email protected] P/E 29x 23x 21x 19x Nate Deng FCF yield 5% 4% 4% 6% [email protected] Dividend yield 5.0% 5.0% 5.0% 5.0% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 62 February 27, 2018 Initiation of Coverage Company introduction
Company background Sands China, one of the six gaming concessionaires in Macau, is a subsidiary of Las Vegas Sands (LVS US), led by Sheldon Adelson. Its Macau gaming concession expires in Jun 2022.
There are five casinos currently under Sands China’s license. The first Macau casino in the Las Vegas Sands’ empire was Sands Macao in the Peninsula, followed by the Venetian, Plaza Macao at Four Seasons, Cotai Central and the Parisian in Cotai; these four properties are connected to each other by footbridge. Sands China had 23% market share in 2017.
The major expansion of Sands China is largely complete, but the company continues to refine its Macau properties: renovation of the Venetian is ongoing and Cotai Central will be rebranded as Londoner.
Auditor. The company employs Deloitte as its auditor.
Exhibit 1: Ownership structure
Sheldon Adelson Others
50% 50%
Las Vegas Sands (LVS US)
Venetian Las Vegas Palazzo Las Vegas Sands Bethlehem Marina Bay Sands
US Casino Singapore Casino
70%
Sands China (1928 HK)
100% 100% 100% 100% 100%
Sands Macao Venetian Macao Plaza Macao Cotai Central Parisian Macao
Macau Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 63 February 27, 2018 Initiation of Coverage Properties
Venetian Macao The leading mass-market property in Cotai, Venetian Macao opened in 2007 and currently offers 585 gaming tables, 1,670 slot machines and 2,841 hotel rooms. Venetian Macao is positioned as an integrated resort offering abundant retail space and leading MICE facilities. Therefore, its major clients are low-end mass gamblers and low-end VIP clients, who are less sensitive to political and/or economic conditions. Venetian Macao has been losing market share to other Cotai integrated resorts, due to 1) cannibalization from the recently opened Parisian Macao, and 2) old products with less customer satisfaction. The property is undergoing renovations for product upgrades, and we believe it remains a must-see landmark for low-end tourists to visit and take pictures. We project Venetian Macao’s GGR/EBITDA to strengthen, rising 16%/14% in FY18E on upgraded product offerings.
Exhibit 2: Venetian Macao Exhibit 3: FY18E revenue and property EBITDA
(US$mn) 4,000 609
3,000
2,418 2,000
1,000 1,293 957 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA Source: Company data Source: CRSHK estimates
Parisian Macao The newest property of Sands China in Cotai, Parisian Macao opened in 2016 offering 368 gaming tables, 1,487 slot machines and 2,743 hotel rooms. The 50% scale replica of the Eiffel Tower is its major attraction, having created an “as if in Paris” boom in social media after its opening. The property appears like a younger and more illuminated version of Venetian Macao, with relatively smaller hotel rooms catering to high-end clients. Therefore, it brought cannibalization again its sister property – Venetian Macao. The property is currently seeing some reconfiguration, with some rooms being upgraded into suites. We believe the property’s performance should start to improve in 2H18E. We project Parisian Macao’s GGR/EBITDA to grow at 14%/5% in FY18E on continued ramp-up of both VIP and mass segment.
China Renaissance Securities (Hong Kong) Limited 64 February 27, 2018 Initiation of Coverage
Exhibit 4: Parisian Macao Exhibit 5: FY18E revenue and property EBITDA
(US$mn) 2,000 255
1,500
1,077 1,000
500 608 432 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA Source: Booking.com Source: CRSHK estimates
Sands Cotai Central – to be rebranded as “Londoner” Cotai Central offers abundant hotel rooms, but lacks a uniting theme. Cotai Central opened in phases over 2012-2015, and now offers 401 gaming tables, 1,823 slot machines and 6,246 hotel rooms under four brands: St Regis, Conrad, Sheraton and Holiday Inn. The property’s main contribution is injecting hotel clients into Venetian Macao through the connecting footbridge; its gaming business has performed below market expectations since its opening. Management plans to rebrand the property as “Londoner”, in line with its sister properties “Venetian” and “Parisian”, accessible by footbridge. We expect the property’s contribution in FY18E to grow from weakness in FY17, with GGR/EBITDA rising 14%/28%.
Exhibit 6: Sands Cotai Central Exhibit 7: FY18E revenue and property EBITDA
(US$mn) 3,000
555 2,000
1,651 1,000
812 347 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company data Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 65 February 27, 2018 Initiation of Coverage Plaza Macao at Four Seasons This boutique luxury casino opened in 2008 in Four Seasons. Connected to other Sands properties by footbridge, it offers 108 gaming tables, 164 slot machines and 360 hotel rooms. It is small and caters more to high rollers seeking quiet and privacy. Performance has been inconsistent but has a limited impact on Sands China.
Exhibit 8: Plaza Macao Exhibit 9: FY18E revenue and property EBITDA
(US$mn) 1,000
205 750
500 375
250 314 273
- Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Booking.com Source: CRSHK estimates
Sands Macao Sands China’s first property in Macau, Sands Macao opened in 2004 and now offers 193 gaming tables, 1,014 slot machines and 238 hotel rooms. With the company’s focus shifting to the Cotai side, Sands Macao has less resources and less impact on the company’s financials. It remains a symbolic property in the portfolio but we expect a flat performance with GGR/EBITDA growth of 2%/4% in FY18E.
Exhibit 10: Sands Macao Exhibit 11: FY18E revenue and property EBITDA
(US$mn) 800 50
600
400 579
200
181 105 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA Source: Company data Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 66 February 27, 2018 Initiation of Coverage
Forecast EBITDA CAGR of 12% over FY17-19E
Expect FY18E/19E net revenue to grow 10%/5%, slower than industry average We project Sands China’s top line to continue growing strongly in FY18E, driven by all-round improvement in Cotai, with more visitors attracted by Parisian Macao. By segment, we expect VIP GGR to grow 8% y-y in FY18E, while mass GGR growth should see 17% y-y: slightly lower than 20% in FY17 in line with the industry average.
Exhibit 12: Revenue projection Exhibit 13: Revenue breakdown by properties
(US$mn) (US$mn) 10,000 20% 4,500
8,000 16% 3,000 12% 6,000 8% 4,000 1,500 4%
2,000 0% 0 0 -4% FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Sands Macao Venetian Macao Total net revenue y-y Plaza Macao Sands Cotai Central
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
Expect FY18E/19E EBITDA to grow 17%/8%, on product mix improvement Venetian’s status as the company’s contribution leader is never likely to be challenged. We expect Cotai Central and Parisian to improve after rebranding and reconfiguration, but we do not expect big relocation of gaming tables. Improvement of individual properties will rely mainly on product mix improvement with increasing mass contribution.
Exhibit 14: Property EBITDA projection Exhibit 15: EBITDA breakdown by properties
(US$mn) (US$mn) 4,000 20% 1,600
3,000 1,200 10%
2,000 800
0% 400 1,000
0 0 -10% FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Sands Macao Venetian Macao Adjusted EBITDA y-y Plaza Macao Sands Cotai Central Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 67 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis Sands China’s operating cashflow should continue to rise as Parisian contributes. However, the company’s capex is not likely to slow given management’s plan to reinvest in Macau: 1) rebranding Cotai Central as “Londoner”, 2) potential expansion of non-gaming facilities in Venetian Macao, and 3) product upgrades across all properties during renovation. Therefore, we expect free cashflow to be steady at US$2.1bn-2.8bn in the coming three years.
We expect Sands China’s dividend payout to remain attractive, at HK$1.99 per share per year in the coming three years, offsetting stable growth in free cashflow. Therefore, we expect the company’s net debt to stay steady at the US$3.6bn-4.0bn level.
Exhibit 16: Key financials of cashflow and balance sheet US$mn FY16 FY17 FY18E FY19E FY20E Operating cashflow 2,346 2,626 2,891 3,095 3,347 Net income 1,224 1,603 2,024 2,225 2,430 Depreciation and amortisation 611 676 664 676 706 Change in working capital 339 194 55 27 23 Others 172 153 149 168 187
Investing cashflow (1,149) (461) (798) (1,041) (558) CAPEX (1,211) (477) (841) (1,087) (607) Others 62 16 43 46 49
Financing cashflow (1,196) (2,207) (1,628) (1,649) (1,670) Net proceeds from banks and others 919 147 447 426 404 Dividend paid (2,070) (2,070) (2,075) (2,075) (2,075) Others and forex adjustment (45) (287) - - -
Net change in cash 1 (45) 465 405 1,119 Free cashflow 1,244 2,208 2,122 2,085 2,821
Cash at year-end 1,284 1,239 1,704 2,109 3,229 Borrowings 4,354 4,364 4,964 5,564 6,164 Net debt (cash) 3,070 3,125 3,260 3,455 2,935 Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 68 February 27, 2018 Initiation of Coverage Valuation
Currently trading at 17x FY18E EV/EBITDA The company is currently trading at 17x FY18E EV/EBITDA, 23x P/E and 5% dividend yield. These represent premiums to Macau peers’ average but this has long been the case given its: 1) high earnings visibility and profitability due to the largest exposure to mass business, and 2) sector-leading dividend yields attracting yield investors.
Exhibit 17: 1-year forward EV/EBITDA Exhibit 18: 1-year forward P/E 26
30 23
20 25
17 20 14
11 15 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd EV/EBITDA Mean 1-yr fwd P/E Mean
Source: Bloomberg, company data, CRSHK estimates Source: Bloomberg, company data, CRSHK estimates
Initiate at BUY with TP of HK$51.30 Our 12-month TP is based on 20x FY18E EV/EBITDA, 1-SD above its five-year historical trading average. Our TP implies 26x/24x FY18E/19E P/E and 4%/4% dividend yield. Due to the weak ramp-up of Parisian Macao, market expectations for Sands China have been lowered significantly. We see this as a good risk-reward profile supported by: 1) gradual ramp-up of Parisian, 2) improving profitability of Venetian post renovation, and 3) attractive dividend yield. Catalysts 1) Better-than-expected growth of Macau mass GGR, and 2) greater influx of mainland tourists with improving infrastructure such as railway connections and HK- Zhuhai-Macau Bridge.
Risks 1. Greater-than-expected competition in Cotai low-end premium mass market due to MGM Cotai. MGM Cotai’s ramp-up is likely to come at the expense of neighbouring properties, causing market cannibalization. We think hard-core gamblers at Sands China are less sticky and thus relatively vulnerable, with a higher level of potential to patronize the competition than other properties such as Wynn Palace and/or City of Dreams. 2. Any potential issues when licenses come up for renewal in FY22E. Sands China is one of two purely foreign background names with a high dividend payout ratio. Although its mass focus benefits Macau’s diversification strategy, we think its licensing risk, while not great, is higher than its peers.
China Renaissance Securities (Hong Kong) Limited 69 February 27, 2018 Initiation of Coverage Financial statements Balance sheet Income statement US$ mn FY17 FY18E FY19E FY20E US$ mn FY17 FY18E FY19E FY20E Current assets 1,558 2,058 2,480 3,615 Total net revenue 7,715 8,505 8,895 9,275 Cash and cash equivalents 1,239 1,704 2,109 3,229 Gaming tax and levy (2,925) (3,118) (3,248) (3,361) Account receivables 293 323 338 352 Employee benefit expenses (1,193) (1,253) (1,290) (1,329) Inventories 15 20 21 23 Depreciation and amortisation (676) (664) (676) (706) Other current assets 11 11 11 11 Gaming promoter commissions (135) (142) (149) (154) Non-current assets 9,089 9,228 9,600 9,460 Other operating expenses (1,013) (1,114) (1,095) (1,058) Investment properties 1,311 1,297 1,283 1,270 Adjusted EBITDA 2,491 2,908 3,145 3,405 Property and equipment 7,687 7,839 8,222 8,093 Operating profit 1,773 2,214 2,438 2,667 Intangible assets 34 36 37 39 Interest expense (153) (153) (174) (196) Other non-current assets 57 57 57 57 Interest income 5 5 7 8 Total assets 10,647 11,287 12,080 13,075 Other non-operating items - - - - Current liabilities 1,597 1,687 1,730 1,769 Pre-tax profit 1,625 2,065 2,270 2,480 ST borrowings 6 6 6 6 Income tax expense (22) (41) (45) (50) Account payables 1,537 1,627 1,670 1,709 After-tax profit 1,603 2,024 2,225 2,430 Other current liabilities 54 54 54 54 Non-controlling interests - - - - Non-current liabilities 4,512 5,112 5,712 6,312 Net profit to shareholders 1,603 2,024 2,225 2,430 LT borrowings 4,358 4,958 5,558 6,158 Basic EPS (US$) 0.20 0.25 0.28 0.30 Other non-current liabilities 154 154 154 154 DPS (US$) 0.26 0.26 0.26 0.26 Total liabilities 6,109 6,799 7,442 8,081 Common stock - par value 81 81 81 81 Ratios Reserves 4,457 4,406 4,557 4,912 FY17 FY18E FY19E FY20E Non-controlling interests - - - - y-y Shareholders’ equity 4,538 4,487 4,638 4,993 Total net revenue 16% 10% 5% 4% Total equity and liabilities 10,647 11,287 12,080 13,075 Adjusted EBITDA 18% 17% 8% 8% Op profit 31% 25% 10% 9% Net profit 31% 26% 10% 9% Statement of cash flows Profitability US$ mn FY17 FY18E FY19E FY20E EBITDA margin 32% 34% 35% 37% Operating cashflow 2,626 2,891 3,095 3,347 OP margin 23% 26% 27% 29% Net income 1,603 2,024 2,225 2,430 NP margin 21% 24% 25% 26% Depreciation and amortization 676 664 676 706 ROE 35% 45% 48% 49% Finance costs 153 149 168 187 ROIC 19% 23% 24% 27% Change in working capital 194 55 27 23 Liquidity Other operating cashflow - - - - Debt/equity 96% 111% 120% 123% Investing cashflow (461) (798) (1,041) (558) Net debt/equity 69% 73% 74% 59% Capital expenditure (477) (841) (1,087) (607) Current ratio 1.0x 1.2x 1.4x 2.0x Interest received 5 5 7 8 Quick ratio 1.0x 1.2x 1.4x 2.0x Other investments 11 38 39 41 Operating efficiency Financing cashflow (2,207) (1,628) (1,649) (1,670) Asset turnover 0.7x 0.8x 0.7x 0.7x Net proceeds from borrowings 147 447 426 404 Valuation ratios Share issue - - - - EV/EBITDA 20x 17x 16x 14x Dividend paid (2,070) (2,075) (2,075) (2,075) P/E 29x 23x 21x 19x Other financing cashflow (284) - - - Dividend yield 5% 5% 5% 5% Foreign exchange rate adj. (3) - - - FCF yield 5% 4% 4% 6% Net change in cash (45) 465 405 1,119 P/B 10x 10x 10x 9x Source: Bloomberg, company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 70 February 27, 2018 Initiation of Coverage MGM China Holdings Ltd (2282 HK, HOLD, TP: HK$24.5)
BUY HOLD SELL Headwinds Due to Market Share Loss; Initiate at Hold
▪ Gaming concessionaire operating MGM Peninsula and MGM Cotai in Macau. Targets Target Price: HK$24.5 Current Price: HK$23.00 mid-end premium mass market with good dining options in properties 52-Week High (MM) HK$25.50 We forecast EBITDA to grow 28%/24% in FY18/19, 8%/10% lower than consensus. 52-Week Low (MM) HK$13.58 ▪ EV (MM) $100,163 We expect MGM China’s earnings to start rising from 3Q18E, backed by Market Cap (MM) $87,413 management's strong execution track record. However, with limited exposure to VIP Shares Outstanding (MM) 3,801 at the beginning, we think the ramp-up will take longer Average Daily Trading Volume (M) 11.0 ▪ Currently trading at 19x FY18E EV/EBITDA, 33x P/E and 1% dividend yield. Initiate Source: Factset at Hold with a 12-month TP of HK$24.50 based on 19x FY18E EV/EBITDA, 1-SD above the 5-yr avg to reflect accelerating earnings growth potential
Price Performance MGM Cotai is the only new standalone property expected in Macau in 2018 28 MGM China’s second property opened in Feb 2018, with1,400 hotel rooms in total. It got approval for 100/25 new-to-market gaming tables upon opening/FY19. MGM Cotai 24 started with 100 new tables and 77 tables relocated from MGM Macau. We believe its 20 ramp-up may be slower than Wynn Palace's, as MGM Cotai had only 12 VIP tables upon 16 opening, so it relies heavily on mass, which requires more time for ramp-up. So MGM Cotai is unlikely to outperform near term. However, we expect MGM Cotai’s FY18 net 12 revenue and property EBITDA contribution to reach 35%/20% of the company. Feb-17May-17 Aug-17 Nov-17 Feb-18 EBITDA to grow 28%/24% in FY18E/19E driven by MGM Cotai 2282-HK Hang Seng (rebased) We expect MGM China's net revenue to grow 56%/17% in FY18/19, outperforming Macau GGR thanks to MGM Cotai. With strong expertise in the premium mass business, Source: FactSet we believe the operator will capture a totally new Cotai premium mass market without cannibalizing its Peninsula business. After the tough period of 1Q18E-2Q18E, which is basically the investment period needed to nurture mass clients, MGM China’s market share should start recovering from 7% in FY17 to 10% in FY19E. Dark horse of the year, but still too early to buy Due to potential margin pressure from a fixed opex hike in MGM Cotai, we expect further volatility in share price. We initiate at Hold with a TP of HK$24.50, based on 19x FY18E EV/EBITDA, equivalent to 35x FY18E P/E with a 1% dividend yield. Risks: 1) Slower- than-expected gain in market share of MGM Cotai, and 2) sharp decline in China's economy impacting the Macau gaming sector, and a new property like MGM Cotai would suffer more than existing ones with a sticky client base.
Summary financial data Highlights 2017A 2018E 2019E 2020E Revenue (MM) (HK$) 15,356 23,904 27,876 29,273 EBITDA (MM) (HK$) 4,173 5,331 6,608 7,284 Research Team EPS (HK$) 0.61 0.70 1.13 1.28 Angela Han Lee EV/EBITDA 24x 19x 15x 14x [email protected] P/E 38x 33x 21x 18x Nate Deng FCF yield 0% 8% 4% 4% [email protected] Dividend yield 1.0% 1.0% 2.0% 2.0% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 71 February 27, 2018 Initiation of Coverage Company introduction
Company background One of the six gaming concessionaires in Macau, MGM China is a subsidiary of MGM Resorts (MGM US), with Pansy Ho (Stanley Ho’s daughter) as a key shareholder. Its gaming concession expires in Mar 2020, as with SJM, but earlier than other Macau peers.
There are two casinos currently under MGM China’s license: MGM Macau in Peninsula and MGM Cotai in Cotai. MGM China had 7% market share in 2017.
After MGM Cotai’s opening in Feb 2018, the big capex outlay is behind us, but MGM China will still likely have minor capex requirements: MGM Cotai’s high-end rooms are still in the fit-out stage, and MGM Macau may also undergo renovations.
Auditor. The company employs Deloitte as its auditor.
Exhibit 1: Ownership structure
Pansy Ho
5% MGM Resorts (MGM US)
Other owned MGM Bellagio and leased Grand properties
US Casino
56% 22% MGM Growth CityCenter Holdings Properties (MGP US) MGM China (2282 HK)
100% 100%
MGM Macau MGM Cotai
Macau Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 72 February 27, 2018 Initiation of Coverage Properties
MGM Macau A small Las Vegas-style integrated resort in Peninsula, MGM Macau opened in 2007 and offers 409 gaming tables, 988 slot machines and 582 hotel rooms; 77 tables were recently relocated to MGM Cotai for its opening. Leveraging its affordable and attractive dining options, MGM Macau targets premium mass clients. The property’s market share declined in FY17, due to the competition from Cotai and its newly- renovated neighbour property, Wynn Macau (Peninsula). After MGM Cotai’s opening in Feb 2018, we think management will start refurbishing MGM Macau and grow its market share in Peninsula. We project MGM Macau’s net revenue will grow only 1% y-y in FY18 due to the relocation of tables as mentioned earlier, while EBITDA should be flat y-y.
Exhibit 2: MGM Macau Exhibit 3: FY18E revenue and property EBITDA
(HK$mn) 20,000 356
15,000 9,955
10,000
5,000 8,269 4,576 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA Source: Company data Source: CRSHK estimates
MGM Cotai This is the only standalone property in Cotai opened in 2018. MGM Cotai offers 177 gaming tables, 1,500 slot machines and 1,400 hotel rooms. The property is surrounded by resorts such as City of Dreams, Wynn Palace and Sands Cotai Central. Among these properties, MGM Cotai’s positioning is likely to be mid-end, attracting premium mass clients, which is where their strength in Peninsula lies. MGM Cotai’s wide range of dining options should support its strategy, too. We project MGM Cotai’s contribution to MGM China’s FY18 net revenue and property EBITDA will reach 35%/20%.
China Renaissance Securities (Hong Kong) Limited 73 February 27, 2018 Initiation of Coverage
Exhibit 4: MGM Cotai Exhibit 5: FY18E revenue and property EBITDA
(HK$mn) 10,000
8,000 2,180
6,000
4,700 4,000
2,000 2,346 1,173 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA Source: Company data Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 74 February 27, 2018 Initiation of Coverage Forecast EBITDA CAGR of 26% over FY17-19E
We expect FY18/19 net revenue to grow 56%/17%, higher than Macau GGR We project MGM China’s top line to rise sharply in FY18, driven by the opening of MGM Cotai. We expect VIP GGR to grow strongly at 24% y-y in FY18 with junket operations at MGM Cotai enlarging in mid-2018 with five junket operators. Mass GGR growth should be faster than VIP, rising 58% y-y.
Exhibit 6: Revenue projections Exhibit 7: Revenue breakdown by property
(HK$mn) (HK$mn) 35,000 60% 20,000 30,000 16,000 40% 25,000
20,000 12,000 20% 15,000 8,000 10,000 0% 4,000 5,000
0 -20% 0 FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Total net revenue y-y MGM Peninsula MGM Cotai
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
We expect FY18E/19E EBITDA to grow 28%/24%, on MGM Cotai’s contribution This is a big year for MGM China as it gains exposure on the Cotai side. As with other operators, we think MGM Cotai’s clients will come from different groups of guests than those that are attracted to MGM Macau. Therefore, we expect limited cannibalization of its sister property, but we also believe MGM Cotai will bring competition to the Cotai properties of other casino operators. We expect MGM China to see market share rise from 7% in FY17 to 10% in FY19E.
Exhibit 8: Property EBITDA projections Exhibit 9: EBITDA breakdown by property
(HK$mn) (HK$mn) 8,000 30% 5,000
4,000 6,000 20%
3,000 4,000 10% 2,000
2,000 0% 1,000
0 -10% 0 FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Adjusted EBITDA y-y MGM Peninsula MGM Cotai
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 75 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis We expect MGM China’s operating cashflow to improve significantly from FY18 due to the contribution from MGM Cotai. MGM China’s heavy capex cycle is also coming to an end, since the construction of MGM Cotai has already been completed. As a result, we expect free cashflow to grow strongly in FY18.
For dividend payments, we model a 35% payout ratio for upcoming years, since management has a relatively conservative dividend payment policy compared to its US peers; MGM China thinks it is better to keep cash in hand, to demonstrate its commitment to Macau society, and to reinvest in Macau when necessary. Therefore, we expect the company’s net debt to shrink gradually from HK$13bn in FY17 to HK$1.6bn in FY20E, leaving potential upside for dividend payout in the future.
Exhibit 10: Key financials of cashflow and balance sheet
HK$mn FY16 FY17 FY18E FY19E FY20E Operating cashflow 2,762 8,300 10,664 7,956 7,436 Net income 3,037 2,320 2,661 4,290 4,878 Depreciation and amortisation 806 799 1,885 2,007 1,994 Change in working capital (1,219) 4,852 6,116 1,665 573 Others 139 330 1 (6) (9)
Investing cashflow (6,273) (8,508) (3,780) (3,767) (3,759) CAPEX (8,049) (8,532) (3,875) (3,875) (3,875) Others 1,776 24 95 108 116
Financing cashflow 1,637 1,944 (2,390) (2,753) (3,122) Net proceeds from banks and others 2,846 2,993 (1,509) (1,508) (1,507) Dividend paid (806) (1,049) (881) (1,245) (1,615) Others and forex adjustment (404) - - - -
Net change in cash (1,874) 1,736 4,494 1,436 555 Free cashflow (5,161) 492 7,572 4,398 3,982
Cash at year-end 3,547 5,283 9,778 11,213 11,768 Borrowings 14,709 17,839 16,339 14,839 13,339 Net debt (cash) 11,162 12,556 6,562 3,626 1,571 Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 76 February 27, 2018 Initiation of Coverage Valuation
Currently trading at 19x FY18E EV/EBITDA MGM China is currently trading at 19x FY18E EV/EBITDA, 33x P/E and 1% dividend yield. It is trading at a premium to its Macau peers’ average: however, it used to trade at a discount to peers until a year ago, because it was the smallest operator by market share with exposure on low-growth Peninsula market only. With MGM Cotai’s opening, the market appears to be assigning a premium in anticipation of its valuation and potential for strong growth ahead.
Exhibit 11: 1-year forward EV/EBITDA Exhibit 12: 1-year forward P/E 35 23
30 20
17 25
14 20
11 15
8 10 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd EV/EBITDA Mean Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd P/E Mean
Source: Bloomberg, company data, CRSHK estimates Source: Bloomberg, company data, CRSHK estimates
Initiate at Hold with TP of HK$24.50 Our 12-month TP is based on 19x FY18E EV/EBITDA, at 1-SD above its five-year historical trading average, to reflect stronger earnings growth potential when MGM Cotai is expected to start its earnings contribution in 2H18. Our TP implies 35x/22x FY18E/19E P/E and a 1%/2% dividend yield. We expect volatility in MGM China’s earnings and share price in the near term, due to a faster increase in expenses than revenue after MGM Cotai’s opening. Longer term, however, leveraging MGM Macau’s expertise in its premium mass business, we believe MGM China could enter an exponential growth period beginning in 2H18, and potential exists for MGM China’s share price to outperform peers meaningfully.
Catalysts 1) A pickup in MGM Cotai’s mass business from 2H18, and 2) an increase in dividend payments given a substantial decrease in capex after MGM Cotai’s opening.
Risks 1. The speed of MGM Cotai’s ramp-up is the major uncertainty, and we project this to be slower than the market expects. We think MGM Cotai is not an eye-catching property at first sight, and its VIP business will start in mid-2018E. Therefore, we believe the ramp-up speed of Wynn Palace is unlikely to be replicated at MGM Cotai, as the market appears to expect. 2. Sharp decline in the China economy impacting the Macau gaming sector might cause new properties like MGM Cotai to suffer more than existing properties that have a sticky client base.
China Renaissance Securities (Hong Kong) Limited 77 February 27, 2018 Initiation of Coverage Financial statements
Balance Sheet Income statement HK$ mn FY17 FY18E FY19E FY20E HK$ mn FY17 FY18E FY19E FY20E Current assets 5,811 10,408 11,893 12,467 Total net revenue 15,356 23,904 27,876 29,273 Cash & equivalents 5,283 9,778 11,213 11,768 Gaming tax and levy (7,214) (9,975) (11,868 (12,543 ) ) Account receivables 180 280 326 343 Employee benefit expenses (2,324) (4,648) (4,881) (5,125) Inventories 136 138 141 144 D&A (799) (1,816) (1,938) (1,925) Other current assets 212 212 212 212 Other operating expenses (2,394) (4,789) (4,885) (4,787) Non-current assets 30,795 32,698 34,472 36,253 Adjusted EBITDA 4,173 5,331 6,608 7,284 PPE 29,120 31,219 33,190 35,040 Operating profit 2,624 2,676 4,305 4,894 Sub-concession premium 285 158 31 31 Interest expense (7) (9) (8) (7) Land use right premium 1,191 1,122 1,052 983 Interest income 5 8 14 16 Other non-current assets 199 199 199 199 Other non-operating items 17 - - - Total assets 36,607 43,106 46,365 48,721 Pre-tax profit 2,638 2,674 4,311 4,902 Current liabilities 15,696 21,915 23,630 24,222 Income tax expense (318) (13) (22) (25) ST borrowings 6,045 6,045 6,045 6,045 After-tax profit 2,320 2,661 4,290 4,878 Account payables 9,319 15,539 17,253 17,845 Non-controlling interests - - - - Other current liabilities 331 331 331 331 Net profit to S/H 2,320 2,661 4,290 4,878 Non-current liabilities 12,398 10,898 9,398 7,898 Basic EPS (HK$) 0.61 0.70 1.13 1.28 LT borrowings 11,794 10,294 8,794 7,294 DPS (HK$) 0.21 0.25 0.40 0.45 Other non-current liabilities 604 604 604 604 Total liabilities 28,094 32,813 33,028 32,120 Common stock – par value 3,800 3,800 3,800 3,800 Ratios Reserves 4,712 6,492 9,537 12,800 FY17 FY18E FY19E FY20E Non-controlling interests - - - - y-y Shareholders’ equity 8,512 10,292 13,337 16,600 Total net revenue 3% 56% 17% 5% Total equity and liabilities 36,607 43,106 46,365 48,721 Adjusted EBITDA 2% 28% 24% 10% Op profit -15% 2% 61% 14% Net profit -24% 15% 61% 14% Statement of cash flows Profitability HK$ mn FY17 FY18E FY19E FY20E EBITDA margin 27% 22% 24% 25% Operating cashflow 8,300 10,664 7,956 7,436 OP margin 17% 11% 15% 17% Net income 2,320 2,661 4,290 4,878 NP margin 15% 11% 15% 17% D&A 799 1,885 2,007 1,994 ROE 27% 26% 32% 29% Finance costs 2 1 (6) (9) ROIC 8% 8% 12% 13% Change in working capital 4,852 6,116 1,665 573 Liquidity Other operating cashflow 327 - - - Debt/equity 210% 159% 111% 80% Investing cashflow (8,508) (3,780) (3,767) (3,759) Net debt/equity 148% 64% 27% 9% CAPEX (8,532) (3,875) (3,875) (3,875) Current ratio 0.4x 0.5x 0.5x 0.5x Interest received 5 8 14 16 Quick ratio 0.3x 0.5x 0.5x 0.5x Other investing cashflow 19 87 94 100 Operating efficiency Financing cashflow 1,944 (2,390) (2,753) (3,122) Asset turnover 0.4x 0.6x 0.6x 0.6x Net from borrowings 2,993 (1,509) (1,508) (1,507) Valuation ratios Share issue - - - - EV/EBITDA 24x 19x 15x 14x Dividend paid (1,049) (881) (1,245) (1,615) P/E 38x 33x 21x 18x Other financing cashflow - - - - FCF yield 0% 8% 4% 4% Foreign exchange rate adj. - - - - Dividend yield 1% 1% 2% 2% Net change in cash 1,736 4,494 1,436 555 P/B 10x 9x 7x 5x Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 78 February 27, 2018 Initiation of Coverage Melco Resorts & Entertainment (MLCO US, BUY, TP: $37.2)
BUY HOLD SELL Poised for 2Q18 Turnaround: Initiate at BUY
▪ Operator of City of Dreams (CoD), Studio City (MSC) and Altira in Macau. In 2014 it Target Price: $37.2 Current Price: $28.27 embarked on its global expansion with the opening of CoD Manila. CoD is well known 52-Week High (MM) $30.49 for its premium mass expertise 52-Week Low (MM) $16.00 EV (MM) $16,692 ▪ We forecast EBITDA to grow 15%/19% in FY18/19, higher than consensus by 2%/8%, Market Cap (MM) $15,369 with an earnings recovery starting in earnest from 2Q18E Shares Outstanding (MM) 544 ▪ Currently trading at 11x FY18E EV/EBITDA and 24x P/E with a 2% dividend yield, we Average Daily Trading Volume (M) 3.2 initiate coverage at BUY with a 12-month TP of US$37.20, based on 14x FY18E EV/ Source: Factset EBITDA, in line with its five-year average
Net revenue/EBITDA to grow 11%/10% in FY18E Price Performance We expect net revenue to grow slower than Macau GGR in 1H18, followed by a recovery 35 from 2H18, driven by: 1) MSC’s ramp-up with 16% net revenue growth and 2) additional capacity at CoD when Morpheus opens in late 2Q18E with 780 hotel rooms. We model 30 Morpheus to obtain 50 new-to-market gaming tables. We believe the operational trend 25 in FY18 to be “bottom, then up”, as CoD's reshuffled management team could have a 20 positive effect on its premium mass business. We project company EBITDA to grow 15% y-y. MLCO increased its quarterly dividend at the 4Q17 result release to US$0.135 per 15 ADS from US$0.090; we expect this to remain unchanged. Feb-17May-17 Aug-17 Nov-17 Feb-18 Young gaming company seeking global expansion MLCO-US NASDAQ (rebased) MLCO is the first Macau casino operator with success outside Macau: CoD Manila became an Entertainment City leader with Solaire Resorts. In its pipeline ahead we see: Source: FactSet 1) MSC expansion plan, although no details have been disclosed yet; 2) MLCO has a strong interest in Japan gaming, which was legalized in 2016 and may be introduced in the long term; 3) its parent company, Melco International, has launched a 75%-owned project in Cyprus, CoD Mediterranean. Given that MLCO is its major casino-operating arm, we see potential for the Cyprus business to be injected into MLCO at some stage. Below-industry valuation with high growth potential With a solid expansion pipeline ahead, we believe MLCO is well positioned to grow as a global gaming operator. Its near-term outlook also appears solid, as the new CoD management has a strong track record of developing the premium mass business (the current CoD president led MSC’s ramp-up). We initiate at BUY with a TP of US$37.20, based on 14x FY18E EV/EBITDA and equivalent to 31x FY18E P/E, with a 1% dividend yield. Risks include: 1) Greater-than-expected competition from MGM Cotai, and 2) further, and frequent, reshuffling of management. Summary financial data Highlights 2017A 2018E 2019E 2020E Revenue (MM) ($) 5,285 5,873 6,444 6,680 EBITDA (MM) ($) 1,285 1,480 1,755 1,870 Research Team EPS ($) 0.71 1.20 1.71 1.78 Angela Han Lee EV/EBITDA 13x 11x 9x 9x [email protected] P/E 40x 24x 17x 16x Nate Deng FCF yield 5% 6% 8% 9% [email protected] Dividend yield 1.0% 2.0% 2.0% 2.0% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 79 February 27, 2018 Initiation of Coverage Company introduction
Company background One of the six gaming concessionaires in Macau, Melco Resorts (MLCO) is licensed to operate four casinos: City of Dreams (CoD) and Studio City (MSC) in Cotai, and Altira in Taipa. MLCO also runs Mocha Club, which is a café-style venue for electronic gaming machines in eight locations in Macau. MLCO had 16% market share in 2017.
Melco Resorts was previously Melco Crown Entertainment, jointly controlled by Melco International, led by Lawrence Ho (son of Stanley Ho), and Crown Resorts (CWN AU), led by James Packer. Over 2016-2017, Crown Resorts disposed its stake via share repurchase by MLCO and the secondary market. MLCO is now a subsidiary of Melco International and has been renamed. Its gaming concession expires in Jun 2022.
In Manila, MLCO operates CoD Manila, which leads the gaming zone called “Manila Entertainment City” with Solaire. Together with its parent company, MLCO has aggressive expansion plans. In Macau, the fifth CoD tower, known as Morpheus, appears set to open in late 2Q18E. In addition, there are plans for expansion of Studio City and CoD. MLCO also has expressed strong interest in the Japan gaming market.
Auditor. The company employs Ernst & Young as its auditor.
Exhibit 1: Ownership structure
Lawrence Ho Others
53% 47% Melco International (200 HK)
51% 5%
Melco Resorts Oriental (MLCO US) Regent
72%
Melco Resorts Philippines (MCP PM)
100% 100% 100% 60% 100% 100% 75%
Altira City of Mocha Studio CoD Tigre de CoD Dreams Club City Manila Cristal Mediterranean
Macau Casino Philippine Russia Cyprus Casino Casino Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 80 February 27, 2018 Initiation of Coverage Properties
City of Dreams (CoD) Located in Cotai, CoD is an integrated resort catering to high-end premium mass gamblers. It opened in 2009 and offers 479 gaming tables, 712 slot machines and 1,400 hotel rooms. It is well-known among tourists for its resident show, “House of Dancing Water”. The “Dancing Water Theatre” and wide retail area brought diversification to Macau’s tourism industry, but the property’s main target remains high-end cash gamblers. These core clients have also been drawn to competitors’ properties, such as Wynn Palace; in our view, the major goal for CoD in FY18 will be bringing these core clients back.
Exhibit 2: City of Dreams (without Morpheus) Exhibit 3: FY18E revenue and property EBITDA
(US$mn) 4,000 367
3,000 1,800 2,000
1,000 1,552 897 - Revenue Adj. EBITDA
VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company website Source: CRSHK estimates
We believe Morpheus could be the driver for CoD to turn around this year. Upon this opening in mid-2018, we model Morpheus to add 50 new-to-market gaming tables and 780 hotel rooms to CoD’s offering. Including the contribution from Morpheus, we project CoD’s net revenue/EBITDA to grow at 9%/11% in FY18.
Exhibit 4: City of Dreams with Morpheus
Source: CRSHK
China Renaissance Securities (Hong Kong) Limited 81 February 27, 2018 Initiation of Coverage Macau Studio City (MSC) Originally launched as a mass-only property, it came to add VIP customers later. MSC opened in 2015 offering 293 gaming tables, 883 slot machines and 1,600 hotel rooms. The property’s ownership was dramatic: the project was jointly initiated by US investment firms and a Hong Kong company – eSun Holdings. MLCO took over a 60% stake from eSun in 2011 and launched the property successfully in 2015. However, the ramp-up was relatively slow due to: 1) product mismatch (it had been a family- vacation oriented property but with luxury retail outlets), 2) isolation from other Cotai properties due to the Parisian’s construction, and 3) lower-than-expected synergy with CoD due to conflicts of interest (MLCO owns 100% of CoD, but only 60% of MSC). MSC responded by reconfiguring its gaming floor to add a VIP area, and then gradually began ramping up. We project MSC’s net revenue/EBITDA to grow steadily at 16%/28% in FY18.
Exhibit 5: Macau Studio City Exhibit 6: FY18E revenue and property EBITDA
(US$mn) 2,500
2,000 214
1,500 1,050 1,000
500 698 428 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company website Source: CRSHK estimates
Altira This is a cozy luxury property in Taipa with the best view from the hotel of the Peninsula. Altira is a small-scale property but well known for excellent dining options, spas and swimming pool. Opened in 2007, it is MLCO’s first property with 103 gaming tables and 262 hotel rooms. However, it is too far removed from both the Peninsula gaming zone and Cotai integrated resort area and, therefore, barely breaks even. We project Altira’s FY18 EBITDA to continue to be minimal at US$74mn.
China Renaissance Securities (Hong Kong) Limited 82 February 27, 2018 Initiation of Coverage
Exhibit 7: Altira Exhibit 8: FY18E revenue and property EBITDA
(US$mn) 1,000
28 750 102
500
657 250
74 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA Source: Company website Source: CRSHK estimates
City of Dreams Manila This resort is well positioned in a high-growth area driven by a newly emerging VIP sector. CoD Manila opened in 2014 in Manila’s Entertainment City, offering 291 gaming tables, 1,800 slot machines and 946 hotel rooms. It is the second casino property opened in the area, after Solaire’s opening in 2013. The third property, Okada Manila, opened in 2016. CoD Manila is on track to ramp up, backed by: 1) the cluster effect of new adjoining properties, and 2) the attractive tax regime and loose regulatory environment for junkets to bring in high rollers. We project CoD Manila should deliver a flat performance in FY18, with a more significant increase in FY19 with expansion of the resort.
Exhibit 9: City of Dreams Manila Exhibit 10: FY18E revenue and property EBITDA
(US$mn) 1,000 125
750
424 500
250 375 231 - Revenue Adj. EBITDA VIP GGR Mass GGR Non-gaming revenue Adj. EBITDA
Source: Company website Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 83 February 27, 2018 Initiation of Coverage Forecast EBITDA CAGR of 17% over FY17-19E
Expecting FY18/19 net revenue to grow 11%/10% We expect 2018 to be a mixed year for MLCO with major headwinds ahead in 1H18. Its flagship casino, CoD, is still undergoing optimization after a senior management reshuffling, and a new premium-mass-focused competitor, MGM Cotai, having just opened next door. However, we think MLCO will regain momentum in 2H18, after management settles in and the opening of Morpheus widens the non-gaming amenities of CoD.
Exhibit 11: Revenue projections Exhibit 12: Revenue breakdown by property
(US$mn) (US$mn) 8,000 20% 4,000
16% 6,000 3,000
12% 4,000 2,000 8%
2,000 4% 1,000
0 0% 0 FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Total net revenue y-y Altira City of Dreams Studio City City of Dreams Manila
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
Expect FY18E/19E EBITDA to grow 15%/19% Apart from CoD’s recovery, other properties should also grow. We expect the ramp- up of MSC to continue, making up an increasingly bigger portion of MLCO’s EBITDA.
Exhibit 13: Property EBITDA projections Exhibit 14: EBITDA breakdown by property
(US$mn) (US$mn) 2,100 40% 1,400
1,800 1,200 30% 1,500 1,000
1,200 800 20% 900 600
600 400 10% 300 200
0 0% 0 FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Adjusted EBITDA y-y Altira City of Dreams Studio City City of Dreams Manila
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 84 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis Although the company is in the process of building Morpheus, it is relatively small and an expansion of CoD. Therefore, MLCO’s cashflow has not been impacted much.
We expect the company’s operating cashflow to remain solid at the US$1.3bn-1.5bn level in the coming three years, with gradual improvement of CoD’s premium mass performance. The company’s capex is likely to be stable as well, potentially leading to steady growth in free cashflow.
With less capex pressure and improving operating cashflow, the company raised its quarterly DPS to US$0.135 per ADS from US$0.090 per ADS originally, and we expect it to be maintained for the foreseeable future, given that there has been no significant hike in net debt.
Exhibit 15: Key financials of cashflow and balance sheet
US$mn FY16 FY17 FY18E FY19E FY20E Operating cashflow 1,158 1,018 1,354 1,571 1,586 Net income 176 347 589 839 874 Depreciation and amortisation 552 538 584 579 574 Change in working capital 402 45 (22) (22) (8) Others 28 87 203 175 145
Investing cashflow 281 (530) (513) (457) (453) CAPEX (438) (566) (516) (459) (456) Others 719 36 3 3 3
Financing cashflow (1,347) (782) (989) (895) (748) Net proceeds from banks and others (1,145) 70 (706) (677) (648) Dividend paid (386) (821) (264) (264) (264) Others and forex adjustment 183 (32) (19) 47 165
Net change in cash 91 (294) (148) 219 385 Free cashflow 937 765 942 1,274 1,406
Cash at year-end 1,702 1,408 1,260 1,480 1,865 Borrowings 3,720 3,558 3,058 2,558 2,058 Net debt (cash) 2,018 2,149 1,797 1,078 192 Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 85 February 27, 2018 Initiation of Coverage Valuation
Currently trading at 11x FY18E EV/EBITDA The company is currently trading at 11x FY18E EV/EBITDA, 24x P/E with a 2% dividend yield. It is trading at a discount to its Macau peers’ average; and has a more complicated corporate structure (owns 60% of Studio City) and is the only Macau gaming name listed in the US. We think the valuation gap is unlikely to narrow over our investment horizon.
Exhibit 16: 1-year forward EV/EBITDA Exhibit 17: 1-year forward P/E 60 23
20 50
17 40 14 30 11
8 20 5 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 10 1-yr fwd EV/EBITDA Mean Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 1-yr fwd P/E Mean Source: Bloomberg, company data, CRSHK estimates Source: Bloomberg, company data, CRSHK estimates
Initiate at BUY with TP of US$37.20 Our 12-month TP of US$37.20 is based on 14x FY18E EV/EBITDA, in line with its five-year historical trading average. Our TP implies 31x/22x FY18E/19E P/E and 1%/1% dividend yield. While we expect a competitive challenge from the opening of MGM Cotai right next door, we think CoD should start to recover soon given that: 1) its management has restructured and 2) with the expanded product offering from Morpheus. We believe the property could surprise the market with a higher-than- expected earnings improvement.
Catalysts 1) Potential pick-up at CoD from 2H18E, and 2) confirmation of the opening date for the fifth hotel/casino tower, Morpheus.
Risks 1. Greater-than-expected competition from MGM Cotai: MGM Macau has strong expertise in the premium mass business, and its recently opened MGM Cotai is likely to position itself for premium mass visitors as well, potentially taking share from CoD. 2. Continued reshuffling at the management level: MLCO changed its senior management structure and assigned a property president in late 2016. After a year of operations, MLCO was unhappy with the performance of CoD, so it reshuffled CoD’s senior management in Jan 2018. We believe it is positive for the company to react quickly to unsuitable executives, but uncertainty at the senior management level makes this a double-edged sword.
China Renaissance Securities (Hong Kong) Limited 86 February 27, 2018 Initiation of Coverage Financial statements
Balance Sheet Income statement US$ mn FY17 FY18E FY19E FY20E US$ mn FY17 FY18E FY19E FY20E Current assets 1,845 1,721 1,963 2,356 Total net revenue 5,285 5,873 6,444 6,680 Cash & equivalents 1,408 1,260 1,480 1,865 Casino expenses (3,374) (3,693) (3,929) (4,009) Account receivables 177 196 215 223 F&B expenses (58) (60) (64) (63) Inventories 35 39 43 43 Entertain and other opex (88) (115) (126) (124) Other current assets 225 225 225 225 Other operating expenses (1,157) (1,221) (1,261) (1,301) Non-current assets 7,050 6,982 6,862 6,744 Adjusted EBITDA 1,285 1,480 1,755 1,870 PPE 5,731 5,742 5,702 5,664 Operating profit 608 783 1,064 1,183 Gaming sub-concession 256 199 142 84 Interest expense (230) (206) (177) (148) Land use rights 787 765 742 719 Interest income 4 3 3 3 Other non-current assets 276 276 276 276 Other non-operating items (66) (17) (15) (13) Total assets 8,895 8,702 8,825 9,100 Pre-tax profit 315 562 874 1,025 Current liabilities 1,684 1,685 1,686 1,687 Income tax expense 0 8 12 14 ST borrowings 51 51 51 51 After-tax profit 315 570 886 1,039 Account payables 16 17 18 19 Non-controlling interests 32 19 (47) (165) Other current liabilities 1,617 1,617 1,617 1,617 Net profit to S/H 347 589 839 874 Non-current liabilities 3,875 3,375 2,875 2,375 Basic EPS (US$) 0.71 1.20 1.71 1.78 LT borrowings 3,507 3,007 2,507 2,007 DPS (US$) 0.41 0.54 0.54 0.54 Other non-current liabilities 369 369 369 369 Total liabilities 5,559 5,061 4,562 4,062 Ratios Common stock – par value 15 15 15 15 FY17 FY18E FY19E FY20E Reserves 2,873 3,197 3,771 4,381 y-y Non-controlling interests 448 430 477 642 Total net revenue 17% 11% 10% 4% Shareholders’ equity 3,336 3,641 4,263 5,038 Adjusted EBITDA 32% 15% 19% 7% Total equity and liabilities 8,895 8,702 8,825 9,100 Op profit 67% 29% 36% 11% Net profit 97% 70% 42% 4% Statement of cash flows Profitability US$ mn FY17 FY18E FY19E FY20E EBITDA margin 24% 25% 27% 28% Operating cashflow 1,018 1,354 1,571 1,586 OP margin 11% 13% 17% 18% Net income 347 589 839 874 NP margin 7% 10% 13% 13% D&A 538 584 579 574 ROE 12% 18% 22% 20% Finance costs 226 203 175 145 ROIC 9% 13% 19% 21% Change in working capital 45 (22) (22) (8) Liquidity Other operating cashflow (139) - - - Debt/equity 123% 95% 68% 47% Investing cashflow (530) (513) (457) (453) Net debt/equity 74% 56% 28% 4% CAPEX (566) (516) (459) (456) Current ratio 1.1x 1.0x 1.2x 1.4x Interest received 4 3 3 3 Quick ratio 0.9x 0.9x 1.0x 1.2x Other investing cashflow 32 - - - Operating efficiency Financing cashflow (782) (989) (895) (748) Asset turnover 0.6x 0.7x 0.7x 0.7x Net from borrowings 70 (706) (677) (648) Valuation ratios Share issue - - - - EV/EBITDA 13x 11x 9x 9x Dividend paid (821) (264) (264) (264) P/E 40x 24x 17x 16x Other financing cashflow (32) (19) 47 165 FCF yield 5% 6% 8% 9% Foreign exchange rate adj. - - - - Dividend yield 1% 2% 2% 2% Net change in cash (294) (148) 219 385 P/B 5x 4x 4x 3x Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 87 February 27, 2018 Initiation of Coverage Melco International Development (200 HK, BUY, TP: HK$34.7)
BUY HOLD SELL Melco Resorts Proxy for HK Investors: Initiate at BUY
▪ We initiate coverage at BUY on Melco International, a holding company that derives Target Price: HK$34.7 Current Price: HK$22.75 90% of its NAV from Melco Resorts (BUY, MLCO US, TP US$37.20), a Macau-based 52-Week High (MM) HK$24.90 casino operator with ambitions of global expansion 52-Week Low (MM) HK$11.72 EV (MM) $86,690 ▪ We forecast MLCO will see stable EBITDA growth of 15%/19% y-y in FY18/19, Market Cap (MM) $34,952 on improvement at its City of Dreams resort in Macau, driven by the opening of Shares Outstanding (MM) 1,536 Morpheus, its fifth hotel/casino tower Average Daily Trading Volume (M) 4.8 ▪ Shares are trading at a 56% discount to our FY18E NAV estimate, vs. the five- Source: Factset year average holdco discount of 34%. Our 12-month SOTP-derived TP of HK$34.70 factors in the historical 34% discount
Price Performance Conglomerate with interests in gaming and leisure 26 53% owned by Lawrence Ho, Melco International’s NAV is derived mostly from its 51% stake in MLCO, which operates gaming concessions in Macau and Manila. It also 22 holds 75% of a Cyprus gaming project, City of Dreams Mediterranean. We believe the 18 company's 5% stake in Oriental Regent, a Vladivostok gaming business, is likely to be 14 disposed, as Lawrence Ho recently divested his personal interest in Summit Ascent, the entity that owns Oriental Regent. The company has said it is also seeking gaming 10 opportunities in Japan through MLCO. Feb-17May-17 Aug-17 Nov-17 Feb-18 Earnings improvement at MLCO to be the major driver 200-HK Hang Seng (rebased) MLCO’s flagship property, CoD in Macau, has been under pressure in the past three quarters due to deterioration of the premium mass business. We expect CoD’s operation Source: FactSet to start bottoming in 2Q18 on the back of: 1) management reshuffling in Jan 2018, and 2) the addition of 780 hotel rooms to the current 1,400 rooms when Morpheus opens around the end of 2Q18E. We project MLCO’s EBITDA to grow 15%/19% y-y, driven by improvement at CoD and the continued ramp-up of Studio City. Trading at 56% discount to our FY18E NAV vs. historical 34% discount Melco International's NAV discount narrowed significantly in FY17 from 60%, after its stake in MLCO was boosted to 51%, implying greater management control. We expect earnings improvement at MLCO to provide the main catalyst for shares to reach our TP of HK$34.70, which is based on SOTP with a 34% holding company discount applied, in line with its five-year historical mean. Risks to our target price include: 1) Greater-than- expected competition from MGM Cotai, and 2) ongoing management reshuffling.
Summary financial data Highlights 2017E 2018E 2019E 2020E Research Team Revenue (MM) (HK$) 41,234 46,511 51,036 52,974 Angela Han Lee EPS (HK$) 1.85 4.74 6.56 7.33 [email protected] P/E 13x 5x 4x 3x Nate Deng Dividend yield 0.0% 1.0% 1.0% 1.0% [email protected] ROE 13% 26% 27% 24% Source: China Renaissance Securities (Hong Kong) Limited China Renaissance Securities (US) Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON APPENDIX A
China Renaissance Securities (Hong Kong) Limited 88 February 27, 2018 Initiation of Coverage Company introduction
A conglomerate with investments in leisure and entertainment Lawrence Ho is the major shareholder of Melco International, with a 53% stake. His investments in public companies are mostly done through Melco International. In FY17, the company disposed several non-core businesses, such as MelcoLot, which was its China lottery business. Currently, the major business units within Melco International are:
1. 51% stake in Melco Resorts (MLCO US), its Macau and Manila gaming business 2. 5% in Oriental Regent, its Russia gaming business 3. 75% stake in City Of Dreams Mediterranean, its Cyprus gaming business Auditor. The company employs Ernst & Young as its auditor.
Exhibit 1: Ownership structure
Lawrence Ho Others
53% 47%
Melco International (200 HK)
51% 5%
Melco Resorts Oriental (MLCO US) Regent
72%
Melco Resorts Philippines (MCP PM)
100% 100% 100% 60% 100% 100% 75%
City of Mocha Studio CoD CoD Altira Tigre de Cristal Dreams Club City Manila Mediterranean
Philippines Macau Casino Russia Casino Cyprus Casino Casino
Source: Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 89 February 27, 2018 Initiation of Coverage Forecast EBITDA CAGR of 30% over FY17-19E
Melco Resorts (MLCO) is the major source of earnings We forecast MLCO’s EBITDA to see a 17% FY17-19E CAGR to US$1,755mn, backed by City of Dreams (CoD). MLCO currently operates three Macau casinos (CoD, Studio City, Altira) and a Manila casino (CoD Manila). The ramp-ups of Studio City and CoD Manila in FY17 were impressive, while CoD in Macau lagged due to weakness in the premium mass business. Post management reshuffling of CoD in Jan 2018 and the opening of its fifth hotel/casino tower Morpheus in mid-2018, we believe CoD’s performance could start to improve from 2H18E if big cash players are successfully enticed to return. We expect CoD’s EBITDA to grow 11%/24% in FY18E/19E, driving MLCO’s EBITDA growth.
Exhibit 2: MLCO’s revenue/EBITDA
(US$mn) 40% 6,500
30% 5,000
20% 3,500
2,000 10%
500 0% FY16 FY17 FY18E FY19E FY20E Total net revenue Adjusted EBITDA Total net revenue y-y EBITDA y-y Source: Company data, CRSHK estimates
Casino operating license in Russia and Cyprus Russia gaming – Oriental Regent. Oriental Regent operates the Tigre de Cristal casino in Vladivostok, Russia, which opened in Nov 2015. Major shareholders at the launch were Summit Ascent (102 HK, 60%) and Melco International (5%), both of which were controlled by Lawrence Ho. However, in Dec 2017, Lawrence Ho sold his personal interest in Summit Ascent and we see high probability for Melco International to dispose its 5% stake in Summit Ascent as well, completely cutting the tie between Russian gaming and Lawrence Ho. Oriental Regent’s size is relatively small (121 hotel rooms, c.40 gaming tables open on average, HK$57mn EBITDA in 1H17), and any potential disposal would be unlikely to have a material impact on Melco International’s earnings or share price.
China Renaissance Securities (Hong Kong) Limited 90 February 27, 2018 Initiation of Coverage
Exhibit 3: Tigre de Cristal Exhibit 4: Market cap of Summit Ascent (102 HK), holding 60% of Oriental Regent
(HK$mn) 12,000
8,000
4,000
0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 102 HK Mkt Cap Source: Bookings.com Source: Bloomberg, CRSHK
Cyprus gaming – first European gaming business. Representing Melco International’s first foray outside Asia to become a global leisure and entertainment operator, this business unit took over already-built satellite casinos. We believe the major focus point will be its new casino, City of Dreams Mediterranean. The casino is expected to offer 130 gaming tables and 1,200 slot machines. Phase 1 of the property is expected cost €500mn (US$573mn) for 500 hotel rooms and other non- gaming amenities. The ownership structure was updated in Dec 2017, and we think the contribution from the new resort will start in FY21E or later.
China Renaissance Securities (Hong Kong) Limited 91 February 27, 2018 Initiation of Coverage Cashflow and balance sheet analysis As MLCO represents most of its assets, Melco International is highly dependent on MLCO’s business growth. Operating cashflow and free cashflow growth are driven mostly by MLCO, which continues to grow with CoD’s expansion.
Net debt, excluding MLCO, is low, and we expect it to have turned net cash in FY17, on strong dividend income from MLCO.
Exhibit 5: Key financials of cashflow and balance sheet
US$mn FY16 FY17E FY18E FY19E FY20E Operating cashflow 8,193 12,285 15,078 16,981 17,812 Profit before tax 9,929 2,864 7,237 9,952 11,263 Depreciation and amortisation 3,325 6,164 6,630 6,576 6,523 Change in working capital 3,232 1,099 (171) (175) (59) Profit/loss from JV/associates (179) 2 - - - Others (8,115) 2,155 1,382 628 84
Investing cashflow 8,693 (2,365) (5,465) (4,985) (4,946) CAPEX 7,570 (2,365) (5,465) (4,985) (4,946) Others 1,123 - - - -
Financing cashflow (3,625) (6,754) (7,533) (7,203) (6,857) Net proceeds from banks and others (3,362) (3,634) (6,343) (5,996) (5,649) Dividend paid (187) (3,158) (1,190) (1,207) (1,207) Forex adjustment (76) 38 - - -
Net change in cash 13,260 3,167 2,080 4,793 6,009 Free cashflow 15,413 8,245 7,982 10,418 11,338
Cash at year-end 13,728 16,894 18,975 23,768 29,777 Borrowings 30,410 29,071 25,196 21,321 17,446 Net debt (cash) 16,683 12,177 6,222 (2,447) (12,330)
Net debt (cash) excluding MLCO 1,043 (4,481) (7,706) (10,800) (13,822) Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 92 February 27, 2018 Initiation of Coverage Valuation SOTP valuation methodology with holdco discount We derive the fair value of Melco International’s individual business units separately, and then apply a holding company discount. The four components of our SOTP are: 1) its stake in MLCO, based on our EV/EBITDA-based TP of US$37.20; 2) the Russia business, based on the latest market cap of Summit Ascent (102 HK, Not Covered), 3) latest book value of other business units such as investment property; and 4) our FY18E projection of net cash. We apply a 34% holding company discount, based on the five-year historical average, to the sum of these four components to arrive at our estimated FY18 NAV and target price.
Exhibit 6: 1-year forward NAV discount
90%
80%
70%
60%
50%
40% Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Market Px/NAV Mean Mean+1SD Mean-1SD Source: Company data, CRSHK estimates
Initiate at BUY with TP of HK$34.70 We think MLCO’s business is on a decent uptrend backed by: 1) new leadership at CoD, and 2) the opening of Morpheus, the fifth tower at CoD in Macau. Melco International’s current share price implies a 56% discount to our FY18E NAV estimate, which is far below its historical mean.
Exhibit 7: SOTP valuation
Stake % Methodology Value % of Per share (HK$mn) NAV (HK$) Melco Resorts 51% Listed in the US: MLCO US CRSHK target price: 72,452 90% 47.30 US$37.20 Oriental Regent 5% Summit Ascent with 60% of 102 HK market price 110 0% 0.10 Oriental Regent ownership; listed in Hong Kong: 102 HK Investment property Book value as at FY16-end 190 0% 0.10 Total investments 72,751 Net cash (debt) FY18E-end estimates, 7,706 10% 5.00 excluding MLCO's FY18E net cash (debt) Net asset value 80,457 Holding company discount 5-year historical mean 34% (17.80) Fair value after discount 53,102 66% No. of shares (mn) 1,531 Fair value per share (HK$) 34.70 Source: Bloomberg, Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 93 February 27, 2018 Initiation of Coverage Exhibit 8: FY18E NAV breakdown
52.50 47.30
34.70
MLCO Oriental Investment Net cash NAV Holding NAV after Regent property discount discount Source: Company data, CRSHK estimates
MLCO proxy for HK investors with holdco discount to narrow in long term Melco International’s 90% of our FY18E NAV estimate is from its 51% stake in MLCO. Therefore, we believe Melco International is a good proxy for Hong Kong investors with limited access to MLCO, to gain exposure to MLCO’s earnings recovery in 2H18E. While our TP reflects its NAV discount at historical mean, we see potential for this to narrow by: 1) more involvement of Melco International in MLCO’s management, taking more control on MLCO’s operation, 2) potential disposal of Russia gaming business (Lawrence Ho sold his personal stake in Dec 2017), and 3) the injection of the Cyprus gaming business into MLCO at a later stage.
Catalysts 1) Potential pick-up of CoD from 2H18E, and 2) confirmation of Morpheus hotel/casino opening date.
Risks 1. Greater-than-expected competition from MGM Cotai: MGM Macau has strong expertise in the premium mass business, and its recently opened MGM Cotai is likely to position itself as a premium mass property as well. CoD is one of leading properties in Cotai for its solid premium mass clients, so MGM Cotai might be positioned to take share from CoD. 2. Continued reshuffling at the management level: MLCO changed its senior management structure and assigned a property president in late 2016. After a year of operations, MLCO was unhappy with the performance of CoD, so it reshuffled CoD’s senior management in Jan 2018. Although it is positive for the company to react quickly to management issues, this can be a double-edged sword if it results in unstable senior management.
China Renaissance Securities (Hong Kong) Limited 94 February 27, 2018 Initiation of Coverage Financial statements
Balance Sheet Income statement HK$ mn FY17E FY18E FY19E FY20E HK$ mn FY17E FY18E FY19E FY20E Current assets 20,288 22,550 27,526 33,597 Casino revenue 38,354 43,177 47,321 49,251 Cash & equivalents 16,894 18,975 23,768 29,777 Entertain, retail & others 1,534 1,894 2,143 2,149 Inventories 336 365 400 402 Catering service income 740 804 881 884 Account receivables 1,969 2,121 2,269 2,330 Rooms revenue 572 604 663 665 Other current assets 1,089 1,089 1,089 1,089 Other revenue 35 31 28 26 Non-current assets 82,076 80,911 79,320 77,743 Total revenue 41,234 46,511 51,036 52,974 PPE 47,665 47,761 47,429 47,113 Other income/gains 72 - - - Land use rights 5,554 5,388 5,222 5,056 Employee expenses (6,868) (6,810) (6,756) (6,587) Gaming license 4,897 3,803 2,708 1,614 Gaming tax and levy (16,940) (19,184) (21,138) (21,996) Other intangible assets 22,307 22,307 22,307 22,307 Raw materials used (401) - - - Interests in JV - - - - Other expenses (6,742) (5,442) (5,753) (6,090) Interests in associates 14 14 14 14 Depre and disposals (4,743) (5,370) (5,316) (5,263) Other non-current assets 1,639 1,639 1,639 1,639 Chg in assets fair value - - - - Total assets 102,364 103,461 106,846 111,340 Finance cost (2,746) (2,468) (2,121) (1,774) Current liabilities 13,194 13,205 13,213 13,216 Profit/loss from JV/assos (2) - - - ST borrowings 1,895 1,895 1,895 1,895 Pre-tax profit 2,864 7,237 9,952 11,263 Account payables 11,004 11,015 11,023 11,026 Income tax expense (430) (1,086) (1,494) (1,690) Other current liabilities 295 295 295 295 Non-controlling interest 563 1,111 1,583 1,649 Non-current liabilities 32,814 28,939 25,064 21,189 Net profit 2,997 7,261 10,041 11,222 LT borrowings 27,176 23,301 19,426 15,551 Core net profit 2,836 7,261 10,041 11,222 Other non-currents 5,638 5,638 5,638 5,638 Basic EPS (HK$) 1.96 4.74 6.56 7.33 Total liabilities 46,008 42,144 38,277 34,405 Core EPS (HK$) 1.85 4.74 6.56 7.33 Share capital 5,473 5,473 5,473 5,473 DPS (HK$) 0.08 0.14 0.14 0.14 Reserves 16,750 22,822 31,656 41,671 Non-controlling interests 34,133 33,022 31,439 29,790 Shareholders’ equity 56,356 61,317 68,569 76,934 Tot equity and liabilities 102,364 103,461 106,846 111,340 Ratios FY17E FY18E FY19E FY20E Statement of cash flows y-y HK$ mn FY17E FY18E FY19E FY20E Total revenue 73% 13% 10% 4% Operating cashflow 12,285 15,078 16,981 17,812 Net profit -71% 142% 38% 12% Profit before tax 2,864 7,237 9,952 11,263 Core net profit 156% 38% 12% D&A 6,164 6,630 6,576 6,523 Profitability Chg in working capital 1,099 (171) (175) (59) Net margin 7% 16% 20% 21% Profit/loss from JV/assos 2 - - - Core net margin 7% 16% 20% 21% Other operating cashflow 2,155 1,382 628 84 ROE 13% 26% 27% 24% Investing cashflow (2,365) (5,465) (4,985) (4,946) Core ROE 13% 26% 27% 24% CAPEX (2,365) (5,465) (4,985) (4,946) Liquidity Disposals - - - - Debt/equity 52% 41% 31% 23% Investment in JV/assos - - - - Net debt(cash)/equity 22% 10% -4% -16% Dividends & others - - - - Current ratio 2x 2x 2x 3x Financing cashflow (6,754) (7,533) (7,203) (6,857) Quick ratio 1x 2x 2x 2x Net from borrowings (4,086) (6,343) (5,996) (5,649) Valuation ratios Share issue and others 452 - - - P/E 13x 5x 4x 3x Dividend paid (3,158) (1,190) (1,207) (1,207) P/B 2x 1x 1x 1x Forex adj. 38 - - - Dividend yield 0% 1% 1% 1% Net change in cash 3,167 2,080 4,793 6,009 EV/EBITDA 8x 6x 5x 5x Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 95 February 27, 2018 Initiation of Coverage Appendix Macau gaming history Exhibit 1: Macau gaming history
Time Event 1847 The Portuguese government of Macau legalized gaming for the first time.
1930 Hou Heng Company won the first casino monopoly concession.
1937 The government passed a Decree Law to integrate different gaming operations.
1937 Casino monopoly concession was granted to Tai Heng Company.
1961 Macau governor designated the region as a “permanent gaming region”, lowered its tax and identified tourism as an economic pillar.
1962 STDM, owned by Ip Hon, Terry Ip Tak Lei, Stanley Ho Hon San and Henry Fok, was granted the casino monopoly.
1970 STDM's first casino, Casino Estoril, as well as its flagship Casino Lisboa started operation.
2000 After the handover, the Macau Gaming Committee was established to study gaming policies, legal issues, regulations, etc.
2002 Macau SAR granted casino concessions to SJM, (owned by STDM), Galaxy Entertainment Group and Wynn Macau.
2002 Galaxy was permitted to issue a sub-concession to Sands China for no charge.
2004 Sands Macau (Sands China) and Waldo (Galaxy) started operation.
2005 SJM issued a sub-concession to MGM for US$200mn.
2006 Wynn Macau issued a sub-concession to Melco Resorts for US$900mn. Wynn opened its first casino, Wynn Macau.
2007 Melco Resorts and MGM China opened their first Macau casinos, Crown (since rebranded as Altira) and MGM Grand. Sands opened its second casino, Venetian Macau.
2008 SJM opened Grand Lisboa.
2011 Galaxy Macau (Galaxy) started operation.
2012 Sands Cotai Central (Sands China) started operation.
2015 Galaxy Macau (Galaxy) opened Phase 2 expansion. Studio City (Melco Resorts) started operation.
2016 Wynn Palace (Wynn Macau) and Parisian (Sands China) started operation.
2018 MGM Cotai (MGM China) started operation.
Now There are 41 casinos in Macau (25 in Macau Peninsula plus 16 in Taipa and Cotai). By operator, SJM has 22, Galaxy has 6, Sands has 5, Melco has 4, and Wynn and MGM have 2 each.
Source: DICJ, Company data, CRSHK
China Renaissance Securities (Hong Kong) Limited 96 February 27, 2018 Initiation of Coverage Macau casino locations Peninsula is the downtown area of Macau, and most of the older casinos are located here. However, the reclaimed land situated between the islands of Coloane and Taipa, which became known as “Cotai”, was identified as the location for integrated resorts.
Exhibit 2: Macau casino map
Gongbei Gate - 49% Entrance
ZHUHAI HK – ZH – Mo Bridge Casinos - Peninsula MACAU 1 SJM-Grand Lisboa (2008) 2 SJM-Lisboa (1970) 3 Macau Ferry Terminal & Heliport: 3 SJM-Oceanus (2009) - 21% of arrivals 4 Galaxy-StarWorld (2006) 2 5 Wynn Macau-Wynn Macau (2006) 6 MGM China-MGM Macau (2007) 7 Sands China-Sands Macao (2004) SJM-Satellite Casinos Galaxy-Satellite Casinos Casinos – Taipa & Cotai 8 Melco Crown-Altira (2007) Taipa Ferry Terminal 9 Galaxy-Casino Broadway (2015) -13% Entrance 10 Galaxy-Galaxy Macau 1 & 2 (2011 & 2015) 11 Galaxy-Galaxy Macau 3 & 4 (est.2019 by stage) 12 Sands China-Venetian (2007) Airport TAIPA - 8% Entrance 13 Sands China-Four Seasons Plaza (2008) 14 Sands China-Parisian (2016) 15 15 Melco Crown-City of Dreams (2009) HENGQIN 10 18 12 16 Sands China-Sands Cotai Central (2012) 13 16 17 11 17 MGM China-MGM Cotai (2018) 14 18 Wynn Macau-Wynn Palace (2016) 20 Hengqin Gate (Lotus Bridge) 19 SJM-Lisboa Palace (est.2019) - 8% Entrance COTAI 20 Melco Crown-Studio City (2015) Melco Crown-Satellite Casino
COLOANE
Source: DICJ, CRSHK
China Renaissance Securities (Hong Kong) Limited 97 February 27, 2018 Initiation of Coverage Peninsula vs. Cotai Integrated resorts are located primarily in the Cotai area, which offers a wider range of accommodation and entertainment options. Therefore, we expect Cotai to continue growing market share in both GGR and property EBITDA. Because new casinos see a greater contribution from the high-margin mass business and have higher table yield, we expect Cotai’s property EBITDA contribution to be even larger than GGR.
Exhibit 3: GGR breakdown Exhibit 4: Property EBITDA breakdown
(US$mn) (US$mn) 50,000 12,000
40,000 10,000
8,000 30,000 76% 75% 64% 6,000 73% 20,000 61% 59% 71% 55% 4,000 66% 10,000 51% 2,000
- - FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Cotai GGR Peninsula GGR Cotai EBITDA Peninsula EBITDA Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 98 February 27, 2018 Initiation of Coverage Comparison of casino operators Exhibit 5: Comparison of casino operators
Casino operators Overall target VIP target Mass target SJM Old and classic mid-end More contribution from a Mid to low-end, more day clients junket operator called Golden trippers. Minimum bet is the Group lowest, due to the big exposure to satellite casinos in Peninsula Galaxy All categories of clients More contribution from big Mid to high-end. Minimum bet junkets and high-end in-house is relatively high in both VIP Galaxy Macau and Starworld
Wynn Macau High-end More contribution from big High-end. Both Wynn junkets and in-house VIP Peninsula and Wynn Palace have strong focus on customers' experience
Sands China Low-end More in-house VIP and low- Low-end. Tourist-driven end clients property, with Las Vegas-like properties. Well-known MICE place for Macau
MGM China Mid and high-end with More contribution from big Mid-end. Property has never standout F&B offering junkets and mid-end VIP been larger than others, but used to surprise the market on margin, thanks to premium mass Melco Resorts Cool and high-end More high-end VIP High-end. Originator of premium mass segment: cash players betting as big as VIP gamblers. Michelin-rated restaurants are major attractions Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 99 February 27, 2018 Initiation of Coverage By casino operator, Sands China and Galaxy are the top two in Macau GGR. MGM China has the smallest market share in Macau, but this is likely to improve gradually with MGM Cotai’s opening.
Exhibit 6: FY18E GGR by properties
US$mn 10,000
8,000 Others Others Starworld 6,000 Cotai Central CoD Manila Other self- Wynn Palace Others 4,000 promoted and Parisian Studio City Galaxy Macau satellite casinos MGM Cotai 2,000 Wynn Peninsula Venetian City of Dreams Grand Lisboa MGM Macau - Galaxy SJM Wynn Macau Sands China MGM China Melco Resorts
Source: CRSHK estimates
Exhibit 7: GGR projection by operator Exhibit 8: Market share by operator
(US$mn) 100% 50,000 14% 14% 14% 15% 14% 80% 8% 7% 9% 10% 10% 40,000 23% 23% 23% 22% 21% 60% 30,000 12% 17% 17% 17% 16% 40% 20,000 20% 16% 15% 17% 18% 10,000 20% 22% 22% 22% 21% 21% 0 0% FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Galaxy SJM Galaxy SJM Wynn Macau Sands China Wynn Macau Sands China MGM China Melco Resorts w/o Manila MGM China Melco Resorts w/o Manila
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 100 February 27, 2018 Initiation of Coverage In terms of EBITDA, Sands China is definitely the market leader. Although its GGR market share is similar to Galaxy, Sands China has much larger exposure to the high- margin mass business. SJM has the lowest EBITDA compared to the other five casino operators; due to its large exposure to satellite casinos which are operated by third parties, part of earnings go to these third-party operators. Therefore, although SJM is not the smallest operator by market share, its EBITDA is the smallest.
Exhibit 9: FY18E property EBITDA by properties
US$mn 4,000
3,000 Others
Others Cotai Central 2,000 Starworld CoD Manila Parisian Others Other self- Wynn Palace 1,000 Studio City Galaxy Macau promoted and Venetian MGM Cotai satellite casinos City of Dreams Wynn Peninsula MGM Macau - Grand Lisboa Galaxy SJM Wynn Macau Sands China MGM China Melco Resorts
Source: CRSHK estimates
Exhibit 10: EBITDA projection by operator Exhibit 11: EBITDA contribution by operator
US$mn 12,000 100% 12% 12% 13% 14% 13% 10,000 8% 80% 9% 8% 9% 9% 8,000 60% 36% 34% 33% 32% 32% 6,000 40% 4,000 13% 17% 17% 17% 17% 7% 5% 5% 5% 6% 2,000 20% 23% 25% 24% 23% 23% 0 0% FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Galaxy SJM Galaxy SJM Wynn Macau Sands China Wynn Macau Sands China MGM China Melco Resorts w/o Manila MGM China Melco Resorts w/o Manila Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 101 February 27, 2018 Initiation of Coverage In terms of gaming tables, SJM and Sands China have the most gaming tables in Macau. As SJM has been operating casinos for far longer than the others, it did not face restrictions when adding tables. Sands China also obtained sufficient gaming tables in the past, since its major focus is the mass business with low table yields. Other operators rely heavily on new gaming tables when they open a new casino.
By hotel rooms, Sands China has a 40% market share of Macau’s 4- and 5-star hotels. Galaxy is next, and its market share will expand further when it doubles its number of hotel rooms at Galaxy Macau with the opening of Phases 3 & 4 in the long term.
Exhibit 12: FY18E number of gaming tables and market Exhibit 13: FY18E hotel room inventory and market share share of Macau 4- and 5-star hotels
2,000 14,000 40% 26% 26% 12,000 1,600 10,000 18% 1,200 8,000 14% 6,000 800 9% 14% 7% 12% 4,000 9% 400 6% 2,000 1% - - Galaxy SJM Wynn Sands MGM Melco Galaxy SJM Wynn Sands MGM Melco Macau China China Resorts Macau China China Resorts w/o w/o Manila Manila
Source: Company data, CRSHK estimates Source: Company data, CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 102 February 27, 2018 Initiation of Coverage Top 10 casino properties in Macau Galaxy Macau is the largest property in terms of GGR, according to our FY18 estimates, with 16% market share. When it adds Phases 3 & 4, its market-leading position will be more consolidated.
Seven of the top 10 casinos are located in Cotai, because resorts in Cotai are far larger in size.
Exhibit 14: FY18E top 10 properties by GGR
(US$mn) 7,500 6,117 6,000
4,500 3,342 3,036 2,982 2,809 3,000 2,352 2,082 1,991 1,855 1,503 1,500
- Galaxy - Wynn - Wynn - Sands - Melco - City MGM - SJM - Galaxy - Sands - Melco - Galaxy Wynn Wynn Venetian of Dreams MGM Macau Grand Starworld Cotai Central Studio City Macau Palace Peninsula Lisboa
Source: CRSHK estimates
Exhibit 15: FY18E GGR market share of top 10 properties 20% 16%
15%
9% 10% 8% 8% 8% 6% 6% 5% 5% 5% 4%
0% Galaxy - Wynn - Wynn - Sands - Melco - City MGM - SJM - Grand Galaxy - Sands - Melco - Galaxy Wynn Palace Wynn Venetian of Dreams MGM Macau Lisboa Starworld Cotai Central Studio City Macau Peninsula
Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 103 February 27, 2018 Initiation of Coverage Galaxy Macau maintains its No.1 position in terms of EBITDA as well. However, No.2 is different: Venetian ranks second in profit in Macau although it ranked No.4 in terms of GGR, thanks to its large exposure to the high-margin mass business.
A highlight could be Melco Resorts’ Studio City, replacing SJM’s Grand Lisboa which is in top 10 by GGR, thanks to Studio City’s continuous ramp-up。
Exhibit 16: FY18E top 10 properties by EBITDA
(US$mn) 2,000 1,689 1,600 1,293 1,200 897 815 812 802 800 591 432 428 422 400
- Galaxy - Sands - Melco - City Wynn - Sands - Wynn - MGM - Sands - Melco - Galaxy - Galaxy Venetian of Dreams Wynn Cotai Central Wynn MGM Macau Parisian Studio City Starworld Macau Peninsula Palace
Source: CRSHK estimates
Exhibit 17: FY18E Macau EBITDA contribution of top 10 properties to overall Macau casinos’ property EBITDA
20% 18%
15% 14%
10% 10% 9% 9% 9% 6% 5% 5% 5% 5%
0% Galaxy - Sands - Melco - City Wynn - Sands - Wynn - MGM - Sands - Melco - Galaxy - Galaxy Venetian of Dreams Wynn Cotai CentralWynn Palace MGM Macau Parisian Studio City Starworld Macau Peninsula
Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 104 February 27, 2018 Initiation of Coverage No change here in terms of number of gaming tables, too. Galaxy Macau also continues to be the largest property in offering gaming facilities. All properties in the top 10 are located in Cotai, except SJM’s Grand Lisboa.
Exhibit 18: FY18E top 10 properties by number of tables in operation and market share
800 11%
9% 600 8%
6% 6% 6% 400 5% 5% 5% 4%
200
- Galaxy - Sands - Melco - City Sands - SJM - Sands - Wynn - MGM - Wynn - Melco - Galaxy Venetian of Dreams Cotai Central Grand Parisian Wynn PalaceMGM Macau Wynn Studio City Macau Lisboa Peninsula
Source: CRSHK estimates
Sands Cotai Central has the largest hotel room supply in Macau. Even after Galaxy Macau adds Phases 3 & 4, we think Cotai Central will continue to be No.1.
Exhibit 19: FY18E top 10 properties by number of hotel rooms and market share
7,500 20% 6,000
4,500 11% 9% 9% 3,000 6% 5% 5% 4% 1,500 3% 2%
- Sands - Galaxy - Sands - Sands - Melco - City Wynn - Melco - MGM - Wynn - MGM - Cotai Central Galaxy Venetian Parisian of Dreams Wynn Studio City MGM Cotai Wynn MGM Macau Macau Palace Peninsula
Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 105 February 27, 2018 Initiation of Coverage The No.1 property generating the highest table yield in town is Wynn Palace. Well differentiated by its luxury products and services, the 2016 launch of Wynn Palace reaffirmed the Wynn name as the preferred choice among high rollers from China. No.2 is also under the Wynn brand: Wynn Macau (Peninsula). Nos. 3 and 4 are the two flagship properties of Galaxy: Starworld and Galaxy Macau.
Exhibit 20: FY18E top 10 properties by table GGR/table/day
(US$) 30,000 27,646 25,895
24,000 21,399 21,140 20,049 19,170 17,196 16,403 18,000 15,493 14,923
12,000
6,000
- Wynn - Wynn - Galaxy - Galaxy - Melco - MGM - Melco - City Sands - Melco - Sands - Wynn Wynn Galaxy Starworld Altira MGM Macau of Dreams Plaza Studio City Venetian Palace Peninsula Macau
Source: CRSHK estimates
The ranking varies if we count in terms of GGR per room per day. Since Peninsula casinos welcome more day trippers, the top 5 high-ranking casinos are unsurprisingly in Peninsula.
Exhibit 21: FY18E top 10 properties by GGR/room/day
(US$) 16,000 13,814
12,000 11,070 10,715
8,251 8,000 7,262 5,531 5,367 4,888 4,300 4,140 4,000
- SJM - MGM - Galaxy - Wynn - Sands - Melco - Wynn - Galaxy - Melco - City Sands - Grand MGM Macau Starworld Wynn Sands Altira Wynn Galaxy of Dreams Plaza Lisboa Peninsula Macao Palace Macau
Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 106 February 27, 2018 Initiation of Coverage Top line is important but not as much as profitability. Also, since Peninsula serves more day trippers, Peninsula casinos generate higher table earnings per hotel room.
Exhibit 22: FY18E top 10 properties by EBITDA/room/day
(US$) 3,000 2,780
2,400 2,272 2,215 2,085 2,074
1,800 1,498 1,372 1,350 1,289 1,247 1,200
600
- MGM - Galaxy - Wynn - Sands - Sands - SJM - Melco - City Galaxy - Wynn - Sands - MGM Macau Starworld Wynn Sands Plaza Grand of Dreams Galaxy Wynn Venetian Peninsula Macao Lisboa Macau Palace
Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 107 February 27, 2018 Initiation of Coverage Major casino games offered in Macau
Exhibit 23: Major casino games offered in Macau
2017 GGR % of House Games Feature (MOP mn) total GGR edge Baccarat Baccarat is a comparing card game played between two 234,956 88% 2.7%-3.0% hands: the "banker" and the "player." Both hands are assigned two cards, maximum of three cards. The hand with higher value wins the game.
Slot machine Casino games played against machines, rather than 13,164 5% 4%-7% cards. The machine spins when player presses the button.
Cussec (Sic Bo) Cussec is played with 3 standard dice. A player can 7,480 3% 2.8% make any number/combo of bets on the table. Outcome is based on the combinations of the 3 dice.
Blackjack Known as "Twenty-one", Blackjack is a card game 2,662 1% 0.3% where players compete to accumulate the highest hand value that does not exceed 21.
Live Multi Game Gaming machine/system that allows players to play 2,431 1% 2.7%-3.0% traditional card games at electronic terminals. A live dealer distributes cards in front. Players can see the live broadcasting of the process through their terminal and make betting decisions. Stud Poker Stud Poker is a card game where the player and the 1,170 0.4% 5.2% dealer compare their five cards individually. The best poker hand wins.
Roulette Roulette is a game where the ball rolls inside a wheel 1,143 0.4% 2.8%-5.3% that marks numbers 1-36 in red and black pockets, 0 in green. Players can bet numbers, color, odd or even, etc.
3-Card Poker 3-Card Poker is a card game where the player and 909 0.3% 3.4% dealer compare their 3 cards on hand.
3-Card Baccarat Similar to baccarat but with 3 cards on hand. 504 0.2% 2.4% Game
Total 266,121 Source: CRSHK estimates
China Renaissance Securities (Hong Kong) Limited 108 February 27, 2018 Initiation of Coverage Appendix A
Analyst Certification
We, Angela Han Lee and Nate Deng, certify that the views expressed in this research report accurately reflect our personal views about any and all of the subject securities or issuers featured in this report. Furthermore, no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report. The one of the research analysts responsible for this publication is not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of China Renaissance Securities (US) Inc. and therefore may not be subject to applicable restrictions under FINRA rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Important Disclosures
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Distribution of Ratings and Investment Banking Below is the distribution of research recommendations as of February 26, 2018 Rating Count Percent IB Count IB% Buy 19 73.08% 19 100.00% Hold 6 23.08% 6 100.00% Sell 1 3.85% 1 100.00% China Renaissance Ratings as of December 31, 2016: Ratings of Buy, Hold and Sell have a time horizon of twelve to eighteen months from the date of publishing the initiation or subsequent rating/price target change report issued for the subject company. The ratings are as follows: Buy – The expected return on the subject company’s stock price should outperform the typical benchmark market index for the subject company's primary listing exchange (e.g. the S&P 500 for US-listed stocks) over the above- defined time horizon from the publishing date of the initiation of coverage or subsequent report announcing a rating change. Hold – The stock price of the subject company is not expected to either appreciate or depreciate meaningfully from the typical benchmark market index for the subject company's primary listing exchange (e.g. the S&P 500 for US- listed stocks) during the above-stated time horizon. Sell – The expected return on the subject company’s stock price should underperform the typical benchmark market index for the subject company's primary listing exchange (e.g. the S&P 500 for US-listed stocks) over the above- defined time horizon from the publishing date of the initiation of coverage or subsequent report announcing a rating change. Not Rated – China Renaissance has removed the rating and, if applicable, the price target, for the subject company's stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, should no longer be relied upon. An NR designation is not a recommendation or a rating. Not Covered – a company for which China Renaissance research has not been published.
Valuation Methodology 27 HK: We value Galaxy Entertainment Group (27 HK) at HK$79.00 based on 18x FY18E EV/EBITDA, implying 27x FY18E P/E. Risks that may impact our TP assigned to 27 HK include: 1) Greater-than-expected cannibalization of the Cotai market from Wynn Palace and MGM Cotai. 2) Greater-than-expected increase in marketing expenses to promote the VIP and retail businesses. 200 HK: We use SOTP method to value Melco International (200 HK) and derive a TP of HK$34.70 at 34% holding company discount of its FY18E NAV. Risks that may impact our TP assigned to 200 HK include: 1) More-than-expected competition from MGM Gotai. 2) Frequent reshuffling of management. MLCO US:
China Renaissance Securities (Hong Kong) Limited 111 February 27, 2018 Initiation of Coverage We value Melco Resorts & Entertainment (MLCO US) at US$37.20 based on 14x FY18E EV/EBITDA, implying 31x FY18E P/E. Risks that may impact our TP assigned to MLCO US include: 1) More-than-expected competition from MGM Gotai. 2) Frequent reshuffling of management. 2282 HK: We value MGM China (2282 HK) at HK$24.50 based on 19x FY18E EV/EBITDA, implying 35x FY18E P/E. Risks that may impact our TP assigned to 2282 HK include: 1) Slower-than-expected gain in market share of MGM Cotai. 2) Sharp decline in China's economy. A new property like MGM Cotai would suffer more than existing ones with a sticky client base. 1928 HK: We value Sands China (1928 HK) at HK$51.30 based on 20x FY18E EV/EBITDA, implying 26x FY18E P/E. Risks that may impact our TP assigned to 1928 HK include: 1) Greater-than-expected competition in Cotai low-end premium mass market due to MGM Cotai opening. 2) Obstacles in license renewal in 2022. 880 HK: We value SJM (880 HK) at HK$7.80 based on 12x FY18E EV/EBITDA, implying 27x FY18E P/E. Risks that may impact our TP assigned to 880 HK include: 1) More-than-expected migration of market share from Peninsula to Cotai. 2)Delay of Lisboa Palace’s opening. 3) Any significant change in Ho Family resulting in a reshuffling of the management team. 1128 HK: We value Wynn Macau (1128 HK) at HK$31.30 based on 17x FY18E EV/EBITDA, implying 26x FY18E P/E. Risks that may impact our TP assigned to 1128 HK include: 1) Greater-than-expected competition in VIP and premium mass from MGM Cotai. 2) Unfavorable litigation results driving changes to management structure. 3) Obstacles in license renewal in 2022. Compendium Report Disclosure: Because this report covers six or more companies, you may request current applicable disclosures by writing to: Research Department, China Renaissance Securities (US) Inc., 600 Fifth Avenue, 21st Floor, Rockefeller Plaza, New York, NY 10020, USA. General Disclosures This research is for institutional investors only. Other than disclosures relating to China Renaissance, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. China Renaissance conducts a global integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our research group. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including China Renaissance salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies
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