Macau Gaming

Macau Consumer Discretionary 30 July 2019

Macau Gaming

Trading on US-China trade tensions

 Four themes: 1) visa policy support, 2) GBA development, 3) operator promotions with SOEs, and 4) Chinese gamers’ preference for Macau  GGR for May (+1.8% YoY) and June (+5.9% YoY) moved into positive Andrew Chung, CFA territory; we expect growth to accelerate in 2H19 (852) 2773 8529  Maintain positive sector view; stock preference: Sands China, Galaxy [email protected] Entertainment, Melco Resorts, MGM China, SJM and Wynn Macau Terry Ng

(852) 2773 8530 [email protected]

See important disclosures, including any required research certifications, beginning on page 129

Macau Consumer Discretionary 30 July 2019

Macau Gaming

Trading on US-China trade tensions

(852) 2773 8530 [email protected]

What's new: We see 4 major investment themes emerging for the Macau Key stock calls Gaming Sector amidst ongoing US-China tensions: 1) extended easing of New Prev. domestic travel visa policies, 2) Greater Bay Area (GBA) development in Sands China (1928 HK) Rating Buy Buy improving immigration checkpoint procedures and logistics between Macau Target 50.10 45.60 and GBA cities, 3) continuous collaboration between SOEs and Macau Upside p 27.3% gaming operators, and 4) more Chinese gaming patrons potentially Galaxy Entertainment Group (27 HK) preferring Macau over US gaming destinations. We believe these themes Rating Buy Buy have supported Macau’s robust Mainland Chinese visitation growth YTD Target 67.20 61.40 (1H19 +23% YoY), while GGR growth for both May (+1.8% YoY) and June Upside p 21.6% (+5.9% YoY) turned positive. If visitation growth continues, factoring in the Melco Resorts & Entertainment (MLCO US) Rating Buy Outperform above themes, we expect it to be the catalyst for GGR growth in 2H19. Target 29.10 24.90 Upside p 21.5% What's the impact: Since July 2018, when trade tensions between the US MGM China Holdings (2282 HK) and China began, the Chinese government has implemented a number of Rating Buy Hold visa policies aimed at expediting visa approvals and cutting the cost of Target 16.68 16.68 visas for travel to/from Macau. Official estimates suggest 65m Mainland Upside p 20.7% residents will benefit from these new policies. Also, on 18 February 2019, SJM Holdings (880 HK) Rating Outperform Hold China released its development plan for the GBA, laying out initiatives for Target 10.00 8.80 accessibility improvement, infrastructure connectivity, and overall Upside p 11.4%

integration of Macau into the GBA. Meanwhile, since 4Q18, the Macau Source: Daiwa forecasts subsidiaries of China SOEs and Macau gaming operators (see p.19) have stepped up their joint promotions. Interestingly, travel from China to the US fell by 5.7% YoY for 2018, marking the first decline on a YoY basis in 15 years. Las Vegas Baccarat GGR fell by 17.9% between 3Q18 and 1Q19, signalling a potential shift in gaming patrons’ destination preference.

What we recommend: We expect Mainland Chinese visitations to continue to rise, benefiting all 6 operators. Our pecking order is: Sands (1928 HK, HKD39.35, Buy [1]), TP: HKD45.6 to HKD50.1; Galaxy (27 HK, HKD55.25, Buy [1]), TP: HKD61.4 to HKD67.2; Melco (MLCO US, USD23.96), upgraded to Buy (1) from Outperform (2), TP: USD24.9 to USD29.1; MGM (2282 HK, HKD13.82) upgraded to Buy (1) from Hold (3), TP: HKD16.68; SJM (880 HK, HKD8.98) upgraded to Outperform (2) from Hold (3), TP: HKD8.8 to HKD10.0; and Wynn (1128 HK, HKD19.16) upgraded to Outperform (2) from Hold (3), TP: HKD18.2 to HKD20.4. Key sector downside risks include: 1) slowing growth in visitations, 2) a deteriorating macro environment in China, 3) rapid CNY depreciation, and 4) a slowdown in GBA development.

How we differ: We forecast GGR growth using our proprietary fundamental-based 3G3S Model. Furthermore, we see China-US trade tension affecting Macau GGR as Mainland Chinese gamblers shift from the US to Macau, rather than shifting from US to Chinese operators.

See important disclosures, including any required research certifications, beginning on page 129

Macau Gaming: 30 July 2019

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Galaxy Entertainment Group 27 HK 55.25 Buy Buy 67.20 61.40 9.4% 3.404 3.414 (0.3%) 3.825 3.988 (4.1%) Melco Resorts & Entertainment MLCO US 23.96 Buy Outperform 29.10 24.90 16.9% 0.980 0.950 3.2% 1.270 1.206 5.3% MGM China Holdings 2282 HK 13.82 Buy Hold 16.68 16.68 0.0% 0.692 0.705 (1.8%) 0.911 0.996 (8.5%) Sands China 1928 HK 39.35 Buy Buy 50.10 45.60 9.9% 0.299 0.298 0.3% 0.356 0.355 0.4% SJM Holdings 880 HK 8.98 Outperform Hold 10.00 8.80 13.6% 0.415 0.420 (1.1%) 0.519 0.514 1.0% Wynn Macau 1128 HK 19.16 Outperform Hold 20.40 18.20 12.1% 1.135 1.182 (3.9%) 1.280 1.338 (4.3%) Source: Bloomberg, Daiwa forecasts

Macau Gaming: market share by GGR Macau Gaming: adjusted property EBITDA of main operators (HKDm)

100% 80,000 70,000 80% 60,000 60% 50,000 40,000 40% 30,000 20,000 20% 10,000 0% 0 2012 2013 2014 2015 2016 2017 2018 2019E 2012 2013 2014 2015 2016 2017 2018 2019E Sands Galaxy Melco SJM MGM Wynn Sands Galaxy Melco MGM SJM Wynn

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts

Macau Gaming: day trippers vs. overnight visitors as a % of Macau Gaming: Macau hotel inventory and occupancy rate total Mainland China visitations 80% (%) 40,000 100 70% 35,000 60% 90 30,000 50% 25,000 80 40% 20,000 30% 15,000 70 20% 10,000 60 10% 5,000 0% 0 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Same-day visitors Overnight visitors Macau Hotel Inventory (unit) (LHS) Macau Hotel Occupancy Rate (RHS)

Source: DSEC Source: DSEC

Macau Gaming: number of gaming tables and slot machines Macau Gaming: overnight visitors’ length of stay in Macau – overall vs. Mainland China (days) 18,000 2.4 16,000 2.3 14,000 2.2 12,000 10,000 2.1 8,000 2.0 6,000 1.9 4,000 2,000 1.8 0 1.7 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 No. of Tables No. of Slot machines Overall Mainland China

Source: DSEC Source: DSEC

Macau Gaming: 30 July 2019

Table of contents

Four investment themes amid US-China tensions ...... 4 How visa policy loosening maps into US-China trade talk progress ...... 6 How development of the GBA will drive growth in visitations from Mainland Chinese ...... 9 Targeting the mass market: joint promotions between China SOEs and Macau operators ...... 18 Change in Chinese gaming patrons’ preference between the US and Macau due to trade tensions ...... 25 Update on the gaming concession transition ...... 28 Making sense of everything: Daiwa’s 3G3S Model ...... 30 The 3G3S assessment chart ...... 31 Our revised forecast for mass market GGR using our 3G3S model ...... 32 Our revised forecast for VIP market GGR using our 3G3S model ...... 34 2019 EBITDA forecast and EBITDA trend ...... 36 Our coverage at a glance ...... 38 Appendix 1 ...... 45

Company Section Sands China ...... 47 Galaxy Entertainment Group...... 61 Melco Resorts & Entertainment ...... 75 MGM China Holdings ...... 89 SJM Holdings ...... 101 Wynn Macau ...... 113

Macau Gaming: 30 July 2019

Four investment themes amid US-China tensions

The US-China trade conflict has been one of the most talked-about topics in the global markets in 2019. The back-and-forth threats made by the US and swift retaliation by China have caused significant disruption to global markets. As a result, investors may be wondering whether there are still investment opportunities out there? We believe there are, and see the Macau Gaming sector in a good position to benefit from the ongoing US-China trade tensions.

In 1Q19, Macau experienced an unprecedented 23.5% YoY increase in Mainland Chinese visitations. As a key component of our 3G3S model, we believe that higher visitations will lead to higher GGR, as more potential gaming patrons visit Macau. Moreover, as part of our China penetration thesis in our initiation report (Initiation: next flight – gross gaming revenue), we can also translate visitations into expected longer days-per-stay as more hotel rooms are built and Macau diversifies with more non-gaming activities.

Macau: Mainland China visitations Total Mainland visitation 8,000,000 growth accelerated to 23.5% 23.5% YoY for 1Q19, 7,000,000 completely surpassing 6,000,000 market expectations 5,000,000

4,000,000

3,000,000

2,000,000 1Q 2Q 3Q 4Q 1Q 2018 2019

Source: DSEC, Daiwa

With this in mind, we ask ourselves, “What factors were responsible for this increase in the first place?” In our view, several emerging themes contributed to this significant increase in visitations. In particular, we see 4 key investment themes to watch if US-China trade tensions continue to increase, which we believe will lead to a further increase in visitations and as such, have a positive impact on Macau’s GGR.

Daiwa’s 4 investment themes during US-China trade tensions We highlight 4 key themes for the sector during ongoing US- China trade talks; Macau stands to benefit

Source: Daiwa

Macau Gaming: 30 July 2019

1) Visa policy support. During the period of US-China trade tensions, the Chinese government has rolled out 3 rounds of domestic travel visa easing policies, in September 2018, April 2019 and July 2019, including introducing the Entry-Exit Permit (EEP) to Hong Kong and Macau. The aim of these policies is to reduce the time and/or reduce the cost of applying for visas. In the case of Macau, we believe by enabling mainland residents to apply for the EEP more easily and cheaply, it incentivises travel to Macau.

2) Greater Bay Area Development. The Outline Development Plan for the Guangdong- Hong Kong-Macau Greater Bay Area (the document) was released on 18 February 2019. Specifically, the GBA project plans to integrate Macau into the GBA, becoming its “world class centre of tourism and leisure”. We expect future integration efforts to enhance connectivity through infrastructure improvements, such as the HKZM Bridge and planned high-speed rail extension to Zhuhai and Hengqin. We expect some of these initiatives to include improving speed and convenience of immigration checkpoint procedures and shuttle bus/ taxi services between Macau and GBA cities via the HKZM Bridge.

3) Joint promotions between China SOEs and Macau gaming operators. Over the past year, the Macau gaming operators and China SOEs have stepped up their joint promotions, such as travel, financial institutions, and retail. These include discounts on hotel rooms, shopping, F&B, and other non-gaming amenities. We believe these promotional initiatives will enable the Macau gaming operators to generate greater reach and awareness to potential gaming patrons in underpenetrated Mainland Chinese cities, indirectly drawing more visitors to Macau.

4) Chinese gamblers’ rising preference for Macau. Mainland China visitations to the US fell by 7.4% YoY between 3Q18 (the beginning of trade tensions) and 1Q19. As a result, travel from China to the US fell by 5.7% YoY for 2018, marking the first time in 15 years that Chinese visitor numbers to the US had declined on a YoY basis. Moreover, Las Vegas Baccarat revenue fell by 31.6% YoY for 1Q19. With the simultaneous events of ongoing trade tensions and loosening domestic policies, we believe these data suggest a shift in preference by high-quality Mainland Chinese gamblers from the US to Macau.

Moreover, Macau GGR has started to move back into the positive YoY growth zone over the past 2 months, rising by 1.8% YoY for May 2019 and 5.9% YoY for June. We believe the 4 themes discussed above will provide stimulus for further GGR growth in 2H19, benefiting all 6 operators we cover.

Macau: monthly GGR (MOPm) Macau GGR has started 28,000 8% to move back into 26,000 6% positive YoY growth 24,000 4% territory over the past 2 22,000 2% months 20,000 0% 18,000 (2%) 16,000 (4%) 14,000 (6%) 12,000 (8%) 10,000 (10%) Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19

Monthly GGR (MOPmn) YoY Change

Source: DSEC, Daiwa

Macau Gaming: 30 July 2019

How visa policy loosening maps into US-China trade talk progress

The government has Our first trade theme under the expected ongoing US-China trade tensions is for the implemented nationwide Chinese government to continuously roll out supportive visa relaxation policies to reduce visa relaxation policies the friction associated with domestic travel. The aim of these policies is to expedite the to support the domestic issue of visas to Mainland Chinese residents and cut the cost of applying for such visas. economy since the onset We expect this move by the government to have a positive impact on GGR by driving up of US-China trade demand for domestic travel. tensions; we believe these policies support Since trade tensions between the US and China began in July 2018, the Chinese Macau GGR government has rolled out 3 rounds of nationwide visa relaxation policies, including introducing the EEP for travel to and from Hong Kong and Macau. The following diagram outlines the key events that have occurred since 1 July 2018 when the first round of tariffs were implemented by the US.

Timeline of key events in US-China trade tensions

Source: Bloomberg, Daiwa

Macau Gaming: 30 July 2019

The visa relaxation Although the Chinese government has implemented visa relaxation policies in the past, we policies aim to cut the believe the trade conflict with the US has prompted the government to engage in some of time and cost of the most aggressive loosening of visa policies to date in order to support domestic applying for a visa; the consumption. The most aggressive policy easing occurred on September 2018, just 3 latest round of easing months after trade tensions began. Mainland Chinese citizens could for the first time apply (July 2019) is expected for, renew or change the EEP from any city nationwide; previously they would have to to benefit 65m Mainland return to the city in which their household registration, or ‘Hukou’, was registered in order Chinese citizens to apply. According to official estimates, the visa policy easing was expected to benefit 10.5m citizens, and reduce the aggregate application costs for Chinese citizens by CNY12bn in total. Moreover, the EEP processing time was reduced from 60 days to 7 working days.

On 26 March 2019, the China National Immigration Association announced its second batch of visa relaxation policies effective 1 April 2019. Under this round, EEP holders looking to visit Macau via group package tours could apply for a visa at automated machines in any city nationwide. According to official estimates, these visa policy easing measures will benefit 21m citizens, reduce annual transportation costs by CNY20bn, and hasten the application process for EEP package tour visa applications from 7 working days to less than 3 minutes.

The government’s most recent announcement, in July 2019, lowered the application cost for the EEP from CNY80 to CNY60. While a seemingly simple move, official estimates suggest it will reduce aggregate application costs to the Chinese public by CNY9bn per year, benefiting around 65m Mainland Chinese citizens.

Mainland China: individual visit scheme (IVS) visa policies since September 2018 Year Month Rules and benefits 2019 July Application cost for an EEP (往来港澳通行证) is reduced from CNY80 to CNY60. Any applications made before 1 July 2019 would not be subject to the lower price revisions. According to official estimates, the revised cost will benefit 65m Mainland residents, and reduce aggregate application costs by CNY9bn annually. 2019 April Chinese residents can apply for package tour visas using their approved EEP (往来港澳通行证) via automated machines in any city nationwide. The service is currently limited to package tour visa applications for non-Beijing residents. According to officials, the new policy will benefit/impact: - more than 21m Mainland residents - reduce annual transportation costs by CNY20bn - reduce the processing time for visa applications to less than 3 minutes. 2018 September Citizens can: 1) apply for or renew their package tour visa, and 2) change their EEP (往来港澳通行证) in any city nationwide that accepts EEP and visa (签注) applications. According to official estimates, the new policy will benefit/impact: - 2.7m Mainland residents renewing/changing their visas; and cut annual overall transports cost by CNY3bn - 7.8m Mainland residents who travel to Hong Kong, Macau, or Taiwan from their city of residence; cut annual overall transport costs by CNY9bn - shorten the processing time for EEPs from 60 days to 7 working days

Source: China Ministry of Public Security, Daiwa Note: qualified non-local residents include those who satisfy both of the following conditions: 1) non-local residents who have held a Residential Permit for more than one year, and 2) those who have paid into the social security fund for more than one year continuously

We note that previous rounds of visa policy easing have had a subsequent effect on visitation growth (travel), and mass GGR. For example, after the April 2019 visa policy easing measures were announced, visitations for May 2019 rose by a hefty 30.4% YoY. Moreover, since the September 2018 round of visa policy easing was announced, YoY growth for each subsequent month has been consistently above 10%.

Macau Gaming: 30 July 2019

Macau: Mainland Chinese monthly visitations We believe the visa Sep-18 visa policy Apr-18 visa policy Jul-18 visa policy 3,000,000 35.0% policy easing has had a easing easing easing significant effect on 2,500,000 30.0% 25.0% Macau’s Mainland 2,000,000 ? Chinese visitation and 20.0% 1,500,000 mass GGR growth 15.0% 1,000,000 10.0%

500,000 5.0%

0 0.0% Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19

Mainland visitation YoY Change

Source: DSEC, Daiwa

Furthermore, mass GGR has also trended up as a result of the higher-than-expected visitations. In 1Q19, mass GGR reached MOP35.2bn, higher than the previous record level of MOP33.2bn seen for 4Q18.

Macau: mass GGR (MOPm)

40,000 Sep-18 visa policy Apr-19 visa policy easing easing 38,000 ? 36,000 Jul-19 visa policy easing 34,000 32,000 30,000 28,000 26,000 24,000 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2018 2019

Source: DSEC, Daiwa

Will the visa policy improvements continue? Yes, we think so. We believe that as long as trade tensions remain a relevant risk to China’s economy, the Chinese government will roll out new visa policy easing measures more frequently. Moreover, the Outline Development Plan for the Guangdong-Hong Kong- Macau Greater Bay Area (discussed in more detail in the next section) indicates that one of the key policy agendas is to improve domestic social mobility by enhancing the ease of travel, and speed of immigration to, from and within the GBA. From this, we expect the Chinese government to roll out additional visa policy easing measures that aim to ease travel within the GBA.

Therefore, we would expect to see continuous improvements in convenience and speed of visa applications, and reduced expenses associated with visa applications and travel. As a result, we believe these simultaneous factors will result in continued growth momentum for Mainland Chinese visitations to Macau, which in turn would have a positive impact on mass GGR.

Macau Gaming: 30 July 2019

How development of the GBA will drive growth in visitations from Mainland Chinese

GBA development to see Our second trade theme is GBA development. On 18 February 2019, the Outline improvements in Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area (the connectivity and document) was released by the respective government organisations across the GBA. accessibility to Macau, Macau is one of the 4 core cities (the other 3 being Hong Kong, Guangzhou and which we expect to drive Shenzhen) and will become the GBA’s “world class centre of tourism and leisure”. As one long-term growth in of the 4 core cities, Macau will gradually become more integrated with other GBA cities Mainland China through: 1) transportation infrastructure improvements, and 2) accommodative cross- visitations to Macau border policies, such as faster immigration checkpoint procedures, and ramp-up of transport services on the HKZM Bridge. While the GBA project is a multi-decade, long-term effort, we expect it to lead to further growth in Mainland visitations to Macau, and have a positive impact on GGR.

Improving connectivity with infrastructure Part of the integration effort will involve increasing connectivity between the different GBA cities. By improving connectivity, not only would this shorten the travel time and make it more convenient for people to travel to Macau from GBA cities, we believe it would also allow Macau to ‘localise’ other transport hubs, such as airports. These all point toward potentially higher visitation growth for Macau.

The HKZM Bridge, which opened in October 2018, shortened the travel time between Hong Kong and Macau (via land border crossings, ie, Hong Kong Airport → Hong Kong → Shenzhen → Guangzhou → Zhuhai → Macau) from 4 hours to 40 minutes. Moreover, Macau is currently placing its efforts on improving connectivity with airports in neighbouring GBA cities, such as Guangzhou Airport (extension of the Intercity Rail), and Zhuhai Airport (Macau Light Rail Transit System). We believe that the current infrastructure pipeline (see table below) in the next 3-4 years should enable Macau to localise at least 3 airports in nearby cities.

Infrastructure pipeline to further connect Macau with Mainland China Facility Completion date Description Will connect the Guangzhou South High-speed Railway Station with Foshan, Guangzhou-Zhuhai Intercity est. 2019 Zhongshan to Zhuhai. The new extension line includes Zhuhai Station (Gongbei Railway Extension Line Phase 1 Gate), Hengqin (Lotus Gate) and Chimelong Ocean Park (7 stations in total). Eleven stations which will connect Taipa Ferry Terminal, Macau International Macau Light Rail System - Phase 1 est. 2019 Airport (MIA) and Lotus Gate Will further connect with the Guangzhou-Zhuhai Intercity Railway Extension Line Phase Macau Light Rail System - Phase 2 est. 2022 II through Lotus Gate Guangzhou-Foshan-Jiangmen- Will connect Guangzhou airport to Foshan, Jiangmen, Zhuhai Hengqin (Lotus Gate) est.2022 Zhuhai Intercity Rail Extension and Gongbei, which further connects the GBA cities Guangzhou-Zhuhai Intercity Railway Will further link Zhuhai Airport to Phase I stations including Hengqin (Lotus Gate), est. 2023 Extension Line Phase 2 Gongbei, and can be linked to Macau's Light Rail System via Hengqin (Lotus Gate)

Source: News websites, Daiwa

Improving accessibility with policy Chapter 9 of the Outline Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area highlights the importance of increasing the degree of market integration between cities in the GBA. In section 2, it outlines high-level plans to facilitate and improve the flow of people within the region. Some of these key development points include: 1) continuing to further relax visa policies for travel to and from the GBA (please refer to the previous section for more information), 2) increasing the number of automatic clearance channels at major land control points, and 3) improving policy measures for travel by single-plate vehicles between Hengqin, Macau, and other GBA cities.

We believe there is significant room for policy adjustments to increase utilization of connecting infrastructure. For example, the number of incremental Mainland visitors arriving via the HKZM Bridge has remained relatively flat since the bridge opened in

Macau Gaming: 30 July 2019

October 2018. In 1Q19, Mainland visitations via the HKZM Bridge accounted for less than 11% of total visitations via land checkpoints. As the GBA gradually pushes forward, we expect to see faster immigration checkpoint procedures and shuttle bus/taxi services between Macau and GBA cities. These initiatives are likely to lead to higher visitation growth, and thus, have a positive impact on Macau’s GGR.

Macau: mainland visitations via the HKZM bridge We see significant room 350,000 14% for policy enhancements 300,000 12% to fully utilize transport 250,000 10% infrastructure 200,000 8% 150,000 6% 100,000 4% 50,000 2% 0 0% Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19

Visitations via HKZM Bridge Share of visitations by land (%)

Source: DSEC, Daiwa

How important is the GBA to Macau? The GBA contributes a significant part of Macau’s tourism. We believe the GBA is vitally important to Macau’s gaming industry because of the large visitor base it receives. In 1Q19, the percentage share of visitations to Macau from GBA cities was 62.9% of the total number of visitors from Mainland and Hong Kong combined. In May 2019, the tally of arrivals from the 9 Mainland Chinese cities in the GBA grew by 45.8% YoY to 924,272.

Summary of GBA cities GDP (USDbn) Population (000’s) GDP per capita (USD) Area (km2) Guangzhou 331.3 14,904.4 22,534.9 7,249 Shenzhen 351.0 13,026.6 27,473.6 1,997 Zhuhai 42.2 1,891.1 23,101.4 1,736 Foshan 144.0 7,905.7 18,018.0 3,798 Huizhou 59.5 48,30.0 12,379.4 11,347 Dongguan* 120.0 83,42.5 14,259.9 2,460 Zhongshan 52.6 3,310.0 16,026.8 1,784 Jiangmen 42.0 4,598.2 9,178.0 9,507 Zhaoqing 31.9 4,151.7 7,719.9 14,891 Hong Kong 366.8 7,233.0 48,684.3 1,107 Macau 55.0 548.2 82,613.3 33 Total 1,596.5 70,741.4 55,910

Source: CEIC, China National Statistics Bureau, Hong Kong Census and Statistics Bureau, DSEC, Daiwa Note: *Population figure for Dongguan is 2017; GDP figures translated to USD at USD/CNY = 6.9, USD/HKD = 7.75, USD/MOP = 8.0

Macau: visitations from GBA cities In 1Q19, the percentage 1Q18 2Q18 3Q18 4Q18 1Q19 YoY Change (%) share of visitations to Hong Kong 1,478,549 1,521,582 1,545,623 1,782,171 1,793,114 21.3% Guangzhou 502,109 422,878 491,631 495,091 564,408 12.4% Macau from GBA cities Shenzhen 172,635 168,543 191,799 213,301 231,340 34.0% was 62.9% of the total Zhuhai 513,969 472,109 565,808 673,449 734,044 42.8% combined Mainland and Foshan 352,836 254,144 325,547 309,277 394,018 11.7% Huizhou 38,681 31,539 42,830 61,584 58,783 52.0% Hong Kong visitors Dongguan 83,811 64,816 87,469 91,291 111,281 32.8% Zhongshan 291,817 224,785 278,135 275,032 335,543 15.0% Jiangmen 281,923 226,717 267,522 258,804 299,112 6.1% Zhaoqing 75,602 66,541 80,217 78,081 82,952 9.7% Total 3,791,932 3,453,654 3,876,581 4,238,081 4,604,595 21.4%

Source: DSEC, Daiwa

Moreover, we believe the economic potential of the GBA will benefit Macau in the long run. The GBA is China’s ambitious plan to develop a world-class urban economic cluster that fosters regional development, and could rival the bay areas of 3 other major global cities, namely the Tokyo Bay Area, San Francisco Bay Area, and New York Bay Area.

Macau Gaming: 30 July 2019

Comparison table of major Bay Areas Total GDP of the GBA is projected to reach USD4.62tn by 2030, more than 2.6x the current size of the Tokyo Bay Area

Source: HKTDC Research, Daiwa

Currently, the total combined GDP of the GBA is c.USD1.60tn, and accounts for a 12.2% share of China’s total GDP (CNY90.03tn = USD1.305tn), in an area less than 1% of China’s total useable land mass. The GBA’s population size of 70.7m is greater than the population of the UK, and nearly equal to the 3 other major bay areas combined. In terms of GDP, population and land area, the region already surpasses the San Francisco Bay Area. We expect the region to develop rapidly due to fundamentally strong factors of production and future integration efforts in infrastructure and government policies. According to estimates by the Chinese government, the total GDP of the GBA is projected to reach USD4.62tn by 2030, more than 2.6x the current size of the Tokyo Bay Area.

Macau’s role in the GBA According to the document, the 4 core cities, namely, Hong Kong, Guangzhou, Shenzhen and Macau, will leverage and enhance their comparative advantages in order to pursue a coordinated development strategy across the region. Chapter 3 of the document provides an insight into how the Chinese government envisions the future of Macau:

“To develop [Macau] into a world-class tourism and leisure centre and a commerce and trade cooperation service platform between China and Lusophone countries, promote an appropriate level of diversified economic development, and develop into a base for exchange and cooperation where Chinese culture is mainstream and diverse cultures coexist.”

Main industries of GBA cities

Source: CEIC

Macau Gaming: 30 July 2019

The local Macau SAR government has shown strong support for diversification of Macau’s economy. On 17 May 2018, Maria Helena de Senna Fernandes, director of the Macao Government Tourism Office (MGTO), highlighted the government’s goal for Macau’s casino industry’s non-gaming revenue to account for 40% of sector-wide revenue. On 4 March 2019, Macau’s Secretary for Economy and Finance, Lionel Leong Vai Tac, reaffirmed the MGTO’s earlier statements by indicating a further increase in the amount of non-gaming attractions offered by the local casino sector can help diversify the source markets for the city’s tourism industry.

In 2018, the share of casino revenue from gaming for Macau’s 6 operators was 88.1%. This indicates that Macau’s economy remains heavily concentrated, and dependent on casinos in the sector. In contrast, the share of casino revenue from gaming in Las Vegas is only 34.2%. Las Vegas is home to a diverse range of non-gaming entertainment options, such as large-scale conferences and sporting events.

Macau and Las Vegas: 2018 share of revenue from gaming and non-gaming activities Macau Las Vegas Sands China Galaxy SJM Holdings Melco Wynn Macau MGM China (Average) (Average) Gaming 78.7% 89.9% 97.9% 86.5% 86.1% 89.5% 88.1% 34.2% Non-gaming 21.3% 10.1% 2.1% 13.5% 13.9% 10.5% 11.9% 65.8% Rooms 8.5% 5.5% 0.8% 6.0% 5.6% 5.0% 5.2% 27.4% Food & Beverage 3.5% 2.3% 0.5% 4.0% 3.7% 4.7% 3.1% 23.1% Other 9.4% 2.3% 0.8% 3.5% 4.6% 0.9% 3.6% 15.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Company, UNLV Centre for Gaming Research, Daiwa

Las Vegas’s transformation from the world’s gaming capital to the world’s leading entertainment destination was not completed overnight. How did Las Vegas, the global gaming capital, appeal to a large number of visitors who may not have been that interested in gaming? The answer goes back to 1995, when Las Vegas hosted its first Consumer Electronics Show (CES), which is an annual trade show that has been organised by the Consumer Technology Association (CTA) since 1967. Every year, CES attracts the world’s consumer technology businesses and provides a platform for them to showcase their latest product innovations to the public. More than 4,400 companies and 182,000 industry professionals attended CES 2018 over 5 days.

Major casino operators, such as LV Sands, contributed to the event by offering their MICE facilities such as exhibition and convention spaces. It proved to be such a huge success that organisers have hosted every single CES in Las Vegas ever since, cementing its world-leading position for large-scale conventions and exhibitions. In a similar way, we believe Macau’s next phase of GGR growth will come from diversifying its economy away from gaming towards entertainment and leisure facilities; and all 6 major casino operators in Macau stand to potentially benefit from this initiative.

When did this idea come about? The idea of developing Macau into a World Centre of Tourism and Leisure was first floated at the end of 2008 when the National Development and Reform Commission announced it for the first time in its Outline of the Plan for the Reform and Development of the Pearl River Delta. However, it was only after nearly 8 years that the project was taken more seriously when the Macau Government Tourism Office (MGTO) released the Five-year Development Plan of the Macau Special Administration Region (2016-20), according to the Macau Business Newspaper. With the current iteration of the GBA Outline Development Plan, we believe greater coordination and joint development between cities will give this project the much-needed momentum.

Macau’s need for economic diversification Macau’s economy went through an entire economic cycle from expansion and peak during ‘The Heydays’ (2010-13), to recession and slump in the ‘Turning Year and Down Years’ (2014-16) following the twin effects of President Xi’s campaign to crack down on corruption

Macau Gaming: 30 July 2019

and the stock market crash negatively affecting gaming appetite. Currently, Macau’s economy is undergoing a recovery phase that is being driven largely by mass GGR (see pages 14-21 of our initiation report, Next flight – gross gaming revenue for more information about how the 3G3S model components affect GGR).

Macau: quarterly GDP

Macau’s GDP expanded 140,000 Turning years and Recovery Years Down Years (2014-2016) (2017-) 90% at a CAGR of 24% over 120,000 The Heydays 70% 100,000 (2010-2013) 2010-13, but fell by 50% c.28.9% over 4Q13-2Q16 80,000 30% In 4Q18, Macau recorded 60,000 10% its highest quarterly GDP 40,000 -10% since 4Q13 20,000 -30% 0 -50% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Macau GDP yoy

Source: CEIC, Daiwa

Macau: VIP GGR by quarter VIP GGR expanded at a 70,000 The Heydays Turning years and 90% CAGR of 20.7% over 60,000 (2010-2013) Down Years (2014-2016) Recovery Years 70% 2010-13, but fell by 29% 50,000 (2017-) 50% YoY for 4Q14 and further 40,000 30% by 40% for 2015 30,000 10% 20,000 -10% 10,000 -30% 0 -50% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Macau VIP GGR yoy

Source: DSEC, Daiwa

Macau: mass GGR by quarter Mass GGR expanded at 45,000 50% Turning years and Recovery Years a CAGR of 34.7% over 40,000 Down Years (2014-2016) (2017-) 40% 35,000 30% 2010-13, but fell by The Heydays 30,000 (2010-2013) 20% c.32% between the high 25,000 10% (1Q14) and low (2Q16) 20,000 0% points; the mass 15,000 -10% segment is generally 10,000 -20% 5,000 -30% less volatile than the VIP 0 -40% segment 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Macau Mass GGR yoy

Source: DSEC, Daiwa

Unsurprisingly, we have observed a high positive correlation between GGR and Macau GDP because of the gaming sector’s dominance. The correlation coefficient between total GGR and Macau GDP reached its highest level of 0.99 during The Heydays (2010-13), effectively a perfect correlation. Similarly, during the recession from 2014 to 2016, the correlation remained at a high level of 0.97. Over the past 3 years, we have seen evidence of some progress to diversify Macau’s economy. From 2017 onwards, the correlation coefficient between total GGR and GDP has fallen to 0.90. Moreover, the correlation between mass GGR and VIP GGR has dropped to 0.66 (2017-current) from 0.93 (2014-16), which we believe confirms the change in the driving force of Macau GGR from VIP to mass.

Macau Gaming: 30 July 2019

Macau: correlation between GGR and GDP Correlation coefficient 2010-13 2014-16 2017-current VIP & GDP 0.96 0.98 0.82 Mass & GDP 0.98 0.90 0.82 VIP & Mass 0.92 0.93 0.66 Total GGR & GDP 0.99 0.97 0.90

Source: DSEC, Daiwa Note: Correlation coefficient is calculated using the sample correlation formula: ∑(푥푖 − 푥)(푦푖 − 푦)/(푠푡푑(푥) × 푠푡푑(푦))

Although we expect the correlation between GGR and GDP to remain significant and at the current level for the foreseeable future, we believe the gaming revenue structure is now more sustainable and more progressive than in the past, reflecting the government objectives for Macau to become a world-class tourism and leisure centre.

Looking across the border to Hengqin The big question is: how can Macau diversify its economy and become a world class tourism and leisure centre similar to Las Vegas? We believe the answer lies just 5 minutes away by car across the border to Macau, in Hengqin, Zhuhai. Hengqin New Area was officially established on 16 December 2009 and became part of the Guangdong Pilot Free Trade Zone (FTZ) in 2015, along with Qianhai in Shenzhen, and Nansha in Guangzhou.

Hengqin’s economy has undergone rapid growth and development in the past decade. Companies that set up in Hengqin enjoy lower tax rates compared to non-FTZ PRC jurisdictions (15% flat vs. a maximum of 45%), and free office space rent for the first 3 years of operation. As a result, GDP grew from CNY6.8bn in 2014 to CNY24.51bn in 2018, with an average annual growth of 29.1%. Foreign investment increased from USD257m in 2014 to USD1.06bn last year, with an average annual rise of 32.7%.

Hengqin: GDP (CNYbn) Hengqin: foreign direct investment (CNYm) 30 1,200

25 1,000 4.1x 20 3.6x 800

15 600

10 400

5 200

0 0 2014 2018 2014 2018 Source: Zhuhai Statistical Yearbook 2018, Zhuhai Municipal Statistics Bureau Source: Zhuhai Statistical Yearbook 2018, Zhuhai Municipal Statistics Bureau

What makes Hengqin such an attractive opportunity? The Hengqin New Area is currently split into the following 6 sub-districts (please refer to the figures on the next page):

 Northwestern Zone – development of a high-tech industrial park, and environmentally friendly development projects.  Northern Zone – main residential zone between the 2 bridges connecting Central Zhuhai and Hengqin New Area.  Northeastern Exhibition Zone – dedicated zone to the development of exhibition and convention centres, and Hengqin’s business and financial district.  Central Channel – split into 3 distinct areas to build up Hengqin’s industries: 1) technology research and development hub, 2) cultural and creative, and 3) professional services.  Eastern Residential and Commercial Zone – area for co-development projects between the PRC and Macau (eg, the University of Macau satellite campus).  Southern Tourist Zone – divided into 7 sub-zones for tourist attractions and leisure development zone for integrated resorts, theme parks, and other attractions.

Macau Gaming: 30 July 2019

Map: Macau, Hengqin and Zhuhai Map: Hengqin urban zones

Source: Hengqin Government Source: Hengqin Government

We think Hengqin could be a potential game-changer for Macau tourism for the following reasons:

1) Differentiated entertainment options: Hengqin has already seen high levels of visitations following the opening of the island’s only integrated resort, Zhuhai Chimelong Ocean Kingdom, in 2014. According to Theme Entertainment Association (TEA) and AECOM, Zhuhai Chimelong Ocean Kingdom welcomed 10.83m visitors in 2018, equivalent to 42.8% of total visitations by the Mainland to Macau. We believe that Hengqin’s portfolio of non-gaming attractions will complement Macau’s casinos in providing a complete multi-day entertainment experience for visitors, similar to combining Las Vegas (casinos, hotels, MICE) and Orlando (integrated resorts, theme parks) into a single, integrated entertainment destination.

2) Access to a young and wealthy population: By being designated an FTZ, Hengqin enjoys a favourable environment for new businesses. The Northwestern Zone and Central Channel have designated technology parks for start-ups. We believe that these initiatives will attract technology start-ups to set up in Hengqin and create a haven for young entrepreneurs. In our view, gaming operators could tap into this potential pool of new wealth next door.

3) Conventions and exhibition centres: We believe the addition of dedicated and integrated MICE facilities in the Northeastern Exhibition Zone would not only increase the number of large-scale technology conventions, it would also help to build up the area’s reputation for conventions similar to CES for Las Vegas (please refer to page 13). Furthermore, we believe it would create a trend of “exhibition-driven” tourism, which could further increase visitations to the area.

On 1 April 2019, China’s State Council agreed to a proposal to develop Hengqin into an “island for international leisure and tourism”. We believe this move suggests that future co- development of the tourism and leisure industry will involve collaboration with Macau’s gaming operators. In Chapter 10, Section 3 of the outline development plan, it explicitly states that “Macau tourism practitioners will provide relevant services in Hengqin”. We believe this gives operators a greenlight for potential development of non-gaming resorts outside of Cotai. Overall, we see continuous efforts to connect and integrate the 2 cities opening up the next chapter of the China penetration story and leading to the next stage of GGR growth for Macau.

Macau Gaming: 30 July 2019

Potential impact of the GBA on Macau GGR We hypothesise that the GBA will have the following effects on the components in our proprietary 3G3S model:

 Visitation numbers of gaming patrons: In order to push forward with China’s policy agenda for the GBA and improve social mobility domestically, we believe the Chinese government will continue to enhance outbound travel policies via the relaxation of visa applications to the GBA. We expect further easing to be implemented in the near term, and bring additional Mainland visitations to Macau. Moreover, as previously mentioned, we believe the rapid growth of Hengqin’s technology industry and non-gaming attractions will further increase visitations to the Hengqin-Macau area.

 Average days-per-stay per gaming patron: We expect to see more integrated resorts being built, and more expansion works being conducted in the Hengqin-Macau area. As a result of the hotel room supply constraint in Macau, we believe this enables Macau gaming operators to take advantage of hotels within the GBA instead of just Macau, especially in Hengqin and Zhuhai due to their close proximity.

 Average bet size per hand: As aforementioned, the influx of young, wealthy technology entrepreneurs into Hengqin could lead to higher average spend per head, and as such, an increase in average bet size per hand when Hengqin fully develops.

 Average gambling hour of gaming patrons per day: Continuous progress as regards the integration between Macau and Hengqin would increase the variety of choices available to Mainland Chinese visitors. We believe that over the longer term, these visitors may spend less time at the tables in conjunction with an improved mass-to-VIP ratio.

 Average hands-dealt per hour: We do not expect any material impact on this component.

 Average gaming hold percentage: We do not expect there to be any changes to gaming hold percentage.

Macau Gaming: 30 July 2019

1Q19 share of total Mainland visitors to Macau

0.5% 1.3% 1.5%

2.1%

1.2% 1.1%

0.7% 1.6%

1.4% 3.7% 2.4% 1.1% 3.6%

1.4%

4.0%

3.9%

3.0% 3.7%

1.5% 4.8% 2.0% 3.3% 50.2%

Source: DSEC, Google Images, Daiwa

Macau Gaming: 30 July 2019

Targeting the mass market: joint promotions between China SOEs and Macau operators

We see evidence across the market that China SOEs from various parallel industries, for example travel, financial institutions, and retail (ie, duty-free shops), have been forming more partnerships with Macau gaming operators over the past year to promote their respective non-gaming amenities. We believe there are 2 reasons for this occurrence:

1) Marketing to the mass segment: Gambling is illegal in Mainland China, so Macau gaming operators have not been able to engage in direct marketing activities. While junkets help to bring in VIP clients, they have been unable to effectively reach out to the growing mass segment. We believe joint promotions with China SOEs enable the Macau gaming operators to reach out to more potential mass gaming patrons in Mainland China.

2) Access to customer data and data-driven marketing: China SOEs have a wealth of customer data. Through partnerships, Macau gaming operators can gain access to their data to build up their in-house databases and understand spending patterns, shopping behaviours, and specific preferences, and engage customers through personalised marketing to build loyalty.

We believe the Macau gaming operators that have China SOE partners will enable the former to take advantage of the potential continual rapid rise in visitations from Mainland China, and differentiate themselves from other operators to capture a disproportionate share of GGR.

Travel partners: Chinese airlines On page 25 of our initiation report, we offer our view that supply-side issues are the root cause of the under-penetration in China outside of cities in Guangdong. Macau International Airport (MIA) has been making significant progress to tackle this supply issue by aggressively opening up new direct flights to tier-1 and tier-2 Mainland cities. Within the past two-and-a-half years, 13 new direct flight routes have been opened, including 2 daily flights in 1Q19; the Nanchang-Macau and Wenzhou-Macau routes, bringing the total number of direct flight routes to 26. The same number of direct flight routes between Mainland cities and Macau (13) opened from 2017 to 1Q19, and between 2010 and 2016.

Macau: number of direct flights from Mainland China cities added The same number of 7 direct flight routes 13 between Mainland cities 6 and Macau (13) opened 5 from 2017 to 1Q19, and 4 between 2010 and 2016 3

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD

Source: CTrip, Skyscanner, MIA, Daiwa

The China penetration story is a very attractive proposal for Macau gaming operators to capture incremental visitations by air. We note Chinese airlines are aggressive in forming alliances with Chinese gaming operators in order to capture the shifting visitation trend. Air Macau, for instance, partnered with Galaxy in July 2018 to offer passengers who fly with the airline exclusive hotel room, dining and retail offers.

Macau Gaming: 30 July 2019

Galaxy – rewards promotion with Air Macau Chinese airlines are aggressive in forming alliances with Chinese gaming operators in capturing the shifting visitation trend

Source: Company

Mainland China: cities with direct flights to Macau There are currently 26 City IVS City? City-tier Airline Route Open Time Flights Per week Max Capacity per year direct flights to Macau Nanchang Y 2 4/1/2019 7 58,400 3/7/2013 (first launch) 7 44,530 Wenzhou N 2 from Mainland China 1/21/2019 (relaunch) cities; we expect the 2 Beijing Y 1 7/25/2017 (new airline added) 32 311,896 new direct flight routes Shanghai Y 1 1/26/2018 (new airline added) 70 719,992 Xiamen Y 1 8/11/2013 (increase frequency) 14 160,160 to and from Wenzhou Nanjing Y 1 Before 2000 7 80,080 and Nanchang added in 12/2003 (first launch) 7 80,080 Chengdu Y 1 4/1/2005 (relaunch) 1Q19 to add 103k in Wuxi Y 1 11/20/2006 7 68,796 annual passenger Nanning Y 2 10/19/2009 4 27,872 capacity via airport Hefei Y 2 12/18/2010 3 20,904 Fuzhou Y 2 4/16/2011 4 39,312 Taiyuan N 2 7/23/2011 7 65,520 7/28/2011 7 48,776 Chongqing Y 1 11/28/2013 (increase frequency)

Quanzhou Y 2 4/2/2013 7 68,796 Tianjin Y 1 8/20/2014 7 65,520 Haikou Y 2 8/31/2015 4 39,312 Wuhan Y 1 4/3/2015 7 65,520 Guiyang Y 2 9/23/2016 3 20,904 Hangzhou Y 1 3/26/2017 (New line added) 28 294,476 9/23/2013 (first launch) 3 20,904 Zhengzhou Y 1 5/20/2017 (relaunch)

Changzhou N 2 12/18/2017 7 65,520 Ningbo Y 1 5/20/2018 (new line added) 14 86,216 Qingdao N 1 8/29/2018 4 37,440 Sanya N 2 7/9/2018 2 19,656 Xi'An N 1 11/22/2018 3 28,080 Kunming Y 1 12/18/2018 7 65,520 Annual Max Capacity 2,604,182

Source: MIA, press releases, Ctrip, Ministry of Public Security, PRC, Daiwa

Macau Gaming: 30 July 2019

Passenger throughput at MIA grew by 17.9% YoY to 2.38m for 1H19, while growth in passenger traffic from Mainland China accelerated by 31% YoY, according to a press release by the MIA. In 1Q19, Mainland China visitations by air through MIA increased by 27% YoY to 610k, which represents 63.8% of all passenger arrivals by air.

Macau: MIA passenger traffic Macau: Mainland Chinese visitations by air

25% 700,000 50% 2,400,000 19% 600,000 27% 2,200,000 20% 40% 2,000,000 500,000 15% 30% 1,800,000 400,000 1,600,000 10% 300,000 20% 1,400,000 200,000 5% 10% 1,200,000 100,000 1,000,000 0% 0 0% 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2018 2019 2018 2019

Passenger Traffic YoY Change (%) Mainland China Visitation (By Air) YoY Change (%)

Source: MIA, Daiwa Source: DSEC, Daiwa Note: Visitor arrivals by air excludes arrivals at the heliport

The total number of direct flights from Mainland cities to Macau increased by 19.2% YoY for 1Q19. We expect that based on the current growth trajectory, the number of direct flights will reach 14,223 in 2019, which represents a 12.7% CAGR over 2010-19.

Macau: Number of direct flights from Mainland Chinese cities The total number of 16,000 25% direct flights from 14,000 20% 12,000 Mainland cities to 12.7% 15% Macau grew by 19% 10,000 10% YoY in 1Q19 8,000 5% 6,000 0% 4,000 2,000 -5% 0 -10% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 No. of Direct flights from Mainland China to Macau 2019E Total YoY Growth (%)

Source: MIA, Daiwa forecasts

As a result of the opening up of more direct flight routes to cities outside Guangdong, the share of Mainland visitors from outside Guangdong Province increased 1.9ppt, from 47.9% to 49.8% in 1Q19. In 1Q19, visitation from Guangdong Province and non-Guangdong Provinces increased by 20% YoY and 29.3% YoY, respectively. Furthermore, average growth in visitation from provinces and/or municipalities with a direct flight route to Macau is 32.6% YoY, compared to 20.1% YoY for no direct flight routes in 1Q19.

We expect Macau gaming operators with airline partners, such as Galaxy, to capture a greater share of incremental visitations by air as MIA continues to expand routes to new cities and/or increase flight frequencies to existing destinations.

Macau Gaming: 30 July 2019

Macau: Mainland China visitations by province and municipality 1Q18 1Q19 YoY Change % share (1Q18) % share (1Q19) Direct flight route Guangdong 2,644,888 3,174,951 20.0% 52.1% 50.2% N Fujian 190,727 236,372 23.9% 3.8% 3.7% Y Zhejiang 177,431 244,123 37.6% 3.5% 3.9% Y Hunan 238,937 305,315 27.8% 4.7% 4.8% N Jiangsu 158,229 231,162 46.1% 3.1% 3.7% Y Henan 124,117 152,762 23.1% 2.4% 2.4% Y Sichuan 108,070 190,929 76.7% 2.1% 3.0% Y Beijing 112,740 131,627 16.8% 2.2% 2.1% Y Shanghai 190,336 227,850 19.7% 3.7% 3.6% Y Tianjin 38,186 45,024 17.9% 0.8% 0.7% Y Chongqing 67,860 93,796 38.2% 1.3% 1.5% Y Hubei 177,918 254,680 43.1% 3.5% 4.0% Y Guangxi 148,205 209,257 41.2% 2.9% 3.3% Y Jiangxi 110,098 125,076 13.6% 2.2% 2.0% Y Liaoning 91,678 99,991 9.1% 1.8% 1.6% N Anhui 63,568 86,083 35.4% 1.3% 1.4% Y Shanxi 54,453 67,098 23.2% 1.1% 1.1% Y Shandong 77,113 88,240 14.4% 1.5% 1.4% Y Heilongjiang 81,441 96,888 19.0% 1.6% 1.5% N Hebei 72,629 79,220 9.1% 1.4% 1.3% N Shaanxi 52,130 70,970 36.1% 1.0% 1.1% Y Inner Mongolia 31,299 34,599 10.5% 0.6% 0.5% N Jilin 64,260 73,855 14.9% 1.3% 1.2% N Total 5,076,313 6,319,868 24.5% 100.0% 100.0%

Source: DSEC, Daiwa

Financial institution partners: mobile payment platforms Besides offering promotions and partnerships with airline companies, casino operators have also created exclusive offers for customers using mobile payments. Sands China was the first, and is still the only operator to allow hotel room bookings through WeChat Pay, having started back in 2016. Galaxy and Melco have also rolled out exclusive promotions and discounts with WeChat Pay that are tied to spending on hotel rooms, food & beverage, and retail. Last year on 9 May 2018, SJM Holdings’ Grand Lisboa hotel introduced electronic payment methods at its refurbished Crystal Lounge.

Galaxy: WeChat Pay exclusive promotion Galaxy: Alipay, MPay exclusive promotion

Source: Company Source: Company

Melco: WeChat pay available at CoD Sands: WeChat Pay and Alipay to book hotel rooms

Source: Company Source: Company

Macau Gaming: 30 July 2019

According to Beijing-based consultancy firm Analysys, in 2018, Mainland China’s mobile payment size grew by 58.62% YoY to CNY467.9tn. As mobile payments have become so widespread in China, Ant Financials’ (not listed) Alipay (53.2%) and Tencent’s (0700 HK, HKD370.2, Outperform [2]) WeChat Pay (39.4%) have become the leading players in the industry, with a combined market share of 92.7%. Ant Financial and Tencent in particular have built up significantly large customer databases across multiple platforms, such as e- commerce, logistics, financial services, and social networks. Macau gaming operators can partner with these technology companies to leverage their consumer database and data analytics capabilities to better understand their needs, and therefore build loyalty with customers.

Mainland China: third-party mobile payment platforms Technology partners can 60,000 14% supply Macau gaming 12% 50,000 operators with 10% 40,000 8% consumer data and data 6% 30,000 analytics capabilities to 4% 20,000 2% enable them to better 0% 10,000 understand customer (2%) 0 (4%) needs Q1 Q2 Q3 Q4 Q1 2018 2019

Transaction value (CNYbn) YoY growth

Source: Analysys, Daiwa

While we observe that using social media channels to offer consumers exclusive promotions is common practice across the industry, we believe promotions that leverage mobile payment platforms are the differentiating factors. Furthermore, mobile phones have become integrated with the lifestyles of Mainland Chinese (see additional detail in the next sub-section). As a result, we expect Macau gaming operators that create promotions/offers that leverage a better understanding of the spending habits of Mainland consumers to see greater-than-expected upside as the Macau mass gaming story continues to unfold.

How important is the mobile phone to China’s growth? We believe that mobile phones are one of the key drivers of China’s economic and technology growth. Due to the low wealth of developing nations during their early growth years, a majority of the population in developing countries did not own PC/laptops. The rapid emergence and rise of China’s low- to middle-income class in the digital, mobile-first age meant that many ‘leapfrogged’ directly into mobile devices. According to a consumer survey conducted by Google in January 2018, the percentages of China’s population that use a smartphone, laptop/PC, and tablet device are 83%, 53%, and 20%, respectively.

Nowadays, Mainland citizens living in cities use mobile payments more than any other payment method for their everyday tasks, such as paying utility bills, ordering and paying at restaurants, and even purchasing groceries from the local market. Total transaction value on mobile point-of-sales (POS) is forecast to reach USD581.4bn in 2019 (+40% YoY), according to estimates from Statista. To put this into perspective, mobile payments transaction value in the US, the second-largest market worldwide, is expected to be only USD87bn (Statista).

Do people spend more if they use mobile payments? Most likely they will, due to convenience, speed, and the integrated mobile ecosystem of Alipay and WeChat Pay. As users grow accustomed to completing transactions via mobile, they tend to increase their propensity to spend using that platform. According to data from Statista, average transaction value is expected to increase by 29% to USD1,155.6 in 2019.

Macau Gaming: 30 July 2019

Mainland China: mobile payments market statistics Total transaction value 2017 2018 2019E 2020E 2021E on mobile POS is Transaction value (USDbn) 285.9 413.9 581.4 793.7 1049.7 YoY Growth 45% 40% 37% 32% forecast to reach Users (m) 420.5 462.3 503.1 540.8 574.0 USD581.4bn in 2019 YoY Growth 10% 9% 7% 6% (+40% YoY) Avg. Transaction value per user (USD) 679.9 895.3 1155.6 1467.6 1828.7 YoY Growth 32% 29% 27% 25%

Source: Statista, Daiwa Note: The Mobile POS Payments segment involves transactions at point-of-sale that are processed via smartphone applications (so-called "mobile wallets"). These include: 1) Mobile wallet point-of-sale payments processed with any kind of personal smart devices; 2) Contactless, app-based transactions with a suitable payment terminal belonging to the merchant; and 3) NFC, QR-Code or Bluetooth-based payment transaction

Moreover, travel & accommodation is the second highest e-commerce spending category, at USD158.6bn (+17% YoY) in 2019. This indicates that Mainland consumers have a relatively high propensity for online consumption for travel purposes compared to other categories of products and services.

Mainland China: e-commerce spend by category, 2019 Travel & accommodation Rank Category Annual amount (USDbn) is the second highest 1 Fashion & Beauty 246.9 2 Travel & Accommodation 158.6 e-commerce spending 3 Electronics & Physical Media 136.1 category, at USD158.6bn 4 Toys, DIY & Hobbies 111.8 (+17% YoY) 5 Furniture & Appliances 95.02 6 Food & Personal Care 46.25 7 Video Games 21.73 8 Digital Music 0.816

Source: Hootsuite, We Are Social, Daiwa

Retail partners: duty-free shops We have also seen Macau gaming operators partnering with large retail conglomerates for the same reasons discussed above. On 31 May 2019, SJM signed a binding agreement with China Duty Free Group (CDF), a subsidiary of China International Travel Service Corporation (SH 601888) to open a 7,500 sq. metre flagship store in Grand Lisboa Palace. This would not only be the largest CDF store in Macau (the other one being at MIA), it would also be its first store in a casino property.

Retail conglomerates also have large customer databases due to the number of points in which they can collect data: 1) in-store POS for inventory management, 2) in-store beacon technology to track customer locations to identify store ’hotspots’, and 3) membership loyalty programmes. Opening up retail outlets in the casino property can attract and retain more high- spending customers into the property by leveraging its loyalty programme and customer data.

China Duty Free Shop

Source: Company

Macau Gaming: 30 July 2019

How do joint promotions with China SOEs impact Macau GGR? Based on our proprietary 3G3S model, we believe that partnership-driven promotions with China SOEs can lead to GGR growth through potential increases in the following components:

 Visitation numbers of gaming patrons: We expect joint promotions with China SOEs to indirectly draw visitors to Macau, thereby increasing overall visitations.

 Average days-per-stay per gaming patron: Airline promotions that tie discounts/offers with length of stay can lead to an increase in days-per-stay. Moreover, as more direct flight routes are added, visitors from cities further away are likely have a higher average length of stay in Macau to make their holidays worthwhile.

Besides, we believe that as Macau gaming operators gain more customer insights through data analytics, this will lead to higher non-gaming spend per head. Moreover, it may have an indirect impact on GGR if operators offer promotions that link rewards to length of stay. We believe these partnerships with China SOEs will become more common when casino operators introduce or upgrade their portfolios of non-gaming products and leverage them to drive non-gaming revenue and GGR.

Macau Gaming: 30 July 2019

Change in Chinese gaming patrons’ preference between the US and Macau due to trade tensions

Our fourth and final theme for this sector report is the change in Chinese gaming patrons’ preference between the US and Macau. Although Macau has surpassed Las Vegas as the world’s destination for gaming since the start of the decade, we see evidence that trade tensions may be causing Chinese gaming patrons to change their preference from the US to Macau. If this is the case, we believe 2H19 could see further growth in Macau’s Mainland visitations, and potentially an acceleration in GGR.

Trade tensions leading to Mainland Chinese gamblers moving from the US to Macau Mainland Chinese visitations to the US fell by 7.4% between 3Q18 and 1Q19. Over the same period, Macau’s Mainland Chinese visitations rose by 17.9%. The number of Mainland visitors arriving in the US has been declining YoY since 4Q17, just before the Office of the United States Trade Representative initiated an investigation into Chinese government policies and practices relating to technology transfer, intellectual property and innovation on 18 August 2017 (3Q17). This suggests a small but likely significant negative correlation between trade tensions and Mainland visitations to the US.

US: Mainland China visitations Mainland Chinese 1,200,000 15% visitations to the US fell 1,000,000 10% 7.4% YoY between 3Q18 800,000 5% and 1Q19, since the 600,000 0% trade tensions began 400,000 (5%) 200,000 (10%) 0 (15%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2017 2018 2019

Total visitation YoY Change (RHS)

Source: US National Travel & Tourism Office, Daiwa

Moreover, Las Vegas gaming revenue from Baccarat, which we use as a proxy for gaming demand by Mainland gamblers, tumbled by 31.7% YoY for 1Q19. The last time Las Vegas revenue from Baccarat fell by this much was back in 2Q15 (-33.7% YoY), just prior to the Chinese stock market crash in 2015, which wiped out over 40% of the value of the Shanghai Composite Index. We believe, however, unlike in 2015, in which the fall in GGR was mainly attributed to the Chinese government crackdown on corruption affecting demand for gaming, the current drop may more likely be motivated by trade tensions.

Las Vegas: YoY change in Baccarat revenue

Las Vegas gaming 40% revenue from Baccarat, 30% fell by 31.7% YoY for 20% 1Q19 10% 0% (10%) (20%) (30%) (40%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2015 2016 2017 2018 2019

Source: Nevada Gaming Control Board, Daiwa

Macau Gaming: 30 July 2019

We would expect to see a continuation of this shift from the US to Macau in 2H19 and possibly over the longer term, if: 1) trade talk progress continues to stall, and 2) 2Q19 shows a continued decline in both Mainland Chinese to US visitations and Las Vegas Baccarat revenue. Nonetheless, we do not expect visitations to Macau to increase significantly in 2Q19 due to its comparatively lower visitor base.

Suncity online gambling crackdown – regional shift to Macau In Asia, we also see a potentially large market catalyst leading into 2H19. On 8 July 2019, Chinese state media issued a report in the Economic Information Daily citing that Suncity, Macau’s largest junket operator, “has raked in billions of dollars in online gaming and proxy betting, causing great harm to China’s social economic order.” The report details how Suncity enabled Chinese players to bet through online casinos in the Philippines and Cambodia and utilised underground banks to move capital out of the country. Several days later on 13 July, Suncity held a press conference denying these allegations, vowing to stop its online gaming and proxy betting operations in Mainland China.

We believe that during 1H19, the observed weakness in Macau’s VIP segment was likely due to junkets redirecting their VIPs to casinos in other Southeast Asian countries, such as the Philippines and Cambodia. With Suncity’s latest statement, we believe this may cause Suncity to reduce its junket operations overseas, and instead focus on bringing back VIP clients to Macau. If this is the case, we expect VIP GGR recover in 2H19.

How would ongoing trade tensions affect Macau GGR? We hypothesise that persistent trade tensions will have the following effects on the components in our proprietary 3G3S model:

 Visitation numbers of gaming patrons: Trade tensions with the US may cause China to discourage its citizens from travelling to the US and Las Vegas. Mainland visitors that originally intended to visit Las Vegas may decide to visit Macau instead, not only to satisfy gaming appetite, but also receive additional social benefits by conforming to PRC social norms via the “social credit” system.

 Average days-per-stay per gaming patron: The large variety of entertainment options, gaming and non-gaming, suggests that visitors making a trip to Las Vegas would visit for the full experience. In 2018, Macau’s overall days-per-stay for Mainland visitors lingered at the level of 1.3 days. It remains significantly lower compared to the 4.4 days-per-stay level in Las Vegas. We expect if trade tensions continue to intensify, it will lead to stricter and more unfavourable travel policies towards Mainland visitors. These travellers, with a longer average length-of-stay, may consider visiting Macau as an alternative. However, days-per-stay for Macau stagnated at the 2.2 days level between January and May, which either shows these gaming patrons have not made the shift towards Macau, or the more fundamental reason that Macau still lags behind Las Vegas in non-gaming amenities to attract gaming patrons to stay longer.

Macau: Mainland visitors days-per-stay vs. Las Vegas Macau’s overall days- Macau Days per stay - Overall Macau Days per stay - Overnight Las Vegas Days per stay* per-stay for Mainland 2013 1.1 2.1 4.3 2014 1.0 2.0 4.2 visitors is at the level of 2015 1.1 2.1 4.4 1.3 days 2016 1.2 2.2 4.4 2017 1.3 2.2 4.5 2018 1.3 2.2 4.4

Source: DSEC, Las Vegas Convention and Visitors Authority Note: *Statistic is the average of all visitors to Las Vegas, not just visitors from Mainland China

Macau Gaming: 30 July 2019

 Average bet size per hand: We believe as long as US-China trade tensions remain stable, the CNY is also likely to remain in a stable range. We believe this stability should not create any material changes in average bet size per hand. However, we anticipate Mainland Chinese who visit Las Vegas tend to be more affluent, thus these gaming patrons likely have a higher average spend per hand in both non-gaming and gaming activities. This could potentially impact average bet size. Additionally, with Suncity potentially retreating its operations from other Southeast Asian countries to avoid any trouble with PRC government, we may expect a recovery in VIP GGR growth in 2H19 and onwards.

USD/CNY exchange rate Under an ongoing trade 7.00 28 June, 2019 G20 summit, tension scenario, we 6.95 resume trade talks expect CNY to remain 6.90 10 May, 2019 relatively stable Breakdown in trade talks 6.85

6.80

6.75

6.70

6.65

6.60 1-Jul-18 1-Aug-18 1-Sep-18 1-Oct-18 1-Nov-18 1-Dec-18 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19 1-May-19 1-Jun-19 1-Jul-19 Source: Bloomberg, Daiwa

 Average gambling hours of gaming patrons per day: The aforementioned Mainland visitors are likely to want diverse experiences not limited to gaming. In fact, we believe that over the longer term, these visitors may spend less time at the tables in conjunction with an improved mass-to-VIP ratio. We expect that over the short term, intensifying trade tensions would likely not have an impact on gaming time spent.

 Average hands-dealt per hour: We do not expect any material impact on this component, as it is only affected by changes to casino floor operations and staff training, not the gaming patrons.

 Average gaming hold percentage: We do not expect there to be any changes to gaming hold percentage as a result of the potential inflow of Las Vegas gaming patrons.

Macau Gaming: 30 July 2019

Update on the gaming concession transition

Macau’s Land Law stipulates that operators that are granted provisional concessions have the right to use land for a maximum of 25 years. SJM and MGM’s licences were due to expire on 31 March 2020. However, as expected, the government has granted both operators an extension of their gaming concessions in exchange for one-time premiums; so that all 6 operators’ gaming concessions are due to expire at exactly the same time on 26 June 2022.

Concession regime in Macau Concession SJM Galaxy Wynn Start date 28-Mar-02 24-Jun-02 26-Jun-02 End date 26-Jun-22 (new) 26-Jun-22 26-Jun-22 Tenure (years) 18 20 20 Early redemption start date Apr-09 Jun-17 Jun-17 Special levy 4% 4% 4% Special gaming tax 35% 35% 35% Committed investment MOP 4.7bn MOP 8.8bn* MOP 4bn Sub-concession MGM Sands Melco Start date 20-Apr-05 Dec-02 8-Sep-06 End date 26-Jun-22 (new) 26-Jun-22 26-Jun-22 Tenure (years) 15 20 16 Early redemption start date Apr-17 Jun-17 Jun-17 Special levy 4% 4% 4% Special gaming tax 35% 35% 35% Committed investment MOP4bn MOP4.4bn* MOP4bn

Source: Companies, DICJ Note: * Sands didn't pay any sub-concession premium to Galaxy; instead Sands is responsible for MOP4.4bn of Galaxy's original MOP8.8bn investment commitment under the sub-concession contract

What is the possibility that 1 of the 6 concessionaires will lose out in the re-bidding? We believe that when Macau opens up the re-bidding process, the possibility of any 1 of the 6 operators losing out in the gaming concession bidding is low.

Judging from the Macau Government’s 2015 mid-term review and the criteria for granting gaming tables, we believe the government will look at the following 4 areas when considering the merit of the concession bidders:

 Track record of the potential bidder in terms of contribution to the local labour market.

 Track record of the potential bidder in terms of contribution to local businesses (eg, procurement of goods and services from local vendors).

 Track record of the potential bidder in terms of managing a casino business (including compliance of laws and regulations and promotion of responsible gaming).

 Track record of the potential bidder in promoting tourism (eg, experience in building non- gaming attractions).

We believe it will be challenging for a new-to-Macau bidder to draw up a tender proposal proving it will outperform current operators for the following reasons:

We believe it would be  Under Macau’s labour laws, each of the 6 operators must have at least 70% of its challenging for a workforce made up of local city hires (Hong Kong and Mainland Chinese hires are newcomer to qualify for considered foreign hires). It would be a challenge for any prominent casino operators the re-bidding from other jurisdictions to show that they have a track record in and commitment to achieving such a high percentage of “local city” hires.

 Showing a track record in complying with the law and regulations, and practising responsible gaming might sound easy, but proving the management of compliance in a junket-centric gaming environment and managing responsible gaming among Chinese

Macau Gaming: 30 July 2019

gamers is another story. Managing such compliance while showing the ability to generate Macau standard GGR would probably be a major barrier for other potential bidders, in our opinion.

 Promotion of tourism is not just about building hotels. It is about achieving an >85% occupancy rate during both high and low seasons, and building multi-day stay initiatives (eg, exhibitions and conventions) as part of an integrated resort. These initiatives take years to build up a track record.

Road to gaming concession tendering in 2022 As expected, the Macau Government has extended SJM and MGM’s concessions until 26 June 2022, which matches the expiry date of the concessions of the other 4 operators. Although we do not expect the government to introduce new terms to the extension, we expect the 2 operators to have to pay a one-off premium of MOP200m (USD24.7m) to the government for the extension.

So, what do we expect will happen on June 2022? Up until now, the Macau government has provided little guidance on the extension, renewal, and re-bidding processes for gaming concessions. We believe the government will be able to pass a new set of Macau gaming laws (replacing Law 16/2001) before 2022, by the time the gaming concessions of all the operators we cover would expire.

However, we expect amendments to the International Gaming Tender Regulation (Regulation 26/2001, 34/2001, 4/2002) and other related laws might take longer than expected due to the following factors:

1) Gaming tax: Currently, the total tax rate is the same for Sands, Galaxy, Wynn, Melco and MGM (39% of GGR). SJM’s tax rate is lower due to a government-approved 1% deduction for its water dredging obligation (38% of GGR). We understand the recent concession extension for SJM dealt only with the equalisation of concession expiry dates but not the equalisation of tax rates. Thus, we believe that the new tax laws would at least have to be able to address a method to unify Macau’s complex tax structure legally.

2) Rights to operate satellite casinos: Currently, 3 of the 6 operators (SJM, Galaxy, and Melco) have satellite casino operations. There are no clear rules in the Macau gaming legal framework on the operation of a satellite casino. We believe that the concession operation rights for which the applicants are tendering need to be addressed, as those could potentially impact an operators’ scope of operations and business model.

3) Gaming tables: Every operator has a different number of gaming tables granted by the government. If the Macau government is to open up 6 tender slots in 2022, it might have to open up 6 different tenders, which might take much longer to prepare. If the Macau government is to open more/less than 6 concession tender slots, it will become even more complicated.

Macau Gaming: 30 July 2019

Making sense of everything: Daiwa’s 3G3S Model

As discussed in the previous section, we believe that under ongoing US-China trade tensions, there are 4 themes we believe will continue to provide stimulus and support for Macau GGR growth: 1) visa policy support, 2) GBA development, 3) joint promotions between China SOEs and Macau gaming operators, and 4) change in Chinese gamers’ appetite in choosing between the US and Macau. To understand the implications of these 4 trade themes on Macau GGR, we revisit our proprietary 3G3S model first introduced in our initiation report - Initiation: Next flight – gross gaming revenue.

GGR, for a specific timeframe, can be expressed as a simple multiplication function of: 1) number of gaming patron visitations, 2) average gaming hours per day for each gaming patron, 3) average days-per-stay for each gaming patron, 4) average bet size per hand for each gaming patron, 5) average number of hands dealt per hour, and 6) gaming hold percentage.

Daiwa’s proprietary 3G3S model

Source: Daiwa

By breaking down the GGR into 6 components, we think it is easier to analyse the strengths and weaknesses of each component and identify the underlining factors that propel the movement of a component. (Please refer to Appendix 1 for demand-side and supply-side factors that affect these components.)

Macau Gaming: 30 July 2019

The 3G3S assessment chart

The 3G3S assessment chart below summarises the movement of the 6 components of our 3G3S model.

Macau: gross gaming revenue (MOPm)

120,000 60% 50% 100,000 40% 30% 80,000 20% 10% 60,000 0% -10% 40,000 -20% 20,000 -30% -40% 0 -50% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 2015 2016 2017 2018 2019

VIP Mass Slots Macau GGR YoY change (RHS)

Source: DSEC, DICJ, Daiwa

2011 2012 2013 2014 2015 2016 2017 2018 2019E

Visitations of gaming patrons (G) Average gaming time

(G) Days-per-stay (S)

Average bet size (S)

Hands dealt (speed) (S)

Gaming hold % (G)

Source: Daiwa

Macau Gaming: 30 July 2019

Our revised forecast for mass market GGR using our 3G3S model

Macau: 3G3S model results for Macau mass-market GGR (YoY %) Visitation number of Mass market gaming Gaming hours per Average days- Average hands Average hold patrons day per patron per-stay Average bet size dealt per hour percentage Total 2019E 23.0% -5.0% 1.0% -4.0% 0.0% 0.0% 13.3% 2020E 16.0% 0% 1.0% -3.0% 0.0% 0.0% 13.6% 2021E 16.0% 0% 2.0% -3.0% 0.0% 0.0% 14.7%

Source: Daiwa forecasts

Macau: mass GGR YoY change

50% 40% 30% 20% 10% 0% (10%) (20%) (30%) (40%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: DSEC, Daiwa forecasts

Assumption notes 1) Visitations by mass-market gaming patrons We expect mass gaming In 1Q19 visitations from the Mainland increased by 23.5% YoY, and rose by 22.7% patron visitations to be YoY for the 5 months from January to May. We believe that we underestimated the boosted by increasing impact of the EEP visa application policy relaxation and major land transportation direct flights from high- infrastructure openings, such as the GD-SZ-HK high-speed railway and HKZM Bridge. disposable-income IVS In May, the number of Mainland visitors arriving via land crossings, including the cities, as well as the HKZM, grew by 53.5% YoY, far outpacing the growth in numbers regarding those that HKZM Bridge arrived in the city by air (29.5% YoY) or by sea (-60.7% YoY). Growth in visitations via land crossings and airport were more than enough to offset the sharp decline in visitations via the ferry service.

We expect the HKZM Bridge to be the main driver of visitations for mass patrons provided that MIA reaches maximum capacity, and sees more meaningful traffic growth from 2H19 with more organised direct shuttle services, more direct taxi/limo licences, and the GD-SZ-HK high-speed railway. We also expect the number of package tours to increase materially over the next 3 years after the new round of EEP visa application relaxation in April.

On the premium mass side, we expect new direct flight routes from provincial cities eligible for the IVS, such as Shenyang, Jinan and Changsha, and an increase in flight frequency from high-disposable-income regions, like Tianjin and Chongqing cities, and Zhejiang and Jiangsu provinces to bring about a meaningful increment in mass patrons over 2019-20. We foresee new direct flights between underpenetrated IVS cities and Macau continuing to develop in 2019 and 2020, while traffic passing through the Lotus Bridge Border Gate should increase after 2023 when the Macau Light Rapid Transit (MLRT) system connects with Guangzhou-Zhuhai Intercity Railway. Given the high visitation growth in 5M19, we are revising up our GGR growth forecast from 12% YoY to 23% YoY for the full-year 2019, before lowering it to 16% for both 2020 and 2021.

Macau Gaming: 30 July 2019

2) Average gaming time (hours) per day for mass-market patrons Although all smoking lounges at major casino properties have been approved by the government, there were notable delays for major properties such as MGM Cotai (May- 19) that likely had a notable impact on gaming time for 1H19. As a result, we are revising down our forecast for average gaming time from -2% to -5% for 2019.

3) Average days-per-stay for mass-market patrons In 1Q19, days-per-stay of overnight Mainland visitors was 2.2 days (flat YoY). Meanwhile, YTD (5M19) days-per-stay also remained flat at 2.2 days, although this increased to the level of 2.3 days in April and May. Moreover, we expect the delay in major hotel openings, such as Grand Lisboa Palace, to have a negative impact on days-per-stay due to hotel room supply constraints. As such, we are revising down our average days-per-stay growth forecast for Mainland China visitors from 3.5% YoY to 1% YoY for 2019 and 2020. With an expected 2,500+ rooms entering Cotai over 2019- 20 (c.10% of current Cotai inventory), and continuing uptrend in occupancy rates, we expect days-per-stay to increase by 2% YoY for 2021. However, should visitation growth increase more than 16%, we may see days-per-stay go into negative territory due to hotel room inventory not increasing quickly enough to absorb the growth in visitors.

4) Average bet size per hand for each gaming patron For both 2019 and 2020, we assume CNY weakness will have a -2% impact per year and other liquidity headwinds will have a -2% impact per year on the average bet size for mass-market patrons. As more mass market players enter Macau and more non- gaming amenities become available, we believe these mass market players would tend to have lower average bet size. Hence, we now assume the average bet size to decrease by -4% for 2019E from -2.5% and -3% over 2020-21.

5) Average number of hands dealt per hour We expect no significant change in casino dealer morale or dealing speed.

6) Hold percentage We assume neutral luck compared with 2018.

Macau Gaming: 30 July 2019

Our revised forecast for VIP market GGR using our 3G3S model

Macau: 3G3S model results for Macau VIP market GGR YoY Visitation number of Gaming hours per Average days- Average hands Average hold VIP gaming patrons day per patron per-stay Average bet size dealt per hour percentage Total 2019 23.0% -6.0% 1% -13% 0.0% 0.0% 1.6% 2020 13.0% 0.0% 3.5% -7% 0.0% 0.0% 7.6% 2021 13.0% 0.0% 3.5% -7% 0.0% 0.0% 7.6%

Source: Daiwa estimates

Macau: VIP GGR YoY change

80%

60%

40%

20%

(20%)

(40%)

(60%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: DSEC, Daiwa forecasts

Assumption notes 1) Visitations by VIP gaming patrons The increasing number We expect the HKZM Bridge to have a limited impact on VIP gaming patrons as they of direct flights is likely are less likely than mass patrons to choose public buses as a mode of transport. to bring more VIP However, we believe that when more organised transport is established, such as the visitations than mass availability of direct taxi/limo licences, the HKZM Bridge will start to transfer VIP visitations initially, as gaming patrons from nearby airports, like HKIA and Zhuhai Airport. Besides, we expect they are less price- new direct flights from IVS available provincial capital cities such as Shenyang, Jinan sensitive and more likely and Changsha, and an increase in flight frequency from high-disposable-income to choose direct flights regions, like Tianjin and Chongqing cities, and Zhejiang and Jiangsu provinces to bring when a new flight is about a meaningful increment in VIP patrons over 2019-20. We foresee new direct launched flights between underpenetrated IVS cities and Macau continuing to develop in 2019 and 2020, while traffic passing through the Lotus Bridge Border Gate should increase after 2023 when the Macau LRT system connects with Guangzhou-Zhuhai Intercity Railway. Assuming the high visitation growth in 5M19 continues into 2H19, we are revising up our visitation growth forecast from 13% to 23% for 2019, and maintain our forecast for 13% YoY visitation growth for both 2020 and 2021.

2) Average gaming time (hours) per day for VIP market patrons We expect the Chinese government crackdown on illegal underground banking networks earlier this year, and the 31 January 2019 announcement of new laws regulating certain types of foreign currency transactions, to have a full-year impact in 2019. Moreover, we estimate junkets have been redirecting business to other Southeast Asian countries, such as the Philippines and Cambodia, which would have a negative impact on VIP GGR. As a result, we are revising down our forecast for average gaming time from -3% to -6% for 2019.

3) Average days-per-stay for VIP patrons Due to the delay in the opening of the Grand Lisboa Palace to 2020, we are revising down our average days-per-stay growth forecast for Mainland China visitors to 1% for 2019, from 3.5% previously, but maintaining our forecast for 3.5% growth per year over 2020-21, reflecting our expectations of an increase in the number of hotel rooms

Macau Gaming: 30 July 2019

entering the market, and for an uptrend in Macau’s overall hotel occupancy rate from the current 90% to around 98% in 2 years.

4) Average bet size per hand for each gaming patron Depending on the outlook for US-China trade talks, we assume CNY weakness will have a -3% impact per year, and junket and other liquidity headwinds will have a -3% impact per year on the average bet size for VIP patrons. Moreover, Macau’s Financial Intelligence Office announced that the number of suspicious transaction reports from gaming companies were down 14.4% YoY for 1H19, which also supports our lower average bet size assumption. We now forecast this to have a -7% impact for the rest of 2019 and 0% in 2020 and 2021.

5) Average number of hands dealt per hour We expect no marked change in casino dealer morale or dealing speed.

6) Hold percentage We assume neutral luck compared with 2018.

Macau Gaming: 30 July 2019

2019 EBITDA forecast and EBITDA trend

For the year ended 31 December 2018, Macau posted GGR of HKD294bn, +14% YoY. Industry EBITDA was HKD70.4bn (+16% YoY), higher than our estimate of HKD68.7bn, while industry EBITDA as a percentage of GGR was 24.3%, up 0.5pp YoY. In the first half ended 30 June 2019, Macau posted accumulated GGR of HKD145.1bn (MOP149.5bn translating into HKD145.1bn at an exchange rate of HKD1 = MOP1.03), which was -0.5% lower YoY. We believe that the loss in gaming time from the smoking ban and delayed approval of new smoking lounges at various properties, and drop in average bet size for VIP patrons due to the depreciation of the CNY as a result of ongoing trade tensions, have marginally outweighed the higher-than-expected growth in visitations to Macau (see our 3G3S model for details).

Looking ahead, we believe that 2H19 will see an improvement in GGR as a result of: 1) continued improvement in mass-to-VIP ratio, 2) strong momentum in Mainland visitations due to the seasonal effect, and 3) further visa relaxation policies to speed up implementation of the GBA project. We now forecast overall 2019 GGR and adjusted EBITDA to increase by 7.6% YoY (from 8.7%) and 11.4% YoY (no change), respectively, and industry EBITDA as a percentage of GGR of 25.2% (from 24.7%), up 0.5pp YoY.

On the P&L, we also expect the 14th month bonus to become standard for the 6 operators. Unless the Macau Government imposes regulations over casino operation hours, we believe the casino-wide smoking ban will be the last factor affecting gaming time. We expect GGR growth and industry EBITDA growth to accelerate again in 2020 once gamer visitations and days-per-stay regain momentum without further hindrance from incremental factors affecting gaming time. As for 2021, we forecast GGR and industry adjusted property EBITDA to rise by 11.3% YoY and 13.0% YoY, and industry EBITDA as a percent of GGR of 25.5%, up 0.3pp YoY.

Going forward, we believe gamer visitations will continue to rise over our forecast horizon on the back of the inflection point for China penetration being reached through the rapid development of direct flights between Macau and underpenetrated Mainland China cities. Moreover, we also see infrastructure improvements and other factors affecting visitations in a structural way, and do not expect these to disappear anytime soon. With the continuous pipeline of hotel openings through 2022, we also expect days-per-stay to continue to rise as more visitors who arrive by air demand overnight stays.

Furthermore, we expect disposable incomes in Mainland China to continue to rise over 2019-21, enhancing the average bet size for mass gamers. Meanwhile, we expect a more balanced mass-to-VIP ratio, and hence, the EBITDA margin to improve over 2019-21. In the long run, we expect headwinds from junkets and illegal capital flight to be the only negative factors affecting average bet size.

Macau Gaming: 30 July 2019

Macau: gaming industry GGR (MOPm) We forecast industry 900,000 80% GGR to rise by 6.9% YoY 800,000 60% for 2019 on ongoing 700,000 trade tensions, GBA 600,000 40% 500,000 20% development and the 400,000 China penetration story 300,000 0% 200,000 (20%) 100,000 0 (40%) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Total GGR VIP Mass Slot YoY Change

Source: DSEC, Daiwa

Macau: gaming operators’ EBITDA (MOPm) We expect the 6 120,000 60% operators to maintain 100,000 40% low-double-digit EBITDA growth over 2019-21E 80,000 20% 60,000 0%

40,000 (20%)

20,000 (40%)

0 (60%) 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Total YoY Change

Source: Companies, Daiwa

Macau: gaming operators’ EBITDA to GGR (%) We expect average ratio 28% of EBITDA to GGR to 26% continue improving to reach mid-20% on a 24% better mass-to-VIP ratio 22% and ramp-up of 20% properties 18% 16% 14% 12% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Companies, Daiwa

Macau Gaming: 30 July 2019

Our coverage at a glance Positive on the sector, with Sands China as top pick At the stock level, Daiwa’s pecking order is as follows: 1) Sands China, 2) Galaxy Entertainment Group, 3) Melco Resorts, 4) SJM Holdings, 5) MGM China, and 6) Wynn Macau.

We are bullish on the Sands China (1928 HK) Macau Gaming Sector, We reaffirm our Buy (1) rating and raise our 12-month target price to HKD50.1 from with Sands China as our HKD45.6, based on a SOTP valuation using 2019-20E average EV/EBITDA. We place top pick Sands at the top of our pecking order for its strong 1Q19 results and integrated resort model, which we believe allows it to benefit the most from the China penetration story and ongoing trade tensions. The Parisian was the standout property in terms of performance in a relatively strong 1Q19 for Sands. We expect the ramp-up of the Parisian to continue at this pace from better mass table yield optimisation throughout 2019.

Sands controls the largest portfolio of hotel rooms (12,518 hotel rooms, representing c.47% of total hotel rooms of the 6 operators combined) in Macau by far. In a market that is continuously shifting towards mass and premium mass segment patrons, we maintain our view that Sands is in an advantageous position where it has already built a solid foundation while other competitors would require time and large capital expenditure to increase room inventory. Currently, Sands has several property upgrade projects in its pipeline through to 2021, including the upgrade and rebranding of Sands Cotai Central into The Londoner Macau. We believe these property upgrades will create a large portfolio of premium mass products to enhance Sand’s ability to compete for the leading position in premium mass, and cement Sands’ market-leading position in Cotai.

Sands China’s shares are trading currently at an 11.9x 1-year forward EV/EBITDA multiple, based on our 2019-20E average EBITDA forecast, which is 1SD below its past-9-year EV/EBITDA. Key downside risks include: 1) Macau visitations and China’s macro situation deteriorating markedly, as Sands is the prime beneficiary of growing visitations, 2) CNY devaluing faster than expected, 3) a sudden slowdown in the ramp-up of Parisian Macau, and 4) delays in the construction pipeline and opening of The Londoner Macau.

Galaxy Entertainment Group (27 HK) We reaffirm our Buy (1) rating and raise our 12-month target price to HKD67.2 from HKD61.4, using a SOTP valuation based on 2019-20E average EV/EBITDA. Galaxy has been making great strides in its efforts for partnership-driven promotions. We particularly like Galaxy’s partnership with Air Macau; Galaxy is currently the only operator that has formed an alliance with a Chinese airline. We believe this gives Galaxy a first-mover advantage that positions it well to gain more market share in the premium mass segment by tapping into underpenetrated and wealthy cities outside the Guangdong Province from the rapid expansion of direct flights.

Moreover, we believe Galaxy stands to gain a disproportional share of benefits from the GBA project and rapid developments in Hengqin Island. Galaxy is currently the only operator to own land in Hengqin Island, which could unlock synergies between Galaxy in Cotai and Hengqin as the 2 areas become more integrated in the future. Furthermore, with Galaxy having the largest undeveloped land bank among Macau operators, we maintain our view that this operator has the greatest room for growth over the next 5-7 years.

Galaxy is trading currently at a 12.1x 1-year forward EV/EBITDA multiple using a SOTP valuation based on the 2019-20E average EV/EBITDA, currently level with its past-10-year average. Key downside risks include: 1) direct flights ramping up more slowly than expected, as Galaxy has the biggest competitive advantage to capture incremental visitations by air, and 2) severe policy tightening on anti-money laundering (AML) and

Macau Gaming: 30 July 2019

Mainland capital outflow, 3) delays in construction of Galaxy Phases 3 and 4, 4) other competitors forming airline alliances, reducing its competitive advantage, and 5) gaming concession risk.

Melco Resorts (MLCO US) We are upgrading our rating on Melco Resorts from Outperform (2) to Buy (1), and raising our 12-month target price to USD29.1 from USD24.9, using a SOTP valuation based on 2019-20E average EV/EBITDA. We expect Melco to continue to offer highly differentiated gaming and non-gaming products, such as night clubs and pool party events, to capture the upcoming generation of young and wealthy gaming patrons in the premium mass segment. 1Q19 saw its 40 new-to-market gaming tables underutilised. However, we believe table yields will improve at City of Dreams (CoD) going into 2H19 due to: 1) minimum bets at entry-level mass tables comparable to the 2013 level, 2) revival of the Melco-Crown partnership creating sustainable table yields similar to 2012-13, 3) concentration of junkets under CoD having a positive spill-over effect on higher-end premium mass demand, and 4) improving industry fundamentals to support premium mass demand. The expected phase out of VIP operations at Studio City, and construction of Studio City Phase II should build up its portfolio of non-gaming products, which would help Melco build mass and premium mass market share.

We also see improvements in transportation infrastructure having a positive impact for Melco, such as the Macau LRT to connect Studio City and CoD, and extension of the high- speed inter-city railway link to Hengqin Station to increase proximity to Studio City. Furthermore, CoD is strategically located within only a 5-minute drive of the MIA and a 7- minute drive of the Taipa Ferry Terminal, which should help it capture the incremental rise in premium mass visitations by sea and air. We also view the recent acquisition of a 19.9% stake in Crown Resorts for AUD13.00 per share as a strategic move that will reap long- term benefits for the operator as it sets its sights on a Japan IR licence.

Melco stock is trading currently at a 10.5x 1-year forward EV/EBITDA based on our 2019E and 2020E average EBITDA forecasts. Key downside risks include: 1) slower ramp-up of refurbishment projects on CoD, 2) delays in government approval for Studio City Phase II construction, 3) CNY devaluation, and 4) gaming concession risk.

MGM China (2282 HK) We are upgrading MGM from Hold (3) to Buy (1), with an unchanged 12-month target price of HKD16.68, using a SOTP valuation based on 2019-20E average EV/EBITDA. MGM, like SJM, was granted an extension of its concession until 26 June 2022. MGM Cotai finally received official approval from the Health Bureau for new-style smoking lounges on 10 May 2019. We believe its high-end hotel products and its direct VIP player development were the keys to MGM Cotai’s performance in the VIP segment. In addition to fewer expected short-term regulatory risks, we expect acceleration in the ramp up of MGM Cotai in 2H19 after opening its super high-end VIP luxury villas, The Mansion. In response, the company is planning on building more high-end hotel rooms. Management has plans to add a further 50-60 luxury suites to MGM Cotai within the next few years. We view these as positive developments for MGM Cotai to continue to build upon its competitive position and capture a larger share of the VIP market segment when other operators are building up their mass and premium mass product offerings.

We believe that future developments in Macau’s transportation infrastructure would create more visitor foot traffic into MGM Cotai. MGM Cotai is within close proximity of the Cotai East Stop on the Taipa line of Macau’s upcoming LRT system, and is strategically located within only a 5-minute drive of the MIA and a 7-minute drive of the Taipa Ferry Terminal, which should help it capture the incremental visitations by sea and air.

Macau Gaming: 30 July 2019

MGM China’s shares are trading currently at an 11.2x 1-year forward EV/EBITDA multiple based on our 2019-20E forecast, around 0.5SD below its past-10-year average. Key downside risks include: 1) slower-than-expected ramp-up of MGM Cotai, and thus less- than-expected market share gains, 2) intensifying competition with other Cotai operators, and 3) gaming concession risk.

SJM Holdings (880 HK) We are upgrading SJM Holdings to Outperform (2) from Hold (3), and raising our 12-month target price to HKD10.0 from HKD8.8, using a SOTP valuation based on 2019-20E average EV/EBITDA. Ongoing EBITDA margin improvements at Grand Lisboa and self- promoted casinos contributed to robust 1Q19 earnings for the group. As expected, SJM had been granted an extension of its concession until 26 June 2022, and all major casinos operated by SJM have been granted smoking lounge approvals.

We maintain our view that Grand Lisboa Palace will be one of the biggest catalysts for SJM looking ahead to 2020. SJM has been making big strides in attracting the mass segment for the Grand Lisboa Palace, such as planning to open a 7,500 square metre duty-free shop. Another positive element we see is the potential synergies between the Grand Lisboa Palace and the adjacent Lisboeta Macau developed by Macau Theme Park and Resorts Ltd. We also believe SJM delayed the potential opening date to 2H20 to match the opening date of Lisboeta, in order to capture the synergies. The wide variety of non-gaming activities should bring in new elements to Grand Lisboa Palace. Finally, with the official announcement of “The Macao SAR Participation in the Construction of the Guangdong-Hong Kong-Macao Greater Bay Area Cooperation” annex to the Outline Development Plan to promote the development of tourism in Macau, we believe local players such as SJM will stand to gain an advantage through their deep understanding of the market and local relationships. If US-China trade tensions escalate, we may see Chinese operators, such as SJM, outperform as a result of synergistic partnerships with other Chinese companies.

SJM shares are trading currently at a 10.6x 1-year forward EV/EBITDA multiple, which is 0.4SD above its past 10-year average EV/EBITDA. We believe due to its opening delay, the market may be underestimating the potential incremental EBITDA contribution from Grand Lisboa Palace. Key downside risks include: 1) further delays in the opening of Grand Lisboa Palace, 2) fewer-than-expected tables at Grand Lisboa Palace, 3) delays in the opening of Lisboeta Macau for onset of synergies, and 4) gaming concession risk.

Wynn Macau (1128 HK) We are upgrading Wynn from Hold (3) to Outperform (2) and raising our 12-month target price to HKD20.4 from HKD18.2, using a SOTP valuation based on 2019-20E average EV/EBITDA. Management indicated a significant shift in strategy towards the mass and premium mass segment. Some initiatives touted include building a larger premium mass gaming area, focusing on adding non-gaming facilities, and lower allocation of hotel rooms for junket operators. Moreover, Wynn Palace Phase 2 is expected to add an additional 1,371 all-suite hotel rooms, bringing the total to 3,000 (equal to The Venetian). The Crystal Pavilion will also come with a Vatican-themed theatre and physical link to Grand Lisboa Palace via footbridge to extend gaming patrons’ stays. Wynn has a long history of creating unique, high-end products for its VIP customer base, which we believe can translate into differentiated non-gaming products for mass and premium mass patrons. Additionally, Wynn Palace is strategically located within only a 5-minute drive of the MIA and a 7-minute drive of the Taipa Ferry Terminal, which will help it capture the incremental visitations by sea and air. However, despite these potentially positive developments, we believe it will take some time for Wynn to adjust its mass-to-VIP mix given that it caters to more VIP/junket players than most of its competitors.

Macau Gaming: 30 July 2019

Wynn Macau’s shares are trading currently at an 11.5x 1-year forward EV/EBITDA multiple, based on our 2019E and 2020E average EBITDA forecast, nearly 0.8SD below its past-9-year average. Key downside risks: 1) visa tightening and/or a Mainland China anti- corruption drive, which could lead to a drop in visitations as occurred during 2014 to 2016. As Wynn caters to more VIP/junket players than most of its competitors, headwinds for junkets would also have more effect on Wynn, 2) intensifying competition in Cotai with new premium mass and VIP products entering the market, 3) the CNY/USD dropping faster than expected and 4) severe UnionPay headwinds are other potential risks.

Macau Gaming: valuations and Daiwa’s preferred pecking order Order Stock Rating Local currency Share price TP Valuation Investment thesis 1 Sands Buy HKD 39.35 50.1 We assign a 2019-20E average EV/EBITDA multiple of 11x for Sands 1. Far-and-away the leader in both self-operated gaming Macau, 16x for Venetian Macau,15x for Four Seasons/Plaza, Sands tables and hotel room inventory Cotai Central and Parisian, 5x for the ferry and other operations, plus 2. Valuation looks attractive given its earnings growth a discount for the gaming concession re-bidding risk. outlook 3. Attractive dividend and consistent track record in delivering shareholder returns 4. We see Sands generating higher-than-expected VIP GGR for 2019 from its newly refurbished smoking-ban- regulation-friendly VIP rooms across its Cotai properties 2 Galaxy Buy HKD 55.25 67.2 We assign a 2019-20E average multiple of 10x for Starworld, 15x for 1. Prime beneficiary of the development of direct flights with Galaxy Resort Phase 1 & 2, 8x for Broadway Macau, and 5x for City its well-structured premium mass loyalty programme Club revenue. Our 5x EV/EBITDA multiple for Galaxy Resort Phase 3 2. Currently the only operator with a partnership with a reflects HKD15bn in capex with an expected ROIC of 10% discounted Chinese airline (Air Macau) at WACC, plus a discount for the gaming concession re-bidding risk. 3. Galaxy has the second highest number of self-directed gaming tables and hotel room inventory, as well as the largest undeveloped Macau land bank (capable of doubling its current gaming and hotel space), plus it is currently the only concessionaire with a Hengqin land bank. 3 Melco Buy USD 23.96 29.1 We assign a 2019-20E average multiple of 14x for CoD,12x for Studio 1. Highly differentiated gaming and non-gaming products to City, 5x for Altira, 10x for CoD Manila, plus a discount for the gaming capture the ever-changing demographic of the premium concession re-bidding risk. segment of the mass market 2. 40-new-to-market gaming tables at CoD expected to become better utilised in 2Q19 and onwards on high entry- level minimum bet on tables, synergies with Crown, concentration of junket operations, and subsiding negative industry headwinds. 3. Trading currently near a historical low EV/EBITDA multiple 4 MGM Buy HKD 13.82 16.68 We assign a 2019-20E average multiple of 11x for MGM Macau, and 1. We expect to see VIP and mass GGR start to pick up for 14x for MGM Cotai, plus a discount for the gaming concession re- MGM Cotai after the infusion of junkets, and addition of bidding risk. MGM Theatre 2. Unveiled super high-end premium mass residents suites, The Mansion, with potential synergies with Mansion One and Dynamic Theatre to capture high-end segments 5 SJM Outperform HKD 8.8 10.0 We assign a 2019-20E average multiple of 12x for Grand Lisboa, and 1. The most high-risk/high-reward stock in the Macau 5x for self-promoted and satellite casinos. We assign a 14x gaming sector EV/EBITDA multiple based on 2020E EBITDA and discounted at 2.Make or break depends on Grand Lisboa Palace WACC for Grand Lisboa Palace, plus a discount for the gaming 3. We believe the market either has priced too much for the concession re-bidding risk. gaming concession risk or has not priced in fully the potential incremental EBITDA Grand Lisboa Palace can provide for SJM. 6 Wynn Outperform HKD 19.16 20.4 We assign a 2019-20E average multiple of 11x for Wynn Macau, and 1. Wynn Palace Phase 2 and Crystal Palace (est. 13x for Wynn Palace, plus a discount for the gaming concession re- completion in 4Q24) expected to increase hotel inventory to bidding risk. 3,000 rooms in Cotai, similar to Venetian. 2. Wynn Palace is strategically located near the MIA and Taipa Ferry Terminal. We believe Wynn Palace is in a good position to capture the high-end segment of Mainland Chinese arrivals at the MIA. 3. One of the biggest limitations of Wynn is the less-than- ideal number of gaming tables (number) allocated by the Macau Government. Source: Daiwa forecasts Share prices as of 26 July 2019

Macau Gaming: 30 July 2019

Macau: operator total GGR market share 2017 2018 2019E 2020F 2021F Galaxy 22.1% 22.7% 22.1% 21.5% 22.0% StarWorld 5.5% 5.7% 5.5% 5.3% 5.1% City Clubs 0.2% 0.2% 0.1% 0.1% 0.1% Galaxy Phase 1&2 16.3% 16.7% 16.2% 15.8% 16.5% Galaxy Phase 3&4 Broadway 0.2% 0.2% 0.2% 0.2% 0.2% Melco 15.7% 14.6% 15.2% 14.4% 14.7% Altira 1.9% 2.0% 1.9% 1.8% 1.7% CoD 9.1% 8.0% 8.8% 9.8% 10.1% Studio City 4.4% 4.2% 4.2% 2.6% 2.6% Mocha Club 0.4% 0.3% 0.3% 0.3% 0.2%

MGM 7.1% 7.9% 8.4% 8.3% 8.1% MGM Macau 7.1% 5.8% 4.7% 4.4% 4.2% MGM Cotai 0.0% 2.0% 3.7% 3.9% 3.9% Sands 22.4% 23.2% 24.5% 25.2% 25.3% Venetian 8.8% 9.4% 10.8% 11.3% 11.0% Sands 2.0% 2.0% 1.8% 1.6% 1.3% Plaza 1.8% 2.0% 2.1% 2.2% 2.2% SCC 5.4% 5.4% 5.1% 4.7% 5.3% Parisian 4.5% 4.4% 4.8% 5.3% 5.4% SJM 16.2% 15.1% 14.7% 16.5% 16.6% Grand Lisboa 5.8% 5.4% 5.4% 5.0% 4.7% Self-promoted 2.4% 2.2% 2.0% 1.0% 0.9% Satellite 7.9% 7.6% 7.3% 7.2% 7.0% Grand Lisboa Palace 0.0% 0.0% 0.0% 3.3% 4.0% Wynn 16.5% 16.4% 15.1% 14.1% 13.4% Wynn Macau 9.0% 7.5% 6.8% 6.2% 5.7% Wynn Palace 7.5% 8.9% 8.3% 7.8% 7.7%

Source: Companies, Daiwa

Macau: operator VIP GGR market share VIP 2017 2018 2019E 2020F 2021F Galaxy 24.8% 27.0% 26.2% 25.7% 26.3% Starworld 6.5% 7.0% 6.7% 6.5% 6.3% Galaxy - Cityclubs 0.2% 0.2% 0.2% 0.2% 0.2% Galaxy Macau 1&2 18.2% 19.8% 19.3% 19.1% 19.8% Galaxy Macau 3&4 0.0% 0.0% 0.0% 0.0% 0.0% Broadway 0.0% 0.0% 0.0% 0.0% 0.0% Melco 15.5% 14.4% 15.5% 14.0% 14.7% Altira 3.3% 3.6% 3.6% 3.5% 3.3% CoD 8.5% 7.3% 8.6% 10.5% 11.4% Studio City 3.7% 3.5% 3.3% 0.0% 0.0% MGM 6.7% 7.0% 7.7% 7.9% 7.8% MGM Macau 6.7% 6.1% 4.5% 4.4% 4.3% MGM Cotai 0.0% 0.9% 3.2% 3.5% 3.5% Sands 16.4% 17.7% 18.2% 19.2% 18.9% The Venetian Macao 5.4% 7.0% 7.4% 8.7% 9.0% Sands Macao 4.0% 4.0% 4.0% 4.0% 4.0% The Plaza Macao 1.6% 2.4% 2.5% 3.0% 3.2% Sands Cotai Central 2.0% 2.3% 2.3% 2.4% 2.7% Parisian 3.5% 3.7% 4.0% 4.5% 5.0% SJM 15.7% 14.2% 14.1% 16.0% 16.2% Grand Lisboa 8.0% 7.3% 7.7% 7.5% 7.2% Self promoted 1.7% 1.2% 1.2% 0.7% 0.6% Satellite 6.0% 5.7% 5.2% 5.0% 4.7% Grand Lisboa Palace 0.0% 0.0% 0.0% 2.9% 3.7% Wynn 20.8% 19.6% 18.4% 17.1% 16.1% Wynn Macau 11.7% 9.0% 8.4% 7.7% 6.9% Wynn Palace 9.1% 10.6% 9.9% 9.4% 9.2%

Source: Companies, Daiwa

Macau Gaming: 30 July 2019

Macau: operator Mass GGR market share We reiterate that MGM Mass GGR 2017 2018 2019E 2020F 2021F Cotai should see Galaxy 19.4% 18.9% 18.8% 18.2% 18.8% Starworld 4.7% 4.8% 4.8% 4.6% 4.5% market-share gains for Galaxy - Cityclubs 0.2% 0.2% 0.1% 0.1% 0.1% both VIP and mass in Galaxy Macau 1&2 14.1% 13.5% 13.4% 13.1% 13.8% 2019 in its second year Galaxy Macau 3&4 0.0% 0.0% 0.0% 0.0% 0.0% Broadway 0.4% 0.4% 0.4% 0.4% 0.4% of ramp-up phase, with Melco 15.0% 13.9% 14.0% 13.9% 13.9% market share shifting Altira 0.5% 0.6% 0.5% 0.5% 0.5% CoD 9.5% 8.5% 8.7% 8.9% 9.0% further to The Venetian, Studio City 5.0% 4.8% 4.8% 4.5% 4.4% Parisian and CoD Mocha Club MGM 6.9% 7.8% 8.4% 8.0% 7.6% MGM Macau 6.9% 5.0% 4.4% 4.0% 3.7% MGM Cotai 0.0% 2.8% 3.9% 4.0% 3.9% Sands 30.4% 30.2% 31.5% 31.6% 31.7% The Venetian Macao 12.2% 12.5% 14.6% 14.7% 14.3% Sands Macao 3.1% 2.6% 2.2% 2.3% 1.7% The Plaza Macao 1.9% 1.9% 1.9% 1.9% 1.9% Sands Cotai Central 8.1% 8.1% 7.4% 6.5% 7.4% Parisian 5.1% 5.1% 5.5% 6.3% 6.4% SJM 17.2% 16.6% 15.7% 17.2% 17.3% Grand Lisboa 3.7% 3.6% 3.4% 3.2% 2.9% Self-promoted 3.2% 3.1% 2.8% 1.2% 1.0% Satellite 10.3% 9.8% 9.5% 9.3% 9.2% Grand Lisboa Palace 0.0% 3.5% 4.2% Wynn 11.1% 12.6% 11.7% 11.0% 10.6% Wynn Macau 5.9% 5.8% 5.1% 4.8% 4.5% Wynn Palace 5.2% 6.8% 6.5% 6.2% 6.1%

Source: Companies, Daiwa

Macau Gaming Sector: EV/EBITDA bands The sector is trading (x) currently near its 27 25 historical average 23 EV/EBITDA multiple 21 19 17 15 13 11 9 7 5 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 EV/Consensus Core EBITDA

Source: Bloomberg, companies

Risks As our call for the sector is based on our 3G3S model, any material deviation in our expectations for any of the 6 components in our model would have an impact on the GGR outcome. We would highlight a number of key risks associated with our assumptions:

1) Visitations growing more slowly than expected. Visa tightening and/or the Mainland China anti-corruption drive being stepped up would likely lead to a decline in visitations as occurred during the 2014-16 period. The main driver we see keeping visitations robust over the next 3-5 years is the rapid development of direct flights between Macau and China’s IVS cities and the ramp-up of the HKZM Bridge. The MIA Master Plan is also crucial to this thesis. Any material deviation and timeline changes might affect the speed of direct flight developments, while arrivals via the HKZM Bridge might be affected if the vehicle license approval is slower than expected.

2) Mainland China political environment/situation. Any significant change to current US-China trade tensions could have an impact on the frequency, magnitude, and type of domestic policies the Chinese government rolls out in response, including the visa relaxation policies. This could potentially have an impact on visitations from Mainland China, and average bet size.

Macau Gaming: 30 July 2019

3) A change in the overnight visitation trend would have an impact on our days-per-stay estimate, while delayed hotel openings would have an impact on available days-per-stay. As days-per-stay is tied to visitations, any change in visitations would have an impact on days-per-stay.

4) The average bet size deteriorates more rapidly than expected as a result of the CNY/USD dropping faster-than-expected and severe UnionPay headwinds.

Gaming concessions are another key risk to our call. Our call would be impacted if the Macau Government were to introduce new terms and conditions for concession renewal (ie, an increase in the gaming tax). Moreover, the government has no obligation to renew any of the concessions. Gaming concessions of all 6 operators expire on 26 June 2022.

Macau Gaming: 30 July 2019

Appendix 1

3G3S Model components and factors

Summary of Daiwa’s proprietary 3G3S model Visitation number of Average Gaming time Average bet Size per hand Average days-per-Stay for Average number of hands Average Gaming hold Gaming patrons gaming patrons dealt per hour (Speed) percentage Supply side China outbound travel Availability of approved CNY/HKD fluctuations Hotel room availability Card-dealing speed House advantage (Macau) policies and regulations, smoking lounges including the IVS and Package Tour Scheme

The magnitude of gaming The distance between Change in net worth of Range of different hotel tiers Payout calculation ability of promotion and marketing gaming tables and smoking Chinese gaming patrons and configurations the dealers allowed by the China lounges government The intensity of the China DICJ’s decision on casinos’ China disposable income per Hotel room affordability Game innovation to government’s anti-corruption operation hours capita minimise the need for and anti-graft drive calculation

Times when high-ranked Cash allowed to be carried A good balance of gaming China government officials out of Mainland China per and on-gaming products visit Macau (or neighbouring trip cities)

Mainland China public UnionPay policies and Number and quality of MICE holidays regulations and other multi-day events

Mainland Chinese appetite for gaming

Demand side Macau inbound travel Ratio of smoking gamers to Liquidity channel in Macau The need to attend multi-day Nil Luck under the preferred (China) policies and regulations total gamers events in Macau choice of game

Infrastructure connectivity The average time needed for Headwinds relating to The number of gamer visitors with Macau a smoking break AML/China capital flight arriving by air

Infrastructure improvements The average frequency of Movement of gaming table The growth of day-trippers within Macau smoking break time needed minimum bets (for mass) and by gamers average gaming table maximum bets (for VIP) Availability and frequency of Average number of hands The growth of transiting arrival transportation means dealt per hour gamers Number of immigration counters/checkpoint locations

Source: Daiwa

Macau Gaming: 30 July 2019

Macau Consumer Discretionary 30 July 2019

(1928 HK) Sands China Sands C hina

Target price: HKD50.10 (from HKD45.60)

Share price (26 Jul): HKD39.35 | Up/downside: +27.3%

Fast train from Paris to London Andrew Chung, CFA (852) 2773 8529  Parisian ramped-up significantly in 1Q19; likely more upside in 2H19 [email protected]  Execution success of Parisian set to carry over to The Londoner Macau Terry Ng (852) 2773 8530  Reiterating our Buy (1) rating; lifting TP to HKD50.10; our top pick [email protected]

What's new: The major renovation, expansion and conversion of Sands Forecast revisions (%) Cotai Central (SCC) to The Londoner Macau started in 1Q19 and the short- Year to 31 Dec 19E 20E 21E term setback from construction disruption will likely be the story throughout Revenue change 1.1 0.6 n.a. Net profit change 0.5 0.5 n.a. 2019. The Londoner is due to be completed in phases over 2020-21. Core EPS (FD) change 0.3 0.4 n.a. Besides The Londoner, other Sands properties might also experience some Source: Daiwa forecasts minor construction disruptions. Venetian’s VIP gaming areas expansion/ refurbishment will also go through phased completion throughout 2019, Share price performance while we expect the Four Season Suites Tower to be completed in (HKD) (%) 1Q20. The good news for Sands is that visitations to Macau continue to 44 105 beat market estimates (+22.7% YoY for 5M19 vs. consensus’ +10-12%). 41 99 37 93 34 86 What's the impact: We expect the construction disruption to have an 30 80 impact on SCC’s gaming and non-gaming revenue until the opening of the Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

Londoner Tower Suites. On the back of robust visitations from the Sands Chn (LHS) Relative to HSI (RHS) mainland, we expect Sands’ other properties to continue their table yield optimisation efforts, particularly The Parisian (1Q19 adjusted property 12-month range 30.30-43.95 EBITDA +23% QoQ, +41% YoY). Looking into 2020, we expect Sands to Market cap (USDbn) 40.66 shift its table yield optimisation focus to the Plaza Casino upon completion 3m avg daily turnover (USDm) 67.81 of the Four Season Suites Tower (80% rise in hotel room inventory). If Shares outstanding (m) 8,079 Major shareholder Las Vegas Sands (70.1%) Sands can replicate Parisian’s success at Plaza Casino, we believe it would not only give Sands a potential earnings catalyst for 2020, but also Financial summary (USD) set a benchmark for The Londoner in 2021. Sands is far-and-away the Year to 31 Dec 19E 20E 21E leader in the Macau grind mass market due to its number and range of Revenue (m) 9,886 11,181 12,392 hotel rooms and non-gaming products. Even after taking out 1,224 rooms Operating profit (m) 2,643 3,108 3,302 Net profit (m) 2,416 2,879 3,080 from Holiday Inn for remodelling, Sands still controls over 40% of all Cotai Core EPS (fully-diluted) 0.299 0.356 0.381 hotel rooms. Along with its existing Paiza suites and mansions in the EPS change (%) 28.9 19.1 7.0 Venetian and the Four Seasons, the additions of Parisian suites (opened in Daiwa vs Cons. EPS (%) 10.7 18.7 16.1 4Q18), Four Season Suites Tower (1Q20), and Londoner Suites (4Q20) PER (x) 16.8 14.1 13.2 Dividend yield (%) 5.1 5.1 5.1 should enable Sands to compete for the market leader position in Macau’s DPS 0.254 0.254 0.254 premium mass segment by the start of 2021, in our view. PBR (x) 8.5 7.1 5.7 EV/EBITDA (x) 12.2 10.7 9.8 What we recommend: As the leading integrated resort operator during the ROE (%) 52.6 54.8 47.7 current high visitation growth period, Sands’ current valuation (trading 1SD Source: FactSet, Daiwa forecasts below its past-9-year EV/EBITDA) offers investors the most share-price upside, in our view, and as such, is our top sector pick. We reiterate our Buy (1) rating and lift our 12-month TP to HKD50.1 (from HKD45.6) using SOTP valuation based on 2019-20E average EV/EBITDA. On the back of expected strong visitation growth, we raise our 2019-20E earnings slightly by 0.3-0.4%. Risks: 1) slowing growth in visitations, 2) slowing ramp-up of the Parisian, and 3) delays in its construction and opening pipeline.

How we differ: We believe Sands can compete for Macau’s premium mass segment whereas the market perceives it as a grind mass only player.

See important disclosures, including any required research certifications, beginning on page 129

Sands China (1928 HK): 30 July 2019

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Sands: operating revenue and EBITDA Given Sands’ strong revenue growth in 1Q19, we see its 14,000 earnings maintaining momentum for the rest of 2019. Also, 12,000 with the higher-than-expected mainland visitation growth 10,000 (+22.7% YoY for 5M19), we expect Sands to benefit disproportionally as it has the largest hotel room inventory, 8,000 and the highest number of casual dining outlets of any 6,000 operator to absorb the visitation traffic, especially during 4,000 holiday periods (eg, Golden Week, Lunar New Year). We 2,000 believe 2020 will be Sands’ year due to the expected 0 opening of the Four Seasons Suites in 1Q20, and The 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Londoner Tower Suites. We expect the 3,100sq ft rooms to Revenue (USDmn) EBITDA (USDmn) help Sands acquire the premium mass segment that was Source: Company, Daiwa forecasts missing from its existing client base.

Valuation Sands: 1-year forward EV/EBITDA band

Sands stock is trading currently at a 1-year forward 26 EV/EBITDA multiple of 11.9x (more than 1SD below its 24 past-9-year average). As Sands dominates the mass GGR 22 market share and its mass market EBITDA margin is 20 relatively predictable, Sands typically trades back up to 18 +1SD within a few months when the market is confident 16 14 that mass market GGR growth would be sustainable and/or 12 the derating is unwarranted (2Q13-4Q14, 4Q16 and 1Q18- 10 2Q18). During 1H19, despite its strong 1Q19 earnings, 8 Sand’s valuation remained near the -1SD level. We expect Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 the stock to trade at a higher valuation premium in the EV/Daiwa EBITDA current visitation upcycle once the market fully understands Source: Bloomberg, Daiwa forecasts its integrated resort model.

Earnings revisions Sands: Bloomberg-consensus EPS forecast revisions (USD) In 1H19, the Macau gaming sector was hit with 0.35 simultaneous negative news which led to downward earnings revisions, namely: 1) the smoking ban, 2) UnionPay crackdown, 3) crackdown on underground 0.30 banking network, and 4) possible leakage of junket VIPs to other Southeast Asian countries. Moreover, accumulated 0.25 1H19 GGR was -0.5% YoY due to the high comp base in 1H18. We expect these negative systematic factors to subside going into 2H19. If 2H19 experiences faster-than- 0.20 expected growth in visitation and GGR, we expect to see Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 upwards earnings revision by the end of this year due to 2019 EPS 2020 EPS

Sands’ aforementioned strong attributes in the mass and Source: Bloomberg emerging premium mass-driven market.

Sands China (1928 HK): 30 July 2019

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Venetian Macao GGR (USDm) 4,067 2,874 2,830 2,896 3,533 4,342 5,036 5,393 Sands Macao GGR (USDm) 1,359 977 751 667 730 710 713 619 Plaza Macao GGR (USDm) 1,273 701 548 584 761 828 980 1,072 Sands Cotai Central GGR (USDm) 3,331 2,116 1,839 1,766 2,008 2,059 2,099 2,599 Parisian GGR (USDm) n.a. n.a. 417 1,476 1,660 1,916 2,364 2,655

Profit and loss (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Gaming 8,362 5,736 5,573 5,880 6,816 7,939 9,008 10,004 Non-gaming 1,144 1,084 1,080 1,706 1,811 1,947 2,173 2,389 Other Revenue 0 0 0 0 38 0 0 (0) Total Revenue 9,505 6,820 6,653 7,586 8,665 9,886 11,181 12,392 Other income 0 0 0 0 0 0 0 0 COGS (4,053) (2,723) (2,610) (3,023) (3,529) (4,019) (4,559) (5,023) SG&A (1,391) (1,238) (1,243) (1,193) (1,238) (1,468) (1,525) (1,647) Other op.expenses (1,437) (1,340) (1,448) (1,597) (1,744) (1,756) (1,989) (2,420) Operating profit 2,624 1,519 1,352 1,773 2,154 2,643 3,108 3,302 Net-interest inc./(exp.) (50) (48) (83) (148) (205) (207) (208) (197) Assoc/forex/extraord./others (18) 0 (1) 0 (81) 0 0 0 Pre-tax profit 2,556 1,471 1,268 1,625 1,868 2,436 2,901 3,104 Tax (8) (11) (44) (22) 7 (20) (22) (24) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 2,548 1,459 1,224 1,603 1,875 2,416 2,879 3,080 Net profit (adjusted) 2,548 1,459 1,224 1,603 1,875 2,416 2,879 3,080 EPS (reported)(USD) 0.316 0.181 0.152 0.199 0.232 0.299 0.356 0.381 EPS (adjusted)(USD) 0.316 0.181 0.152 0.199 0.232 0.299 0.356 0.381 EPS (adjusted fully-diluted)(USD) 0.316 0.181 0.152 0.198 0.232 0.299 0.356 0.381 DPS (USD) 0.257 0.256 0.256 0.254 0.254 0.254 0.254 0.254 EBIT 2,624 1,519 1,352 1,773 2,154 2,643 3,108 3,302 EBITDA 3,261 2,223 2,244 2,607 3,058 3,615 4,107 4,395

Cash flow (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 2,556 1,471 1,268 1,625 1,868 2,436 2,901 3,104 Depreciation and amortisation 554 567 645 715 695 696 832 1,096 Tax paid (2) (6) (6) (6) (6) (20) (22) (24) Change in working capital 23 (148) 331 126 80 396 (32) (18) Other operational CF items 93 84 108 166 412 219 220 209 Cash flow from operations 3,224 1,968 2,346 2,626 3,049 3,727 3,898 4,367 Capex (931) (1,251) (1,133) (423) (492) (2,132) (1,250) (1,250) Net (acquisitions)/disposals (6) (13) (17) 4 (19) (19) (19) (19) Other investing CF items 19 13 1 3 14 27 20 22 Cash flow from investing (917) (1,252) (1,149) (416) (497) (2,124) (1,249) (1,247) Change in debt 0 179 1,000 (19) (4,337) (10) (200) (200) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (2,601) (2,071) (2,070) (2,067) (2,052) (2,056) (2,056) (2,056) Other financing CF items (112) (76) (125) (121) (210) (234) (228) (219) Cash flow from financing (2,713) (1,968) (1,195) (2,207) (6,599) (2,300) (2,484) (2,475) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (406) (1,253) 2 3 (4,047) (697) 166 645 Free cash flow 2,293 716 1,213 2,203 2,557 1,595 2,648 3,117 Source: FactSet, Daiwa forecasts

Sands China (1928 HK): 30 July 2019

Financial summary continued … Balance sheet (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 2,542 1,291 1,294 1,250 2,689 1,976 2,126 2,755 Inventory 14 12 14 15 14 17 18 21 Accounts receivable 639 498 352 293 477 512 574 627 Other current assets 0 0 0 0 0 0 0 0 Total current assets 3,195 1,801 1,660 1,558 3,180 2,505 2,717 3,403 Fixed assets 8,056 8,866 9,433 8,998 8,763 10,234 10,823 11,412 Goodwill & intangibles 21 28 35 34 46 34 34 34 Other non-current assets 76 77 55 57 69 57 57 57 Total assets 11,348 10,771 11,183 10,647 12,058 12,830 13,631 14,906 Short-term debt 6 6 26 54 10 200 200 200 Accounts payable 1,608 1,429 1,622 1,537 1,928 2,349 2,380 2,418 Other current liabilities 6 5 6 6 5 5 5 5 Total current liabilities 1,620 1,441 1,654 1,597 1,943 2,554 2,585 2,623 Long-term debt 3,194 3,379 4,348 4,358 5,552 5,352 5,152 4,952 Other non-current liabilities 104 113 174 154 154 154 154 154 Total liabilities 4,918 4,933 6,176 6,109 7,649 8,060 7,891 7,729 Share capital 81 81 81 81 81 81 81 81 Reserves/R.E./others 6,349 5,758 4,926 4,457 4,328 4,689 5,659 7,096 Shareholders' equity 6,429 5,839 5,007 4,538 4,409 4,770 5,740 7,177 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 11,348 10,772 11,183 10,647 12,058 12,830 13,631 14,906 EV 41,318 42,754 43,740 43,822 43,533 44,236 43,886 43,057 Net debt/(cash) 658 2,094 3,080 3,162 2,873 3,576 3,226 2,397 BVPS (USD) 0.797 0.724 0.620 0.562 0.546 0.590 0.711 0.888

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 6.7 (28.2) (2.4) 14.0 14.2 14.1 13.1 10.8 EBITDA (YoY) 12.4 (31.8) 0.9 16.2 17.3 18.2 13.6 7.0 Operating profit (YoY) 14.6 (42.1) (11.0) 31.1 21.5 22.7 17.6 6.2 Net profit (YoY) 15.0 (42.7) (16.1) 31.0 17.0 28.9 19.1 7.0 Core EPS (fully-diluted) (YoY) 14.9 (42.7) (16.1) 30.9 16.8 28.9 19.1 7.0 Gross-profit margin 57.4 60.1 60.8 60.2 59.3 59.3 59.2 59.5 EBITDA margin 34.3 32.6 33.7 34.4 35.3 36.6 36.7 35.5 Operating-profit margin 27.6 22.3 20.3 23.4 24.9 26.7 27.8 26.6 Net profit margin 26.8 21.4 18.4 21.1 21.6 24.4 25.7 24.9 ROAE 39.6 23.8 22.6 33.6 41.9 52.6 54.8 47.7 ROAA 22.3 13.2 11.2 14.7 16.5 19.4 21.8 21.6 ROCE 27.2 16.1 14.5 19.3 22.8 26.0 29.0 28.2 ROIC 37.9 20.1 16.3 22.2 28.9 33.6 35.6 35.3 Net debt to equity 10.2 35.9 61.5 69.7 65.2 75.0 56.2 33.4 Effective tax rate 0.3 0.8 3.5 1.4 (0.4) 0.8 0.8 0.8 Accounts receivable (days) 28.0 30.4 23.3 15.5 16.2 18.3 17.7 17.7 Current ratio (x) 2.0 1.2 1.0 1.0 1.6 1.0 1.1 1.3 Net interest cover (x) 52.5 31.5 16.3 12.0 10.5 12.8 15.0 16.7 Net dividend payout 81.3 141.8 169.0 128.1 109.7 85.1 71.4 66.7 Free cash flow yield 5.6 1.8 3.0 5.4 6.3 3.9 6.5 7.7 Source: FactSet, Daiwa forecasts

Company profile

Sands China is one of the 6 gaming operators in Macau and operates Sands Macau, The Venetian Macau, Plaza Macau, Sands Cotai Central and The Parisian. Sands Cotai Central is to be refurbished and rebranded as The Londoner commencing in 2019, with phased completion throughout 2020 and 2021.

Sands China (1928 HK): 30 July 2019

Fast train from Paris to London Construction pipeline and timeline Sands’ major properties Sands is currently going through major renovation and/or expansion projects at its major to see construction Cotai properties to build up its premium mass-segment products. The most significant disruptions throughout project in its pipeline is the renovation, expansion, and rebranding of SCC to The Londoner 2019-20 in order for the Macau, which is scheduled to be completed in phases throughout 2020-21. Besides The operator to compete for Londoner, other Sands properties might also experience some minor construction premium mass disruptions. Venetian’s VIP gaming areas expansion/refurbishment will also go through leadership position in phased completion throughout 2019. We expect its Four Season Suites Tower to be 2021 completed by 1Q20 and The Londoner Tower Suites to be completed by 4Q20.

We expect construction disruption at these properties to have some negative impact on gaming patrons’ gaming time and days-per-stay over 2019 and potentially into 2020. Nevertheless, we believe the Parisian will continue to ramp up, offsetting the disruption effects. In the long run, we view this short-term pain being a long-term gain for Sands as those conversions should enable Sands to capture the high-end premium mass segment, a segment that was previously considered weak in Sands’ repertoire. Moreover, we believe the different but compact timeframes enable each of Sand’s properties to experience an independent and uninterrupted ramp-up, creating a situation whereby it constantly brings new products to the market to maintain engagement with the brand. We believe that once the construction of these properties is complete, it would give Sands enough arsenal to compete for the premium mass-market leadership position in 2021.

Sands: Macau project pipeline and timeframe Project Details Expected Timeframe The Londoner Macau Renovation, expansion, and rebranding of Sands Cotai Central (SCC) Commencement in 2019 Convert 1,224 room Holiday Inn into 600 room, The Londoner Hotel Phased completion throughout 2020 and Suites and 2021 Four Seasons Tower Suites Macau Expand suite inventory with approximately 290 new luxury suites, Expected completion: 1Q20 ranging in size from 2,000 to 4,700sq ft Londoner Tower Suites Macau 370 new luxury suites Expected completion: 4Q20 Ranging in size from 1,400 to 3,100sq ft The Parisian Additional luxury suites Completed (4Q18) The Venetian Refurbished and expanded VIP gaming areas Phased completion in 2019 The Plaza Refurbished and expanded VIP gaming areas Completed

Source: Company

Parisian Macau, the best performing Cotai property Parisian Macau ramped up faster than expected, achieving adjusted property EBITDA of USD163m (23% QoQ, 41% YoY) in 1Q19. Mass and VIP GGR increased to USD263m (3% QoQ, 20% YoY) and USD181m (19% QoQ, 42% YoY), respectively. We maintain our forecast for Parisian to reach USD1.9bn GGR for 2019. We also expect mass GGR to expand at a CAGR of 19.9% over 2019-21, due to rapid increases in visitations.

Sands China: Parisian VIP and mass GGR (USDm) 1,800 40% 1,600 35% 1,400 30% 1,200 25% 1,000 20% 800 15% 600 400 10% 200 5% 0 0% 2017 2018 2019E 2020E 2021E VIP GGR Mass GGR VIP YoY Mass YoY

Source: Company, Daiwa forecasts

Sands China (1928 HK): 30 July 2019

Four Seasons/Plaza Casino is the next table yield optimisation project We expect Four Lower table yields at Sands compared to the industry suggest that it is not as efficient an Seasons/Plaza Casino to operator as its competitors due to the difficulty of optimising the large number of tables it become Sand’s next has across its properties. However, we believe that this perceived disadvantage is actually table yield optimization an advantage for Sands. Sands China has 1,660 gaming tables under 5 distinctive casino focus upon expected properties. Among the 6 operators, it has the most flexibility versus competitors in terms of: completion of Four 1) switching between mass gaming tables and VIP gaming tables, and 2) switching tables Seasons Suites Tower in between its 5 casino properties in accordance with the prevailing yield conditions. 1H20 Over the past 2 years, we have seen Sands focusing its optimisation efforts on the Venetian Macau (2018), and the Parisian (2019) with industry leading single property EBITDA growth results. We expect the next one up to be Four Seasons/Plaza Casino. Once the Four Season Suites Tower opens (expected in 1H20), the Four Seasons/Plaza Casino will be infused with more than 360 incremental ultra-high-end suites (minimum size of the suites 2,000sq ft). Arguably, the Four Season Suites Tower will be the most high-end hotel offering in Macau and will allow Sands to capture a market segment that it has not been able to capture before. Moreover, the 360 additional suites will add c.80% increase in hotel rooms/suites inventory to Four Season/Plaza Casino and offer its gaming patrons the much needed rooms for extension of playing days. We believe it will be the biggest earnings catalyst for Sands in 2020.

Sands China: Plaza Casino VIP win/table/day (HKD) Sands China: Plaza Casino mass win/table/day (HKD) 450,000 50% 160,000 50% 400,000 40% 140,000 40% 350,000 30% 120,000 30% 300,000 20% 100,000 20% 250,000 10% 80,000 10% 200,000 0% 150,000 60,000 0% 100,000 (10%) 40,000 (10%) 50,000 (20%) 20,000 (20%)

0 (30%) 0 (30%)

2012 2010 2011 2013 2014 2015 2016 2017 2018

2013 2010 2011 2012 2014 2015 2016 2017 2018

2019E 2020E 2021E

2019E 2020E 2021E VIP YoY Change Mass YoY Change

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Integrated resort model: GGR beneficiary of high visitations We believe the higher-than-expected visitations in 1Q19 from mainland China to Macau (up 22.7% YoY for 5M19, see page 4-5 for more details) had an influence on Sands’ strong 1Q19 results. The integrated business model it employed to develop its Macau business (please refer to page 63 of our initiation report) is yielding fruit in the current mass-market- driven environment. We believe that the combination of deeper China penetration, ongoing US-China trade tensions, and GBA will lead to further growth in visitations to Macau over the next 3 years. Moreover, using our 3G3S model, we maintain our view that Sands is in the best position to capture a larger mass GGR market share due to its:

1) Large hotel room inventory: Sands currently controls the largest portfolio of hotel rooms (12,518 hotel rooms, representing c.47% of total hotel rooms of the 6 operators combined) in Macau by far. Sands is projected to control half of all hotel rooms at gaming operator properties in Cotai by the end of 2020, based on all operators’ press releases on expected hotel opening timelines. With more hotel rooms, Sands can absorb the incremental visitations by air; we expect visitors arriving by air to more likely be overnight visitors rather than day-trippers, especially if they are originally from a faraway province (please refer to page 11 of our initiation report for more details).

Sands China (1928 HK): 30 July 2019

Sands China: Macau room inventory, 2018 vs. 2020E Sands is projected to 14,000 control half of all hotel Londoner Tower Suites: 370 rooms 12,000 Four seasons Tower Suites: 290 rooms rooms at gaming 10,000 operator properties in Galaxy Phase III: 1,500 rooms Cotai by the end of 2020, 8,000 Grand Lisboa Palace: 2,000 based on all operators’ 6,000 press releases on 4,000 expected hotel opening timelines 2,000 0 Sands China Galaxy Entertainment Melco Resorts SJM Holdings* Wynn Resorts MGM China

Source: Company Note: *Includes only SJM owned hotels

2) High mass-to-VIP GGR ratio: Mass and VIP contributed to 62.2% and 30.9% of Sands’ 2018 GGR, respectively, implying a mass-to-VIP ratio of 2.0x. Meanwhile, the share of industry GGR from mass was 40.2%, according to statistics from DSEC. We look for Sands’ GGR contribution from mass and VIP to be 65.2% and 28.0%, respectively, for 2021.

Sands China: GGR contribution by segment Sands has a higher- 80% than-average mass-to- 70% VIP GGR ratio compared 60% to the industry average; 50% Industry share of GGR by mass (2018) mass GGR contributes 40% to 62.2% of 2018 30% company GGR 20% 10% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

VIP Mass Slot

Source: Company, Daiwa forecasts

Moreover, mass gaming and non-gaming (hotel, catering and retail) contributed 56% and 27%, respectively, to Sands profits in 1Q19, while VIP segment contributed only 8%. Also, Sands has the highest EBITDA margin compared to other operators, which is likely due to its lower VIP market exposure.

EBITDA margin of the 6 Macau operators Sands has consistently 40% maintained an EBITDA 35% margin above 30% since 30% 2011 which we believe is 25% a result of its mass- 20% driven, integrated resort 15% business model 10% 5% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Sands Galaxy Melco MGM SJM Wynn

Source: Company, Daiwa forecasts

With the planned construction works at The Londoner Macau (in more detail below), and Four Seasons Tower Suites offering new, high-quality suites for premium mass and VIP gaming patrons, we believe Sands can gain market share in both VIP and mass GGR in 2021 compared to its market share level at the end of 2018.

Sands China (1928 HK): 30 July 2019

Sands China: VIP market share 2017 2018 2019E 2020E 2021E Sands 13.6% 15.5% 15.9% 16.8% 16.6% The Venetian Macao 5.5% 6.6% 6.8% 7.5% 7.1% Sands Macao 0.8% 1.0% 0.9% 0.8% 0.8% The Plaza Macao 1.6% 2.2% 2.3% 2.6% 2.5% Sands Cotai Central 2.1% 2.2% 2.1% 2.0% 2.2% Parisian 3.6% 3.5% 3.7% 3.9% 4.0%

Source: Company, Daiwa forecasts

Sands China: mass market share 2017 2018 2019E 2020E 2021E Sands 30.5% 30.3% 31.6% 31.6% 31.6% The Venetian Macao 12.2% 12.5% 14.6% 14.7% 14.2% Sands Macao 3.1% 2.6% 2.2% 2.3% 1.7% The Plaza Macao 1.9% 1.9% 1.9% 1.9% 1.9% Sands Cotai Central 8.1% 8.1% 7.4% 6.5% 7.3% Parisian 5.1% 5.1% 5.5% 6.3% 6.4%

Source: Company, Daiwa forecasts

From Paris to London As the ramp-up of the Parisian is well under way, we turn our attention to the renovation, expansion and rebranding of SCC into The Londoner Macau. The Londoner Macau aims to bring a more contemporary British-themed offering to the Cotai Strip, and integrate Sands’ Cotai Strip properties under a distinct European theme (The Venetian Macau and Parisian) by 2021. Once all renovations, conversions and rebranding at SCC are completed by 4Q20, The Londoner is expected to have:

 Thirty per cent more usable area compared to the Venetian, which should provide Sands additional space to add more gaming tables and non-gaming facilities (eg, 6,000- seat arena for multiple types of events).

 Over 6,000 hotel rooms and suites, compared to the Venetian’s 3,000 rooms.

 1.2m sq ft of total space for retail, entertainment, and dining facilities compared to the Venetian’s 1m sq ft and Parisian’s 300,000 sq ft.

With a considerably larger usable area and double the number of hotel rooms compared to the Venetian, The Londoner stands to be the main GGR driver for Sands in 2021 in the premium mass segment, in our view. We expect The Londoner’s total GGR (+23.8% YoY) and adjusted property EBITDA (+26% YoY) to accelerate in 2021 during the first year of its ramp-up stage, after flat YoY growth during 2019-20E.

SCC (The Londoner): GGR and adjusted property EBITDA (USDm)

We expect The 3,500 Londoner’s GGR and Expected opening of 3,000 The Londoner Macau adjusted property EBITDA to accelerate 2,500 upon completion of all 2,000 renovations in 2021 1,500

1,000

500

0 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E GGR Adjusted property EBITDA

Source: Company, Daiwa forecasts

Sands China (1928 HK): 30 July 2019

What can we expect from The Londoner Macau? We expect the new In a press release on 9 May 2019, Sands revealed more details about what to expect from premium offerings to The Londoner: drive mass and premium mass visitor traffic to The  Hotels: Holiday Inn Macau Cotai Central will be rebranded into the more premium Londoner Macau Londoner Hotel; 1,224 rooms will be converted into 600 premium suites. Furthermore, the St. Regis Hotel plans to add around 370 luxury suites which will be renamed The Londoner Tower Suites which it expects to complete by 3Q20.

 F&B: More than 20 dining options, with new restaurant concepts such as a British-style gastropub by Gordon Ramsay.

 Retail & others: Shoppes at The Londoner (previously Shoppes at Cotai Central) will have about 200 stores, 34,300 square metres of meeting and convention space for large-scale events, 3 spas and 4 health clubs.

The Londoner Macau: property exterior The Londoner Macau: Crystal Palace Atrium

Source: Company Source: Company

The Londoner Macau: suites (living room) The Londoner Macau: suites (bedroom)

Source: Company Source: Company

Sands China (1928 HK): 30 July 2019

The Londoner Macau: Shoppes (retail space) The Londoner Macau: Gordon Ramsay Pub & Grill

Source: Company Source: Company

Management expects the total cost of renovation, expansion, and rebranding of The Londoner Macau to be c.USD1.35bn. Total spend, including the new 290-room Four Seasons Tower Suites Macau (estimated completion by 1Q20), is estimated at USD2.2bn. Management expects The Londoner Macau to open progressively over 2020 and 2021.

We expect these new premium offerings to drive mass and premium mass visitor traffic to The Londoner Macau. We believe it is well-timed for Sands to add more premium mass products based on our assumption that future developments in Hengqin are likely to bring in more premium mass gaming patrons into Macau (please refer to page 17 of our sector report). Moreover, we expect the opening of The Londoner Macau to increase premium mass gaming population density into Cotai Strip, which would indirectly benefit The Venetian and Parisian.

Overall, we believe The Londoner Macau will be a great addition to Sand’s portfolio of properties, by enhancing its ability to attract premium mass patrons, a gaming segment that is traditionally underpenetrated in Sand’s customer base, and cement Sands’ market- leading position in Cotai.

Earnings forecasts and financials We predict Sand’s would Sands China recorded full-year GGR and adjusted property EBITDA YoY growth of 17.6% achieve faster growth in and 17.9%, respectively, for 2018. We expect 2019 mass market and VIP GGR to reach adjusted property USD6.26bn and USD2.79bn, respectively, and Sands China group adjusted property EBITDA compared to EBITDA for 2019E to reach USD3.58bn (+16.8% YoY). consensus as its integrated resort model Looking ahead, we maintain our view that Sands will achieve faster growth (14% CAGR in makes it the main adjusted property EBITDA over 2020-21 compared with the consensus estimate of 9.7%) beneficiary during the due to rapid visitation expansion from underpenetrated cities in China, future current high visitation improvements in infrastructure improving visitor capacity, and further integration of Macau growth period into the GBA. We look for its adjusted property EBITDA to rise by 14.8% YoY for 2020E and12.7% YoY for 2021E.

For the Parisian, we expect it to continuously gain mass market share as its ramp-up phase progresses. We expect more gaming tables to be reallocated to the Parisian from Sands Macao or SCC until the Parisian reaches an optimal point. Due to the better-than- expected ramp-up in 1Q19, we expect the Parisian’s 2019E mass market win/unit/day (w/u/d) to hit HKD89,800, a level similar to the Venetian in 2018, and w/u/d of HKD107,800 in 2020E. We forecast VIP w/u/d of HKD239,000 for the Parisian for 2019E, HKD260,500 for 2020E, and HKD276,000 for 2021E. Due to the property’s GGR growth and relatively early stages of its ramp-up, we forecast the Parisian to achieve 2019E adjusted property EBITDA of USD579m (+19.7% YoY), 2020E adjusted property EBITDA of USD739m (+27.5% YoY), and 2021E adjusted property EBITDA of USD832m (+12.6% YoY).

Sands China (1928 HK): 30 July 2019

Sands China: adjusted property EBITDA by property (USDm) We forecast Sands 5,000 China’s adjusted property EBITDA to rise 4,000 by 16.0% YoY for 2019E, 3,000 14.5% YoY in 2020E, and 14.7% YoY in 2021E 2,000

1,000

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Venetian Sands Macao The Plaza Macao Sands Cotai Central Parisian

Source: Company, Daiwa Estimates

For the Plaza, we expect its market share to remain flat and in line with industry growth for 2019 until the Four Seasons Suites are ready in 1Q20, by which time we expect the property to capture a larger share of the premium mass market. For SCC, we lower our GGR forecast for 2019 from USD2.17bn to USD2.06bn (-5.1%) due to the disruption from ongoing construction works for The Londoner Macau through to 2021. Moreover, we expect limited growth until the St. Regis Suites are ready by 1Q20.

For the company’s cash position, we expect free cash flow to increase at a 3-year CAGR of 29.2% over 2019-21E due to the increasing contribution from operating cash inflows. This would secure a stable dividend payment after cash outlay for interest expenses and management’s capex guidance totalling USD4.55bn over 2018-21E. We expect Sands to continue its stable dividend payment of USD2bn.

Sands China: dividend declared (USDm) 3,000 180% 160% 2,500 140% 2,000 120% 100% 1,500 80% 1,000 60% 40% 500 20% 0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Interim dividend Final dividend Special dividend Dividend payout ratio (RHS)

Source: Company, Daiwa forecasts

Sands China: free cash flow (USDm) 3,500

3,000

2,500

2,000

1,500

1,000

500

0 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts

Sands China (1928 HK): 30 July 2019

Valuation and recommendation We reiterate our Buy (1) rating on Sands, our top sector pick, and raise our 12-month target price to HKD50.1 (from HKD45.6). We use an SOTP valuation based on 2019-20E average EV/EBITDA, for which we assign 16x for the Venetian, 11x for Sands Macao, and 15x for each of Parisian, SCC and Plaza Macao. We also assign 5x for the ferry and other operations. Currently, Sands China is trading 1SD below its past-9-year average of 15.2x 1-year forward EV/EBITDA multiple. On the back of expected strong visitation growth, we raise our 2019-2020E earnings slightly by 0.3-0.4%.

Sands China EV/EBITDA band

Sands China is trading 26 1SD below its past-9- 24 year average of 15.2x 1- 22 year forward EV/EBITDA 20 18 multiple 16 14 12 10

Jan-14 Jan-17 Jan-12 Jan-13 Jan-15 Jan-16 Jan-18 Jan-19 EV/Daiwa EBITDA

Source: Bloomberg, Daiwa forecasts

Sands China: SOTP valuation Breakdown Metrics 2019-20E SOTP (USDm) Value per share (HKD) % of SOTP Sands 11x EBITDA 1,739 1.7 3% Venetian 16x EBITDA 29,631 28.6 57% Plaza 15x EBITDA 5,066 4.9 10% SCC 15x EBITDA 12,078 11.7 23% Parisian 15x EBITDA 9,953 9.6 19% Corporate expenses 13x EBITDA (3,441) -3.3 -7% Ferry and other operations 5x EBITDA 123 0.1 0% Net debt (3,226) -3.1 -6%

Target price (2019) (8,073m shares) 51,924 50.1 100%

Source: Daiwa estimates and forecasts

Risks The primary risk to our As our forecasts are based on Sands running its integrated resort business model call is a decline in smoothly and efficiently, the primary risk to our call is visitations to Macau from mainland visitations to Macau China. A tightening of visitor visas and/or a mainland China anti-corruption drive could lead to a visitation drop as we saw during 2014-16. The main driver of our view for visitations to remain robust for the next 3-5 years is the rapid development of direct flights between Macau and China IVS eligible cities. The Macau International Airport Master Plan is crucial for this thesis. Any material deviation and timeline changes may affect the speed of direct flight development. Our model also relies on a material pick-up in gaming and non-gaming revenue from the Parisian and to a lesser extent, the Venetian. Sands’ slower-than- expected revenue growth would have an impact on our earnings forecasts or the valuation multiples we have assigned to both the properties.

Another potential, but low-probability, risk is a delay in the construction pipeline and the opening of The Londoner Macau as this would extend the period of disruption, which could negatively affect average gaming time and days-per-stay at the property.

External factors like the China macro economy and CNY/USD fluctuation are also factors which affect GGR growth, in our view. As Sands’ gaming concessions will end on 26 June 2022, we believe concession extension and/or re-bidding decisions (and terms/conditions) from the Macau government may have a material impact on Sands’ revenue.

Sands China (1928 HK): 30 July 2019

Sands China: GGR breakdown by quarter (USDm) Sands China: EBITDA by quarter (USDm) 3,500 80% 1,000 80% 3,000 60% 60% 800 2,500 40% 40% 600 2,000 20% 20%

1,500 0% 400 0% 1,000 (20%) (20%) 200 500 (40%) (40%)

0 (60%) 0 (60%)

1Q13 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

1Q16 3Q16 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q17 3Q17 1Q18 3Q18 1Q19 VIP Mass Slot YoY Change Property EBITDA (USDmn) YoY Change

Source: Company Source: Company

Sands China: VIP rolling chips by quarter Sands China: VIP GGR by quarter 60,000 60% 1,600 60% 50,000 40% 1,400 40% 1,200 20% 40,000 20% 1,000 0% 30,000 0% 800 (20%) 20,000 (20%) 600 400 (40%) 10,000 (40%) 200 (60%) 0 (60%) 0 (80%)

VIP Rolling (USDmn) YoY Change VIP YoY Change

Source: Company Source: Company

Sands China: mass drop by quarter Sands China: mass GGR by quarter 7,000 100% 1,600 80% 6,000 80% 1,400 60% 5,000 60% 1,200 1,000 40% 4,000 40% 800 20% 3,000 20% 600 0% 2,000 0% 400 1,000 (20%) 200 (20%) 0 (40%) 0 (40%)

Mass drop (USDmn) YoY Change Mass YoY Change

Source: Company Source: Company

Sands China: ROIC Sands China: net debt to EBITDA 40% 180%

35% 160% 140% 30% 120% 25% 100% 20% 80% 15% 60% 10% 40% 5% 20% 0% 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Sands China (1928 HK): 30 July 2019

Sands China: key management Name Age Position Serving LVS since Years serving LVS Sheldon Gary Adelson 84 Chairman of the Board, Chief Executive Officer and Executive Director 1988 31 Wong Ying Wai 65 President and Chief Operating Officer and Executive Director 2016 3 Robert Glen Goldstein 62 Non-Executive Director 1995 24 Charles Daniel Forman 71 Non-Executive Director 2004 15 Chiang Yun 50 Independent Non-Executive Director 2009 10 Victor Patrick Hoog 64 Independent Non-Executive Director 2012 7 Steven Zygmunt Strasser 69 Independent Non-Executive Director 2013 8 Kenneth Patrick Chung 60 Independent Non-Executive Director 2016 3 Wang Sing 54 Independent Non-Executive Director 2017 2

Source: Company

Macau Consumer Discretionary 30 July 2019

(27 HK) Galaxy Entertainment Group Gal axy Entertai nment Group

Target price: HKD67.20 (from HKD61.40) Share price (26 Jul): HKD55.25 | Up/downside: +21.6%

The Morning Star in a Candlestick Chart Andrew Chung, CFA (852) 2773 8529  Premium mass-focused business strategy sustainable in the long term [email protected]  Innovative airline promotion to gain visits from under-penetrated cities Terry Ng (852) 2773 8530  Reiterating Buy (1) call; raising TP to HKD67.2 from HKD61.4 [email protected]

What's new: Galaxy has continued over the past 12 months to offer Forecast revisions (%) innovative promotions to grow its premium mass patron database Year to 31 Dec 19E 20E 21E (particularly from underpenetrated mainland Chinese cities, please see Revenue change (1.4) (4.1) n.a. Net profit change (0.4) (4.2) n.a. pages 65-68). These promotions continue to leverage the strength of its Core EPS (FD) change (0.3) (4.1) n.a. loyalty programme and its solid understanding of Greater Bay Area Source: Daiwa forecasts development initiatives. The opening of Galaxy Phase 3 is split into several phases, with the first stage scheduled to open by 2H20. Share price performance

(HKD) (%) What's the impact: We view the joint promotions with Air Macau (the 65 105 Macau subsidiary of Air China) for air arrivals from Hangzhou, Ningbo and 59 96 53 88 Wenzhou as the most interesting aspect of Galaxy’s premium mass loyalty 46 79 programme. All 3 cities are based in Zhejiang Province, which is one of the 40 70 richest provinces in China with the 4th highest GDP (USD849bn), and is Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 one of the fastest-growing provinces in terms of visitations to Macau Galaxy Ent (LHS) Relative to HSI (RHS)

(+37.6% YoY for 1Q19), though it remains underpenetrated (population of 57m, average annual visitations to Macau 788k in 2018). Currently, Galaxy 12-month range 40.75-64.20 is also the only operator to have a partnership with a Chinese airline, which Market cap (USDbn) 30.56 we believe would enable it to indirectly reach out to 19 out of the 26 China 3m avg daily turnover (USDm) 76.60 Shares outstanding (m) 4,325 tier-1 and tier-2 cities to which Air Macau currently has direct flights (see Major shareholder Lui Family (50.5%) p.8), and build up its high-value and underpenetrated gaming patron database. If the industry headwinds of: 1) the smoking ban effect, 2) CNY Financial summary (HKD) devaluation, and 3) VIP leakage to other Asian countries subsides in 2H19, Year to 31 Dec 19E 20E 21E we believe Galaxy’s high-end premium mass and direct VIP market would Revenue (m) 76,605 81,836 91,086 ramp up faster than peers. Also, we believe the phased opening of Galaxy Operating profit (m) 14,479 16,083 18,648 Net profit (m) 14,765 16,594 19,144 Phase 3 is a strategy to obtain greater gaming table allocation. Core EPS (fully-diluted) 3.404 3.825 4.413 EPS change (%) 9.3 12.4 15.4 What we recommend: We expect earnings to start to pick up at a faster Daiwa vs Cons. EPS (%) 11.9 19.0 17.2 PER (x) 16.2 14.4 12.5 pace in 2H19 once: 1) the patron database collected through the Air Macau Dividend yield (%) 1.9 2.1 2.4 promotions starts to be monetised, 2) aforementioned industry headwinds DPS 1.024 1.151 1.328 subside, and 3) potential escalation of US-China trade tensions leads to an PBR (x) 3.5 2.9 2.4 outsized share of mainland China visitors. With the stock’s undemanding EV/EBITDA (x) 12.7 11.1 8.9 ROE (%) 22.6 22.1 21.4 valuation (trading 0.14SD below its past 10-year EV/EBITDA), we reiterate Source: FactSet, Daiwa forecasts our Buy (1) rating and raise our 12-month SOTP-based TP to HKD67.2 from HKD61.4 based on 2019-20E average EV/EBITDA. We lower our earnings forecast for 2019E by 0.3% on industry-wide negative factors in 1H19 having a full-year impact, and lower 2020E earnings by 4.1% YoY on potential delay and construction disruption for Galaxy Macau Phase 3.The key downside risk is slower-than-expected ramp-up of direct flights.

How we differ: While others place emphasis on 1Q19 earnings, we believe Galaxy has the most promising future growth potential with its unrivalled landbank for its Phases 3 and 4. Moreover, we believe the market has not accounted for Galaxy’s partnership with Air Macau for its long-term growth.

See important disclosures, including any required research certifications, beginning on page 129

Galaxy Entertainment Group (27 HK): 30 July 2019

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Galaxy: operating revenue and EBITDA

Given our view that the initial impact of the smoking ban in 100,000 1Q19 has subsided, we expect Galaxy’s revenue and 90,000 EBITDA to accelerate from 2H19 onwards due to 80,000 momentum from: 1) rapid mainland China visitation growth, 70,000 60,000 and 2) an increasing number of direct flights from China. 50,000 Galaxy’s premium mass loyalty programme remains the 40,000 most differentiating factor from its competitors due to its 30,000 partnership with Air Macau. We believe this gives Galaxy 20,000 an advantage in capturing incremental premium mass 10,000 visitations by air. Moreover, Galaxy also has the largest 0 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E undeveloped landbank of any operator, which we believe Revenue (HKDm) EBITDA (HKDm) gives the company the greatest growth potential over the Source: Company, Daiwa forecasts next 5-7 years.

Valuation Galaxy: 1-year forward EV/EBITDA band Galaxy is trading currently at an 11.4x 1-year forward (x) EV/EBITDA multiple based on our forecasts, 0.14SD below 30 its past-10-year average. The last time it traded at such a 25 valuation was in 4Q16-1Q17 when Macau had just 20 experienced a multi-year decline in both GGR and 15

EBITDA, falling visitations, and with one-third of junkets 10 having gone out of business. Since January 2012, after the 5 trough, Galaxy traded back up to +1SD within a few months when the market was confident that EBITDA 0

growth was sustainable and/or the derating was

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 EV/Daiwa EBITDA unwarranted (2Q13-4Q14 and 4Q17-1Q18). Now, with the sector void of any potential market headwinds, we expect Source: Bloomberg, Daiwa forecasts its valuation to continue trending upwards on the basis of a potentially strong 2H19.

Earnings revisions Galaxy: Bloomberg-consensus earnings-forecast revisions Galaxy’s uneventful 1Q19 earnings led to a 6% downward 4.50 revision of 2020E consensus earnings. In 1H19, the Macau gaming sector was impacted by a number of negative 4.00 factors, namely: 1) the smoking ban, 2) UnionPay 3.50 crackdown, 3) crackdown on underground banking network, and 4) possible leakage of junket VIPs to other 3.00 Southeast Asian countries. Moreover, accumulated 1H19 2.50 GGR was -0.5% YoY due to the high comp base in 1H18. 2.00 We expect these negative systematic factors to subside in Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 2H19. As aforementioned, we expect Galaxy to capture incremental visitations by air due to its partnership with Air 2019 EPS 2020 EPS

Macau. If 2H19 experiences faster-than-expected growth in Source: Bloomberg visitation and GGR, we could see upwards earnings revisions by the end of this year.

Galaxy Entertainment Group (27 HK): 30 July 2019

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E StarWorld GGR (HKDm) 22,257 12,761 11,613 13,968 16,549 17,183 18,198 19,485 Galaxy Macau ph 1 & 2 GGR (HKDm) 45,370 33,149 35,239 41,566 48,251 50,511 54,565 62,371 Broadway GGR (HKDm) 0 425 676 514 562 633 684 727

Profit and loss (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Gaming and entertainment (GGR) 67,794 46,322 47,439 55,947 65,230 68,139 73,249 82,376 Non-gaming 3,958 4,669 5,387 8,016 8,186 8,466 8,587 8,710 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 71,752 50,991 52,826 63,963 73,416 76,605 81,836 91,086 Other income 0 0 0 0 0 0 0 0 COGS (49,764) (31,610) (30,838) (38,584) (45,024) (45,975) (48,776) (54,179) SG&A (5,602) (7,052) (6,903) (7,369) (7,785) (8,096) (8,420) (8,757) Other op.expenses (6,289) (8,092) (8,975) (8,160) (8,389) (8,054) (8,557) (9,503) Operating profit 10,098 4,236 6,110 9,850 12,219 14,479 16,083 18,648 Net-interest inc./(exp.) (33) (33) (44) (64) (139) 421 473 466 Assoc/forex/extraord./others 499 5 282 842 1,534 129 310 310 Pre-tax profit 10,564 4,209 6,348 10,628 13,614 15,029 16,866 19,423 Tax (202) (82) (77) (113) (43) (201) (209) (217) Min. int./pref. div./others (23) 35 12 (11) (63) (63) (63) (63) Net profit (reported) 10,340 4,161 6,283 10,504 13,507 14,765 16,594 19,144 Net profit (adjusted) 10,340 4,161 6,283 10,504 13,507 14,765 16,594 19,144 EPS (reported)(HKD) 2.439 0.978 1.473 2.451 3.128 3.419 3.843 4.433 EPS (adjusted)(HKD) 2.439 0.978 1.473 2.451 3.128 3.419 3.843 4.433 EPS (adjusted fully-diluted)(HKD) 2.415 0.974 1.469 2.438 3.114 3.404 3.825 4.413 DPS (HKD) 1.149 0.290 0.440 0.739 0.502 1.024 1.151 1.328 EBIT 10,098 4,236 6,110 9,850 12,219 14,479 16,083 18,648 EBITDA 13,223 8,736 10,348 14,147 16,857 18,032 19,559 22,136

Cash flow (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 10,564 4,209 6,348 10,628 13,614 15,029 16,866 19,423 Depreciation and amortisation 1,884 3,086 3,573 3,349 3,316 3,343 3,266 3,279 Tax paid (152) (67) (88) (94) (128) (201) (209) (217) Change in working capital (186) (833) 2,701 5,066 (1,769) 608 (15) 983 Other operational CF items (168) 2 (37) (688) (1,344) (989) (1,170) (1,170) Cash flow from operations 11,943 6,397 12,497 18,261 13,689 17,790 18,738 22,299 Capex (9,475) (6,541) (2,099) (2,008) (3,009) (8,445) (3,778) (200) Net (acquisitions)/disposals 55 (694) (4) 2,405 389 0 0 0 Other investing CF items 1,010 1,775 (12,472) 11,968 2,383 1,722 1,760 1,817 Cash flow from investing (8,410) (5,461) (14,576) 12,365 (237) (6,723) (2,018) 1,617 Change in debt 342 433 4,800 3,715 (864) (1,055) 0 0 Net share issues/(repurchases) 256 125 109 348 382 0 0 0 Dividends paid (4,918) (1,754) (1,459) (2,583) (3,979) (9,436) (4,702) (3,706) Other financing CF items (39) 33 (50) (57) (50) (6,137) 2 1,655 Cash flow from financing (4,358) (1,164) 3,400 1,423 (4,511) (16,628) (4,699) (2,051) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (825) (228) 1,321 32,049 8,941 (5,560) 12,020 21,865 Free cash flow 2,468 (145) 10,397 16,252 10,680 9,346 14,959 22,099 Source: FactSet, Daiwa forecasts

Galaxy Entertainment Group (27 HK): 30 July 2019

Financial summary continued … Balance sheet (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 10,362 8,451 19,967 17,740 16,049 16,720 28,833 49,138 Inventory 143 151 158 171 190 260 190 278 Accounts receivable 1,982 2,184 1,583 1,962 1,860 2,734 1,979 3,006 Other current assets 340 414 323 228 214 214 214 214 Total current assets 12,827 11,199 22,032 20,101 18,313 19,927 31,216 52,636 Fixed assets 30,422 35,691 33,502 31,802 31,359 36,785 37,622 34,868 Goodwill & intangibles 6,721 6,463 6,194 5,934 5,644 5,282 4,957 4,632 Other non-current assets 1,869 2,002 4,533 25,977 32,068 32,197 32,507 32,817 Total assets 51,839 55,354 66,261 83,815 87,384 94,191 106,302 124,953 Short-term debt 412 719 5,609 9,685 8,804 18 18 18 Accounts payable 11,112 11,458 12,660 17,237 14,828 16,379 15,539 17,637 Other current liabilities 60 68 53 113 107 107 107 107 Total current liabilities 11,583 12,245 18,321 27,035 23,739 16,505 15,665 17,763 Long-term debt 576 671 526 259 251 7,982 7,982 7,982 Other non-current liabilities 690 725 551 504 563 563 563 563 Total liabilities 12,850 13,641 19,398 27,799 24,553 25,049 24,209 26,307 Share capital 19,775 19,952 20,106 21,469 22,017 22,017 22,017 22,017 Reserves/R.E./others 18,594 21,149 26,239 34,013 40,263 46,511 59,399 75,890 Shareholders' equity 38,369 41,101 46,345 55,482 62,280 68,528 81,416 97,906 Minority interests 620 612 518 534 551 614 677 740 Total equity & liabilities 51,839 55,354 66,261 83,815 87,384 94,191 106,302 124,953 EV 228,750 231,185 224,385 230,173 230,880 229,087 216,727 196,175 Net debt/(cash) (9,374) (7,061) (13,832) (7,796) (6,994) (8,720) (20,833) (41,138) BVPS (HKD) 9.039 9.647 10.849 12.878 14.400 15.845 18.825 22.637

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 8.7 (28.9) 3.6 21.1 14.8 4.3 6.8 11.3 EBITDA (YoY) 5.1 (33.9) 18.5 36.7 19.2 7.0 8.5 13.2 Operating profit (YoY) (0.4) (58.0) 44.2 61.2 24.0 18.5 11.1 15.9 Net profit (YoY) 2.9 (59.8) 51.0 67.2 28.6 9.3 12.4 15.4 Core EPS (fully-diluted) (YoY) 2.9 (59.7) 50.8 65.9 27.7 9.3 12.4 15.4 Gross-profit margin 30.6 38.0 41.6 39.7 38.7 40.0 40.4 40.5 EBITDA margin 18.4 17.1 19.6 22.1 23.0 23.5 23.9 24.3 Operating-profit margin 14.1 8.3 11.6 15.4 16.6 18.9 19.7 20.5 Net profit margin 14.4 8.2 11.9 16.4 18.4 19.3 20.3 21.0 ROAE 29.2 10.5 14.4 20.6 22.9 22.6 22.1 21.4 ROAA 21.1 7.8 10.3 14.0 15.8 16.3 16.6 16.6 ROCE 27.4 10.2 12.7 16.6 17.7 19.4 19.2 19.0 ROIC 38.4 12.9 17.8 24.0 23.4 24.6 26.1 31.1 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 1.9 2.0 1.2 1.1 0.3 1.3 1.2 1.1 Accounts receivable (days) 10.1 14.9 13.0 10.1 9.5 10.9 10.5 10.0 Current ratio (x) 1.1 0.9 1.2 0.7 0.8 1.2 2.0 3.0 Net interest cover (x) 307.4 129.3 139.9 154.1 88.0 n.a. n.a. n.a. Net dividend payout 47.1 29.7 29.9 30.1 16.0 30.0 30.0 30.0 Free cash flow yield 1.0 n.a. 4.4 6.8 4.5 3.9 6.3 9.2 Source: FactSet, Daiwa forecasts

Company profile

Galaxy Entertainment Group (Galaxy) is one of the 6 gaming operators in Macau. The company operates StarWorld on the Macau Peninsula and the Galaxy Macau in Cotai. Originally named KWah Construction, it started out manufacturing construction materials. In 2005, the controlling Lui family injected a casino concession into the company and subsequently changed its name. The company opened its flagship integrated resort, Galaxy Macau in May 2011.

Galaxy Entertainment Group (27 HK): 30 July 2019

The Morning Star in a Candlestick Chart Premium mass loyalty programme and promotions continue to differentiate Galaxy from the rest We believe that Galaxy’s premium mass loyalty programme is well-structured to capture a larger proportion of premium mass gaming patrons arriving in Macau by air than its competitors. The rapid development of direct flights between Macau and underpenetrated Chinese cities led to mainland visitations by air increasing c.27% YoY for 1Q19 (see page 22). Galaxy is currently the only operator to have tied its premium mass loyalty programme to its airline partnership, which began in 2019. We particularly like Galaxy’s choice of partner, Air Macau, which began offering joint promotions with Galaxy for air arrivals from Hangzhou, Zhejiang and Wenzhou in 1Q19. All 3 cities are based in Zhejiang Province, one of the richest provinces in China with the 4th highest GDP (USD849bn). It is also one of the fastest-growing provinces in terms of visitations to Macau (+37.6% YoY for 1Q19). Moreover, it remains significantly underpenetrated since the population of the province is 57m and average annual visitations to Macau were only 788k in 2018.

We believe this alliance gives Galaxy a unique advantage over other operators because:

1) Its first-mover advantage means other operators would find it difficult to replicate this partnership quickly.

2) It gives Galaxy access to 19 of the 26 tier-1 and tier-2 mainland cities with direct flights to and from Macau currently. This opens Galaxy to potentially a greater share of premium mass patrons from these mainland Chinese cities than its competitors.

3) Air Macau’s hub is the Macau International Airport. (MIA). The airport is currently planning Phase 3 of its expansion which would increase annual passenger traffic to 15m annually.

Air Macau: direct flight routes The Air Macau alliance offers Galaxy unique advantages that other operators cannot easily replicate

Source: Air Macau

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: rewards promotion with Air Macau Galaxy is the only operator with an airline partnership, which is tied to its premium mass loyalty programme

Source: Company

Galaxy: rewards promotion with Air Macau

Source: Company

Moreover, Galaxy has the only mass market loyalty programme in Macau that offers the benefits of airport lounge access and complimentary airfares to premium mass patrons. In total, 5 of the 15 key benefits of its Diamond-level membership are air-travel-related.

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: loyalty programme benefits

Source: Company

With many competitors building up their non-gaming products, Galaxy made the first move to appeal to mainland Chinese customers’ preference for mobile payments by offering mobile payment options from November 2017 (see pages 22-24 of the sector report). By leveraging mainland Chinese customers’ preference for mobile payments, we believe this could lead to higher growth in non-gaming revenue, and gaming revenue if shoppers decide to play several hands at the gaming tables. We expect Galaxy to further expand its WeChat Pay and Alipay exclusive offers for its non-gaming offerings for customers paying with mobile payment platforms going forward in 2H19.

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: WeChat Pay exclusive promotion Galaxy: Alipay, MPay exclusive promotion

Source: Company Source: Company

Why is Galaxy’s premium mass-focused business strategy sustainable? We have good reason to be optimistic about Galaxy’s focus on the premium mass segment. Following the VIP downturn in 2015-16, Galaxy shifted focus to develop the premium mass market in mainland China and across Asia (please refer to page 80 of our initiation report – Initiation: next flight – gross gaming revenue). Since then, mass market GGR has grown YoY unabated for 13 quarters straight since 2Q16. We believe this is due not only to a better mass-to-VIP mix, but also to group-wide internal strategies rather than table yield optimisation (please refer to page 79 of our initiation report for more detail).

Galaxy: mass GGR and YoY growth Decision to focus on 7,000 80% 70% premium mass business 6,000 has yielded consistent 60% 5,000 50% and sustainable 4,000 40% increases in mass GGR 30% 3,000 20% 2,000 10% 0% 1,000 -10%

0 -20%

1Q13 1Q15 1Q17 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Mass GGR (HKDm) YoY Change

Source: Company, Daiwa

With a strong mass-to-VIP mix, Galaxy has recorded an EBITDA margin of above 20% since the end of 2016, which was the first time it had achieved this level since the company began operations in Macau. Moreover, as a growing EBITDA margin is indicative of more efficient operations management, we also see this as evidence of the sustainability of Galaxy’s strategy. We forecast the group’s overall EBITDA margin to improve by 0.8pp YoY for 2019 to 23.8%, 0.9pp YoY for 2020 to 24.7%, and 1.2pp YoY for 2021 upon the completion of Galaxy Phase 3.

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: adjusted property EBITDA (HKDm) and EBITDA margin 25,000 30%

20,000 25%

15,000 20%

10,000 15%

5,000 10%

0 5%

(5,000) 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Galaxy Macau 1&2 Starworld EBITDA Broadway Macau CityClubs EBITDA Margin

Source: Company, Daiwa forecasts

Moreover, we also see evidence of sustainable GGR increases by looking at table yields (ie, win/table/day). Normally, when a property increases the number of gaming tables, there is a fall in table yield (win/table/day) due to the time needed to optimise table allocations. After Galaxy switched its strategy to focus on premium mass, it was able to record increases in table yields across both Galaxy Phases 1 and 2, and StarWorld despite increases in the average number of tables. Furthermore, we think Galaxy’s decision to open Phases 3 and 4 in stages is a strategically motivated decision in order to get a greater absolute number of new-to-market tables. As such, we believe that Galaxy would be able to absorb the new-to-market tables while sustaining growth in its average win/table/day once Galaxy Phase 3 opens.

Galaxy Phases 1 and 2: average win/table/day

Growth in average table 250,000 1,000 win/table/day in spite of 900 increases in number of 200,000 tables suggests better 800 mass-to-VIP mix and 150,000 700 sustainable GGR 600 100,000 500

50,000 400 2011 2012 2013 2014 2015 2016 2017 2018

Galaxy Macau 1&2 win/table/day (HKD) Number of tables

Source: Company, Daiwa

StarWorld: average win/table/day 300,000 350

250,000 300

200,000 250

150,000 200

100,000 150

50,000 100 2011 2012 2013 2014 2015 2016 2017 2018

Starworld win/table/day (HKD) Number of tables

Source: Company, Daiwa

Galaxy Entertainment Group (27 HK): 30 July 2019

Poised to be a future star with the largest landbank Among the 6 operators, Galaxy has the largest landbank in Macau. The next phase (Phase 3) of Galaxy is due to open in 2020 and will focus on the mass and meetings, incentives, conferences and exhibitions (MICE) markets. Phases 3 and 4 are expected to offer 400,000 sq ft of MICE space, a 500,000 sq ft, 16,000-seat multi-purpose arena, and other F&B and retail offerings. Phase 4 will be a standalone (though connected property) integrated casino resort. Phases 3 and 4 combined will add 1m sq ft of floor space to Galaxy Macau and 4,500 hotel rooms to its hotel inventory (more than double the current number of rooms). With longer expected days-per-stay by visitors arriving by air, the significant increase in hotel room inventory will translate into additional gaming days for Galaxy’s gaming patrons, on our estimates. Also, we believe Galaxy is taking advantage of its large undeveloped landbank by splitting up the opening of Galaxy Phase 3. We view this to be a strategic move to take advantage of more fiscal years for gaming table allocation.

Hengqin resort potential In addition, Galaxy is the only operator with a landbank on Hengqin Island (2.7 sq km). Galaxy has indicated that it plans to develop a world-class, lifestyle leisure resort on this piece of land, though few details have been provided. We see potential synergies to be unlocked as Galaxy continues to rapidly expand its portfolio of premium non-gaming offerings. In our view, Galaxy is well-positioned location-wise, product-wise, and strategically to take advantage of the rapid development on Hengqin Island and future integration with the Greater Bay Area.

Galaxy: hotel room inventory

Galaxy Phase 3 is due to 5,000 4500 launch in 2020, with a 4,500 1,500 incremental room 4,000 3600 inventory, which we 3,500 expect to translate into 3,000 additional gaming days 2,500 for Galaxy’s gaming 2,000 patrons 1,500 1,000 500 320 500 0 Starworld Broadway Galaxy 1&2 Galaxy 3&4

Source: Company, Daiwa

Galaxy: landbank in Cotai

Galaxy 1&2

Galaxy 3&4

Source: Google Earth, Daiwa

Galaxy Entertainment Group (27 HK): 30 July 2019

Earnings forecasts and financials We believe Galaxy’s top Galaxy recorded high GGR growth of 17% YoY and EBITDA growth of 26.1% YoY for line and EBITDA growth 2018, thanks to strong mainland China visitations and continuous relaxation of the EEP in 2019-20E will be visa policy since 2016. driven by its competitive edge in capturing the Looking ahead, we forecast Galaxy Group’s operating revenue to rise by 4.3% YoY for 2019, rise in mainland China 6.8% YoY for 2020, and 11.3% YoY for 2021. Also, we expect its adjusted property EBITDA visitations due to to increase by 7.0% YoY for 2019, 8.5% YoY for 2020 and 13.2% YoY for 2021. We believe increasing direct flights Galaxy has the competitive edge to capture the rise in the number of mainland China patrons at all its properties brought about by the burgeoning direct flights, largely due to:

1) Its premium mass loyalty programme, which we believe is well constructed for air travel benefits.

2) Its superior junket management team (with its track record of having incubated the current top-2 junket operators in Macau back in 2007) and its working relationship with the Macau International Airport, which we believe will assist its junket partners in developing their mainland China junket VIP direct flight arrival business.

3) Its business operation in mainland China (the construction material arm), which in our view, will enrich the development of the company’s rapidly growing mainland China direct VIP patron database.

We forecast Galaxy Phases 1 and 2 to record property revenue growth of 4.7% YoY for 2019, 7.5% YoY for 2020, and 13.3% YoY for 2021, and respective adjusted property EBITDA growth of 10.4% YoY, 8.5% YoY and 15.1% YoY, thereby gaining share in the premium mass market due to visitation growth from underpenetrated tier-1 and tier-2 mainland China cities, and direct VIP markets (especially from the newly opened direct VIP club, Jinmen8). For StarWorld, we forecast operating revenue growth of 4.0% YoY for 2019, 5.8% YoY for 2020 and 6.9% YoY for 2021, and respective EBITDA growth of 1.4% YoY, 9.3% YoY and 10.1% YoY.

We attribute StarWorld’s slower growth vs. Galaxy Phases 1 and 2 to an expected drag from the smoking ban at Horizon Club. We forecast the group’s overall EBITDA margin to improve by 0.8pp YoY for 2019 to 23.5%, 0.4pp YoY for 2020 to 23.9%, and 0.4pp YoY for 2021 to 24.3% upon the completion of Galaxy Phase 3.

Galaxy: Phases 1 and 2 EBITDA StarWorld: EBITDA 20,000 200% 5,000 50% 40% 150% 4,000 30% 15,000 20% 100% 3,000 10% 10,000 0% 50% 2,000 (10%) (20%) 5,000 0% 1,000 (30%) (40%) 0 (50%) 0 (50%) 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Galaxy Macau 1&2 YoY Change Starworld EBITDA YoY Change

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

We forecast the total capex associated with Galaxy Phases 3 and 4 to be c.HKD15.7bn over 2018-20, which is close to the capex for Galaxy Phase 2 during 2013-15. We expect the 2 new properties to contribute an incremental 4,000-5,000 hotel rooms in Cotai after they are fully launched. With strong support from the company's strong operating cash flow, we expect its dividend payout ratio to remain at c.30% over 2019-21, with DPS rising at a CAGR of c.13.9% over 2019-21 to HKD1.15 per share in 2020 and HKD1.33 per share in 2021.

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: dividend paid (HKDm) We forecast the dividend 7,000 50% payout ratio to remain 6,000 40% steady at c.30% over 5,000 2019-21 4,000 30%

3,000 20% 2,000 10% 1,000

0 0% 2014 2015 2016 2017 2018 2019E 2020E 2021E Dividend Dividend payout ratio (RHS)

Source: Company, Daiwa forecasts

Galaxy: free cash flow (HKDm) 26,000

21,000

16,000

11,000

6,000

1,000

(4,000) 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts

Valuation and recommendation We reiterate our Buy (1) rating on Galaxy, and raise our SOTP-based 12-month TP to HKD67.2 (from HKD61.4). Under our SOTP valuation, based on 2019-20E average EV/EBITDA, we assign 10x for StarWorld, 8x for Broadway Macau, and 5x for City Clubs. We are increasing our Galaxy Resort Phases 1 and 2 EV/EBITDA multiple from 14x to 15x to reflect a closer earnings multiple with Sands’ Cotai properties, which run a similar integrated resort model. We also apply a 5x multiple for Galaxy Resort Phase 3, indicating HKD15bn in capex with an expected ROIC of 10% discounted at a WACC of 10%. We also value Galaxy’s 4.9% stake in Wynn Resorts at market value, and 5% stake in SBM at its acquisition cost of USD50.6m, plus an implicit discount to factor in the gaming concession re- bidding risk. Separately, we lower our 2019 earnings forecast by 0.3% on the industry-wide negative impact of the smoking ban and leakage of junket VIPs to other Southeast Asian countries over 1H19. We also lower 2020E earnings by 4.1% YoY on potential delay and construction disruption at Galaxy Macau Phase 3. However, our 2020E EPS forecast is 19% ahead of consensus.

Galaxy: 1-year forward EV/EBITDA multiple Galaxy is trading (x) currently at an 11.4x 1- 30 year forward EV/EBITDA 25 multiple, 0.14SD below 20 its past-10-year average 15 10 5

Jan-12 Jan-16 Jan-13 Jan-14 Jan-15 Jan-17 Jan-18 Jan-19 EV/Daiwa EBITDA

Source: Bloomberg, Daiwa forecasts

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: SOTP valuation 2019-20E SOTP Value per share Breakdown Metrics (HKDm) (HKD) % of SOTP StarWorld (net of corp exp) 10x EBITDA 31,250 7.2 11% CityClubs 5x EBITDA 597 0.1 0% Broadway 8x EBITDA 552 0.1 0% Galaxy Macau 15x EBITDA 222,194 51.5 77% Galaxy Macau 3 10% incremental ROIC, 5x EBITDA 6,198 1.4 2% discounted at WACC Construction 5x EBITDA 4,985 1.2 2% 4.9% stake in Wynn resorts Market value 5,474 1.3 2% 5% stake in Monaco Casino (Monte Carlos) Acquisition cost 392 0.1 0% Corporate Expenses 13x (2,510) -0.6 -1% Net Cash 20,833 4.8 7% Price Target (4,315m shares) 289,965 67.2 100%

Source: Daiwa forecasts

Risks The key risk to our call Both our sector and Galaxy calls are based on robust visitation growth, particularly arrivals would be slower by air. Visa tightening and/or stepping up of mainland China’s anti-corruption drive could visitation growth as a lead to a decline in visitations, as we saw during 2014-16. As we see it, the main drivers of result of slower ramp-up robust visitations over the next 3-5 years will be the rapid increase in the number of direct of direct flights flights between Macau and China’s IVS-eligible cities (also our core sector thesis), and the ramp-up of the HKZM Bridge. The Macau International Airport master plan is crucial to this thesis. Any material deviation or timeline changes would affect the speed of direct flight growth. Similarly, arrivals via the HKZM Bridge could be affected if the vehicle licence approval proves to be slower than expected. This is the key risk to our call.

Any unexpected delays in the construction of Galaxy’s Phases 3 or 4 would also have an impact on Galaxy’s GGR over the long term due to a forward shift in the beginning period of the ramp-up cycle for the property. We also assume that Galaxy’s superior premium mass loyalty programme remains the premier loyalty programme in Macau. If other operators upgrade their premium mass loyalty programmes to a level similar to Galaxy, Galaxy’s attractiveness in the premium mass market may be affected. This is a secondary risk to our call. As Galaxy caters more to VIP and junket players than most of its competitors, headwinds against junkets would also have more impact on Galaxy. The CNY/USD dropping more rapidly than expected and severe Unionpay headwinds are other potential secondary risks.

The gaming concessions pose another secondary risk to our call. Our call would be impacted if the Macau government were to introduce new terms and conditions for concession renewals (ie, a gaming tax increase). Moreover, the government has no obligation to renew any of the concessions; Galaxy’s concession will expire on 26 June 2022.

Galaxy: GGR breakdown by quarter Galaxy: EBITDA by quarter 22,000 60% 4,500 250% 20,000 4,000 200% 18,000 40% 3,500 16,000 150% 3,000 14,000 20% 12,000 2,500 100% 10,000 2,000 0% 50% 8,000 1,500 6,000 0% 1,000 4,000 (20%) (50%) 2,000 500

0 (40%) 0 (100%)

1Q16 3Q16 1Q17 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 3Q17 1Q18 3Q18 1Q19

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 VIP Mass Slot YoY Galaxy Group EBITDA (HKDmn) YoY Change

Source: Company, Daiwa Source: Company, Daiwa

Galaxy Entertainment Group (27 HK): 30 July 2019

Galaxy: VIP rolling chips by quarter Galaxy: VIP GGR by quarter 500,000 150% 16,000 150% 14,000 400,000 100% 100% 12,000

300,000 50% 10,000 50% 8,000 200,000 0% 6,000 0% 4,000 100,000 (50%) (50%) 2,000

0 (100%) 0 (100%)

1Q13 3Q15 1Q18 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 1Q16 3Q16 1Q17 3Q17 3Q18 1Q19

1Q15 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 VIP Rolling (HKDmn) YoY Change VIP YoY Change

Source: Company, Daiwa Source: Company, Daiwa

Galaxy: mass drop by quarter Galaxy: mass GGR by quarter 16,000 400% 7,000 600% 14,000 350% 6,000 500% 300% 12,000 5,000 400% 250% 10,000 200% 4,000 300% 8,000 150% 3,000 200% 6,000 100% 2,000 100% 4,000 50% 2,000 0% 1,000 0%

0 (50%) 0 (100%)

1Q12 1Q13 3Q18 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 1Q19

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 Mass drop (HKDmn) YoY Change Mass YoY Change

Source: Company, Daiwa Source: Company, Daiwa

Galaxy: ROIC 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Source: Company, Daiwa forecasts

Macau Consumer Discretionary 30 July 2019

(MLCO US) Melco Resorts & Entertainment Melco Resorts & Entertai nment

Target price: USD29.10 (from USD24.90) Share price (26 Jul): USD23.96 | Up/downside: +21.5%

Upgrading: the Crown Prince of Macau Andrew Chung, CFA (852) 2773 8529  40 new-to-market gaming tables; ramp-up poised to accelerate in 2H19 [email protected]  19.99% stake in Crown Resorts a long-term strategic move Terry Ng (852) 2773 8530  Upgrading to Buy (1) from Outperform (2) on Crown synergies [email protected]

What's new: We are upgrading Melco to Buy (1) from Outperform (2) and Forecast revisions (%) raising our SOTP-based target price to USD29.1 from USD24.9. Six Year to 31 Dec 19E 20E 21E months after Melco was granted 40 new-to-market gaming tables, we Revenue change 1.1 1.1 n.a. Net profit change 0.5 1.0 n.a. expect these incremental tables (+c.8% of table inventory) to reach City of Core EPS (FD) change 3.2 5.3 n.a. Dreams’ (CoD) 4Q18 average table yield in 2H19E. Source: Daiwa forecasts

What's the impact: On 31 May 2019, Melco announced it would acquire a Share price performance

19.99% stake in Crown Resorts. We believe this move will revive the (USD) (%) synergies between Melco/Crown that we witnessed over 2010-13 27 105 (particularly in the premium mass segment). CoD’s current entry-level mass 24 95 21 85 floor Baccarat minimum bet is back to its 2013 peak of HKD1,000. 17 75

Management indicated during the 1Q19 earnings call that Studio City would 14 65 be transformed into an entertainment complex that will focus purely on the Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 mass segment. We expect Studio City Phase 2 (scheduled to open in Melco (LHS) Relative to HSI (RHS)

3Q21) to add 900-1,000 hotel rooms to the property, enabling it to extend its mass gaming patron days-per-stay and gameplay. Also, the privatisation 12-month range 15.52-26.62 of CoD Manila on 10 June should streamline the group structure. We Market cap (USDbn) 11.94 expect CoD’s win/table/day rate to bottom out in 1Q19 as the adjustment 3m avg daily turnover (USDm) 15.42 Shares outstanding (m) 487 and utilisation of 40 additional gaming tables starts to ramp up towards the Major shareholder Melco International (54.3%) 4Q18 win/table/day level in 2H19 due to: 1) minimum bets at entry-level mass tables comparable to the 2013 level, 2) revival of Melco-Crown Financial summary (USD) partnership synergies on table yields similar to the 2012-13 period in which Year to 31 Dec 19E 20E 21E Melco was arguably the best performing operator in Macau, 3) Revenue (m) 5,740 6,251 6,874 Operating profit (m) 783 937 1,088 concentration of junkets under CoD which could create a positive spill-over Net profit (m) 477 619 804 effect on premium mass demand, and 4) improving industry fundamentals Core EPS (fully-diluted) 0.980 1.270 1.651 such as strong visitation growth from Mainland China and subsiding EPS change (%) 36.9 29.6 29.9 negative industry headwinds (eg, smoking ban effect and leakage of junket Daiwa vs Cons. EPS (%) (2.0) 5.9 11.5 PER (x) 25.0 19.3 14.8 VIPs to other Southeast Asian countries) towards the end of 2Q19. Dividend yield (%) 2.4 3.3 4.2 DPS 0.583 0.803 1.034 What we recommend: We believe Melco’s current share price and PBR (x) 5.6 5.0 4.3 valuation are undemanding (0.4SD below its 10-year average EV/EBITDA). EV/EBITDA (x) 10.1 9.2 7.4 ROE (%) 22.4 27.3 31.0 Along with the aforementioned factors discussed, we upgrade Melco to Buy Source: FactSet, Daiwa forecasts (1) from Outperform (2) with a revised SOTP valuation based on a 2019- 20E average EV/EBITDA target price of USD29.1, from USD24.90. We raise our 2019-20E EPS by 3-5% based on our expectation of a fast ramp- up of CoD in both VIP and mass segments. Key downside risks: 1) slower- than-expected growth in visitations, especially by air, 2) slower-than- expected ramp-up of Morpheus, 3) delayed construction of Studio City Phase 2, and 4) CNY devaluation and other China macro headwinds.

How we differ: We use our fundamentals-based proprietary 3G3S model to derive our outlook for the company. Moreover, we believe that CoD’s mass table yields could reach their previous peak level by 2H19.

See important disclosures, including any required research certifications, beginning on page 129

Melco Resorts & Entertainment (MLCO US): 30 July 2019

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Melco: revenue and EBITDA We forecast Melco’s mass and VIP GGR to rise by 14.3% 8,000 YoY and by 9.9% YoY, respectively, for 2019 due to the 7,000 ramp-up of Morpheus, and 13.8% YoY and -3.74% YoY for 6,000 2020, due to the phase-out of VIP operations at Studio 5,000 City. On the back of the China penetration story, and with 4,000 Melco’s Morpheus and superior track record in growing the 3,000 premium mass segment over the past 5 years, we forecast 2,000 adjusted property EBITDA growth of 13.5% YoY for 2019, 1,000 12.8% YoY for 2020, and 15.3% YoY for 2021. 0 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Revenue (USDm) EBITDA (USDm)

Source: Company, Daiwa forecasts

Valuation Melco: 1-year forward EV/EBITDA band

Melco is trading currently at a 10.5x 1-year forward 30 EV/EBITDA based on consensus estimates (0.4SD below 27 its past-10-year EV/EBITDA). Its historical low was back in 24 3Q12; at the time Melco’s GGR market share dropped to 21 13.4% in 2012 from 16.5% in 2011, but the stock traded 18 back up to more than +1SD when Melco started regaining 15 market share in 2013. Since then, it has traded between +1 12 / -1SD. Year-to-date, Melco has traded below -1SD, which 9 could be the market discounting for risks associated with 6 Studio City’s ownership structure. However, we believe the 3 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 ramp-up of Morpheus over 2019-20, its proven ability in the EV/Daiwa EBITDA premium mass segment, and the strategic implications of Source: Bloomberg, Daiwa forecasts the Crown Resorts acquisition stake should support a higher valuation over 2019-20.

Earnings revisions Melco: revisions to the Bloomberg-consensus EPS forecasts The market revised down its 2019E and 2020E earnings 2.3 forecasts for Melco throughout 2H18 by c.38%, likely due 2.1 to: 1) Morpheus failing to have gaming tables granted by 1.9 the Macau government, and 2) disappointing results for the 1.7 past 3 quarters. As expected, the strong 4Q18 earnings 1.5 result lifted 2019 consensus earnings forecasts in 1.3 February, before earnings were quickly revised downwards 1.1 0.9 back to the start of 2019 levels in May 2019. With 40 new- 0.7 to-market tables at CoD granted by the government on 1 0.5 January 2019, Melco could see upward earnings revisions, Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 in our view, as CoD ramps up with table yield optimisation 2019 EPS 2020 EPS in 2019. Source: Bloombergg105

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E City of Dreams GGR (USDm) 4,517 3,110 2,860 3,008 3,010 3,528 4,334 4,957 Altira GGR (USDm) 1,044 787 599 615 754 769 799 831 Studio City GGR (USDm) n.a. 100 705 1,440 1,586 1,681 1,163 1,273

Profit and loss (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Gaming 4,556 3,629 4,006 4,753 4,464 5,053 5,472 6,040 Non-gaming 246 345 513 532 695 687 779 834 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 4,802 3,975 4,519 5,285 5,159 5,740 6,251 6,874 Other income 0 0 0 0 0 0 0 0 COGS (2,276) (1,718) (1,661) (2,026) (2,130) (2,367) (2,436) (2,728) SG&A (1,241) (1,325) (1,771) (1,836) (1,551) (1,734) (2,027) (2,117) Other op.expenses (600) (834) (724) (818) (854) (857) (851) (941) Operating profit 685 98 363 604 624 783 937 1,088 Net-interest inc./(exp.) (104) (104) (218) (226) (259) (243) (246) (213) Assoc/forex/extraord./others (51) (54) (70) (66) (14) (65) (70) (70) Pre-tax profit 530 (60) 75 312 350 475 621 805 Tax (3) (1) (8) 0 0 (6) (6) (7) Min. int./pref. div./others 81 167 109 32 (2) 8 4 5 Net profit (reported) 608 106 176 344 349 477 619 803 Net profit (adjusted) 608 106 176 344 349 477 619 804 EPS (reported)(USD) 1.108 0.196 0.348 0.703 0.721 0.987 1.279 1.660 EPS (adjusted)(USD) 1.108 0.196 0.348 0.703 0.721 0.987 1.279 1.662 EPS (adjusted fully-diluted)(USD) 1.099 0.195 0.346 0.697 0.716 0.980 1.270 1.651 DPS (USD) 0.328 0.709 1.441 0.405 0.456 0.583 0.803 1.034 EBIT 685 98 363 604 624 783 937 1,088 EBITDA 1,167 816 973 1,285 1,370 1,530 1,678 1,917

Cash flow (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 530 (60) 75 312 350 475 621 805 Depreciation and amortisation 396 509 601 567 586 681 674 747 Tax paid (3) (1) (8) 0 0 (6) (6) (7) Change in working capital (85) (37) 369 175 80 567 (499) 549 Other operational CF items 55 110 122 106 37 37 37 37 Cash flow from operations 895 522 1,158 1,159 1,054 1,754 826 2,130 Capex (1,215) (1,291) (500) (157) (276) (200) (200) (200) Net (acquisitions)/disposals 1 0 29 1 1 1 1 1 Other investing CF items (1,048) 407 (22) (518) (382) (1,160) 55 55 Cash flow from investing (2,261) (884) (493) (674) (658) (1,360) (145) (145) Change in debt 1,370 78 (124) (194) 503 (396) (396) (396) Net share issues/(repurchases) (178) 0 (803) 0 (442) (500) (300) (200) Dividends paid (343) (63) (386) (821) (272) (282) (389) (500) Other financing CF items 78 (20) (27) (31) (194) (17) (14) (9) Cash flow from financing 927 (5) (1,340) (1,046) (405) (1,194) (1,098) (1,104) Forex effect/others (0) (9) (8) (0) (11) 0 0 0 Change in cash (440) (376) (683) (561) (20) (800) (417) 881 Free cash flow (320) (769) 658 1,002 778 1,554 626 1,930 Source: FactSet, Daiwa forecasts

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Financial summary continued … Balance sheet (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 3,155 2,653 1,952 1,464 1,485 726 338 1,249 Inventory 23 33 33 35 41 44 48 53 Accounts receivable 254 272 225 177 242 241 238 262 Other current assets 71 63 69 170 190 190 190 190 Total current assets 3,503 3,020 2,280 1,845 1,957 1,200 813 1,754 Fixed assets 5,584 6,593 6,466 6,518 6,421 6,200 5,986 5,699 Goodwill & intangibles 514 457 399 342 309 253 196 139 Other non-current assets 832 192 195 190 190 1,405 1,406 1,407 Total assets 10,433 10,262 9,340 8,895 8,877 9,059 8,401 8,999 Short-term debt 263 103 51 51 396 396 396 396 Accounts payable 14 16 17 16 25 21 29 26 Other current liabilities 1,039 1,093 1,411 1,617 1,710 2,283 1,777 2,359 Total current liabilities 1,317 1,211 1,479 1,684 2,130 2,699 2,202 2,781 Long-term debt 3,640 3,712 3,670 3,507 3,665 3,270 2,874 2,479 Other non-current liabilities 434 407 368 368 336 336 336 336 Total liabilities 5,391 5,330 5,517 5,559 6,132 6,305 5,412 5,596 Share capital (17) 16 15 15 (643) (893) (1,043) (1,143) Reserves/R.E./others 4,303 4,324 3,329 2,873 2,770 3,035 3,425 3,945 Shareholders' equity 4,286 4,340 3,344 2,888 2,127 2,143 2,382 2,802 Minority interests 756 592 480 449 618 610 606 601 Total equity & liabilities 10,433 10,262 9,340 8,895 8,877 9,059 8,401 8,999 EV 13,439 13,691 14,184 14,479 15,131 15,486 15,475 14,163 Net debt/(cash) 747 1,162 1,768 2,094 2,576 2,940 2,932 1,625 BVPS (USD) 7.871 7.983 6.847 5.856 4.369 4.400 4.892 5.754

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) (5.6) (17.2) 13.7 16.9 (2.4) 11.3 8.9 10.0 EBITDA (YoY) (9.4) (30.0) 19.2 32.1 6.6 11.7 9.6 14.3 Operating profit (YoY) (18.4) (85.6) 269.0 66.5 3.2 25.6 19.6 16.1 Net profit (YoY) (4.6) (82.6) 66.3 95.5 1.4 36.9 29.6 29.9 Core EPS (fully-diluted) (YoY) (4.4) (82.3) 77.5 101.5 2.6 36.9 29.6 29.9 Gross-profit margin 52.6 56.8 63.3 61.7 58.7 58.8 61.0 60.3 EBITDA margin 24.3 20.5 21.5 24.3 26.5 26.7 26.8 27.9 Operating-profit margin 14.3 2.5 8.0 11.4 12.1 13.6 15.0 15.8 Net profit margin 12.7 2.7 3.9 6.5 6.8 8.3 9.9 11.7 ROAE 14.3 2.5 4.6 11.0 13.9 22.4 27.3 31.0 ROAA 6.3 1.0 1.8 3.8 3.9 5.3 7.1 9.2 ROCE 8.4 1.1 4.5 8.4 9.1 11.8 14.8 17.4 ROIC 13.1 1.7 6.2 11.0 11.6 14.2 16.1 19.9 Net debt to equity 17.4 26.8 52.9 72.5 121.1 137.2 123.1 58.0 Effective tax rate 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Accounts receivable (days) 20.6 24.1 20.1 13.9 14.8 15.4 14.0 13.3 Current ratio (x) 2.7 2.5 1.5 1.1 0.9 0.4 0.4 0.6 Net interest cover (x) 6.6 0.9 1.7 2.7 2.4 3.2 3.8 5.1 Net dividend payout 29.6 361.7 414.1 57.6 63.2 59.1 62.8 62.3 Free cash flow yield n.a. n.a. 5.5 8.4 6.5 13.0 5.2 16.2 Source: FactSet, Daiwa forecasts

Company profile

Melco Resorts and Entertainment Limited is an owner and developer of casino gaming and entertainment resort facilities. It holds 1 of the 6 granted concessions or sub-concessions to operate casinos in Macau. It currently operates the City of Dreams, Studio City and Altira casinos, and also Mocha Clubs, which is a non-casino-based operation of electronic-gaming machines. Morpheus (City of Dreams Phase 3) was opened on 15 June 2018.

Melco Resorts & Entertainment (MLCO US): 30 July 2019

The Crown Prince of Macau City of Dreams (CoD) ramp-up to accelerate from 2Q19E We expect table yields at We believe the decrease in table yields at CoD in 1Q19 was due to the addition of 40 CoD to accelerate from gaming tables granted by the government not being utilised well since the beginning of the 2Q19 year. We believe it is normal for the sudden increase in tables to result in a drop in table yields as it requires time to optimise allocation and gaming space. We expect table yields to pick up in 2Q19 due to the following reasons:

1) High entry-level table minimum bet size CoD’s entry-level mass floor Baccarat minimum bet is back to its 2012-13 peak level of HKD1,000, which suggests that Melco has been consistently increasing its minimum bet level during its table yield optimisation exercise during 1H19. We estimate that if the entry- level minimum bet is maintained at this level (even with the 40 additional tables), the win/table/day level would approach CoD’s 2012-13 levels by the end of the year.

CoD: VIP w/u/d (USD) CoD: mass w/u/d (USD) 25,000 50,000 2012-2013 peak VIP w/u/d level 45,000 2012-2013 peak mass w/u/d level 40,000 20,000 35,000 30,000 15,000 25,000 20,000 10,000 15,000 10,000 5,000 5,000 0 0 3Q18 4Q19 1Q19 2Q19-4Q19 3Q18 4Q19 1Q19 2Q19-4Q19

Source: Company, Daiwa Source: Company, Daiwa

Furthermore, the (800) premium mass focused rooms and suites currently at Morpheus did not exist back in 2012-13. As these rooms and suites were well-received by premium direct gaming patrons in the past 3 quarters, we believe the high-value patron days-per-stay generated by Morpheus will help accelerate CoD mass table drop (due to extended playing time) in 2H19. We believe Melco will continue to offer differentiated gaming and non- gaming products to the premium mass and VIP patrons. This should enable it to capture a larger share of premium mass players amid the shifting trend of gaming patrons from the US to China, and a young, wealthy generation of gamers.

CoD: non-rolling chip drop (USDm)

1,600 40 new-to-market Morpheus opened tables granted 1,500 1,400 1,300 1,200 1,100 1,000 900 800 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 -

Source: Company, Daiwa

Melco Resorts & Entertainment (MLCO US): 30 July 2019

2) Revival of Melco-Crown synergies Acquisition of Crown On 31 May 2019, Melco announced it would acquire a 19.99% stake in Crown Resorts for Resorts stake to create AUD13.00 per share, which implies a 10.1x FY19E EV/EBITDA multiple. As discussed synergies previously, entry-level minimum table bets have reached the previous peak level in 2013, during which Melco and Crown were engaged in a partnership. Following the acquisition of the 19.99% stake in Crown Resorts (scheduled to be completed in 2 equal tranches, with the first paid on 6 June, and the second on or prior to 30 September 2019), we expect to see a revival of the synergies that led to many to believe Melco was the best Macau operator back in 2012-13.

We also believe Melco intends to increase its stake in Crown Resorts in the future to build up its international portfolio of casino properties and operations. According to Australian law, if foreign entities, such as Melco, hold at least a 20% stake in Australian companies, they become subject to Australian takeover laws which require investigation and approval from the Foreign Investment Review Board (FIRB). However, Melco CEO Lawrence Ho recently stated:

“We are always happy to go through the regulatory process. I think if anything, if you look at our track record of developing our global footprint overseas, we always prefer jurisdictions where there is strong governance and strong regulatory regime which is why we’ve shied away from some of the other smaller Asian countries where their regulatory regime wasn’t as developed. Again it will further demonstrate to Japan that we are a global player that is not afraid of compliance and probity reviews.” – Lawrence Ho, 4 June 2019

These comments indicate that Melco would voluntarily choose to go through with the probity process, and suggests it has a keen interest to either acquire a larger stake in Crown Resorts, or operator Crown or other Australian casinos in the future. Regardless of Melco’s intentions, we view the decision to acquire a stake in Crown Resorts as a strategic move that could derive the following long-term benefits:

1) Having exposure outside of Macau and the Philippines (which some regard as less recognised AML regulated jurisdictions), might give Melco the credibility it needs when it bids for an IR licence in Japan, Melco’s long-term focus market.

2) Realise potential synergies from a revival in joint marketing activities and cross-referral efforts combining Melco’s expertise in the premium mass and VIP segments between Melco and Crown, which we witnessed back in 2010-13.

3) As Macau is becoming more diversified, Melco could leverage Crown’s Aussie Million event (one of the world’s premier poker events) and other non-gaming know-how to attract more international gaming patrons.

4) Crown pays an attractive 4.6% dividend yield, hence holding onto the Crown stake should help to diversify Melco’s revenue stream.

The AUD13.00 per share acquisition price represents an 11.9% discount compared to the reference price of AUD14.75 per share reported for potential takeover talks between Wynn Resorts and Crown Resorts. Moreover, at the time of the announcement, the AUD/USD was trading at 0.691, near its lowest level in more than 3 years potentially due to trade tensions having a negative impact on China’s economy, and simultaneously Australia’s commodity export-dependent economy. If Melco is able to fully leverage the partnership synergies, we believe the deal could potentially be a bargain.

Melco Resorts & Entertainment (MLCO US): 30 July 2019

AUD/USD exchange rate 0.85

0.80

0.75

0.70

0.65

Jul-15 Jul-16 Jul-17 Jul-18

Jan-19 Jan-15 Jan-16 Jan-17 Jan-18

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Nov-17 Sep-15 Nov-15 Sep-16 Nov-16 Sep-17 Sep-18 Nov-18

May-16 May-17 May-18 May-19 May-15 Source: Bloomberg, Daiwa

3) Concentration of junkets in CoD Management indicated during the 1Q19 earnings call that Studio City would completely phase out its VIP operations starting from January 2020. The 46 VIP tables currently at Studio City are expected to be transferred back to CoD to support the ramp-up of Morpheus. We believe that by focusing its junket VIP operations under CoD, this will create a critical-mass effect on its VIP segment and spill over to premium mass segment demand at CoD, similar to the impact of introducing junkets to Studio City in 2H16.

Studio City: VIP GGR (USDm), 2016-18 Studio City: Mass GGR (USDm), 2016-18 400 500 Junkets 350 introduced to 450 Studio City 300

250 Junkets 400 introduced to 200 Studio City 350 150 300 100 250 50

0 200 1H16 2H16 1H17 2H17 1H18 2H18 1H16 2H16 1H17 2H17 1H18 2H18

Source: Company, Daiwa Source: Company, Daiwa

Studio City Phase 2 Studio City Phase 2 to We believe Studio City Phase 2 will help Melco build up a portfolio of non-gaming products increase Melco’s room that will help it gain mass and premium mass market share. We expect Studio City Phase inventory by 1,000 2 to be an entertainment-centric facility and to increase Melco’s room inventory by 1,000 rooms (+31%) rooms (+31%). These rooms will be managed by W Hotel. Also, Melco plans to introduce unique and differentiated non-gaming facilities such as a VR game centre, a water park, which management claims will be one of the biggest water parks in Asia, and a trampoline park. Budgeted capex for Phase 2 is in the region of USD1.3bn. Moreover, hotel occupancy rates at Melco properties have consistently been higher compared to other 5- star properties in Macau (see chart below). We believe these factors indicate a faster-than- normal ramp-up of Studio City Phase 2 over 2021-22.

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Melco: occupancy rate vs. Macau 5-star hotels Occupancy rates at 100% Melco hotels have consistently been above 95% 90%, significantly higher 90% than Macau’s 5-star hotel average 85%

80%

75% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Altira CoD Studio City Macau 5-star hotel Average

Source: Company, DSEC

We expect construction of Studio City Phase 2 to begin in 3Q19 at the earliest once Melco obtains approval from the government. With an increase in hotel inventory at Studio City, and consistently high occupancy rates, this could lead to longer days-per-stay in the future and potentially higher GGR going forward.

4) Negative industry headwinds are subsiding Towards the end of 2Q19, we saw several negative industry headwinds beginning to ease, for example, the negative impact on industry demand in Macau of leakage of junket VIPs to Southeast Asian countries. Simultaneously, mainland visitation growth has continued to surprise on the upside (+22.7% for 5M19). Therefore, we believe the combination of improving industry fundamentals coupled with Melco’s specialty in the premium mass segment will have a positive impact on table yields in 2H19E.

One of the key risks we saw subsiding towards the end of 2Q19 is the leakage of junket VIPs to Southeast Asian countries. On 8 July 2019, Chinese state media issued a report in the Economic Information Daily accusing Suncity, Macau’s largest junket operator, of enabling Chinese players to bet through online casinos in the Philippines and Cambodia and using underground banks to move capital out of the country. As a result of this episode, we believe Suncity is likely to reduce its junket operations overseas, and instead focus on bringing VIP clients to Macau. If this is the case, we expect VIP GGR for the whole industry, to recover in 2H19, of which Melco stands to gain a disproportionate share.

Macau has been investing in infrastructure to improve connectivity within Macau and with neighbouring Greater Bay Area cities. We believe that future improvements in transportation infrastructure may have a greater-than-expected positive impact on Melco as:

 Studio City (at the Lotus Checkpoint station) and CoD (at the Cotai East station) will be located directly next to Macau Light Rapid Transit (LRT) stations on the Taipa Line, which is expected to commence in 2H19. This would serve to improve connectivity between the 2 properties, potentially lengthening gaming patrons’ time spent at either CoD or Studio City. We believe Melco stands to gain most from the LRT due to the proximity of the stations to its properties.

 Extension of the high-speed inter-city railway link from Zhuhai to Hengqin (whose Phase 1 service is scheduled to commence in 2H19) will allow visitors to cross directly into the Cotai area via the Lotus Bridge where Studio City is located.

 We expect more direct flight routes to tier-1 and/or tier-2 cities in mainland China to be added over the next couple of years. CoD is strategically located within a 5-minute drive from Macau International Airport, the closest property of the 6 operators, which should help it capture the incremental rise in visitations by air.

Melco Resorts & Entertainment (MLCO US): 30 July 2019

 We also expect the number of arrivals from Hong Kong by land through the Hong Kong Zhuhai Macau (HKZM) Bridge to increase in the future in anticipation of new travel policies to improve accessibility.

With the rapid development across the bridge in neighbouring Hengqin Island, Zhuhai, we expect Cotai area properties to benefit most from their proximity and linkage to the Lotus Bridge border. Melco is the only operator with all its properties (CoD, Studio City and Altira) in Cotai, which we believe will enable it to capture a disproportionate share of new visitor arrivals from the China penetration story.

Melco: LRT stations at CoD and Studio City CoD: strategically located in Cotai

Source: Company, Daiwa Source: Company Daiwa

If table yields improve substantially in 2Q19 (results due on 25 July), we expect that based on the factors discussed above, CoD would carry this momentum into 2H19.

CoD: VIP win/table/day (USD) Drops in VIP 35,000 60% 50% win/table/day and mass 30,000 win/table/day at CoD 40% 25,000 was mainly attributed to 30% lower utilisation of new 20,000 20% gaming tables 15,000 10% 0% 10,000 (10%) 5,000 (20%) 0 (30%) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Source: Company

CoD: mass win/table/day (USD) We expect to see a pick- 16,000 30% up in table yield in 2Q19 14,000 25% and 2H19 on stronger 12,000 20% industry and table 15% 10,000 utilisation at CoD 10% 8,000 5% 6,000 0% 4,000 (5%) 2,000 (10%) 0 (15%) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

Source: Company

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Earnings forecasts and financials We expect better 2Q19 Melco recorded GGR growth of 5% YoY and an adjusted property EBITDA increase of results and a strong 3.9% YoY for 2018. Going forward, we now forecast Melco’s operating revenue to expand 2H19 on continued by 11.3% YoY (from our previous forecast of 10.1% YoY) for 2019, 8.9% YoY (unchanged) ramp-up of for 2020, and by 10% YoY for 2021; and group adjusted property EBITDA to rise by 13.5% Morpheus/CoD and YoY (from our previous forecast of 8.8% YoY) for 2019 and 12.8% YoY (from our previous further increase in forecast of 9.9% YoY) for 2020, and 15.2% YoY for 2021 to reflect the increase in CoD’s Macau visitation market share in high-margin segments, including premium mass and direct VIP. We expect the EBITDA margin to reach 27.9% in 2021 on the assumption that Morpheus/CoD will achieve full utilisation by then and on a greater contribution to higher-margin mass GGR by Studio City upon completion of Phase 2 in 3Q21.

We forecast CoD’s property EBITDA to expand by 19.9% YoY for 2019, 17.9% YoY for 2020, and 17.6% YoY for 2021 given that 46 gaming tables are scheduled to be moved from Studio City to CoD in 2020, and achieve ramp-up in utilisation in 2021. We expect this robust growth to be driven by its attractiveness to premium mass gaming patrons and the increasing penetration of mainland China visitors brought about by increasing direct flights. We believe this growth would be further supported by the completion of refurbishment of the Morpheus VIP area in 2019, and the completion of refurbishment of the Nuwa VIP area in 2020.

For Studio City, we forecast its property EBITDA to increase by 4.8% YoY for 2019, 2.1% YoY for 2020 and 11.7% YoY for 2021. We expect only a small increase in 2020 as the property offsets the decline in VIP operations with the higher margin mass segment with 46 fewer tables, before ramping up again in 2020 with Studio City Phase 2 in 2021. We base our expectations on continuous high growth in mainland Chinese visitations to Macau, and minimal disruption from Studio Phase 2 on current gaming operations in Phase 1.

Melco Group: adjusted property EBITDA (USDm) 2,000 100%

80% 1,500 60%

40% 1,000 20%

0% 500 (20%)

0 (40%) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Total adjusted property EBITDA YoY Change (RHS)

Source: Company, Daiwa forecasts

Improving capital return and sustainable DPS In 2018 alone, Melco approved a total of USD1bn for share buybacks (USD500m approved in March and another USD500m in November). Also, dividends have been on a continuous uptrend since the trough in 2015.

Melco has been paying dividends to its shareholders regularly since 2014. Regular dividends increased by 11.2% to USD220m in 2018 while its dividend payout ratio increased to 63%, which in our view reflects the company’s strong financial position. We expect Melco to be able to maintain a stable payout ratio of above 60% during 2019-21.

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Melco: dividend declared (USDm) 600 70%

500 60% 50% 400 40% 300 30% 200 20%

100 10%

0 0% 2014 2015 2016 2017 2018 2019E 2020E 2021E Dividend declared (USDmn) Dividend payout ratio (RHS)

Source: Company, Daiwa forecasts Note: Excludes any special dividends paid

Melco: free cash flow (USDm) 2,500

2,000

1,500

1,000

500

(500)

(1,000) 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts

Valuation and recommendation We upgrade Melco to Buy (1) from Outperform (2) with a new 12-month target price of USD29.1 from USD24.9. Using our SOTP valuation based on 2019-20E average EV/EBITDA, we assign 14x to CoD and 12x to Studio City, as we believe CoD and Studio City have some of the most differentiated non-gaming assets in Macau. Similarly, we ascribe a 5x multiple to Altira, and 10x to CoD Manila to reflect: 1) their stable single-digit growth in both the VIP and mass segments, and 2) fewer headwinds from mainland policies due to their more diversified target customer group and lower concession risk. We also value the 19.99% stake in Crown Resorts at market value. We are also revising up our 2019-20E EPS by 3-5% based on our expectation of a fast ramp-up of CoD in both VIP and mass segments.

Melco: 1-year forward EV/EBITDA band Melco is currently 30 trading slightly less than 27 0.4SD below its past-10- 24 year average 21 18 15 12 9 6 3 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 EV/Daiwa EBITDA

Source: Bloomberg, Daiwa forecasts

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Melco: SOTP valuation Breakdown Metrics (2020E) 2019-20E SOTP (USDm) Value per share (USD) % of SOTP Altira 5x EBITDA 266 0.5 2% CoD Macau 14x EBITDA 13,736 28.2 97% Studio City 12x EBITDA (54.1% stake) 2,580 5.3 18% Mocha 5x EBITDA 108 0.2 1% Philippines 10x EBITDA (97.9% stake) 2,564 5.3 18% Corporate Expense 13x (3,375) -6.9 -24% Crown Resorts Stake Market value 1,214 2.5 9% Net Debt (2,932) -6.0 -21% Price Target (487m shares) 14,160 29.10 100%

Source: Daiwa

Risks Both our sector rating and rating for Melco are based on robust visitation growth, particularly for arrivals by air. We believe visa tightening and/or mainland China’s anti- corruption drive would lead to a drop in visitations, as we saw in 2014-16. Hence, lower- than-expected mainland visitations is the primary risk to our call. The main driver for us to believe visitations will be robust for the next 3-5 years is the rapid development of direct flights between Macau and China’s Individual Visit Scheme eligible cities (also our core sector thesis), and the ramp-up of visitors due to the HKZM Bridge. We believe the Macau International Airport Master plan is crucial to this thesis. Any material deviation and timeline changes might affect the speed of direct flight developments. Arrivals via the HKZM Bridge may be affected if vehicle licence approval is slower than expected.

Slower-than-expected We assume CoD has the ability to regain a w/u/d close to its 2012 w/u/d by 2020E, direct flight development especially after Nuwa Hotel completes its VIP area refurbishment by the 2020 Lunar New and ramp-up of Year, thanks to CoD’s strategic location to capture increasing China penetration, and the refurbishment projects likely table yield optimisation on the mass floor. A slower-than-expected ramp-up would are major risks to our have an impact on CoD’s GGR and EBITDA. If its Countdown Hotel room refurbishment is call completed sooner than expected, this would have an indirect impact on GGR. Delays in government approval for Studio City Phase 2 is another risk that would impact our outlook for 2021 and onwards. A faster-than-expected drop in CNY/USD and severe UnionPay headwinds are other potential risks, in our view.

Gaming concessions is also a key risk. Our call would likely be affected if the Macau government were to introduce new terms and conditions for concession renewal (ie, gaming tax increase). Moreover, the Macau government has no obligation to renew any of the concessionaires. Melco’s concession expires on 26 June 2022.

Melco: GGR breakdown by quarter (USDm) Melco: EBITDA by quarter 2,000 40% 450 100% 1,800 30% 400 80% 1,600 20% 350 60% 1,400 300 1,200 10% 40% 250 1,000 0% 20% 200 800 (10%) 0% 600 150 (20%) (20%) 400 100 200 (30%) 50 (40%)

0 (40%) 0 (60%)

3Q17 1Q18 3Q18 1Q19 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 VIP Mass Slot YoY Change Melco Property EBITDA (USDmn) YoY Change

Source: Company Source: Company

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Melco: VIP rolling chips by quarter Melco: VIP GGR by quarter 40,000 60% 1,200 80% 35,000 40% 1,000 60% 30,000 40% 20% 800 25,000 20% 20,000 0% 600 0% 15,000 (20%) 400 (20%) 10,000 (40%) 200 5,000 (40%)

0 (60%) 0 (60%)

1Q13 3Q15 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

3Q13 3Q17 1Q12 3Q12 1Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q18 3Q18 1Q19 VIP Rolling (USDmn) YoY Change VIP YoY Change

Source: Company Source: Company

Melco: Mass drop by quarter Melco: Mass GGR by quarter 2,500 50% 1,200 80%

40% 1,000 60% 2,000 30% 800 40% 1,500 20% 600 20% 1,000 10% 400 0% 0% 500 200 (20%) (10%)

0 (20%) 0 (40%)

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

3Q15 1Q16 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 Mass drop (USDmn) YoY Change Mass YoY Change

Source: Company Source: Company

Melco: ROIC Melco: net debt to EBITDA 25% 350%

300% 20% 250% 15% 200%

10% 150% 100% 5% 50%

0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Melco Resorts: director profile Name Age Position Joined the company in Years in the company Lawrence Yau Lung Ho 42 Chairman, chief executive officer and executive director 2001 18 Geoffrey Stuart Davis 50 Executive vice president and chief financial officer 2007 12 Stephanie Cheung 56 Executive vice president and chief legal officer 2006 13 Akiko Takahashi 65 Executive vice president and chief human resources/ 2006 13 corporate social responsibility officer Clarence Yuk Man Chung 56 Non-executive director 2003 16 Evan Andrew Winkler 44 Non-executive director 2016 3 Alec Yiu Wa Tsui 69 Independent non-executive director 2006 13 Thomas Jefferson Wu 46 Independent non-executive director 2006 13 John William Crawford 76 Independent non-executive director 2017 2

Source: Company

Melco Resorts & Entertainment (MLCO US): 30 July 2019

Macau Consumer Discretionary 30 July 2019

(2282 HK) MGM China Holdings MGM Chi na Hol dings

Target price: HKD16.68 (from HKD16.68) Share price (26 Jul): HKD13.82 | Up/downside: +20.7%

Upgrading: fitting out The Mansion in the Greater Bay Andrew Chung, CFA (852) 2773 8529  We expect MGM Cotai’s ramp-up to continue in 2H19 [email protected]  Mansion, Mansion One, and Dynamic Theatre to have strong synergies Terry Ng (852) 2773 8530  Upgrading to Buy (1) from Hold (3) on high-end market focus [email protected]

What's new: We upgrade our rating on MGM China to Buy (1) from Hold Forecast revisions (%) (3) and maintain our 12-month TP at HKD16.68. MGM’s gaming Year to 31 Dec 19E 20E 21E concession was extended to 26 June 2022 on 15 March 2019. Also, after Revenue change 0.1 (0.8) n.a. Net profit change (1.8) (8.5) n.a. several months of delay, the Macau government approved MGM Cotai’s Core EPS (FD) change (1.8) (8.5) n.a. new-style smoking lounges on 10 May and MGM Cotai opened its high-end Source: Daiwa forecasts VIP luxury residential villas, The Mansion, at the end of 1Q19. Share price performance

What's the impact: On 2 May, a press release detailed the visit of MGM’s (HKD) (%) senior management team to Shenzhen (SZ) to meet with various 18 100 stakeholders, such as the SZ municipal government and tech firm Tencent, 16 91 15 83 to learn more about the developments in the Greater Bay Area (GBA). Also, 13 74

MGM issued a total of USD1.5bn in new debt in Hong Kong on 17 May. 11 65 With fewer regulatory headwinds on the horizon following its gaming Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 concession deadline extension at the end of 1Q19 and approval of new- MGM China (LHS) Relative to HSI (RHS) style smoking lounges in 2Q19, we expect the ramp-up of MGM Cotai to accelerate in 2H19. Moreover, The Mansion, the world-renowned brand 12-month range 11.00-17.54 imported directly from MGM Grand in Las Vegas, offers a highly Market cap (USDbn) 6.72 differentiated hotel product for higher-end premium mass gaming patrons. 3m avg daily turnover (USDm) 10.13 Shares outstanding (m) 3,800 The opening of The Mansion will likely be the catalyst for MGM Cotai to Major shareholder MGM Resorts (56.0%) capture an even greater share of the higher-end premium mass market as Cotai competitors are shifting towards building mass and lower-to-middle Financial summary (HKD) premium mass gaming and non-gaming products. We also expect the Year to 31 Dec 19E 20E 21E proceeds from the USD1.5bn debt listing to be used for the continuing Revenue (m) 22,398 24,539 26,156 development of high-end premium mass products, and maintaining its Operating profit (m) 3,283 4,098 4,609 Net profit (m) 2,635 3,471 4,114 strategy of importing renowned entertainment elements from Las Vegas Core EPS (fully-diluted) 0.692 0.911 1.080 into Macau that leverage its Dynamic Theatre, such as Mixed Martial Arts EPS change (%) 146.6 31.7 18.5 (MMA). In addition, we see MGM management’s visit to Shenzhen as a Daiwa vs Cons. EPS (%) 4.3 7.0 6.2 PER (x) 20.0 15.2 12.8 strategic move to build relationships and leverage external capabilities (eg, Dividend yield (%) 1.8 2.3 2.7 technology from Tencent) as Macau gradually integrates into the GBA. DPS 0.242 0.319 0.378 PBR (x) 4.6 3.7 3.0 What we recommend: We believe MGM’s new initiatives position it well to EV/EBITDA (x) 10.7 8.7 7.4 ROE (%) 25.8 27.0 26.0 gain market share in the higher-end premium mass segment. The stock is Source: FactSet, Daiwa forecasts trading currently at a 12.1x 1-year forward EV/EBITDA, more than 0.5SD below its past-8-year average of 14.8x, which does not reflect its current ramp-up stage. As such, we upgrade MGM to Buy (1) from Hold (3) and maintain our SOTP-based 12-month TP at HKD16.68, based on 2019-20E average EV/EBITDA. We lower our 2019-20E EPS by 2-9% due to signs of potential further cannibalisation effect on MGM Macau by MGM Cotai. Downside risks: 1) CNY devaluation, 2) slowdown in ramp-up of MGM Cotai and 3) intensifying competition with Cotai operators.

How we differ: Unlike some, we do not think US operators (including MGM) will be discriminated in gaming concession re-tendering in 2022.

See important disclosures, including any required research certifications, beginning on page 129

MGM China Holdings (2282 HK): 30 July 2019

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook MGM China: operating revenue and EBITDA MGM China’s market share in both mass and VIP rose by 30,000 0.5% and 0.7%, respectively, for 1Q19 led by ramp-up of 25,000 MGM Cotai, higher-than-expected mainland Chinese visitation growth, and infusion of junkets which kept the VIP 20,000 rolling level intact while the market average declined. Now, 15,000 with fewer regulatory headwinds (such as the delayed 10,000 smoking lounge approval and lower concession risk) and the opening of The Mansion at the end of 1Q19, we expect 5,000 MGM Cotai to accelerate its ramp-up in 2H19 through 0 further increases in visitations due to the seasonal effect 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E and days-per-stay on incremental visitations by air from Revenue (HKDm) EBITDA (HKDm) premium mass patrons. We forecast 2019 revenue and Source: Company, Daiwa forecasts property EBITDA to grow by 16.7% YoY and 38.4% YoY, respectively.

Valuation MGM China: 1-year forward EV/EBITDA band MGM is trading currently at a 12.1x 1-year forward (x) 31 EV/EBITDA, based on our forecast, more than 0.5SD 29 below its past-8-year average EV/EBITDA of 14.8x. The 27 25 last time it traded below 1SD was in 2Q16, when MGM 23 21 saw 8 consecutive quarters of GGR and EBITDA decline. 19 17 MGM typically tends to trade between its past-8-year 15 average EV/EBITDA and +1SD when the sector average 13 11 records EBITDA growth. We believe the expected ramp-up 9 7 of MGM Cotai in 2019E will drive its valuation beyond 5 +1SD. MGM’s valuation stayed above 1SD for 4 months Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 before MGM Cotai’s opening. EV/Daiwa EBITDA

Source: Bloomberg, Daiwa forecasts

Earnings revisions MGM China: Bloomberg-consensus EPS forecast revisions (HKD) In 1H19, the Macau gaming sector was negatively 1.6 impacted by several headwinds such as: 1) the smoking 1.4 ban, 2) UnionPay crackdown, 3) crackdown on the underground banking network, and 4) possible leakage of 1.2 junket VIPs to other Southeast Asian countries. The 2020E 1.0 consensus EPS for MGM was revised down from a high of 0.8 HKD1.83 to the current low of HKD1.28 in July, likely reflecting the market’s current low expectations for the 0.6 high-end-oriented MGM. However, we expect these 0.4 negative systematic factors to subside going into 2H19. Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 With low expectations, improving fundamentals and the 2019 EPS 2020 EPS super-luxury Mansion villas opening in MGM Cotai, we Source: Bloomberg foresee potential upward earnings revisions in 2H19E.

MGM China Holdings (2282 HK): 30 July 2019

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E MGM Macau VIP GGR (HKDm) 21,373 11,737 8,631 8,567 8,416 6,346 6,618 6,864 MGM Macau Mass GGR (HKDm) 9,528 7,557 7,689 8,139 7,004 6,948 7,211 7,443 MGM Cotai VIP GGR (HKDm) 0 0 0 0 1,267 4,484 5,170 5,672 MGM Cotai Mass GGR (HKDm) 0 0 0 0 3,901 6,209 7,223 7,923

Profit and loss (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Gaming 25,138 16,842 14,606 13,557 17,176 20,062 22,042 23,604 Non-gaming 316 329 301 923 2,025 2,336 2,497 2,552 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 25,454 17,170 14,907 14,481 19,201 22,398 24,539 26,156 Other income 0 0 0 0 0 0 0 0 COGS (13,003) (8,306) (6,999) (7,214) (9,198) (10,411) (11,406) (12,188) SG&A (1,944) (1,966) (1,949) (2,324) (3,506) (3,506) (3,506) (3,506) Other op.expenses (4,726) (3,565) (2,695) (2,318) (5,062) (5,199) (5,530) (5,852) Operating profit 5,782 3,334 3,265 2,624 1,435 3,283 4,098 4,609 Net-interest inc./(exp.) (25) (133) (47) (2) (656) (633) (612) (480) Assoc/forex/extraord./others (34) (72) (166) 17 (6) 0 0 0 Pre-tax profit 5,723 3,129 3,052 2,638 773 2,650 3,486 4,129 Tax (16) (17) (15) (318) 296 (15) (15) (15) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 5,707 3,113 3,037 2,320 1,068 2,635 3,471 4,114 Net profit (adjusted) 5,707 3,113 3,037 2,320 1,068 2,635 3,471 4,114 EPS (reported)(HKD) 1.502 0.819 0.799 0.611 0.281 0.693 0.913 1.083 EPS (adjusted)(HKD) 1.502 0.819 0.799 0.611 0.281 0.693 0.913 1.083 EPS (adjusted fully-diluted)(HKD) 1.499 0.819 0.799 0.609 0.281 0.692 0.911 1.080 DPS (HKD) 1.341 0.249 0.279 0.213 0.098 0.242 0.319 0.378 EBIT 5,782 3,334 3,265 2,624 1,435 3,283 4,098 4,609 EBITDA 6,770 4,368 4,231 3,963 4,340 6,008 6,885 7,466

Cash flow (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 5,723 3,129 3,052 2,638 773 2,650 3,486 4,129 Depreciation and amortisation 800 806 772 799 2,150 1,963 2,019 2,081 Tax paid (15) (18) (15) (14) (11) (15) (15) (15) Change in working capital (1,520) (1,149) (1,117) 3,652 (1,649) 476 463 389 Other operational CF items 211 442 71 82 983 637 619 489 Cash flow from operations 5,199 3,210 2,762 7,158 2,245 5,711 6,572 7,073 Capex (2,742) (4,569) (6,248) (6,773) (2,897) (1,371) (628) (691) Net (acquisitions)/disposals 5 4 4 120 57 0 0 0 Other investing CF items (12) (17) (29) (121) (76) 0 0 0 Cash flow from investing (2,748) (4,581) (6,273) (6,773) (2,915) (1,371) (628) (691) Change in debt 0 7,439 2,814 2,996 1,075 (780) (3,120) (3,120) Net share issues/(repurchases) 17 0 7 (148) (58) 0 0 0 Dividends paid (5,928) (4,625) (806) (1,049) (612) (729) (1,110) (1,357) Other financing CF items (192) (254) (377) (450) (938) (637) (619) (489) Cash flow from financing (6,103) 2,560 1,639 1,349 (533) (2,147) (4,848) (4,966) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (3,653) 1,189 (1,872) 1,733 (1,203) 2,194 1,095 1,416 Free cash flow 2,457 (1,359) (3,486) 385 (651) 4,340 5,944 6,382 Source: FactSet, Daiwa forecasts

MGM China Holdings (2282 HK): 30 July 2019

Financial summary continued … Balance sheet (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 4,232 5,421 3,547 5,283 3,992 6,272 7,367 8,783 Inventory 110 108 92 136 160 175 191 203 Accounts receivable 428 243 225 180 323 353 386 411 Other current assets 138 170 178 212 184 184 184 184 Total current assets 4,908 5,941 4,042 5,811 4,658 6,983 8,127 9,580 Fixed assets 4,046 3,701 3,295 3,027 27,222 26,228 25,256 24,328 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 7,873 12,313 19,744 27,768 3,253 4,209 4,190 4,171 Total assets 16,828 21,955 27,080 36,607 35,133 37,420 37,573 38,079 Short-term debt 0 0 605 6,045 780 3,120 3,120 3,205 Accounts payable 5,219 4,284 3,664 9,319 6,857 7,377 7,889 8,316 Other current liabilities 638 567 1,224 331 422 422 422 422 Total current liabilities 5,857 4,850 5,492 15,696 8,058 10,919 11,431 11,942 Long-term debt 4,118 11,732 14,104 11,794 18,093 14,973 11,853 8,648 Other non-current liabilities 511 457 267 604 36 36 36 36 Total liabilities 10,486 17,040 19,864 28,094 26,187 25,928 23,320 20,626 Share capital 3,800 3,800 3,800 3,800 3,800 3,800 3,800 3,800 Reserves/R.E./others 2,542 1,115 3,417 4,712 5,146 7,693 10,453 13,653 Shareholders' equity 6,342 4,915 7,217 8,512 8,946 11,493 14,253 17,453 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 16,828 21,955 27,080 36,607 35,133 37,420 37,573 38,079 EV 52,402 58,827 63,678 65,072 67,397 64,337 60,122 55,587 Net debt/(cash) (114) 6,311 11,162 12,556 14,881 11,821 7,606 3,071 BVPS (HKD) 1.669 1.293 1.899 2.240 2.354 3.024 3.751 4.593

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) (1.1) (32.5) (13.2) (2.9) 32.6 16.7 9.6 6.6 EBITDA (YoY) 6.3 (35.5) (3.1) (6.3) 9.5 38.4 14.6 8.4 Operating profit (YoY) 4.3 (42.3) (2.1) (19.6) (45.3) 128.8 24.8 12.5 Net profit (YoY) 7.0 (45.5) (2.4) (23.6) (53.9) 146.6 31.7 18.5 Core EPS (fully-diluted) (YoY) 7.0 (45.4) (2.4) (23.8) (53.9) 146.6 31.7 18.5 Gross-profit margin 48.9 51.6 53.1 50.2 52.1 53.5 53.5 53.4 EBITDA margin 26.6 25.4 28.4 27.4 22.6 26.8 28.1 28.5 Operating-profit margin 22.7 19.4 21.9 18.1 7.5 14.7 16.7 17.6 Net profit margin 22.4 18.1 20.4 16.0 5.6 11.8 14.1 15.7 ROAE 88.9 55.3 50.1 29.5 12.2 25.8 27.0 26.0 ROAA 32.7 16.1 12.4 7.3 3.0 7.3 9.3 10.9 ROCE 55.0 24.6 16.9 10.9 5.3 11.4 13.9 15.8 ROIC 129.6 38.0 21.9 11.7 6.4 13.8 18.1 21.7 Net debt to equity n.a. 128.4 154.7 147.5 166.3 102.9 53.4 17.6 Effective tax rate 0.3 0.5 0.5 12.1 0.0 0.6 0.4 0.4 Accounts receivable (days) 7.2 7.1 5.7 5.1 4.8 5.5 5.5 5.6 Current ratio (x) 0.8 1.2 0.7 0.4 0.6 0.6 0.7 0.8 Net interest cover (x) 229.0 25.0 69.8 1,178.4 2.2 5.2 6.7 9.6 Net dividend payout 89.3 30.4 34.9 34.9 34.9 34.9 34.9 34.9 Free cash flow yield 4.7 n.a. n.a. 0.7 n.a. 8.3 11.3 12.2 Source: FactSet, Daiwa forecasts

Company profile

MGM China is one of the six gaming operators in Macau. It is a joint venture, which is 56% owned by MGM Resorts and 22.5% by Pansy Ho, and is one of the leading casino gaming resort developers, owners and operators in Macau. MGM Macau is located in the Macau Peninsula and has about 420 gaming tables. MGM's newly developed Cotai development, MGM Cotai, was opened in Feb 2018. MGM Cotai opened 'The Mansion Villas' high-end luxury residential suites in Mar 2019

MGM China Holdings (2282 HK): 30 July 2019

Fitting out The Mansion in the Greater Bay Fewer regulatory headwinds ahead in 2H19 Fewer regulatory MGM Cotai faced several regulatory risks in 1Q19, including the smoking ban and gaming headwinds in 2H19 likely concession risk. MGM, like SJM, was granted an extension of its concession until 26 June to be the catalyst for a 2022 after paying a one-off premium on 15 March. This puts MGM on a level playing field faster ramp-up of MGM with the other operators for the highly anticipated gaming concession renewal/rebidding Cotai in 2H19 two years from now. Moreover, MGM Cotai finally received the official approval from the Health Bureau for new-style smoking lounges on 10 May. We believe the new-style smoking lounges are an essential component on the casino floor, as these are designed to be near the gaming areas so that these customers can remain on the casino floor. With fewer short-term regulatory risks for MGM, we expect the ramp-up of MGM Cotai to accelerate in 2H19.

MGM Macau: adj. property EBITDA MGM Cotai: adj. property EBITDA 8,000 30% 4,000 250%

7,000 20% 3,500 200% 6,000 3,000 10% 5,000 2,500 0% 150% 4,000 2,000 (10%) 3,000 1,500 100% (20%) 2,000 1,000 50% 1,000 (30%) 500 0 (40%) 0 0% 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2018 2019E 2020E 2021E MGM Macau Property EBITDA YoY Change MGM Cotai Property EBITDA YoY Change

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

An icon from the West: The Mansion villas As mentioned [in our memo, published 30 April 2019], we believe high-end hotel offerings and direct VIP player development were the main drivers of MGM Cotai’s strong performance in the VIP segment in 1Q19. On 21 March 2019, MGM opened its long- awaited luxury VIP hotel, The Mansion. Named after its iconic luxury villas in Las Vegas, The Mansion brand was referred to by MGM Resorts’ CEO Jim Murren as “the final word in luxury accommodation”. The Mansion villas are designed to cater to the higher-end segment of VIP gaming patrons. These 27 resident-style villas are in a private enclave, with each having an area of 215-570 sq m. The Mansion also has a luxury gaming area exclusive to invitation-only premium mass customers known as Mansion One, which MGM describes as “redefining the experience of premium mass”.

MGM Cotai: The Mansion Atrium MGM Cotai: The Mansion Bedroom

Source: Company Source: Company

MGM China Holdings (2282 HK): 30 July 2019

MGM Cotai: The Mansion living room and dining area MGM Cotai: Mansion One gaming area

Source: Company Source: Company

MGM also plans to add 50-60 premium-mass level suites in the southern part of MGM Cotai, which are targeted to be open by end-2020. We view these initiatives by MGM as a differentiating factor. While other operators are quickly and aggressively building up their mass and premium mass non-gaming offerings, MGM is differentiating itself by doing the opposite and building up its high-end VIP offerings by leveraging on its iconic The Mansion brand from Las Vegas. During the 1Q19 earnings call, management said The Mansion villas and the Mansion One high-end gaming area have been very well received. We believe they will be the catalyst for further growth in MGM’s VIP market share over 2019- 20E as junkets divert their higher-end VIPs to MGM Cotai. Also, we expect the VIP market to recover in 2H19, potentially leading to better performance of MGM in the VIP segment.

Entertainment capital of the East In 3Q18, MGM Cotai opened its 2,000-seat Dynamic Theatre, one of the most technologically advanced theatres in the world. Led by our expectation that MGM Cotai will accelerate its ramp-up in 2H19 and the introduction of junkets into the property, we believe MGM Cotai will invest to import unique, internationally renowned entertainment events to the property. On 27 May, CEO Mr. Grant Bowie confirmed that MGM plans to continue bringing in international shows on a temporary basis, rather than having an in-house resident show at MGM Cotai. We believe this is a wise decision as its parent company MGM Resorts Ltd. is renowned in Las Vegas for hosting a wide variety of entertainment events, which we think are essential to keep customers engaged and build up MGM’s brand in Macau, and effectively utilise its Dynamic Theatre, which can be modified into a dozen configurations to suit the event it hosts. For example, on 21 June, MGM signed a partnership with Legend Fighting Championship, a pioneer of MMA in Asia, to host the Legend 13 fighting event in September 2019, the first of several major events lined up over the next 12 months.

MGM Cotai: Dynamic Theatre MGM Cotai’s Dynamic Theatre is one of the world’s most technologically advanced theatres, with a dozen configurations to suit traditional concerts, fashion shows and 360-degree- configuration talk shows

Source: Company

MGM China Holdings (2282 HK): 30 July 2019

MGM Cotai: Legend 13 event

Source: Legend Fighting Championship

Other synergies to look out for in 2020 We expect MGM to We believe MGM will also leverage its M Life loyalty platform to build and secure mass- further leverage on market patrons. In essence, M Life is the reward programme that MGM Resorts M Life Moments at MGM International uses to attract and build patron loyalty through its M Life Moments and Cotai to retain the loyalty generate incremental visitation to its properties in different regions. M Life Moments are of mass-market patrons “once-in-a-lifetime” experiences offered by each MGM Resorts International property, such as behind-the-scenes tour concerts and artist meet-and-greets.

M Life Moments M Life Moments

Source: Company Source: Company

Currently, both MGM Macau and MGM Cotai do not offer M Life Moments. We believe that with its Dynamic Theatre, MGM Cotai is likely to be the first Macau property to offer M Life Moments to MGM Resorts International’s vast worldwide patron base.

Debt offering for investment-led growth On 17 May, MGM Resorts Ltd. (parent company of MGM China) announced its subsidiary, MGM China, had issued USD1.5bn of new debt. The debt is split into 2 tranches: 1) USD750m of 5.375% senior notes due 2024, and 2) USD750m of 5.875% senior notes due 2026. We expect the proceeds from this debt offering to be used to further its strategy to focus on the higher-end sub-segments of VIP and premium mass, including making continuous upgrades in The Mansion and bringing new entertainment events into MGM Cotai to leverage its Dynamic Theatre.

MGM China Holdings (2282 HK): 30 July 2019

MGM’s mass market share among Macau operators reached a high of 9.9% in 1Q19. During the same period, its VIP market share increased to 7.2% from its lowest recorded share of 4.5% in 2Q18, back to the 3Q16 level when the industry was recovering. In fact, MGM has recorded three consecutive quarters of market-share gains in both mass and VIP segments.

MGM China: VIP and mass GGR market share MGM has recorded 3 12% consecutive quarters of 10% market-share gains in both the mass and VIP 8% segments 6%

0% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 VIP market share Mass market share

Source: Company, DSEC, Daiwa

MGM China: quarterly mass GGR (HKDm) MGM Cotai’s ramp-up 4,000 50% significantly contributed 3,500 40% to MGM’s 1Q19 record 3,000 30% 20% mass GGR level of 2,500 10% 2,000 HKD3.49bn (+35% YoY) 0% 1,500 (10%) 1,000 (20%) 500 (30%)

0 (40%)

3Q15 4Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Mass YoY Change

Source: Company, Daiwa

MGM Cotai’s rolling chip volume increased to HKD24.6bn (+1% QoQ) in 1Q19 vs. the market’s expectation of -12% QoQ. MGM Cotai was able to achieve this sequential growth despite no new junkets being added and the delay in smoking lounge approval. We believe MGM Cotai’s high-end premium offerings and direct VIP player development primarily led to strong results in the VIP segment. We also think the introduction of junkets in 4Q18 could have created a “sticky demand” effect, where junkets allocate a larger number of their VIPs to MGM Cotai’s newer, high-end premium offerings vs. competitors.

MGM Cotai: quarterly rolling drop (HKDm) MGM Cotai rolling chip 30,000 volume increased 1% 25,000 QoQ in 1Q19 vs. the market’s estimate of 20,000 -12% QoQ 15,000

10,000

5,000

0 1Q18 2Q18 3Q18 4Q18 1Q19

Source: Company. Daiwa

MGM China Holdings (2282 HK): 30 July 2019

Earnings forecasts and financials MGM China recorded full-year GGR and adjusted property EBITDA growth of 26% YoY and 5.4% YoY, respectively, for 2018, thanks to the strong growth in visitors from mainland China and relaxation of the visa policy. MGM’s 2018 mass and VIP GGR stood at HKD9.68bn (+13% YoY) and HKD10.9bn (+34% YoY), respectively, and 2018 overall China adjusted property EBITDA came in at HKD4.34bn (+0.5% YoY).

Going forward, we forecast MGM’s operating revenue/adjusted property EBITDA to expand by 16.7%/38.4% YoY for 2019, 9.6%/14.6% YoY for 2020, and 6.1%/8.4% for 2021, respectively, driven by the contribution of MGM Cotai after the introduction of junkets and the full ramp-up of other facilities, such as The President’s Club and The Mansion villas in 2019. We estimate the VIP and mass market shares of MGM Cotai among Macau operators will rise to 3.3% (vs. 0.9% for 2018) and 4.0% (vs. 2.8% for 2018), respectively, for 2019.

At the property level, for MGM Cotai, we forecast its operating revenue and property EBITDA in 2019 to grow by 84.4% YoY and 276.3% YoY, respectively, driven by the prospect of market-share gains in the VIP segment following the opening of The Mansion villas in 1Q19. Moreover, we see fewer external, regulatory risks for MGM Cotai in 2H19E as the company has received approval from the government for its smoking lounges and an extension of its gaming concession to 26 June 2022. We believe these factors will contribute to an acceleration in the ramp-up of MGM Cotai in 2H19. In 2020, we expect growth to be more normalised compared with 2019, with its operating revenue and property EBITDA expanding by 15.1% YoY and 23.1% YoY, respectively. Specifically, we estimate more stabilised mass GGR growth (c.16.3% YoY, 9.7% YoY) and VIP GGR growth (c.15.3% YoY, 9.7% YoY) for MGM Cotai in 2020 and 2021, respectively.

For MGM Macau, we forecast its operating revenue and property EBITDA in 2019 to drop by 12.0% YoY and 21% YoY, respectively, due to the reallocation of tables to MGM Cotai, especially with the 39 tables moving to the Cotai property in 4Q18, which we expect to have a full-year impact in 2019.

MGM: adjusted property EBITDA (HKDm) 9,000 30% 8,000 25% 7,000 6,000 20% 5,000 15% 4,000 3,000 10% 2,000 5% 1,000 0 0% 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

MGM Macau Property EBITDA MGM Cotai Property EBITDA EBITDA Margin

Source: Company, Daiwa forecasts

We expect stronger free Due to reduced capex required for development after the completion of MGM Cotai, we cash flows as well as expect the operator’s free cash flow to be stronger over 2019-21 than in 2018, which in turn more dividends in 2019- would be positive for dividend payouts. MGM China has maintained a dividend payout ratio 20 than 2018 c.35% for three consecutive years. We forecast its dividend payout ratio to remain at this level over 2019-21E as we see no reasons for management to change the current dividend policy unless there is material and sustainable outperformance of MGM Cotai.

MGM China Holdings (2282 HK): 30 July 2019

MGM: dividend declared (HKDm) 7,000 120%

6,000 100% 5,000 80% 4,000 60% 3,000 40% 2,000 1,000 20% 0 0% 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Interim dividends Final dividend Special dividend Dividend payout ratio (RHS)

Source: Company, Daiwa forecasts

MGM: free cash flow (HKDm) 8,000

6,000

4,000

2,000

(2,000)

(4,000) 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts

Valuation and recommendation MGM China is trading currently at a 12.1x 1-year forward EV/EBITDA, on our forecasts, more than 0.5SD below its past-8-year average EV/EBITDA of 14.8x. We upgrade our rating on the stock to Buy (1) from Hold (3) and maintain our SOTP-based 12-month TP at HKD16.68. At the property level, we apply a 14x 2019-20E EV/EBITDA multiple to MGM Cotai as we expect it to be a major catalyst for EBITDA growth and market-share gains for the group, and lower our EV/EBITDA multiple for MGM Macau from 12x to 11x due to slowdown in earnings growth, with fewer tables and given its Peninsula location. However, we lower our 2019-20E EPS by 2-9% due to potential further cannibalisation effect on MGM Macau by MGM Cotai.

MGM: 1-year forward EV/EBITDA band MGM is currently trading (x) 31 0.5SD below its past-8- 29 year average 27 25 EV/EBITDA, on our 23 21 forecasts 19 17 15 13 11 9 7 5 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 EV/Daiwa EBITDA

Source: Bloomberg, Daiwa

MGM China Holdings (2282 HK): 30 July 2019

MGM: SOTP valuation Breakdown Metrics 2019-20E SOTP (HKDm) Value per share (HKD) % of SOTP

MGM Macau 11x EBITDA 35,539 9.4 56% MGM Cotai 14x EBITDA 50,176 13.2 79% Corporate expense 13x EBITDA (14,733) -3.9 -23% Net Debt (7,606) -2.0 -12% Target price (3,800m shares) 63,376 16.68 100%

Source: Daiwa forecasts

Risks Key risk to our call is Our calls on the sector and MGM China are based on robust visitation growth, particularly slower-than-expected on arrivals by air. Visa tightening and/or Mainland China’s anti-corruption drive could lead growth in visitors from to a visitation drop, as was seen during 2014-16. The key drivers for us to believe that the mainland China number of visitors will remain robust for the next 3-5 years are the rapid development of direct flights between Macau and individual visitor scheme (IVS) eligible cities in China (also our core sector thesis), and the ramp-up of the Hong-Kong-Zhuhai-Macau (HKZM) Bridge. The Macau International Airport Master plan is crucial to this thesis. Any material deviation and timeline changes may affect the speed of direct flight development. Also, arrivals from the HKZM Bridge may be affected if vehicle licence approval is slower than expected. To conclude, the key risk to our call is that visitation (especially by air) from mainland China grows more slowly than we expect.

Slower-than-expected Slower-than-expected ramp-up of MGM Cotai would impact its GGR and EBITDA in ramp-up of MGM Cotai, 2019. We also expect the Dynamic Theatre to be utilised to its full extent to drive lower-than-expected meaningful mass-market patron growth for MGM Cotai. However, underutilisation of the utilisation of non-gaming theatre or ineffective performances may have an indirect impact on GGR. If the smoking facilities and other ban’s impact is greater than expected, MGM’s revenue growth would be lower than we external macro-related expect. The CNY/USD dropping faster than expected and severe UnionPay headwinds are risks would have an other potential risks. impact on GGR and EBITDA growth Gaming concessions are another risk. Our call would be impacted if the Macau government were to introduce new terms and conditions for concession renewal (ie, gaming tax hike). Moreover, the government has no obligation to renew any of the concessionaires. After the government granted MGM an extension of their concession, MGM’s concession is due to expire on 26 June 2022, the same time as the other operators.

MGM: quarterly GGR breakdown, 2012-1Q19 MGM: quarterly EBITDA, 2012-1Q19 12,000 80% 2,500 40% 30% 10,000 60% 2,000 20% 8,000 40% 10% 1,500 0% 6,000 20% (10%) 1,000 4,000 0% (20%) (30%) 2,000 (20%) 500 (40%)

0 (40%) 0 (50%)

1Q13 1Q17 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 3Q17 1Q18 3Q18 1Q19

3Q16 1Q17 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q17 1Q18 3Q18 1Q19 VIP Mass Slot YoY Change MGM China EBITDA (HKDmn) YoY Change

Source: Company Source: Company

MGM China Holdings (2282 HK): 30 July 2019

MGM: VIP rolling chips by quarter, 2012-1Q19 MGM: quarterly VIP GGR, 2012-1Q19 300,000 40% 8,000 40% 7,000 30% 250,000 20% 20% 6,000 200,000 0% 10% 5,000 0% 150,000 (20%) 4,000 (10%) 3,000 (20%) 100,000 (40%) (30%) 2,000 50,000 (60%) (40%) 1,000 (50%)

0 (80%) 0 (60%)

1Q15 1Q17 1Q13 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15 1Q16 3Q16 3Q17 1Q18 3Q18 1Q19 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 VIP Rolling (HKDmn) YoY Change VIP YoY Change

Source: Company Source: Company

MGM: quarterly mass drop, 2012-1Q19 MGM: quarterly mass GGR, 2012-1Q19 16,000 80% 7,000 50% 70% 14,000 6,000 40% 60% 30% 12,000 5,000 50% 20% 10,000 40% 4,000 10% 8,000 30% 3,000 0% 6,000 20% 10% (10%) 4,000 2,000 0% (20%) 1,000 2,000 (10%) (30%)

0 (20%) 0 (40%)

3Q15 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

1Q14 3Q14 1Q12 3Q12 1Q13 3Q13 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 Mass drop (HKDmn) YoY Change Mass YoY Change

Source: Company Source: Company

MGM: net debt to EBITDA, 2011-20E MGM: ROIC, 2015-21E 350% 40% 300% 35%

250% 30% 200% 25% 150% 20% 100% 15% 50% 10% 0% (50%) 5% (100%) 0% 2015 2016 2017 2018 2019E 2020E 2021E 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

MGM: director profiles With MGM Group Years in MGM Name Age Position since Group Note James Joseph Murren 56 Chairperson, Executive Director 1998 21 Pansy Catilina Chiu King Ho, JP 55 Co-Chairperson, Executive Director 2005 14 Chen Yau Wong 64 Executive Director 2007 12 William Joseph Hornbuckle 60 Executive Director 1998 21 Grant R. Bowie 60 Chief Executive Officer, Executive Director 2008 11 William M. Scott IV 57 Non-executive Director 2009 10 Daniel J. D’Arrigo 49 Non-executive Director 2000 19 Kenneth A. Rosevear 68 Non-executive Director 1995 23 Until 14 Feb 2018 Kenneth Xiaofeng Feng Non-executive Director 2001 17 From 24 May 2018 Zhe Sun 52 Independent Non-executive Director 2010 9 Sze Wan Patricia Lam 51 Independent Non-executive Director 2011 8 Peter Man Kong Wong 69 Independent Non-executive Director 2012 7 Russell Francis Banham 64 Independent Non-executive Director 2014 5

Source: Company

100

Macau Consumer Discretionary 30 July 2019

(880 HK) SJM Holdings SJM H oldi ngs

Target price: HKD10.00 (from HKD8.80) Share price (26 Jul): HKD8.98 | Up/downside: +11.4%

Upgrading: strategic delay in opening of Palace Andrew Chung, CFA (852) 2773 8529  GLP likely to be strategically opened at the same time as Lisboeta [email protected]  Duty-free store likely to be game changer for mass acquisition Terry Ng (852) 2773 8530  Upgrading to Outperform (2) from Hold (3) on lower concession risk [email protected]

What's new: We upgrade our rating on SJM to Outperform (2) from Hold Forecast revisions (%) (3), and raise our 12-month TP to HKD10.0 from HKD8.8. On 15 March Year to 31 Dec 19E 20E 21E 2019, SJM was granted an extension in its gaming concession to 26 June Revenue change (2.8) 0.7 n.a. Net profit change (1.1) 1.0 n.a. 2022. Meanwhile, management said it now expects the construction of Core EPS (FD) change (1.1) 1.0 n.a. Grand Lisboa Palace (GLP) to be completed by end-2019 (vs. mid-2019 Source: Daiwa forecasts previously). As such, we believe a realistic opening day for GLP will be brought forward to 2H20E, which should match the opening date of its Share price performance mega theme park next door, Lisboeta. Management said it plans to create (HKD) (%) synergies between GLP and Lisboeta, including building a bridge joining 11.0 110 the two properties. On 31 May 2019, China Duty Free Group also signed a 9.8 100 8.5 90 binding agreement with SJM to open its flagship duty-free shop at GLP. 7.3 80

6.0 70 What's the impact: We believe the opening of GLP at around the same Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 timing of the opening of Lisboeta will be beneficial for GLP. Both properties SJM Hdg (LHS) Relative to HSI (RHS) are located in the southern Cotai region, which also includes the Macao East Asian Games Dome, Macau’s largest sports stadium. Lisboeta 12-month range 6.29-10.62 features a theme park with an urban zip line, indoor skydiving, and IMAX Market cap (USDbn) 6.50 and MX4D theatres. The Macau East Asian Games Dome is the largest 3m avg daily turnover (USDm) 16.28 Shares outstanding (m) 5,659 indoor sporting facility in the city. It comprises a 3-storey multi-purpose Major shareholder STDM (55.0%) sporting complex covering a total area of 45,000 sq m. It also consists of a large exhibition hall that can accommodate up to 2,000 people. We expect Financial summary (HKD) the southern Cotai region to create a distinctive non-gaming zone to draw Year to 31 Dec 19E 20E 21E traffic to GLP. We also think the anticipated future developments in the Revenue (m) 46,492 59,401 65,420 Operating profit (m) 2,789 3,029 3,997 Greater Bay Area will give local players, such as SJM, an advantage. In Net profit (m) 2,352 2,938 3,892 addition, the agreement with China Duty Free Group (China’s state-owned Core EPS (fully-diluted) 0.415 0.519 0.687 company authorised to carry out duty-free business nationwide) could be EPS change (%) (17.5) 24.9 32.5 the first of many SOE partnerships for SJM. Daiwa vs Cons. EPS (%) (9.7) 8.3 8.9 PER (x) 21.6 17.3 13.1 Dividend yield (%) 2.1 2.6 3.5 What we recommend: Based on the above factors and mitigation of DPS 0.190 0.237 0.314 gaming concession risk until 2022, we upgrade our rating for SJM to PBR (x) 1.8 1.7 1.6 EV/EBITDA (x) 13.2 9.2 7.2 Outperform (2) from Hold (3), and raise our SOTP-based 12-month TP to ROE (%) 8.4 10.0 12.4 HKD10.0 from HKD8.8, based on 2019-20E EV/EBITDA (previously 2019E Source: FactSet, Daiwa forecasts EV/EBITDA). We lower our 2019 net profit forecast by 1.1% on the delay in the opening date of GLP. Key downside risks: 1) any further delay or partial opening of GLP would have an unfavourable impact on group GGR, 2) fewer-than-expected tables being granted to GLP by the government, 3) tables being re-allocated by SJM to GLP, 4) faster-than-expected devaluation of CNY/USD, and 5) a delay in the opening of Lisboeta that could impact the onset of synergies between the two properties.

How we differ: Unlike some, we believe the delay in the opening of GLP is a strategic decision by management to coincide it with the opening of Lisboeta.

See important disclosures, including any required research certifications, beginning on page 129

SJM Holdings (880 HK): 30 July 2019

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SJM: operating revenue and EBITDA We now look for group GGR to rise by 4.2% YoY in 2019 100,000 from our previous forecast of 6.1% YoY due to the delayed opening of GLP affecting potential gaming revenue. But the 80,000 eventual opening of GLP in 2H20E will likely be a catalyst 60,000 for GGR growth. As such, we forecast mass and VIP GGR 40,000 growth of 28.2% YoY and 29.6% YoY for 2020, respectively, on continuing visitation growth momentum 20,000 and SJM’s ability to leverage on its associate companies, 0 TurboJet and Sky Shuttle, to draw much-needed traffic to 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E the Cotai area. On the profitability side, due to the Revenue (HKDmn) Group EBITDA (HKDmn) expected ramp-up of GLP, we forecast SJM’s adjusted property EBITDA to increase by 2.6% YoY in 2019, 43.8% Source: Company, Daiwa forecasts YoY in 2020 and 19.6% YoY in 2021.

Valuation SJM: 1-year forward EV/EBITDA band SJM is currently trading at a 10.6x 1-year forward (x) EV/EBITDA, based on our forecasts, 0.4SD above its past- 18 10-year average 1-year forward EV/EBITDA. SJM has 16 14 been typically trading at a discount of 35% to the sector 12 due to its shrinking market share and below-average 10 margin management. With the opening of GLP, we expect 8 SJM’s overall market positioning and margin management 6 to improve. Galaxy underwent a similar transition after it 4 opened its first Cotai integrated resort in 2011, and we saw 2 0 the market give Galaxy a fair sector valuation (ie, a multiple Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 around the sector average) after seeing improvements in EV/Daiwa EBITDA its marketing positioning and operations. Hence, we see this as a possible “double-barrel” valuation upside for SJM. Source: Bloomberg, Daiwa forecasts

Earnings forecast revisions SJM: Bloomberg-consensus EPS forecast revisions (HKD) We believe the market will focus on the opening date of 0.70 GLP, the number of gaming tables it receives from the 0.60 government, and the number of gaming tables SJM reallocates from its lower-performing properties. The 2019- 0.50 20 Bloomberg-consensus EPS forecasts have remained largely unchanged, which indicates to us that the market is 0.40 revising down SJM’s earnings forecast for 2019 due to the delay in the opening of GLP until 2H20. However, the 0.30 street seems to be revising up slightly the earnings 0.20 forecast for 2020, potentially due to expectations of what Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 GLP, despite its delayed opening, can bring to SJM and 2019 EPS 2020 EPS

Cotai alike. Our 2020-21E EPS are 8-9% above the Source: Bloomberg consensus on the expected potential of GLP (see commentary in our accompanying sector report).

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Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Grand Lisboa GGR (HKDm) 29,587 16,536 14,056 14,866 15,663 16,765 17,373 17,833 Lisboa Palace GGR (HKDm) 0 0 0 0 0 0 11,422 15,195 Self-promoted casinos GGR (HKDm) 9,933 6,563 5,824 6,214 6,265 6,309 3,520 3,465 Satellie casinos GGR (HKDm) 39,749 25,491 21,393 20,209 21,972 22,675 24,687 26,455

Profit and loss (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Gaming 79,269 48,590 41,273 41,289 43,900 45,749 57,002 62,948 Non-gaming 665 581 526 842 890 743 2,400 2,472 Other Revenue 0 0 0 (256) (157) (0) 0 0 Total Revenue 79,934 49,171 41,799 41,875 44,633 46,492 59,401 65,420 Other income (66) (235) 98 23 31 33 41 45 COGS (30,496) (18,820) (16,069) (16,086) (17,005) (17,861) (22,252) (24,572) SG&A (41,475) (26,556) (22,326) (22,520) (23,457) (24,407) (30,421) (33,025) Other op.expenses (1,326) (1,272) (1,250) (1,434) (1,534) (1,466) (3,739) (3,871) Operating profit 6,570 2,288 2,252 1,857 2,668 2,789 3,029 3,997 Net-interest inc./(exp.) 299 202 96 89 272 142 62 72 Assoc/forex/extraord./others 0 0 0 0 0 (500) 0 0 Pre-tax profit 6,870 2,490 2,348 1,947 2,940 2,431 3,092 4,069 Tax (88) (38) (34) (12) (27) (28) (90) (92) Min. int./pref. div./others (51) 13 12 29 (62) (51) (64) (85) Net profit (reported) 6,731 2,465 2,326 1,963 2,850 2,352 2,938 3,892 Net profit (adjusted) 6,731 2,465 2,326 1,963 2,850 2,352 2,938 3,892 EPS (reported)(HKD) 1.200 0.436 0.411 0.347 0.504 0.416 0.519 0.688 EPS (adjusted)(HKD) 1.200 0.436 0.411 0.347 0.504 0.416 0.519 0.688 EPS (adjusted fully-diluted)(HKD) 1.193 0.435 0.411 0.347 0.503 0.415 0.519 0.687 DPS (HKD) 0.716 0.720 0.210 0.230 0.230 0.190 0.237 0.314 EBIT 6,570 2,288 2,252 1,857 2,668 2,789 3,029 3,997 EBITDA 7,763 3,862 3,417 3,074 3,724 3,890 5,528 6,590

Cash flow (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 6,870 2,490 2,348 1,947 2,940 2,431 3,092 4,069 Depreciation and amortisation 1,100 1,101 1,071 1,205 1,163 1,089 2,488 2,582 Tax paid (41) (41) (41) (41) (23) (28) (90) (92) Change in working capital (1,692) (3,545) 517 (490) 156 433 (1,541) 752 Other operational CF items 16 403 80 (31) (200) (157) (78) (88) Cash flow from operations 6,252 409 3,974 2,589 4,036 3,768 3,871 7,222 Capex (3,338) (3,025) (5,965) (5,928) (5,777) (6,647) (2,000) (2,000) Net (acquisitions)/disposals (60) (55) (25) (55) (594) 0 0 0 Other investing CF items 778 7,880 2,684 (5,879) (3,019) 199 120 128 Cash flow from investing (2,621) 4,801 (3,306) (11,863) (9,390) (6,448) (1,880) (1,872) Change in debt (517) (254) (154) 7,588 7,250 (200) (200) (1,200) Net share issues/(repurchases) 1,267 3 1 3 9 0 0 0 Dividends paid (5,769) (4,073) (1,188) (1,301) (1,302) (1,074) (1,342) (1,777) Other financing CF items (212) (60) (188) (355) (452) (36) (35) (34) Cash flow from financing (5,230) (4,385) (1,529) 5,934 5,506 (1,310) (1,577) (3,011) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (1,599) 825 (862) (3,339) 152 (3,989) 414 2,339 Free cash flow 2,914 (2,616) (1,991) (3,339) (1,741) (2,879) 1,871 5,222 Source: FactSet, Daiwa forecasts

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Financial summary continued … Balance sheet (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 23,892 16,895 13,423 15,891 18,693 14,703 15,117 17,456 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 2,094 1,658 1,481 1,166 1,849 1,606 2,314 2,595 Other current assets 142 124 147 167 91 85 483 102 Total current assets 26,128 18,677 15,050 17,224 20,632 16,395 17,914 20,154 Fixed assets 14,160 16,689 22,374 27,087 32,643 38,068 37,455 36,757 Goodwill & intangibles 14 8 2 0 0 0 0 0 Other non-current assets 1,913 1,481 1,330 1,976 3,124 3,124 3,124 3,124 Total assets 42,215 36,855 38,755 46,287 56,399 57,586 58,493 60,034 Short-term debt 258 158 539 200 200 200 1,200 1,252 Accounts payable 14,383 10,730 11,633 11,174 11,958 12,143 11,707 12,359 Other current liabilities 391 409 555 85 117 117 117 117 Total current liabilities 15,033 11,297 12,727 11,459 12,274 12,459 13,024 13,727 Long-term debt 733 554 0 7,935 15,245 15,045 13,845 12,593 Other non-current liabilities 1,587 1,524 1,187 1,424 1,193 1,193 1,193 1,193 Total liabilities 17,353 13,375 13,914 20,818 28,712 28,697 28,061 27,513 Share capital 11,232 11,236 11,238 11,242 11,254 11,254 11,254 11,254 Reserves/R.E./others 13,532 12,090 13,515 14,155 16,298 17,501 19,043 21,132 Shareholders' equity 24,764 23,326 24,753 25,397 27,552 28,755 30,297 32,386 Minority interests 98 154 88 72 135 135 135 135 Total equity & liabilities 42,215 36,855 38,755 46,287 56,399 57,586 58,493 60,034 EV 28,014 34,788 38,021 43,133 47,703 51,493 50,879 47,340 Net debt/(cash) (22,901) (16,182) (12,884) (7,756) (3,248) 542 (72) (3,611) BVPS (HKD) 4.413 4.124 4.376 4.489 4.869 5.081 5.354 5.723

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) (8.8) (38.5) (15.0) 0.2 6.6 4.2 27.8 10.1 EBITDA (YoY) (10.5) (50.3) (11.5) (10.0) 21.1 4.4 42.1 19.2 Operating profit (YoY) (13.1) (65.2) (1.6) (17.5) 43.6 4.5 8.6 31.9 Net profit (YoY) (12.7) (63.4) (5.7) (15.6) 45.2 (17.5) 24.9 32.5 Core EPS (fully-diluted) (YoY) (13.2) (63.5) (5.6) (15.6) 45.1 (17.5) 24.9 32.5 Gross-profit margin 61.8 61.7 61.6 61.6 61.9 61.6 62.5 62.4 EBITDA margin 9.7 7.9 8.2 7.3 8.3 8.4 9.3 10.1 Operating-profit margin 8.2 4.7 5.4 4.4 6.0 6.0 5.1 6.1 Net profit margin 8.4 5.0 5.6 4.7 6.4 5.1 4.9 5.9 ROAE 27.9 10.3 9.7 7.8 10.8 8.4 10.0 12.4 ROAA 15.9 6.2 6.2 4.6 5.6 4.1 5.1 6.6 ROCE 25.9 9.1 9.1 6.3 7.0 6.4 6.8 8.7 ROIC 1,569.9 48.7 23.0 12.4 12.5 10.2 9.8 13.2 Net debt to equity n.a. n.a. n.a. n.a. n.a. 1.9 n.a. n.a. Effective tax rate 1.3 1.5 1.4 0.6 0.9 1.1 2.9 2.3 Accounts receivable (days) 8.2 13.9 13.7 11.5 12.3 13.6 12.0 13.7 Current ratio (x) 1.7 1.7 1.2 1.5 1.7 1.3 1.4 1.5 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 59.7 165.2 51.1 66.3 45.7 45.7 45.7 45.7 Free cash flow yield 5.7 n.a. n.a. n.a. n.a. n.a. 3.7 10.3 Source: FactSet, Daiwa forecasts

Company profile

SJM Holdings is the holding company of Sociedade de Jogos de Macau S.A., one of the six concession holders approved by the Macau government. It previously had a monopoly in Macau gaming until the government opened up the industry in 2002 and issued 5 more concession and sub-concession licenses. SJM currently operates numerous casinos in both the Macau Peninsula and Taipa Island, with the Grand Lisboa its most well-known property. SJM is currently developing Grand Lisboa Palace in Cotai, which is expected to open in second half of 2020.

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Strategic delay for the Palace Signs of margin improvement As detailed in our initiation report on SJM (see page number 119 Night train to Lisbon), we note that SJM has the lowest table yields and lowest EBITDA margins across properties in the Cotai Peninsula. However, in 2018, Grand Lisboa and self-promoted casinos recorded 2pp YoY and 4pp YoY increase in property EBITDA margin, respectively, while the other Peninsula operators remained flat. Moreover, the EBITDA margin of Grand Lisboa and self-promoted casinos rose by 3.2pp QoQ and 4.5pp QoQ, respectively, in 1Q19.

We believe the improved corporate governance and possibly more favourable terms with junkets have contributed to an improvement in margins. Although the 2018 property EBITDA margins of Grand Lisboa (13%) and other SJM self-owned casinos (14%) were still significantly lower than the 22-23% average for other Macau Peninsula operators, we believe that with the imminent opening of Grand Lisboa Palace (GLP) in Cotai, there is still room for growth.

Macau: EBITDA margins of Macau Peninsula operators (%) SJM has the lowest 30% property EBITDA margin 25% among the 6 operators, 20% but the margins of Grand Lisboa and self- 15% promoted casinos 10% improved in 2018 5%

0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sands Macau Starworld MGM Macau Wynn Macau Grand Lisboa Self-promoted Satellite

Source: Company, Daiwa

Strategic delay in opening of GLP According to the latest updates from SJM’s management, the construction of GLP, SJM’s first integrated resort in Cotai, could be completed by the end of 2019. Based on our experience, there is usually a 6-month period between the completion of construction and the actual opening date. Therefore, we believe a realistic opening day for GLP will be extended to 2H20E.

We believe SJM has strategically delayed the opening of GLP to match with the opening date of its next-door mega theme park, Lisboeta (more details in the following section). Management said it would look into creating synergies between GLP and Lisboeta, including building a bridge joining the two properties. SJM’s Chief Executive Ambrose So also discussed the possibility of opening a satellite casino in Lisboeta during a press conference on 12 June. Based on the expected synergies upon the opening of GLP, we expect to see an accelerated ramp-up in GLP vs. other Cotai properties.

Connection with Lisboeta and East Asian Dome Located adjacent to GLP is Lisboeta, an integrated resort with a theme park and other entertainment facilities developed by Macau Theme Park and Resorts Ltd. The resort will include 3 themed hotels totalling 820 rooms, and offer a wide range of non-gaming activities (such as indoor skydiving, cinemas and a zip line) as well as shops and restaurants. The company’s directors include Arnaldo Ho Yau-heng and Angela Leong On Kei, the son and spouse of former SJM Founder and Chairman Stanley Ho Hung-sun.

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Grand Lisboa Palace and Lisboeta Macau: map

Grand Lisboa Palace Macau East Asian Games Dome

Proposed connecting bridge in-between

Macau East

Asian Games Dome

Source: Company

Lisboeta Macau: external resort design Lisboeta Macau: hotel rooms

Source: Macau Theme Park and Resort Source: Macau Theme Park and Resort

Lisboeta Macau: LINE-branded hotel, Casa de Amigo Lisboeta Macau: futuristic shopping mall zone

Source: Macau Theme Park and Resort Source: Macau Theme Park and Resort

We believe GLP stands to benefit from Lisboeta by: 1) providing incremental hotel room capacity to extend days-per-stay, 2) boosting visitor flow into the area, and 3) bringing in more mass clientele as we expect GLP to bring in more premium mass and VIP patrons, whereas Lisboeta is more family-oriented with children-friendly activities.

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Moreover, we expect GLP to enter into a partnership with Lisboeta that goes beyond the connecting bridge to leverage each property’s distinct non-gaming products through joint promotions and referrals. Led by the rapid growth in mainland China visitations through the China penetration story, we believe Lisboeta’s differentiated non-gaming activities could bring a new element to GLP and act as a growth catalyst.

We believe GLP can Both GLP and Lisboeta are adjacent to the Macau East Asian Games Dome. It is the synergise with its largest indoor sporting facility in the city, with a three-storey multi-purpose sporting adjacent properties to complex covering a total area of 45,000 sq m and two separate functional indoor pavilions, bring in traffic to the ideal for different types of indoor sports and activities. The indoor track and field for area; The Lisboeta and sporting events has a total seating capacity of 7,000. Moreover, it consists of a large Macau East Asian exhibition hall that can accommodate up to 2,000 people. The venue had previously Games Dome hosted the 2005 East Asian Games, and the 2007 Asian Indoor Games. Together with GLP, we believe the southern Cotai region could create a unique non-gaming zone to draw much-needed traffic to GLP.

Macau East Asian Games Dome: external view Macau East Asian Games Dome: indoor complex

Source: Google Images Source: Google Images

Additional potential of GLP In a press release on 30 May 2019, SJM provided us with more details about the non- gaming amenities we can expect in GLP.

 Hotels and suites: GLP will have a total of approximately 1,900 rooms in the Grand Lisboa Palace Hotel, Palazzo Versace Macau and Karl Lagerfeld Hotel.

 Fantasy garden-themed shopping mall: GLP’s shopping mall will cover an area of 75,000 sq m, which will include retail, food and beverage outlets, and entertainment and leisure facilities. Several features include: 1) “Fashion Balloons” in the atrium, where signature retail shops will be located, 2) “Catwalk Garden” and “Fashion Boulevard”, which will act as venues for fashion shows or other themed events, 3) a “wedding pavilion” for celebrations and events, and 4) a “multipurpose hall”.

Duty-free shop: SJM signed a binding agreement with China Duty Free Group (a subsidiary of China International Travel Services (601888 SH, not rated) to open a 7,500 sq m duty-free shop in the shopping mall, the first flagship store in any casino property in Macau. The store is expected to offer luxury items such as perfumes, cosmetics, watches and jewellery, clothes, and shoes, as well as more affordable items such as accessories, groceries and travel items. We believe the duty-free shop can be effective in attracting gaming patrons of all segments through its loyalty programme.

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1) Additional 8% hotel room inventory increase in Cotai GLP is located on the east side of Cotai in close proximity to the Macau International Airport. As demand for overnight stays from mainland Chinese visitors is growing rapidly and given that the Macau hotels have been running at occupancy rates of well above 90% (97.1% in 1Q19), we believe the 2,000 hotel rooms can contribute 60,000 room nights (or estimated 90k to 100k days-per-stay) per month for both SJM and the sector in 2020E.

Cotai: operator average occupancy rate 98%

96%

94%

92%

90%

88%

86%

84%

82% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Source: Companies, Daiwa

We believe SJM is likely 2) Potential increase in berth utilisation at the Taipa Ferry Terminal by to optimise the travel TurboJet routes of its transport TurboJet is the largest of the 2 ferry operators in Macau. Being an associated company of subsidiaries upon the SJM, it is understandable why TurboJet primarily operates at the Macau Maritime Ferry opening of GLP to drive Terminal (as currently all SJM casinos are located in the Peninsula). With the opening of incremental visitor traffic GLP, we believe TurboJet will start to balance its ferries between the Macau Maritime Ferry into Cotai Terminal and Taipa Ferry Terminal. This will provide much-needed traffic funnelling during peak hours and holidays, resulting in more gaming hours for the visitors, in our view.

3) Potential utilisation of the 5 helipads at the Taipa Ferry Terminal Sky Shuttle has a monopoly on helicopter services in Macau. Like TurboJet, it is an associated company of SJM and only operates helicopter service between the Maritime Ferry Terminal and Hong Kong/Shenzhen. Helicopter tickets are currently the highest-level casino complimentary offerings in Macau and mainly reserved for the most high-end VIPs. We believe once GLP opens, Sky Shuttle will start utilising the 5 helipads at the Taipa Ferry Terminal, bringing in more high-end VIPs to Cotai.

Taipa Ferry Terminal with 5 helipads Sky Shuttle helicopter

Source: Marine and Water Bureau of Macau Source: Sky Shuttle official website

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Group earnings outlook We expect GLP to open We expect SJM’s group 2019 EBITDA to come in at HKD3.88bn (+1.2% YoY) and 2020 with a total of 300 EBITDA at HKD5.52bn (+42.2% YoY) due to the opening of GLP driving up GGR growth gaming tables sometime and EBITDA margin for the group. As discussed, we expect GLP to open with a total of 300 during 2H20 gaming tables. As we expect GLP to not fully open until 2H20, we are revising down our adjusted property EBITDA forecast to HKD1.55bn for 2020 from HKD2.11bn, and forecast to reach HKD2.61bn for 2021, contributing 27.9% and 39.7% to group adjusted property EBITDA for 2020 and 2021, respectively. Moreover, we expect GGR of GLP to reach a similar level to that of Grand Lisboa’s 2018 GGR by 2021, with growth of 93.3% YoY in 2021.

For Grand Lisboa, we expect its mass GGR to be relatively stable, growing by 7.2% YoY for 2019, 5% YoY for 2020 and 2% YoY for 2021 due to the higher-than-expected visitation growth also having a spill-over effect on Peninsula properties. We forecast its VIP GGR to reach HKD10.9bn (+7.2% YoY) in 2019 on a luck-adjusted basis due to the delay in the opening of GLP, which could shift some direct VIP/junkets to Grand Lisboa in 2H19E. As a result, we estimate its VIP GGR to tick up by 3% YoY in 2020 and 2021. We forecast Grand Lisboa’s property EBITDA to increase by 12.7% YoY in 2019 and 9.9% YoY in 2020, but drop by 3.7% YoY in 2021 as more premium mass Cotai properties enter the market, such as the Four Seasons and The Londoner Macau.

SJM: GGR by property (HKDm)

70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2015 2016 2017 2018 2019E 2020E 2021E

Grand Lisboa Self=promoted Satellite Grand Lisboa Palace

Source: Company, Daiwa forecasts

For other self-promoted casinos, we expect gaming tables to be taken from Casino Lisboa and Oceanus for the opening of GLP. Since opening of GLP has been delayed, the movement of tables would not occur as previously projected in 4Q19, hence, we expect mass GGR to increase by 0.9% YoY, and VIP GGR to increase by 0.8% YoY in 2019E. After the reallocation of tables to GLP, we expect SJM’s other self-operated casinos’ mass GGR to drop by 48.7% YoY and VIP GGR to decline by 40.8% YoY in 2020E.

For satellite casinos under SJM, we expect mass GGR to increase by 8.7% YoY and VIP GGR to drop by 6.6% YoY in 2019 on higher-than-expected visitation and 1H19 industry headwinds for VIP, respectively. We expect EBITDA from satellite casinos to grow by 4.6% YoY in 2019, and 4.5% YoY in 2020 and 2021. Due to the completion of construction and opening of GLP, we expect SJM to generate positive free cash flow from 2020. We also expect SJM to maintain its dividend payout ratio of around 45% over 2019-21.

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SJM: free cash flow (HKDm) We expect free cash flow 12,000 to return to positive in 10,000 2020 following the 8,000 opening and full-year 6,000 ramp-up of GLP 4,000 2,000 0 (2,000) (4,000) (6,000) 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts

SJM: dividend payout (HKDm) We forecast dividend 6,000 180% payout ratio to remain 160% 5,000 stable at 45.7% over 140% 2019-21 4,000 120% 100% 3,000 80% 2,000 60% 40% 1,000 20% 0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Interim dividends Final dividend Special dividend Dividend payout ratio (RHS)

Source: Company, Daiwa forecasts

Valuation and recommendation Upgrading to We upgrade SJM to Outperform (2) from Hold (3) and raise our SOTP-based 12-month TP Outperform (2) with 12- to HKD10.0 from HKD8.8. Our previous downgrade on SJM was due to the stock reaching month TP of HKD10.0 our target price, and not due to business underperformance. We assign a 12x 2019-20E EV/EBITDA for Grand Lisboa due to subsided gaming concession risk, and 5x 2019-20E EV/EBITDA for both self-promoted casinos and satellite casinos on Peninsula locations and similar scale. Also, we assign a 14x 2020E EV/EBITDA discounted by 1 year at WACC for GLP to reflect: 1) its full-year performance in 2020, and 2) its potential to mitigate the shortage of hotel room supply in Macau and take advantage of the incremental visitations indicated in our China penetration story. Meanwhile, we lower our 2019E net profit forecast by 1.1% on the delay in the opening date of Grand Lisboa Palace to 2H20E.

SJM: 1-year forward EV/EBITDA bands SJM is trading at 0.4SD (x) above its past-10-year 18 average 16 14 12 10 8 6 4 2 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 EV/Daiwa EBITDA

Source: Bloomberg, Daiwa

110

SJM Holdings (880 HK): 30 July 2019

SJM: SOTP valuation Breakdown Metrics 2019-20E SOTP (HKDm) Value per share (HKD) % of SOTP Grand Lisboa 12x EBITDA 29,891 5.3 53% Self-promoted 5x EBITDA 2,299 0.4 4% Satellite Casinos 5x EBITDA 3,838 0.7 7% Hospitality 8x EBITDA 3,608 0.6 6% Lisboa Palace 14x EBITDA 19,137 3.4 34% Corporate Expense 12x (2,322) -0.4 -4% Net Debt 72 0.0 0% Price Target (5,657m shares) 56,523 10.0 100%

Source: Daiwa forecasts

Key risk to our call wold Risks be further delays to opening of GLP The main downside risks to our call are:

1) GLP opening delay – Due to the delay in opening of GLP, we revised our initial estimates to reflect its full opening in 2020. Any further delay or partial opening would have an impact on the GGR.

2) New-to-market tables granted to GLP – We expect 100 new-to-market tables to be granted by the government. Fewer-than-expected tables granted would have a significant impact on our forecasts.

3) Reallocation of gaming tables to GLP – We expect SJM to reallocate 200 tables from Casino Lisboa and Oceanus to GLP. Fewer-than-expected tables granted would have an impact on our forecasts.

4) CNY devaluing faster than expected.

5) Gaming concession risk – SJM’s gaming concession was extended on 15 March 2019 to 26 June 2022, the same expiration date as other operators.

SJM: GGR breakdown by quarter SJM: EBITDA by quarter 25,000 20% 2,500 60% 10% 40% 20,000 2,000 0% 20% 1,500 15,000 (10%) 0%

10,000 (20%) 1,000 (20%) (30%) (40%) 5,000 500 (40%) (60%)

0 (50%) 0 (80%)

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

3Q15 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

VIP GGR (HKDmn) Mass GGR (HKDmn) SJM EBITDA (HKDmn) YoY Change

Source: Company Source: Company

SJM: VIP rolling chips by quarter SJM: VIP GGR by quarter 600,000 30% 18,000 20% 20% 16,000 10% 500,000 10% 14,000 0% 400,000 0% 12,000 (10%) (10%) 10,000 300,000 (20%) (20%) 8,000 (30%) (30%) 200,000 (40%) 6,000 4,000 (40%) 100,000 (50%) (60%) 2,000 (50%)

0 (70%) 0 (60%)

1Q14 3Q17 1Q12 3Q12 1Q13 3Q13 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q18 3Q18 1Q19

3Q15 3Q16 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 1Q16 1Q17 3Q17 1Q18 3Q18 1Q19 VIP Rolling (HKDmn) YoY Change VIP GGR (HKDmn) YoY Change

Source: Company Source: Company

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SJM Holdings (880 HK): 30 July 2019

SJM: mass drop by quarter SJM: mass GGR by quarter 45,000 40% 9,000 40% 40,000 30% 8,000 30% 35,000 20% 7,000 20% 30,000 6,000 10% 10% 25,000 5,000 0% 0% 20,000 4,000 (10%) (10%) 15,000 3,000 10,000 (20%) 2,000 (20%) 5,000 (30%) 1,000 (30%)

0 (40%) 0 (40%)

3Q14 1Q12 3Q12 1Q13 3Q13 1Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 Mass drop (HKDmn) YoY Change Mass GGR (HKDmn) YoY Change

Source: Company Source: Company

SJM: net debt to EBITDA SJM: ROIC

100% 60%

0% 50% (100%) 40% (200%) 30% (300%) 20% (400%)

(500%) 10%

(600%) 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company Source: Company

SJM: management profile Years Name Age Position Serving the company (related companies) since serving Ho Chiu Fung, Daisy 54 Chairman Serving Shun Tak Holdings (a corporate director of 25 STDM) since 1994 Elected as executive director of SJM since 2017 Fok Tsun Ting, Timothy 73 Co-Chairman, Executive Director 2010 9 Leong On Kei, Angela 57 Co-Chairman, Executive Director 2005 14 Dr. So Shu Fai 67 Vice-Chairman, Executive Director and 1976 43 Chief Executive Officer

Ng Chi Sing 67 Executive Director and Chief Operating Officer 1978 41

Dr. Chan Un Chan 64 Executive Director 2009 10 Dr. Shum Hong Kuen, 64 Executive Director 2007 12 David

Cheng Kar Shun 72 Non-executive Director 2013 6

Chau Tak Hay 76 Independent Non-executive Director 2007 12 Shek Lai Him, Abraham 73 Independent Non-executive Director 2007 12 Tse Hau Yin 71 Independent Non-executive Director 2007 12 Dr. Lan Hong Tsung, David 78 Independent Non-executive Director 2008 11 Source: Company

112

Macau Consumer Discretionary 30 July 2019

(1128 HK) Wynn Macau Wynn Macau

Target price: HKD20.40 (from HKD18.20) Share price (26 Jul): HKD19.16 | Up/downside: +6.5%

Upgrading: Wynning season for Crystal Palace Andrew Chung, CFA (852) 2773 8529  Phase 2 and Crystal Pavilion scheduled for construction in 2021 [email protected]  Strategic shift towards premium mass segment signals new beginning Terry Ng (852) 2773 8530  Upgrading to Outperform (2) from Hold (3) on shift to premium mass [email protected]

What's new: We are upgrading our call on Wynn to Outperform (2) from Forecast revisions (%) Hold (3), and raising our target price to HKD20.4 from HKD18.2. During the Year to 31 Dec 19E 20E 21E 1Q19 earnings call, management indicated its intention to shift strategy to Revenue change (2.9) (3.0) n.a. Net profit change (3.8) (4.2) n.a. focus on premium mass offerings. On 10 July, Wynn unveiled its plans for Core EPS (FD) change (3.9) (4.3) n.a. Wynn Palace Phase 2 and Crystal Pavilion, which is estimated to cost Source: Daiwa forecasts USD2bn. Wynn Palace Phase 2 should add 1,371 hotel suites, which is a c.84% increase on its Cotai hotel room inventory. The expected opening Share price performance date for Phase 2 and Crystal Pavilion (with a wide range of non-gaming (HKD) (%) facilities) is 4Q24. 25 100 22 91 20 83 What's the impact: In our view, Wynn’s business has always appealed to 17 74 high-end and sophisticated VIP patrons. With a proven track record of 15 65 premium player development and existing high-end non-gaming offerings, Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Wynn needs very little transition time to change from a VIP-centric operator Wynn Macau (LHS) Relative to HSI (RHS) to a premium-mass-centric operator, in our view. Rolling refurbishment of Wynn Macau may cause minor business disruption in 2019. Nonetheless, 12-month range 15.14-23.80 we welcome Wynn’s initiatives to add new non-gaming offerings and lower Market cap (USDbn) 12.73 allocation of hotel rooms to junkets, as that would likely catalyse mass 3m avg daily turnover (USDm) 26.34 Shares outstanding (m) 5,193 GGR growth in the long run. Major shareholder Wynn Resorts (72.3%)

With more than 3,000 hotel rooms after completion of Wynn Palace Phase Financial summary (HKD) 2, Wynn Palace mass market win/table/day rate would hit another record Year to 31 Dec 19E 20E 21E high, on our estimates. We maintain that the location of Wynn Palace Revenue (m) 38,719 40,355 42,540 enables the operator to capture incremental premium mass visitations by Operating profit (m) 7,461 8,029 8,780 Net profit (m) 5,896 6,649 7,620 air. With Wynn’s unique high-end positioning, we also believe it will be one Core EPS (fully-diluted) 1.135 1.280 1.467 of the prime beneficiaries of the Greater Bay Area population expansion. EPS change (%) (5.6) 12.8 14.6 Daiwa vs Cons. EPS (%) (0.8) (0.2) 2.8 PER (x) 16.9 15.0 13.1 What we recommend: We view Wynn’s current valuation, with the stock Dividend yield (%) 6.1 6.1 6.1 trading at an 11.5x 1-year forward EV/EBITDA multiple, or 0.8SD below its DPS 1.171 1.171 1.171 9-year average, as undemanding. We roll over our valuation from 2019E PBR (x) n.a. n.a. 22.7 EV/EBITDA to the 2019-20E average and upgrade Wynn to Outperform (2) EV/EBITDA (x) 11.3 10.4 9.4 ROE (%) n.a. n.a. n.a. from Hold (3). We also raise our 12-month TP to HKD20.4 from HKD18.2 Source: FactSet, Daiwa forecasts using SOTP valuation methodology based on 2019-20E average EV/EBITDA. We lower our 2019E and 2020E earnings on the expectation that the company’s strategic transition will cause a drag on GGR in the near term. Key downside risks include: 1) slower visitation growth by air, 2) visa tightening, 3) intensifying competition with several other new Cotai properties, such as MGM Cotai and Grand Lisboa Palace (2020E), 4) CNY devaluation, and 5) Unionpay headwinds.

How we differ: Unlike the market, we do not think US operators (including MGM) will be discriminated against in the gaming concession re-tendering process in 2022.

See important disclosures, including any required research certifications, beginning on page 129

Wynn Macau (1128 HK): 30 July 2019

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Wynn: operating revenue and EBITDA We expect Wynn’s overall GGR growth to narrow in 2019, 45,000 with mass GGR rising by 3.8% YoY and VIP GGR dropping 40,000 by 4.8% YoY. We look for its 2020 mass and VIP GGR 35,000 growth to accelerate by 7.8% YoY and fall 0.8% YoY, 30,000 respectively, and 2021 mass and VIP GGR to grow at 8.0% 25,000 YoY and 1.4% YoY. That said, we conservatively forecast 20,000 its 2019E EBITDA to drop by 1.4% YoY but rebound with 15,000 10,000 5.6% YoY growth for 2020 and 6.9% YoY for 2021. We also 5,000 see Wynn as a potential beneficiary of higher-than- 0 expected mainland China visitations as it looks to build up 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E its mass and premium mass segments, with the Operating Revenue (HKDm) EBITDA (HKDm) construction of Wynn Palace Phase 2 and Crystal Pavilion Source: Company, Daiwa forecasts expected to begin by 2021E and open by end-2024E.

Valuation Wynn: 1-year forward EV/EBITDA band Wynn is trading currently at 11.5x 1-year forward (x) EV/EBITDA, based on our forecasts, around 0.8SD below 36 its past 9-year average of 15.8x. Historically, Wynn has 31 traded at a 21% premium to the sector as the market 26 considered it a “luxury” brand in the sector. It typically trades between its past-10-year average EV/EBITDA 21 multiple and +1SD (1Q14-1Q18) unless faced with severe 16 headwinds against junkets and/or the VIP segment. The 11 last time it traded below 1SD was in 1Q17, but it quickly 6 rebounded to the past-10-year average level. YTD it has Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 briefly touched upon its -1SD level. We believe Wynn EV/Daiwa EBITDA Palace Phase 2 and the Crystal Pavilion can give Wynn Source: Bloomberg, Daiwa forecasts some traction on its valuation.

Earnings revisions Wynn: Bloomberg-consensus EPS forecast revisions (HKD) Compared to a year earlier, 2019-20E EPS has been 1.6 revised down by 39.7%. After relatively weak 1Q19 1.4 earnings, we believe the market will need to see consecutive quarters of strong earnings growth before it 1.2 makes any upward earnings revisions, effectively taking 1.0 the view that the management team needs to prove its 0.8 ability to drive continuous growth without its former chairman. 0.6

0.4 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

2019 EPS 2020 EPS e Source: Bloomberg

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Wynn Macau (1128 HK): 30 July 2019

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Wynn Macau VIP GGR (HKDm) 23,663 12,868 12,010 14,863 12,444 11,855 11,499 11,154 Wynn Macau Mass GGR (HKDm) 9,368 7,507 6,957 6,989 8,115 8,106 8,655 9,165 Wynn Palace VIP GGR (HKDm) 0 0 3,079 11,588 14,689 13,985 14,125 14,831 Wynn Palace Mass GGR (HKDm) 0 0 1,633 6,173 9,453 10,249 11,168 12,280

Profit and loss (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Gaming 27,788 17,887 20,552 31,442 34,096 36,537 38,110 40,236 Non-gaming 1,657 1,209 1,547 3,440 4,372 2,181 2,245 2,304 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 29,445 19,096 22,099 34,882 38,468 38,719 40,355 42,540 Other income 0 0 0 0 0 0 0 0 COGS (13,885) (8,701) (10,013) (16,737) (18,549) (18,344) (18,906) (19,759) SG&A (7,608) (6,363) (8,230) (10,000) (9,495) (10,106) (10,577) (11,140) Other op.expenses (986) (1,000) (1,591) (2,776) (2,726) (2,807) (2,843) (2,862) Operating profit 6,966 3,032 2,265 5,370 7,698 7,461 8,029 8,780 Net-interest inc./(exp.) (457) (564) (814) (1,255) (1,393) (1,551) (1,366) (1,146) Assoc/forex/extraord./others (40) (51) (3) (402) (48) 0 0 0 Pre-tax profit 6,469 2,417 1,448 3,713 6,258 5,910 6,663 7,634 Tax (24) (6) (12) (12) (12) (14) (14) (14) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 6,445 2,410 1,436 3,700 6,245 5,896 6,649 7,620 Net profit (adjusted) 6,445 2,410 1,436 3,700 6,245 5,896 6,649 7,620 EPS (reported)(HKD) 1.242 0.465 0.277 0.714 1.204 1.137 1.282 1.470 EPS (adjusted)(HKD) 1.242 0.465 0.277 0.714 1.204 1.137 1.282 1.470 EPS (adjusted fully-diluted)(HKD) 1.242 0.465 0.277 0.713 1.203 1.135 1.280 1.467 DPS (HKD) 1.751 0.000 0.600 0.631 1.501 1.171 1.171 1.171 EBIT 6,966 3,032 2,265 5,370 7,698 7,461 8,029 8,780 EBITDA 8,423 4,681 5,105 8,498 10,777 10,621 11,224 11,994

Cash flow (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 6,469 2,417 1,448 3,713 6,258 5,910 6,663 7,634 Depreciation and amortisation 986 1,000 1,591 2,776 2,726 2,807 2,843 2,862 Tax paid (15) (15) (15) (12) (12) (14) (14) (14) Change in working capital (2,362) (1,740) 1,851 4,346 (980) 403 130 116 Other operational CF items 680 796 968 1,621 1,717 1,637 1,452 1,232 Cash flow from operations 5,758 2,458 5,843 12,443 9,708 10,744 11,073 11,830 Capex (8,312) (12,710) (6,790) (1,261) (1,189) (464) (469) (470) Net (acquisitions)/disposals 62 8 6 84 9 9 9 9 Other investing CF items 1,698 25 21 15 90 103 103 103 Cash flow from investing (6,552) (12,677) (6,763) (1,162) (1,090) (353) (357) (359) Change in debt 6,895 12,809 773 (4,118) 4,889 0 (4,962) (4,217) Net share issues/(repurchases) 6 0 0 5 0 0 0 0 Dividends paid (8,716) (5,446) (3,109) (3,272) (7,790) (6,080) (6,080) (6,080) Other financing CF items (707) (1,194) (828) (1,471) (1,399) (1,621) (1,436) (1,215) Cash flow from financing (2,522) 6,169 (3,164) (8,855) (4,300) (7,701) (12,477) (11,513) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (3,316) (4,050) (4,084) 2,426 4,318 2,690 (1,761) (42) Free cash flow (2,554) (10,252) (946) 11,182 8,519 10,280 10,605 11,360 Source: FactSet, Daiwa forecasts

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Wynn Macau (1128 HK): 30 July 2019

Financial summary continued … Balance sheet (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 10,797 6,733 2,604 5,251 9,533 12,175 10,365 10,274 Inventory 186 180 338 332 313 313 313 313 Accounts receivable 571 458 733 677 1,135 834 796 777 Other current assets 440 667 293 315 419 419 419 419 Total current assets 11,994 8,038 3,968 6,574 11,401 13,741 11,893 11,783 Fixed assets 19,195 31,072 35,858 33,504 31,943 30,346 28,154 25,945 Goodwill & intangibles 398 398 398 398 398 398 398 398 Other non-current assets 2,562 2,784 2,721 2,513 2,340 2,232 2,136 2,040 Total assets 34,150 42,292 42,945 42,990 46,082 46,717 42,581 40,167 Short-term debt 0 0 0 449 0 0 0 0 Accounts payable 2,009 1,621 526 681 767 810 842 879 Other current liabilities 5,410 4,288 7,304 10,746 10,298 10,395 10,493 10,592 Total current liabilities 7,418 5,909 7,829 11,876 11,065 11,205 11,335 11,471 Long-term debt 18,605 31,318 32,170 27,674 33,078 33,078 28,116 23,899 Other non-current liabilities 1,083 955 493 445 420 420 420 420 Total liabilities 27,106 38,181 40,492 39,995 44,563 44,704 39,872 35,790 Share capital 167 167 167 273 390 390 390 390 Reserves/R.E./others 6,877 3,935 2,286 2,728 1,128 1,623 2,319 3,986 Shareholders' equity 7,044 4,102 2,453 3,001 1,518 2,013 2,710 4,377 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 34,150 42,284 42,945 42,996 46,082 46,717 42,581 40,167 EV 107,311 124,088 129,070 122,376 123,048 120,407 117,255 113,128 Net debt/(cash) 7,807 24,585 29,566 22,873 23,545 20,903 17,752 13,625 BVPS (HKD) 1.358 0.791 0.473 0.578 0.292 0.388 0.522 0.843

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) (6.0) (35.1) 15.7 57.8 10.3 0.7 4.2 5.4 EBITDA (YoY) (5.0) (44.4) 9.1 66.4 26.8 (1.4) 5.7 6.9 Operating profit (YoY) (10.8) (56.5) (25.3) 137.1 43.4 (3.1) 7.6 9.4 Net profit (YoY) (16.3) (62.6) (40.4) 157.8 68.8 (5.6) 12.8 14.6 Core EPS (fully-diluted) (YoY) (16.3) (62.6) (40.4) 157.4 68.6 (5.6) 12.8 14.6 Gross-profit margin 52.8 54.4 54.7 52.0 51.8 52.6 53.2 53.6 EBITDA margin 28.6 24.5 23.1 24.4 28.0 27.4 27.8 28.2 Operating-profit margin 23.7 15.9 10.2 15.4 20.0 19.3 19.9 20.6 Net profit margin 21.9 12.6 6.5 10.6 16.2 15.2 16.5 17.9 ROAE 79.3 43.3 43.8 135.7 276.4 333.9 281.6 215.1 ROAA 19.8 6.3 3.4 8.6 14.0 12.7 14.9 18.4 ROCE 29.9 9.9 6.5 16.3 23.4 21.4 24.4 29.7 ROIC 69.3 13.9 7.4 18.5 30.2 31.0 36.9 45.6 Net debt to equity 110.8 599.3 1,205.3 762.2 1,550.6 1,038.2 655.2 311.3 Effective tax rate 0.4 0.3 0.9 0.3 0.2 0.2 0.2 0.2 Accounts receivable (days) 7.0 9.8 9.8 7.4 8.6 9.3 7.4 6.7 Current ratio (x) 1.6 1.4 0.5 0.6 1.0 1.2 1.0 1.0 Net interest cover (x) 15.2 5.4 2.8 4.3 5.5 4.8 5.9 7.7 Net dividend payout 140.9 0.0 216.5 88.3 124.6 103.0 91.3 79.7 Free cash flow yield n.a. n.a. n.a. 11.2 8.6 10.3 10.7 11.4 Source: FactSet, Daiwa forecasts

Company profile

Wynn Macau is owned by Wynn Resorts and is located in the Macau Peninsula. Wynn Macau currently owns two properties in Macau, Wynn Macau located in Peninsula (opened in September 2006), and Wynn Palace located in Cotai (opened in August 2016). Wynn Resorts announced the expansion of Wynn Palace Phase 2 and Crystal Pavilion, which is expected to begin construction in 2021.

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Wynn Macau (1128 HK): 30 July 2019

Wynning season for Crystal Palace As a prime beneficiary of What can we expect from a strategy that focuses more incremental visitations by air, Wynn’s strategic on premium mass and less on VIPs? shift towards premium Given that Macau’s gaming industry is now largely driven by the rapid growth in mass and mass segment should premium mass visitations, and the Greater Bay Area agenda for Macau to become a potentially yield long- “world-class leisure and tourism destination”, Wynn’s management has come to a strategic term benefits decision to shift away from VIPs and focus instead on the premium mass segment.

As with any change in strategy, we envisage a short-term impact in exchange for potential long-term benefits. In the near term, we expect a negative impact on mass GGR, as we would expect property upgrade work at Wynn to build premium mass gaming and non- gaming amenities to create construction-related disruption. Wynn could mitigate this impact on GGR by carrying out construction in phases (eg, floor-by-floor), and lowering the allocation of hotel rooms to junkets to offset the loss of premium mass quality room inventory undergoing construction.

Nonetheless, we believe there are significant long-term benefits to focusing on the premium mass segment. First, we believe the premium mass segment is the fastest- growing segment in Macau gaming. Based on our China penetration thesis, we expect more direct flights to open between Macau and underpenetrated tier-1 and tier-2 cities in mainland China, thereby bringing in more premium mass patrons into Macau. Second, a better mass-to-VIP mix creates a more sustainable flow of GGR due to greater recurring demand and visitor traffic into properties, hence making the casino operator less susceptible to volatile bouts of political and systematic risks.

The 1Q19 earnings call provided a glimpse of Wynn’s shift in strategy to build up its premium mass share of GGR. Over the past 24 months, Wynn Macau has been building a larger premium mass gaming area, focusing on adding non-gaming facilities, and lower allocation of hotel rooms for junket operators. Due to construction disruption and its Peninsula location, we expect Wynn Macau’s mass GGR to remain flat YoY in 2019, before growing by 7% YoY and 6% YoY in 2020E and 2021E, respectively. On the other hand, we forecast Wynn Palace’s mass GGR to achieve c.9% CAGR from 2019-21 as a result of its strategic location making the property a potential prime beneficiary of incremental visitations by air.

Wynn Macau: mass GGR (HKDm) Wynn Palace: mass GGR (HKDm) 10,000 50% 14,000 300%

40% 12,000 8,000 250% 30% 10,000 200% 6,000 20% 8,000 10% 150% 4,000 0% 6,000 -10% 100% 2,000 4,000 -20% 2,000 50% 0 -30%

0 0%

2012 2018 2011 2013 2014 2015 2016 2017

2010 2016 2017 2018 2019E 2020E 2021E

2019E 2020E 2021E Wynn Macau YoY Change (RHS) Wynn Palace YoY Change (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Wynn’s mass-to-VIP mix reached 40.1% in 1Q19, the highest level it has ever recorded. We think this is a step in the right direction for Wynn, and believe management has shown a willingness to adapt to the changing market environment.

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Wynn Macau (1128 HK): 30 July 2019

Wynn: VIP and mass GGR share of gaming revenue (%) Wynn’s mass GGR share 90% reached 40.1% in 1Q19, 80% the highest it has ever 70% 60% recorded 50% 40% 30% 20% 10%

1Q13 3Q13 1Q14 3Q14 1Q15 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 VIP GGR share Mass GGR share

Source: Company, Daiwa Note: *Total GGR used as denominator to calculate share includes slots

Can Wynn Palace Phase 2 give it a “Wynn”? We view Wynn Palace Phase 2 as an area of potential revenue growth from 2020 onwards. Phase 2 of its Cotai property, scheduled to open in 4Q24 will add 2 new hotels, including a 671-room all-suite hotel connected to its Crystal Pavilion structure and another 700-room all-suite hotel on the north 4-acre land parcel. The additional 1,371 hotel rooms in Wynn Palace Phase 2 will increase the property’s total room count to 3,000, reaching the target previously mentioned by management during its 3Q18 earnings in order for Wynn’s Macau business to reach USD1bn in EBITDA.

Stagnant mass GGR: the case for more hotel rooms Mass GGR at both of Wynn’s properties has stagnated to average levels of HKD2bn and HKD2.37bn, respectively, over the past 5 quarters. Given Macau’s higher-than-expected increase in Mainland visitation growth of 23.5% YoY for 1Q19, Wynn’s stagnant GGR indicates to us that other operators have gained market share at the expense of Wynn.

Wynn Macau: mass GGR (HKDm) Wynn Palace: mass GGR (HKDm) 2,500 3,000

2,500 2,000

2,000 1,500 1,500 1,000 1,000

500 500

0 0 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

Source: Company. Daiwa Source: Company, Daiwa

Normally, when a property is undergoing its ramp-up phase, we would expect mass table yields and mass hold rates to increase as days-per-stay increase leading to potentially longer average time spent at tables. Does this suggest both Wynn Macau and Wynn Palace are approaching the maturity stage of property ramp-up? Over the same past 5 quarter period, mass table yields and mass hold rate at both properties have remained relatively stable, which seems to support this view.

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Wynn Macau (1128 HK): 30 July 2019

Wynn: mass wins/table/day Wynn: mass Hold (%) 18,000 30% 16,000 25% 14,000 12,000 20% 10,000 15% 8,000 6,000 10% 4,000 5% 2,000 0 0% 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 Wynn Macau Wynn Palace Wynn Macau Wynn Palace

Source: Company Source: Company

We believe the additional hotel rooms in Phase 2 will extend the property ramp-up phase for Wynn Palace. We also expect the property upgrades at Wynn Macau, which are likely to be completed by end of 2019, to provide a lift in mass GGR, but the potential incremental impact may be less than that from Wynn Palace due to its Peninsula location. Reiterating our sector call that US-China trade tensions are likely to lead to a further shift in gaming from Las Vegas to Macau, we maintain our view that Wynn Palace stands to be the prime beneficiary of incremental premium mass visitations by air, which has grown 19% YoY in 1H19 (please refer to pages 18-21 of the corresponding sector report).

Wynn Palace: closest to Macau International Airport Wynn Palace is just a 5- minute drive from the Macau International Airport

Source: Google Earth, Daiwa

Wynn has a long track record of creating unique, high-end non-gaming offerings. As a testament to this claim, in the 2019 edition of Forbes Travel Guide, Wynn was: 1) the only Macau operator to be featured on the World’s Best Hotel Rooms list (Encore Macau and Wynn Macau), and 2) Wynn Macau was the only resort worldwide with 8 individual Five- Star awards. If Wynn’s initiatives are well received by mass gaming patrons, we believe it could create room for both properties to extend the length of ramp-up in their maturity stage.

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Bringing Vatican theatre into the future Crystal Pavilion is a The new hotels will be complemented by the Crystal Pavilion, a 1.5m sq ft glass building 1.5m sq ft structure to be structure with a wide range of non-gaming facilities including an art museum and Asian built as part of Phase 2 gourmet food pavilion. One of the key non-gaming facilities is the 600-seat, immersive theatre inspired by the Auditorium della Conciliazione in The Vatican. Wynn indicated the theatre would feature elements such as digital displays on walls and ceilings that give the audience a 270-degree immersive experience, combined with live performances on-stage.

As mentioned in our Wynn initiation report (see page number 131“Encore needed”), we believe this could redefine the entertainment business in Macau and develop new elements to keep the casino cluster consisting of MGM Cotai (Dynamic Theatre) City of Dreams (House of Dancing Water) and the future Londoner Macau as the most exciting performance arts district in Asia.

Uniting the Palaces The Crystal Pavilion will link to Grand Lisboa Palace via a footbridge. As noted in our initiation report, because Wynn and SJM have the widest junket commission spread, we expect Grand Lisboa Palace to gain VIP market share at the expense of Wynn Palace once it opens in 1H20E. However, connecting both properties may create synergies for building mass visitor foot traffic into the area, creating a semi-integrated casino cluster of nearly 6,000 hotel rooms (Wynn Palace and Grand Lisboa Palace combined) on the Cotai Strip.

Wynn Palace: Crystal Pavilion Wynn Palace: Crystal Pavilion

Source: Company Source: Company

Wynn Palace: Crystal Pavilion - Theatre Wynn Palace: Phase 2 luxury hotel tower rooms

Source: Company Source: Company

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Wynn Palace: Crystal Pavilion – Art Museum Wynn Palace: Crystal Pavilion – Asian Gourmet Food Hall

Source: Company Source: Company

What do we currently know about the cost and expected benefits of the project?

Wynn Resorts released more details about its planned expansion during an investor presentation on 11 July, 2019. Here are some of the details:

 Estimated total cost of the 650-room hotel tower in Phase 2 and Crystal Pavilion is USD2bn.

 Construction is likely to start in late 2021, with an estimated 36+ month construction timetable.

 Wynn targets an ROI of 15-20% for the Phase 2 project itself, which is expected to be 4Q24 onwards, which translates into USD300m to USD400m incremental adjusted property EBITDA.

Based on Wynn’s estimates, this implies a 35-47% increase on Wynn Palace’s 2018 adjusted property EBITDA. In order for Wynn to reach this target, we estimate that Wynn Palace would have to achieve a natural CAGR of 1.5-2.9% on Wynn Palace’s 2018 adjusted property EBITDA under the following assumptions:

1) Phase 2 gaming area is able to obtain 125 new-to-market tables (same number of tables as Phase 1), which translates to 19.5% increase in total gaming tables (from current 641 tables)

2) Wynn Palace is able to maintain its current table utilisation for the additional 125 tables and level of operating leverage, and

3) Wynn is able to complete construction in the stated timeframe, ie, end of 2024.

We have not included Wynn Palace Phase 2 into our valuation in the meantime as we await further clarity on details for the respective projects.

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Earnings forecasts and financials We forecast property Wynn recorded strong overall growth in 2018, with GGR and EBITDA increasing by 13% EBITDA for Wynn to YoY and 28% YoY, respectively, thanks to the robust performance of Wynn Palace on drop by 1.4% YoY in increased number of mainland China visitors and relaxation of visa policy. 2019 on 1Q19 negative industry headwinds Looking ahead, we forecast the property EBITDA of Wynn (Peninsula and Cotai as a having a full-year impact group) to drop by 1.4% YoY in 2019 based on: 1) the upward re-adjustment of junket commissions in 4Q18, and 2) relatively weak VIP gaming demand in 1Q19, due to industry headwinds including leakage of junket VIPs to other gaming jurisdictions and smoking ban, having a full-year impact. We believe these negative factors to have subsided towards the end of 2Q19. We forecast its property EBITDA to increase by 5.6% YoY in 2020, and 6.9% YoY in 2021, led by the China penetration story and Wynn Palace’s proximity to Macau International Airport to capture the incremental gaming visitors by air. Also, we forecast mass market GGR to grow by 3.8% YoY in 2019 but VIP GGR to fall by 4.8% YoY, based on the aforementioned junket commission re-adjustment and weaker-than-expected 1Q19 for its VIP segment.

At the property level, we estimate Wynn Macau to record drops of c.3.7% YoY and c.9.5% YoY in property revenue and property EBITDA in 2019, respectively, due to 1H19 headwinds in the VIP segment, followed by recoveries of 2.7% YoY and 3.2% YoY in 2020, and 2.4% YoY and 0.7% YoY in 2021 thanks to a recovery in sector growth on increasing penetration in mainland China and longer days-per-stay.

For Wynn Palace, we believe the headwinds will be less severe than for Wynn Macau as its close proximity to Macau International Airport allows it to capture the incremental gaming patrons arriving by air. We forecast its property revenue to increase by 4.1% YoY in 2019 and grow by 5.4% YoY and 7.5% YoY in 2020 and 2021 respectively, driven by the China penetration story and the possible digestion of the impact of its junket portfolio and commission structure in 2019. Also, we estimate its property EBITDA to expand by 5.9% YoY in 2019, 7.4% YoY in 2020, and 11.4% YoY in 2021.

Wynn Macau: Property EBITDA (HKDm) Wynn Palace: Property EBITDA (HKDm) 12,000 9,000 8,000 10,000 7,000 8,000 6,000 5,000 6,000 4,000 4,000 3,000 2,000 2,000 1,000 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E Wynn Macau Adj. Property EBITDA Wynn Palace Adj. Property EBITDA

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

We expect higher free As Wynn restructured the terms of its loan facilities in December 2018, we expect less cash flow in 2019E as pressure on finance costs in 2019, which should be a positive in terms of Wynn keeping its loan facilities were dividend payment and free cash flow stable. However, we believe the planned capex for restructured in 2018 Wynn Palace Phase 2 is likely to curtail dividend expectations in 2020-21.

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Wynn: dividend declared (HKDm) 10,000 250%

8,000 200%

6,000 150%

4,000 100%

2,000 50%

0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Interim dividends Final dividend Special dividend Dividend payout ratio (RHS)

Source: Company, Daiwa forecasts

Wynn: free cash flow (HKDm) 15,000

10,000

5,000

(5,000)

(10,000)

(15,000) 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Daiwa forecasts

Valuation We are upgrading Wynn to Outperform (2) from Hold (3), and raise our SOTP-based 12- month TP to HKD20.4 from HKD18.2. Using our SOTP valuation based on 2019-20E average EV/EBITDA, we assign a 13x multiple for Wynn Palace and 11x for Wynn Macau. We lower our 2019E and 2020E earnings on the expectation that the company’s strategic transition will cause a drag on GGR in the near term.

Wynn: 1-year forward EV/EBITDA band Wynn is currently (x) trading 0.8SD below its 36 past-9-year average 1- 31 year forward EV/EBITDA 26 multiple of 15.6x 21

6 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 EV/Daiwa EBITDA

Source: Bloomberg, Daiwa

Wynn: SOTP valuation Breakdown Metrics 2019-20E SOTP (HKDm) Value per share (HKD) % of SOTP Wynn Macau 11x adj. property EBITDA 57,519 11.1 54% Wynn Palace 13x adj. property EBITDA 89,755 17.3 85% Corporate Expenses 11x (20,230) -3.9 -19% Net Debt (20,903) -4.0 -20% Price Target (5,189m shares) 106,141 20.4 100%

Source: Daiwa forecasts

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Risks Slower-than-expected One of the key assumptions for our upgrade to an Outperform (2) call is continued growth visitations is the key risk in mainland China visitations by air, as Wynn Palace is close to Macau International to our call Airport. Slower-than-expected visitation growth would have an impact on Wynn’s top-line. Gaming concession is another key risk to our call. Our call would be impacted if Macau’s government were to introduce new terms and conditions regarding concession renewal (ie, gaming tax hike). Moreover, Macau’s government has no obligation to renew any of the concessionaires. Wynn’s concession expires on 26 June 2022.

Other key downside risks include visa tightening and/or mainland China’s anti-corruption drive, which could lead to a drop in visitations as seen during 2014-16. As Wynn caters more to VIP/junket players compared with its competitors, any headwinds against junkets would also impact Wynn. Moreover, with several new properties entering the Cotai market, offering new premium mass (eg, The Londoner Macau, Grand Lisboa Palace) and luxury VIP offerings (The Mansion Villas at MGM Cotai), we also see competitive pressures as another risk to our call. Other China macro factors such as CNY/USD depreciating faster than expected and severe Unionpay headwinds are other potential downside risks.

Wynn: quarterly GGR, 2012-1Q19 (HKDm) Wynn: quarterly EBITDA, 2012-1Q19 (HKDm) 14,000 150% 3,500 100% 12,000 3,000 80% 100% 60% 10,000 2,500 40% 8,000 50% 2,000 20% 6,000 1,500 0% 0% 4,000 1,000 (20%) (50%) 2,000 500 (40%)

0 (100%) 0 (60%)

1Q14 3Q15 1Q17 3Q18 1Q12 3Q12 1Q13 3Q13 3Q14 1Q15 1Q16 3Q16 3Q17 1Q18 1Q19

3Q14 1Q16 1Q12 3Q12 1Q13 3Q13 1Q14 1Q15 3Q15 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

VIP GGR (HKDmn) Mass GGR (HKDmn) Wynn EBITDA (HKDmn) YoY Change

Source: Company Source: Company

Wynn: VIP rolling chips by quarter, 2012-1Q19 (HKDm) Wynn: quarterly VIP GGR, 2012-1Q19 (HKDm) 300,000 150% 9,000 120% 8,000 100% 250,000 100% 7,000 80% 200,000 6,000 60% 50% 40% 5,000 150,000 20% 4,000 0% 0% 100,000 3,000 (20%) 2,000 50,000 (50%) (40%) 1,000 (60%)

0 (100%) 0 (80%)

1Q15 1Q19 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18

3Q14 3Q18 1Q12 3Q12 1Q13 3Q13 1Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 1Q19 VIP Rolling (HKDmn) YoY Change VIP GGR (HKDmn) YoY Change

Source: Company Source: Company

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Wynn: quarterly mass drop, 2012-1Q19 (HKDm) Wynn: quarterly mass GGR, 2012-1Q19 (HKDm) 25,000 120% 5,000 80% 100% 60% 20,000 4,000 80% 40% 15,000 60% 3,000 40% 20% 10,000 2,000 20% 0% 0% 5,000 1,000 (20%) (20%)

0 (40%) 0 (40%)

3Q15 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

1Q12 3Q17 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q18 3Q18 1Q19 Mass drop (HKDmn) YoY Change Mass GGR (HKDmn) YoY Change

Source: Company Source: Company

Wynn: net debt to EBITDA (%), 2011-21E Wynn: ROIC (%), 2014-21E 900% 80% 800% 70% 700% 600% 60% 500% 50% 400% 40% 300% 200% 30% 100% 20% 0% (100%) 10% (200%) 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company Source: Company

Wynn: current director profiles Year of employment by Years employed by Directors Age Current position Wynn Wynn Matthew O. Maddox 43 Executive Director and Chief Executive Officer 2002 17 Ian Michael Coughlan 59 Executive Director and President 2007 12 Linda Chen 52 Executive Director and Chief Operating Officer 2002 17 Stephen A. Wynn 77 Former Chairman of the Board, Executive Director Founder, resigned on 7 Feb 2018 and Chief Executive Officer Maurice L. Wooden 57 Non-executive Director 2005 14 Craig S. Billings 46 Non-executive Director 2017 2 Allan Zeman, GBM, GBS, JP 70 Chairman of the Board and Independent Non- executive Director 2002 17 Jeffrey Kin-fung Lam, GBS, JP 67 Independent Non-executive Director 2009 10 Bruce Rockowitz 60 Independent Non-executive Director 2009 10 Nicholas Sallnow-Smith 69 Independent Non-executive Director 2009 10

Source: Company

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Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); Utilities; Steel Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Strategist for Asia Pacific; Strategy (Regional) Henny JUNG (82) 2 787 9182 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap) Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Head of Automobiles; Transportation and Industrials (Hong Kong/China) Fiona LIANG (852) 2532 4341 [email protected] TAIWAN Industrials (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Jay LU (852) 2848 4970 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Automobiles and Components (Hong Kong/China) Nora HOU (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] Banking; Diversified financials; Insurance; Strategy Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Kevin JIANG (852) 2532 4383 [email protected] IT/Technology Hardware (Automation & PC Hardware) Kylie HUANG (886) 2 8758 6248 [email protected] Banking (China) Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Andrew CHUNG (852) 2773 8529 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Gaming (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Capital Goods; Utilities Carlton LAI (852) 2532 4349 [email protected]

Small/Mid Cap (Hong Kong/China) SINGAPORE Dennis IP (852) 2848 4068 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Anna LU (852) 2848 4465 [email protected] David LUM (65) 6228 6740 [email protected] Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China) Banking; Property and REITs Jonas KAN (852) 2848 4439 [email protected] Royston TAN (65) 6228 6745 [email protected] Head of Hong Kong and China Property Oil and Gas; Capital Goods Cynthia CHAN (852) 2773 8243 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Property (China) Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer Selwyn CHENG (852) 2773 8716 [email protected] Custom Products Group JAPAN Jack CHAN (852) 2773 8731 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Strategy (Regional) Custom Products Group

PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

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conflict of interest that may affect the objectivity of this research.

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Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 67.99% Hold** 22.52% Sell*** 9.49% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2019. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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