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Hong Kong MGM China Hong Kong 16 September 2013 Initiating Coverage Buy (new) MGM China The Chase For Yield; Initiate at BUY Share price: HKD23.30 (as at close 13 Sep 13) Initiate at BUY; TP HKD27.40. MGM represents a solid yield play with Target price: HKD27.40 (new) 5% and 6% forward yields for FY13 and FY14 backed by solid cashflow. On top of decent yields, our TP implies 18% upside on a positive re- rating over the next few quarters as the Street has not fully priced in the Jeremy TAN Cotai project. As a single-casino operator, MGM is the second cheapest [email protected] trading at 12.6x of FY14 EV/EBITDA vs. the sector’s 13x. However, it (852) 2268 0635 has the second highest daily win per mass market table that is 20% YIN Shao Yang above the sector. Initiate with BUY and TP of HKD27.40, based on [email protected] SOTP valuation, at 12x FY14F EV/EBITDA for MGM Macau while MGM (602) 2297 8916 Cotai is expected to be worth HKD5.1 per share or 19% of our NAV estimate, based on 20% ROIC and 9% WACC. Stock Information Generous dividends, solid cashflow. MGM paid out 95% of net profit Description: MGM China is a casino gaming resort in 2011 and 86% in 2012, compared to competitors such as Galaxy and developer and operator in the Greater China Region. Melco Crown that have yet to start paying dividends to shareholders. As at Jun 2013 it has net cash of about HKD2.5b. With HKD11.3b of credit Ticker: 2282 HK line still undrawn, it remains well-funded for its Cotai investment. Shares Issued (m): 3,800 Market Cap (US$m): 11,418 Cotai to be a game changer. By mid-2016, its single-casino image will 3-mth Avg Daily Turnover (US$m): 12 HSI: 22,915 be history with MGM Cotai onboard. Furthermore, at these levels the Free Float (%): 22 upside from MGM Cotai has not been fully priced by the Street. The project will house 1,600 hotel rooms (+275%), 500 gaming tables Major Shareholders: % MGM Resorts 51 (117%) and 2,500 slot machines (183%). The casino will also have an Chiu King Ho 27 atrium thrice the size of Bellagio. Piling work is about 70% complete and MGM hopes to hand over the site to the contractors by year-end. Market share firm under strong management. MGM’s market share inched up 0.9ppt YoY to 10% in 1H13 despite stiff competition from Cotai, bucking the decline seen by other peninsula operators. The opening of its new VIP gaming area on the second floor at the end of Historical Chart last year to meet rising junket demand led to a 10% increase in VIP rolling chip turnover YTD. Management has also striven to maximise 45.0 40.0 returns on its gross floor area and enhance its non-gaming facilities to 35.0 30.0 capture appeal. 25.0 20.0 MGM China – Summary Earnings Table 15.0 FYE Dec (HKDm) 2011A 2012A 2013F 2014F 2015F 10.0 Revenue 20,294 21,774 24,660 27,976 32,061 5.0 EBITDA 4,933 5,310 6,165 6,994 8,015 0.0 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Recurring Net Profit 3,279 4,941 5,098 5,718 6,476 Recurring Basic EPS (HKD) 0.9 1.2 1.3 1.5 1.7 PRICE PRICE REL. TO HANG SENG INDEX EPS growth (%) n/a 38.2 12.5 12.2 13.3 Source: Bloomberg DPS (HKD) 0.8 1.0 1.2 1.4 1.5 PER (x) 11.8 11.8 17.4 15.5 13.7 EV/EBITDA (x) 7.5 9.4 13.8 12.6 11.5 Performance: Div Yield (%) 8.0 7.3 5.2 5.8 6.6 52-week High/Low HKD24.20/HKD12.03 P/BV (x) 8.7 9.0 12.4 10.7 9.2 Net Gearing (%) Net Cash Net Cash Net Cash Net Cash 37.8 1-mth 3-mth 6-mth 1-yr YTD ROE (%) 74.3 76.6 71.5 69.2 67.5 Absolute (%) 2.9 20.7 40.4 91.6 75.5 ROA (%) 25.8 30.7 31.4 27.7 24.7 Relative (%) 1.2 11.0 38.8 77.3 74.3 Consensus Net Profit (HKDm) 5,160 5,819 6,249 Source: Company data, Maybank Kim Eng estimates SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS MGM China Holdings Limited Contents Investment thesis P3 Earnings forecasts P10 Financial assumptions P11 Valuation and recommendations P12 Appendix P13 16 September 2013 Page 2 of 20 MGM China Holdings Limited Investment thesis Cotai a game changer to help shed single-casino image. MGM Cotai spans over 71.8k sq m, which is more than 50% the size of MGM China’s casino in Macau. The project, estimated to cost HKD20b (USD2.6b), will house 1,600 hotel rooms (+275%), 500 gaming tables (+117%) and 2,500 slot machines (183%). Piling work at the site, which is east of the Sands Cotai Central site, is about 70% complete and MGM aims to hand over to the contractors by year-end. It has appointed China State Construction to build the complex at a cost of USD1.35b. MGM Cotai will include a large-scale atrium, which is three times the size of Las Vegas’s Bellagio, as well as an ultra-luxury and exclusive hotel called the Mansion. We view the development as positive for MGM, as its growth would no longer be constrained by just a single casino on the peninsula. It would also be able to capture a slice of the Cotai gaming pie with 85% of the new casino’s gross area being devoted to mass market amenities. Figure 1: MGM gaming and hotel supply MGM Macau MGM Cotai Increase (%) Gaming table 427 500 117 Slot machines 1,367 2,500 183 Hotel rooms 582 1,600 275 Source: Company, Maybank Kim Eng Figure 2: MGM Cotai – view of construction site Figure 3: MGM Cotai – view from City of Dreams Source: Macau Daily Times Source: APG Macau Figure 4: Projected supply under development in Macau Total cost Expected date of Operator Ticker Property Hotel rooms Tables Slots (USDb) completion Galaxy 27 Galaxy Macau Phase 2 1,350 500 1,000 2.6 2015 Galaxy Macau Phase 3 & 4 5,500 1,000 3,000 7.7 2017 Wynn 1128 Wynn Cotai 2,000 400 TBD 4.0 2016 MGM 2282 MGM Grand Cotai 1,600 500 2,500 2.6 2016 Sands 1928 Sands Parisian 3,300 TBD TBD 2.6 2016 Melco Crown 6883 / MPEL Macau Studio City 2,000 400 1,200 2.1 2015 SJM 880 SJM Cotai 1,800 700 2,000 2.5 2017 Louis XIII 577 Louis xiii Casino 230 66 TBD 1.0 2016 Macau Legend 1680 Babylon 1,344 350 TBD 0.7 2014 Total 19,124 3,916 9,700 25.8 Source: Company, Maybank Kim Eng 16 September 2013 Page 3 of 20 MGM China Holdings Limited Strong yield. MGM has a dividend policy of semi-annual distribution of 35% of anticipated annual profits. On top of this, the company will consider distributing a special dividend subject to its cash flow requirements. Given the parent company MGM Resorts International (MGM US, Not Rated) 51% ownership of MGM China, from a dividend perspective, its interest is aligned with that of minority shareholders. The company has been a generous dividend payer, paying out 95% and 86% of net profit in 2011 and 2012, respectively. We forecast a 90% payout ratio, translating to FY13 and FY14 yields of 5% and 6%. We expect MGM’s dividend to be sustainable, supported by strong net cash hoard of HKD2.5b (as at Jun 2013) and an HKD11.3b credit line which could tapped for its Cotai expansion plans. Figure 5: MGM yield spread over 10 year treasuries (%) Figure 6: MGM dividend yield and free cash flow yield (%) Yield spread over HK 10 Yr Bill Dividend Yield Yield spread over China 10 Yr Bill Free Cash Flow Yield 8 16 7 14 6 12 5 10 4 8 3 6 2 4 1 2 0 0 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng EV/EBITDA second cheapest in sector. MGM has traded in a wide band between 6x and 13x consensus forward EV/EBITDA since its IPO. While MGM currently trades on the high range of its historical EV/EBITDA and largely in line with the sector’s average of 13x, it remains the second cheapest stock in the sector on an EV/EBITDA yardstick. Having displayed strong operational performance and consistent dividend yield the stock has since re-rated from its trough. Hurdles from further positive re-rating include : i) MGM operates a single casino property which lacks mass market amenities, ii) the location of property on the Macau peninsula means MGM lacks exposure to growth in Cotai, and iii) it had to pay a hefty sub-concession premium to SJM. Figure 7: MGM and Macau sector average forward EV/EBITDA (x) Average EV / EBITDA Mean +1 SD -1 SD MGM 16.0 14.0 +1 SD: 12.9x 12.0 Mean: 11.4x 10.0 -1 SD: 9.8x 8.0 6.0 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Source: Bloomberg, Maybank Kim Eng 16 September 2013 Page 4 of 20 MGM China Holdings Limited Figure 8: Macau gaming – relative valuation comparison Current Target PER EBITDA growth EV/EBITDA ROA Dividend Yield BB Price Price (x) (%) (x) (%) (%) Name Code Rating (HKD) (HKD) 13Y 14Y 13Y 14Y 13Y 14Y 13Y 14Y 13Y 14Y Galaxy 27 Hold 52.35 42.80 24.8 18.4 13.5 28.8 18.2 13.7 16.6 15.6 0.0 0.0 Melco Int’l 200 Buy 20.35 20.60 11.8 9.3 n/m n/m n/m n/m 12.1 13.3 0.0 0.0 Sands 1928 Buy 46.25 46.00 22.6 18.5 37.1 19.8 18.2 15.4 11.9 17.0 3.5 4.3 Wynn 1128 Sell 24.60 18.60 18.4 15.9 3.4 15.3 14.5 13.3 24.1 24.4 5.4 5.7 SJM 880 Buy 20.10 26.30 14.2 12.5 10.1 12.2 10.8 9.6 17.9 19.0 5.3 6.0 MGM 2282 Buy 23.30 27.40 17.4 15.5 16.1 13.4 13.8 12.6 31.4 27.7 5.2 5.8 Source: Bloomberg, Maybank Kim Eng (as at close 13 Sep 13) A highly efficient operator.
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