Completed 22 Aug 2016 06:34 AM HKT Disseminated 22 Aug 2016 06:34 AM HKT Asia Pacific Equity Research 22 August 2016
Overweight Wynn Macau 1128.HK, 1128 HK Wynn Palace finally opens, and it lives up to the hype Price: HK$12.30 ▼ Price Target: HK$13.50 Previous: HK$14.00
Wynn Palace opens today, with all its 1,706 rooms, gaming area, retail, F&B Hong Kong and non-gaming facilities fully operational from Day 1. This US$4.2b property, Regional Gaming and Lodging the most expensive project in Macau so far, boosts its room inventory by AC DS Kim c170%, while the number of tables in operation grows by c50% (from 420 to (852) 2800-8597 620) (Table 1). It also increases the industry’s total table and room counts by [email protected] 2% and 5% (or 9% if we only include hotels run by six concessionaires). Bloomberg JPMA DSKIM
See page 17 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
www.jpmorganmarkets.com DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Key catalysts for the stock price: Upside risks to our view: Downside risks to our view: • Profit ramp up of Wynn Palace • Additional table grant from government (we have • RMB devaluation could dampen gaming demand • Sequentially improving gaming demand modelled 100+25+25 tables newly granted by from China & could further tighten liquidity within • More positive regulatory environment would government) junket system. improve investment sentiment and drive up share • New positive policy (such as further visa policy • Unfavorable regulatory changes (e.g. China price for the sector loosening, allowing smoking lounges inside casinos) capital outflow control, junket industry regulation, • Stronger-than-expected improvement in industry full smoking ban, etc.) demand • Stronger-than-expected competitive pressure from new Cotai casinos
Key financial metrics (HK$m) FY15A FY16E FY17E FY18E Valuation and price target basis Reported revenues (net) 19,096 20,271 26,221 28,315 Revenue growth (%) -35% 6% 29% 8% Our Jun-17 price target of HK$13.5 is derived from a DCF EBITDA (reported) 4,032 3,784 6,238 7,273 methodology, assuming 7.2% WACC and 3% terminal growth and 50% EBITDA margin (%) -49.3% -6.2% 64.9% 16.6% discount to terminal value. Our PT implies 16x and 13x EV/EBITDA on Net profit 2,410 1,413 2,516 3,432 2017E and 2018E. EPS (HK$, ex-one-offs) 0.56 0.45 0.49 0.66 EPS growth (%) -57% -20% 9% 36% DPS (HK$) 1.05 0.60 0.60 0.60 Valuation and price target basis Operating cash flow 2,480 5,349 6,498 7,018 HK$ Value (mn) Per-share % of total Capex -12,710 -4,333 -2,000 -1,000 FCFs in '17-22E 29,740 5.7 42% Free cash flow (10,230) 1,017 4,498 6,018 Net debt/equity (%) 599% 1151% 1509% 1192% Terminal value 67,595 13.0 96% ROE (%) 52% 71% 120% 174% Less: '17E net debt -27,272 -5.3 -39% Key assumptions (HK$m) FY15A FY16E FY17E FY18E Fair value 70,063 13.5 100% Gross revenues 24,318 24,824 30,811 33,051 Implied EV/EBITDA - 2017E 15.6 x YoY (%) -36% 2% 24% 7% 2018E 13.1 x VIP 12,868 10,959 9,766 10,339 YoY (%) -46% -15% -11% 6% Mass & slots 8,975 10,726 15,864 17,214 YoY (%) -21% 20% 48% 9% Non-gaming and others 2,475 3,140 5,180 5,498 YoY (%) -22% 27% 65% 6% Adjusted EBITDA 4,681 4,880 6,442 7,480 Source: J.P. Morgan estimates YoY (%) -44% 4% 32% 16% Adjusted EBITDA margin (%) 19.3% 19.7% 20.9% 22.6% J.P. Morgan estimates vs. consensus Industry assumptions (US$m) FY15A FY16E FY17E FY18E EBITDA (HK$ m) FY17E FY18E Macau - Gross gaming revenue 28.9 27.0 28.6 30.6 JPMe 6,442 7,480 YoY (%) -34% -7% 6% 7% Consensus 7,052 7,492 VIP GGR 14.4 12.0 12.2 13.0 Difference % -9% 0% YoY (%) -45% -17% 2% 6% Source: Bloomberg, J.P. Morgan estimates. Mass & slots GGR 14.5 15.0 16.4 17.6 YoY (%) -18% 3% 9% 7% Source: Company, J.P. Morgan estimates
Macau gaming valuations Price Mkt Cap Rating EV/EBITDA (x) P/E (x) Dividend yield YTD (LC) (US$B) 17E 18E 17E 18E 17E 18E stock perf Sands China 30.5 31.7 OW 15.2 13.7 20.7 18.1 6.5% 6.5% 15% Galaxy 26.7 14.7 OW 10.3 9.9 18.2 16.7 2.2% 2.5% 9% Wynn Macau 11.6 7.8 OW 14.0 11.8 23.9 17.5 5.2% 5.2% 28% MGM China 11.6 5.7 N 15.6 12.2 28.0 24.1 1.5% 1.0% 20% SJM 5.2 3.8 UW 12.0 10.7 16.2 30.7 4.0% 3.9% -6% MPEL 13.4 7.6 N 9.8 9.0 20.3 20.5 4.8% 4.8% -20% Macau avg 12.8 11.2 21.2 21.3 4.0% 4.0% 8% Source: Bloomberg, Company and J.P. Morgan estimates. Prices are as of 19 Aug 2016 market close.
2 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Our Palace estimates. We forecast Palace to print property EBITDA of US$98m/$457m/$596m for 2H16E/2017E/2018E, with GGR market shares of 1.6%/5.4%/5.9% respectively. But, "incremental" GGR/EBITDA should be meaningfully lower, due to the inevitable cannibalization on its peninsula casino (esp given sizable table shifts). As a result, we expect group-wide property EBITDA to grow from current run-rate of US$170m/quarter (luck-adjusted 2Q16) to c$270m/qtr by 2018E, growing over 60%. 4Q16 will be the first test on the Palace’s performance & profitability, as it will be the first full quarter after the opening. That said, 3Q16 results can still provide a good benchmark on the scale of cannibalization on existing peninsula property, since the tables have already been shifted starting mid-August (i.e., the impact from big reduction in tables at peninsula will be seen immediately from 3Q16). Other takeaways from the pre-opening tour: (1) Accessibility: the property is not easy to access on foot, as the pedestrian way from the nearest property (City of Dreams) is blocked by the construction of government project (LRT station); but management doesn’t see it as an issue, because the vast majority of its target patrons will most likely access by car (limo, taxi, or shuttle bus) anyway. (2) Layout: overall property is very easy to navigate (see Figure 21 for floor-plan), with main gaming floor in the centre and high-end gaming lounges surrounding the lake (to provide a good view on fountain show). (3) Mr. Steve Wynn and his team sounded very upbeat and confident throughout the tour, though they did not provide any “numbers” (e.g. OPEX guidance, ROIC target etc). Also, management seems to be comfortable with its EBITDA guidance of US$630- 850m for Palace in 2017E (c35-85% above JPMe). (4) It remains to be seen where the additional 50 gaming tables (25 in January 2017, 25 in January 2018) will be allocated, which management will decide depending on the EBITDA/table situation at two properties. (5) Its retail has all the “usual suspects” for luxury brands, except for Louis Vuitton. Please see inside for our detailed guide to the property & photos. Table 1: Wynn Macau – summary of capacity by property
Wynn Macau Wynn Palace Total (Peninsula) (Cotai) Hotel rooms 1,008 1,706 2,714 Gaming tables* 271 349 620 VIP 77 70 147 Mass 194 279 473 Slot machines 780 1,145 1,925 Casino space (Sq.f.) 280,000 495,000 775,000 Retail size (Sq.f.) 57,000 200,000 257,000 Note: Gaming table number is based on its plan after the opening. Source: J.P. Morgan estimates, Company data.
3 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
JPM’s guide to Wynn Palace
Figure 1: Wynn Palace Exterior at night
Source: Company data.
Gaming product Wynn Palace’s casino area totals 495k sqf, almost the double if compared to 280k sqf at its existing property. This is the 2nd largest casino area in Macau, only after gaming area for Galaxy Phase I & II combined (about 700-750k sq.f.). There are total c350 gaming tables at Wynn Palace, including c250 tables shifted from existing property. VIP gaming (70 tables). There are currently three junket rooms at Wynn Palace, run by Sun City, Guangdong (Neptune), and TakChun. There is also a direct VIP room (“Wynn Club”) and a few private salons (near penthouse & garden villas). Junket VIP rooms seemingly allow smoking at the tables (as per our checks with the junket), though we could not confirm this with management; in any case, each VIP room has a large balcony looking over the lake, where players can smoke in an open-air area. According to management, there are currently about 70 VIP tables in total at Wynn Palace. Premium mass (30-40 tables). There are two premium mass lounges, named as Chairman’s Club & Diamond Club, which in total features about 30-40 gaming tables based on our count. We understand smoking is not allowed at the tables here, unlike some of its competitors’ (which have ‘reclassified’ tables from VIP), though we couldn’t confirm this with management. We believe these lounges, especially the Chairman’s Club, offers the most high-end & luxurious premium
4 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
mass area in Macau (hence, in the world), which in fact looks better than most other VIP rooms in town. Mass market floor, located in the centre of the property, is easily accessible from various sides. We estimate there are 240-250 tables on the main floor, which looks quite full (or just about right for the size of area, in our view) despite some concerns following the lower-than-expected table grant. There are a few smoking lounges on the floor (but no outdoor balcony, stating the obvious). Figure 2: Wynn Palace - junket VIP room Figure 3: Wynn Palace - premium mass (Diamond club)
Source: J.P. Morgan. Source: J.P. Morgan.
Figure 4: Wynn Palace - main gaming floor (mass market)
Source: J.P. Morgan.
Hotel rooms Wynn Palace brings in a total of 1,706 hotel rooms, suites, and villas. Palace Room: There are 836 Palace Rooms (about 50% of total room inventory), with room size of 730-840 sq ft (68-78 sqm). The quality of this standard room is already comparable to the suites at other hotels, in our view, although the room rates are not too different from those too (>US$250/night for weekday, >$400 for weekend). The Suites: There are 843 Suites at Wynn Palace in four different types (Fountain / Executive / Parlor / Fountain Salon Suites), with the room sizes ranging between 915 to 2900 sq.f. (85-170 sqm). Stating the obvious, the room quality is among the best in Macau with amazing attention to detail from floor to the ceiling. Room rates vary depending on the type, from
5 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
cUS$400/$550(weekday/weekend) for Fountain Suite to US$3,000/4,000for Fountain Salon Suite. Penthouse and Garden Villa: There are 4 Penthouses (average room size of 3,900 sqf, or 362 sqm) and 5 Garden Villas (average room size of ~8,000 sqf, or ~743 sqm), which are overwhelmingly luxurious & uber-upscale (e.g., each Garden Villa even features a full-blown private garden with 45-meter-long swimming pool). According to management, these rooms will only be used to comp gaming customers (not for cash-sales). Figure 5: Palace room at Wynn Palace Figure 6: Fountain Suite at Wynn Palace
Source: Company data. Source: Company data.
Figure 7: Parlor Suite at Wynn Palace Figure 8: Fountain Salon Suite at Wynn Palace
Source: Company data. Source: Company data.
6 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Figure 9: Penthouse (living room) at Wynn Palace Figure 10: Penthouse (bed room) at Wynn Palace
Source: Company data. Source: Company data.
Figure 11: Garden Villa (living room) at Wynn Palace Figure 12: Garden Villa (dining room) at Wynn Palace
Source: Company data. Source: Company data.
Other non-gaming facilities Retail and F&B: Retail space totals 200k sq ft (18,580 sqm), dubbed “Wynn Esplanade”, with over 50 luxury brands (such as Graff Diamonds, Audemars Piguet, Hermes and Chanel). There are 13 F&B outlets, mostly fine-dining options (that said, there’s also Starbucks, which is in fact the most luxurious Starbucks that we’ve seen). Performance Lake (covers an area of 288k sqf). The fountain show, which takes place every 15 minutes and lasts for 3 minutes, is beautifully choreographed with lighting and music (ranging from classical to pop, Broadway show to Chinese). In our view, the performance lake brings in a truly magnificent (yet free of charge) non-gaming experience, which we think will soon become the ‘must-see’ attraction in Macau. The SkyCab (cable-car): The SkyCab moves around the performance lake & offers a great view of the lake and Cotai. The 34 air-conditioned gondolas can seat 6 guests per cab and transport 18,000 guests per day. The SkyCab takes 10 minutes for each round trip & costs MOP100/person.
7 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Artworks. Lobbies and common area are filled with lavish display of art collections in various themes, such as floral sculptures designed by Preston Bailey, ancient Chinese (such as, Qing-dynasty Buccleuch vases), Western & modern (such as Tulips, by Jeff Koons). Others: The property also has the largest spa in Macau (48k sqf), as well as the multi-function ballroom/theater. Figure 13: Wing Lei Palace (Chinese) Figure 14: SW Steakhouse
Source: Company data Source: Company data
Figure 15: Wynn Macaron Figure 16: Café Fontana (International buffet)
Source: Company data Source: Company data
8 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Figure 17: Carousel Floral Sculpture by Preston Bailey Figure 18: Ferris Wheel Floral Sculpture by Preston Bailey
Source: Company data Source: Company data
Figure 19: Tulips by Jeff Koons Figure 20: Amphora by Viola Frey
Source: Company data Source: Company data
9 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Figure 21: Wynn Palace floor plan
Source: Company data.
10 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Our estimates and key assumptions
Table 2: Wynn Macau: - quarterly P&L and our forecasts (adjusted property EBITDA, before royalty & corporate expense) (US$ m) 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 3Q16E 4Q16E 2016E 2017E 2018E Group-wide (company total) Gross revenue 895 791 741 694 3,116 753 808 684 920 3,165 3,924 4,207 YoY % -40% -37% -38% -29% -37% -16% 2% -8% 33% 2% 24% 7% VIP 479 453 387 339 1,660 379 471 255 305 1,410 1,256 1,330 Mass/Slot 327 260 277 279 1,137 298 269 330 455 1,352 2,001 2,169 Non-gaming 88 78 77 76 319 77 68 99 160 404 666 707 (Gaming tax) -323 -285 -266 -248 -1,122 -272 -295 -235 -309 -1,111 -1,317 -1,416 (Opex) -359 -333 -312 -286 -1,285 -290 -322 -297 -411 -1,320 -1,649 -1,690 Adj. prop EBITDA 212 173 163 160 709 191 190 152 200 734 958 1,100 YoY % -45% -44% -50% -34% -44% -10% 10% -6% 25% 4% 31% 15% EBITDA margin 23.7% 21.9% 22.0% 23.1% 22.7% 25.4% 23.6% 22.3% 21.7% 23.2% 24.4% 26.2% Wynn Macau (Peninsula) Gross revenue 895 791 741 694 3,116 753 808 542 506 2,610 1,972 1,964 YoY % -40% -37% -38% -29% -37% -16% 2% -27% -27% -16% -24% 0% VIP 479 453 387 339 1,660 379 471 219 198 1,267 742 764 Mass/Slot 327 260 277 279 1,137 298 269 254 241 1,062 958 929 Non-gaming 88 78 77 76 319 77 68 69 67 281 272 272 (Gaming tax) -323 -285 -266 -248 -1,122 -272 -295 -190 -178 -936 -685 -682 (Opex) -359 -333 -312 -286 -1,285 -290 -322 -217 -210 -1,038 -786 -777 Adj. prop EBITDA 212 173 163 160 709 191 190 135 118 636 501 505 YoY % -45% -44% -50% -34% -44% -10% 10% -17% -26% -10% -21% 1% EBITDA margin 23.7% 21.9% 22.0% 23.1% 22.7% 25.4% 23.6% 25.0% 23.4% 24.4% 25.4% 25.7% Wynn Palace (Cotai) Gross revenue 142 414 556 1,952 2,242 YoY % 251% 15% VIP 36 107 143 515 566 Mass/Slot 75 214 289 1,043 1,240 Non-gaming 31 93 123 394 436 (Gaming tax) -45 -131 -175 -632 -733 (Opex) -80 -202 -282 -863 -913 Adj. prop EBITDA 17 81 98 457 596 YoY % 365% 30% EBITDA margin 12.0% 19.7% 17.7% 23.4% 26.6% Source: Company reports and J.P. Morgan estimates.
11 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Table 3: Wynn Macau: Revenue and profit forecasts by property and segment (HK$m) 2013 2014 2015 2016E 2017E 2018E Gross revenues 41,607 38,241 24,318 24,824 30,811 33,051 YoY (%) 9% -8% -36% 2% 24% 7% Wynn Macau & Encore 41,607 38,241 24,318 20,443 15,477 15,427 YoY (%) 9% -8% -36% -16% -24% 0% Wynn Palace 4,381 15,333 17,624 YoY (%) 250% 15% Adjusted EBITDA 8,867 8,423 4,681 4,880 6,442 7,480 YoY (%) 15% -5% -44% 4% 32% 16% Wynn Macau & Encore 10,115 9,571 5,412 4,860 3,811 3,843 YoY (%) 14% -5% -43% -10% -22% 1% Wynn Palace 765 3,555 4,629 YoY (%) 365% 30% (Royalty fee) -1,248 -1,148 -731 -745 -924 -992 Adjusted EBITDA margin 21.3% 22.0% 19.3% 19.7% 20.9% 22.6% Wynn Macau & Encore 24.3% 25.0% 22.3% 23.8% 24.6% 24.9% Wynn Palace 17.5% 23.2% 26.3% Revenue forecasts by segment Gross revenues 41,607 38,241 24,318 24,824 30,811 33,051 YoY (%) 9% -8% -36% 2% 24% 7% VIP 28,670 23,663 12,868 10,959 9,766 10,339 YoY (%) 9% -17% -46% -15% -11% 6% Mass table 7,841 9,368 7,507 9,295 13,886 15,075 YoY (%) 17% 19% -20% 24% 49% 9% Slot machine 1,905 2,041 1,468 1,430 1,978 2,139 YoY (%) -1% 7% -28% -3% 38% 8% Non-gaming & etc 3,191 3,169 2,475 3,140 5,180 5,498 YoY (%) 2% -1% -22% 27% 65% 6% Source: Company reports and J.P. Morgan estimates.
Figure 22: Wynn Macau: Revenue split by segment Figure 23: Wynn Macau: EBITDA split by segment 100% 100% 8% 8% 10% 13% 17% 17% 16% 16% 20% 18% 21% 21% 80% 23% 30% 80% 37% 43% 41% 60% 51% 52% 60% 50% 62% 65% 40% 40% 71% 70% 69% 62% 53% 20% 44% 20% 43% 32% 31% 34% 18% 17% 0% 0% 8% 10% 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E VIP Mass & slot Non-gaming VIP Mass & slot Non-gaming
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
12 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Figure 24: Wynn Macau: EBITDA, capex and SH return Figure 25: Wynn Macau: Net debt and leverage ratio (US$m) (USDm) 2,500 4,000 7.0x 6.0x 3,000 2,000 5.0x 1,500 2,000 4.0x 3.0x 1,000 1,000 2.0x 1.0x 500 0 0.0x 0 -1,000 -1.0x 2013 2014 2015 2016E 2017E 2018E 2019E 2013 2014 2015 2016E 2017E 2018E 2019E Wynn - EBITDA Capex Shareholder return Wynn net debt (LHS) Wynn net debt(cash)/EBITDA (RHS)
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
Valuations
Table 4: Wynn Macau: DCF analysis (based on 7.2% WACC, and 3% terminal g)
Terminal (HK$ m) 2017E 2018E 2019E 2020E 2021E 2022E Value Gross revenues 30,811 33,051 34,856 36,266 37,536 38,849 YoY (%) 24% 7% 5% 4% 4% 4% EBITDA 6,238 7,273 7,955 8,387 8,831 9,272 YoY (%) 65% 17% 9% 5% 5% 5% Margin (%) 20.2% 22.0% 22.8% 23.1% 23.5% 23.9% (Changes in working capital) 167 -346 322 752 -100 450 (Capex) -2,000 -1,000 -1,200 -1,200 -1,200 -1,200 Capex as % of revenues 6.5% 3.0% 3.4% 3.3% 3.2% 3.1% (Income tax and others) -1,008 -1,001 -972 -862 -689 -724 Free cash flows (FCF) 3,396 4,926 6,106 7,077 6,841 7,798 191,364 PV of FCF 3,396 4,596 5,314 5,745 5,181 5,509 135,190 (HK$ m) Value Comments Enterprise value 164,930 Sum of all present values Less: concession risk adjustment -67,595 50% discount on terminal value Less: net debt -27,272 End-2017E Equity value 70,063 Fair value per share (HK$/shr) 13.5 Implied EV/EBITDA at PT (x) 2017E 15.6 2018E 13.1 Implied P/E at PT (x) 2017E 27.8 2018E 20.4 Current price (HK$/share) 11.6 Upside % 16% Source: J.P. Morgan estimates.
13 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Figure 26: Wynn Macau – Historical EV/EBITDA (current rolling) Figure 27: Wynn Macau – Historical P/E (current rolling) (HK$) (x) (HK$) (x) 40 35 40 50 35 30 35 40 30 +1 S.D. 25 30 +1 S.D. 25 25 Average = 18x 20 30 20 20 Average = 22x 15 15 15 20 -1 S.D. -1 S.D. 10 10 10 10 5 5 5 0 0 0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Wynn share price (LHS) EV/EBITDA (RHS; current rolling) Wynn share price (LHS) P/E (RHS; current rolling)
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
Investment Thesis, Valuation and Risks
Wynn Macau (Overweight; Price Target: HK$13.50) Investment Thesis We are OW on Wynn Macau with a Jun-17 PT of HK$13.5. That said, ideally, we think the stock should be bought lower given the risk/reward after strong YTD move (up c30% vs. Hang Seng Index’s +5% ytd).
Despite this, we stand pat on OW rating because, longer-term, we still see a path for Wynn to exhibit substantial growth with a multi-year ramp in Palace – i.e., we forecast its EBITDA & EPS to almost double by 2020E (vs. 2015), which would be the fastest growth among the six. Pace of ramp-up is something to be mindful of (especially given the upped market expectations after its Investor Day), but we are confident that Palace can ultimately become among the most profitable casinos in the world.
We just think that, at this level (14x EV/EBITDA for 2017E), risk-averse investors may opt to wait for an entry point to build new positions given the expected stock volatility in the near term.
Valuation Our Jun-17 price target of HK$13.5 is derived from a DCF methodology, assuming 7.2% WACC and 3% terminal growth and a 50% discount to terminal value. Our PT implies 16x EV/EBITDA on 2017E (or 13x on 2018E), largely in-line with industry average.
Risks to Rating and Price Target Downside risks include: (1) Execution risks related to Wynn Palace; (2) RMB devaluation could dampen gaming demand from China & could further tighten liquidity within the junket system; (3) Unfavorable regulatory changes (e.g., China capital outflow control, junket industry regulation, full smoking ban, potential costs associated with concession renewal, etc.); (4) Stronger-than-expected competitive pressure from new Cotai casinos
14 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Wynn Macau: Summary of Financials Profit and Loss Statement Balance Sheet HK$ in millions, year end Dec FY14A FY15A FY16E FY17E FY18E HK$ in millions, year end Dec FY14A FY15A FY16E FY17E FY18E Gross revenues 38,241 24,318 24,824 30,811 33,051 Cash and cash equivalents 10,790 6,731 5,332 5,720 7,186 VIP gaming 23,663 12,868 10,959 9,766 10,339 Receivable 571 458 467 580 622 Mass gaming (including slots) 11,409 8,975 10,726 15,864 17,214 Inventories 186 180 184 228 244 Non-gaming 3,169 2,475 3,140 5,180 5,498 Other current assets 440 659 672 835 895 (Rebates & promo allowances) (8,796) (5,222) (4,554) (4,590) (4,736) Current assets 11,989 8,030 6,655 7,363 8,948 Reported revenue 29,445 19,096 20,271 26,221 28,315 Net fixed assets 19,195 31,072 33,811 33,166 31,522 (Gaming taxes & premiums) (13,885) (8,701) (8,638) (10,238) (11,006) Intangibles and goodwill 2,373 2,277 2,182 2,086 1,991 (Other operating expenses) (5,933) (5,481) (7,231) (9,198) (9,467) Other non-current assets 592 905 924 997 800 Adjusted EBITDA 8,423 4,681 4,880 6,442 7,480 Total assets 34,150 42,284 43,571 43,612 43,261 (Pre-opening, stock option & others) (471) (649) (1,097) (204) (207) a. EBITDA 7,952 4,032 3,784 6,238 7,273 Payables 2,009 1,621 2,655 2,995 2,413 (D&A) (986) (1,000) (1,690) (2,740) (2,740) Short-term debt 0 0 0 0 0 EBIT 6,966 3,032 2,094 3,498 4,534 Others 5,410 4,288 4,750 4,896 5,252 Net interest income / (expense) (457) (564) (678) (975) (1,092) Current liabilities 7,418 5,909 7,405 7,891 7,665 Other income / (expense) - - - - - Long-term debt 18,605 31,318 32,992 32,992 32,545 Pretax income 6,469 2,417 1,417 2,523 3,442 Other long-term liabilities 1,083 955 771 922 924 (Income tax) (24) (6) (4) (7) (9) Total liabilities 27,106 38,181 41,169 41,805 41,134 Net Income 6,445 2,410 1,413 2,516 3,432 Minority interests (MI) - - - - - Shareholders' equity 7,044 4,102 2,403 1,807 2,128 Shares Outstanding (Millions) 5,188 5,187 5,187 5,187 5,187 Shareholders' equity and MI 7,044 4,102 2,403 1,807 2,128 . a. EPS (HK$) 1.24 0.46 0.27 0.49 0.66 Gross debt 18,605 31,318 32,992 32,992 32,545 DPS (HK$) 0.70 1.05 0.60 0.60 0.60 Net Debt/(cash) 7,815 24,587 27,660 27,272 25,359 Payout ratio 56% 226% 220% 124% 91% a. BVPS (HK$) 1.36 0.79 0.46 0.35 0.41 Core EPS (ex-one offs) (HK$) 1.30 0.56 0.45 0.49 0.66 Core EBITDA (ex-one offs) 8,218 4,469 4,684 6,238 7,273 Cashflow Statement Ratio Analysis HK$ in millions, year end Dec FY14A FY15A FY16E FY17E FY18E HK$ in millions, year end Dec FY14A FY15A FY16E FY17E FY18E Net profit 6,445 2,410 1,413 2,516 3,432 Gross revenue growth (8.1%) (36.4%) 2.1% 24.1% 7.3% Depreciation & amortization 986 1,000 1,690 2,740 2,740 Adj. EBITDA growth (5.0%) (44.4%) 4.3% 32.0% 16.1% (Change in working capital) (2,377) (1,755) 1,469 167 (346) EBITDA growth (6.2%) (45.6%) 4.8% 33.2% 16.6% Others 703 825 778 1,075 1,192 EBIT growth (10.8%) (56.5%) (30.9%) 67.0% 29.6% Cashflow from operations 5,758 2,480 5,349 6,498 7,018 EPS growth (16.3%) (62.6%) (41.4%) 78.1% 36.4% . Capex (8,312) (12,710) (4,333) (2,000) (1,000) Margins (based on gross revenue) Maintenance (362) (464) (400) (1,000) (1,000) Adj. EBITDA margin 22.0% 19.3% 19.7% 20.9% 22.6% Expansionary (7,950) (12,246) (3,933) (1,000) 0 EBITDA margin 21.5% 18.4% 18.9% 20.2% 22.0% Others 1,760 34 2 0 0 EBIT margin 18.2% 12.5% 8.4% 11.4% 13.7% Cashflow from investments (6,552) (12,677) (4,331) (2,000) (1,000) Net margin 17.7% 11.9% 9.3% 8.2% 10.4% a. Change in borrowings 6,895 12,809 1,674 0 (448) P/E (x) 9.9 26.5 45.2 25.4 18.6 Dividends paid (8,716) (5,447) (3,112) (3,112) (3,112) Core P/E (x) 9.5 22.0 27.6 25.4 18.6 Others (718) (1,227) (980) (997) (993) Core EV/EBITDA (x) 8.3 19.0 18.8 14.0 11.8 Cashflow from financing (2,538) 6,135 (2,418) (4,110) (4,552) Dividend yield 5.7% 8.5% 4.9% 4.9% 4.9% FCF yield (4.0%) (16.0%) 1.6% 7.0% 9.4% FCF to the firm (2,554) (10,230) 1,017 4,498 6,018 Recurring eFCF yield 7.6% 2.3% 7.4% 6.9% 7.7% YoY change (136.1%) 300.5% (109.9%) 342.4% 33.8% Price/BV (x) 9.1 15.6 26.5 35.3 30.0 Recurring FCF to equity 4,837 1,451 4,750 4,396 4,926 YoY change (50.6%) (70.0%) 227.4% (7.5%) 12.1% Net debt to equity (x) 1.1 6.0 11.5 15.1 11.9 Interest coverage (x) 18.4 8.3 7.2 6.6 6.8 ROE 83.1% 52.0% 71.1% 119.5% 174.5% Cash ROIC (EBITDA/invested capital) 71.6% 17.7% 12.5% 20.5% 24.9% Source: Company reports and J.P. Morgan estimates.
15 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
JPM Q-Profile Wynn Macau Ltd. (MACAU / Consumer Discretionary) As Of: 04-Aug-2016 [email protected] Local Share Price Current: 11.94 12 Mth Forward EPS Current: 0.57 40.00 2.50 35.00 2.00 30.00
25.00 1.50 20.00
15.00 1.00
10.00 0.50 5.00
0.00 0.00 Jul/01 Jul/04 Jul/07 Jul/10 Jul/13 Jul/16 Apr/02 Apr/05 Apr/08 Apr/11 Apr/14 Jan/03 Oct/03 Jan/06 Oct/06 Jan/09 Oct/09 Jan/12 Oct/12 Jan/15 Oct/15 Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14
PE (1Yr Forward) Current: 21.0x P/E Relative to Index Current: 30.0x 1.00 0.90 25.0x 0.80 20.0x 0.70 0.60 15.0x 0.50 0.40 10.0x 0.30 0.20 5.0x 0.10
0.0x 0.00 Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14 Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14
Earnings Yield (& Local Bond Yield) Current: 4.75% Dividend Yield (Trailing) Current: 9.42 14.0 10% 12Mth fwd EY US BY Proxy 9% 12.0 8% 10.0 7% 6% 8.0 5% 6.0 4% 3% 4.0 2% 2.0 1% 0% 0.0 Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14
ROE (Trailing) Current: 43.25 Price/Book (Value) Current: 15.1x 60.00 30.0x P/B Trailing P/B Forward 50.00 25.0x
40.00 20.0x
30.00 15.0x
20.00 10.0x
10.00 5.0x
0.00 0.0x Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14 Jul/01 Jul/03 Jul/05 Jul/07 Jul/09 Jul/11 Jul/13 Jul/15 Mar/02 Mar/04 Mar/06 Mar/08 Mar/10 Mar/12 Mar/14 Mar/16 Nov/02 Nov/04 Nov/06 Nov/08 Nov/10 Nov/12 Nov/14 Summary Wynn Macau Ltd. 7754.21 As Of: 04-Aug-16 MACAU 18.42877 TICKER 1128 HK Local Price: 11.94 Consumer Discretionary Hotels Restaurants & Leisure EPS: 0.57 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 21.03x P/BV (Trailing) 15.10x 10.10 25.00 16.12 17.08 26.39 7.78 -33% 66% 7% 13% Dividend Yield (Trailing) 9.42 0.00 13.21 3.92 3.84 11.11 -3.43 -100% 40% -58% -59% ROE (Trailing) 43.25 21.93 50.00 50.00 46.21 64.15 28.28 -49% 16% 16% 7%
Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy
16 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in securities issued by Wynn Macau. Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Wynn Macau within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Wynn Macau. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment banking clients: Wynn Macau. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Wynn Macau. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services from Wynn Macau. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Wynn Macau. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Wynn Macau. Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Wynn Macau. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477- 0406 or e-mail [email protected].
Wynn Macau (1128.HK, 1128 HK) Price Chart Date Rating Share Price Price Target (HK$) (HK$) 70 10-Nov-09 OW 10.60 12.00 OW HK$25.802OW HK$26OW HK$26.195OW HK$27.998OW OWHK$29 HK$42OW HK$39.8 UW HK$14 OW HK$14 27-Feb-10 OW 9.75 12.20 12-May-10 OW 11.30 -- 56 OW OW HK$24.8OW HK$31.801OW HK$25.8OW HK$27.798OW HK$28.8OW HK$41.8OW HK$42.1 UW HK$18 OW HK$14.5 24-Aug-10 OW 14.28 17.50 16-Dec-10 OW 16.84 20.00
42OWOW HK$12 HK$12.2OW HK$17.504OW HK$19.997OW HK$33OW HK$28.5OW HK$26.5OW HK$25.5OW HK$40OW HK$42.8N HK$29.5UW HK$18.5OW OWHK$12.5 HK$10.5 19-Jan-11 OW 19.80 24.80
Price(HK$) 12-Apr-11 OW 25.15 25.80 16-Aug-11 OW 24.60 33.00 28 20-Oct-11 OW 19.56 31.80 11-Jan-12 OW 18.38 26.00 24-Apr-12 OW 23.85 28.50 14 18-Jul-12 OW 16.52 25.80 25-Oct-12 OW 22.20 26.20 0 18-Jan-13 OW 21.80 26.50 Oct Jul Apr Jan Oct Jul Apr Jan Oct Jul 14-Apr-13 OW 21.35 27.80 09 10 11 12 12 13 14 15 15 16 26-Apr-13 OW 23.30 28.00 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. 29-Jul-13 OW 20.85 25.50 Break in coverage May 12, 2010 - Aug 24, 2010. 03-Oct-13 OW 27.80 28.80
17 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
25-Oct-13 OW 29.35 29.00 11-Dec-13 OW 33.30 40.00 22-Jan-14 OW 36.15 41.80 31-Jan-14 OW 32.95 42.00 02-May-14 OW 31.80 42.80 05-Jun-14 OW 31.50 42.10 30-Jul-14 OW 32.30 39.80 29-Oct-14 N 26.75 29.50 08-Mar-15 UW 19.22 18.50 16-Apr-15 UW 18.26 18.00 16-Jul-15 UW 15.70 14.00 06-Oct-15 OW 9.68 12.50 16-Jan-16 OW 7.35 10.50 18-Apr-16 OW 12.26 14.50 24-Jul-16 OW 12.30 14.00
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. Coverage Universe: Kim, DS: Galaxy Entertainment (0027.HK), Grand Korea Leisure (GKL) (114090.KS), Kangwon Land (035250.KS), MGM China (2282.HK), Melco International (0200.HK), Paradise Co (034230.KQ), SJM Holdings (0880.HK), Sands China (1928.HK), Wynn Macau (1128.HK)
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18 DS Kim Asia Pacific Equity Research (852) 2800-8597 22 August 2016 [email protected]
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Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Limited, Seoul Branch. Singapore: As at the date of this report, JPMSS is a designated market maker for certain structured warrants listed on the Singapore Exchange where the underlying securities may be the securities discussed in this report. Arising from its role as designated market maker for such structured warrants, JPMSS may conduct hedging activities in respect of such underlying securities and hold or have an interest in such underlying securities as a result. The updated list of structured warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore Exchange Limited: http://www.sgx.com.sg. In addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all other securities mentioned in this report, JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways different from those discussed in this report. Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in this report. Taiwan: This material is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800- 7700847 / [email protected].
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised July 9, 2016. Copyright 2016 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P
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