Macau Gaming 27 February 2017 【 2017 outlook: Mass Market Continues To Be The Major Driver Investment Highlights: GGR resumes growth in 2016Q3: According to the DICJ figures, Macau’s gross revenue from Games of Fortune amounted to MOP 60,418million in 2016Q4, as compared to MOP 55,005million in 2016Q3, recording a 10.2% YoY growth in the quarterly GGR. Looking forward in 2017, we estimate Mass GGR, VIP GGR and EBITDA to grow by 13%, 6% and 14% respectively. The long-term prospects for the industry remain attractive, particularly for the Mass segment. Mass market to be the major engine: Mass market represents 47% of the GGR mix in FY2016, and we expect the mass market to further gain importance in the next five years. The strength will be underpinned by 1) increasing visitation to Macau; and 2) the upcoming projects in Cotai, including MGM Cotai and Grand Lisboa Palace. VIP may bottom out, but to be confirmed: The quarterly VIP GGR recorded a 12.7% CASH Research YoY growth in 2016 Q4, represent a strong and the first positive year- on- year [email protected] growth since 2014 Q2. However, with mixed factor such as anti-graft campaign and 27 Feb 2017 capital flow control in China, we remain cautious on the prospect of VIP gaming. It is Cynthia Tam worth noting that the 19th National Congress to be held in 2nd half of 2017 will set Tel: 852-2287-8466 the tone for the upcoming monetary and anti- corruption policy, which in turn have [email protected] a significant impact on Macau VIP gaming. Despite the recent trend signaling a possible turnaround, we would like some more time before calling it a definitive trend. Gaming Tax Reform has an influence on Macau competitiveness: Facing intense competition from casinos located in Asia, including Singapore, Philippines, Cambodia and Malaysia, there is a need for Macau to have a gaming tax reform to maintain its competitiveness. Gaming concessionaires are currently subject to a 39 percent tax, which is substantially higher than other countries. A potential tax cut will be an upside factor to the gaming industry. Consultation on tax reform will roll out before the present casino licenses are due for renewal between 2020 and 2022. The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. ---1-111---- February 27, 2017 Japan casinos pose no immediate threat to Macau: Japan's parliament recently passed a bill legalizing casinos. We believe its impact on Macau gaming industry is yet to come as it will take numbers of years until the first Japanese casino open doors. The future impact of Japanese casino on Macau gaming will depend on 1) how likely Japan's casinos to draw Chinese players, especially from North- Eastern area ; 2) the intensity of the anti- graft campaign; 3) the role of junkets in Japan. We believe the impact of Japan casinos on Macau will only take place later than 2021. We will update our analysis when necessary. 2017 EBITDA boosted by non- gaming revenue: In Macau’s Five- Year Development Plan, covering the period 2016- 2020, the government states that non-gaming revenue should account on average for at least 9 percent of all revenue generated by casino operators by 2020. With more projects open on Cotai, non- gaming segment will become a larger component of revenue. We forecast non- gaming revenue to grow at a CAGR of 14% for the industry from 2017E to 2020E. Galaxy and Wynn are our top picks: We remain positive on the mass gaming performance of Galaxy and Wynn. For Galaxy, the uptrend of Galaxy Macau™ and StarWorld Macau will continue. Meanwhile, we believe Wynn Palace will be a new value driver for Wynn. Galaxy (27.HK) and Wynn Macau (1128.HK) are our top picks. Table 1: Valuation and financial ratios of Macau gaming stocks Source: Bloomberg, CASH The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -2- February 27, 2017 Table of Contents 2017 Growth Drivers 1. GGR resumes growth in 2016 Q3 4 2. Mass Market to be the Major Engine 7 3. Positive effect brought by Cotai development 18 Investment themes 1. Picking companies with high- performing Mass business 20 2. VIP may bottom out, but to be confirmed 22 3. Market Share Forecast 27 4. Legalized Gambling in Japan Should Have little Impact on Macau business in short term 30 5. Potential Risks for the Industry 30 6. Other factors to be considered 32 Stock Recommendations Galaxy (27.HK) 33 Wynn Macau ( 1128.HK) 38 The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates (“CASH”) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document is subject to change without prior notice to you. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee without written consent from CASH and CASH shall not be liable to any such third parties for loss arising from any unauthorized distribution. -3- February 27, 2017 2017 Growth Drivers 1. GGR resumes growth in 2016 Q3, signaling industry recovery Going forward, we estimate Mass GGR, VIP GGR and EBITDA to grow by 13%, 6% and 14% respectively. The long-term prospects of the industry remain attractive, particularly for the Mass segment. According to DICJ’s figures, officially the Gaming Inspection and Coordination Bureau of Macao, the gross revenue from Games of Fortune amounted to MOP60,418million in 2016Q4, as compared to MOP55,005million in 2016Q3, recording a 10.2% YoY growth in the quarterly GGR. Figure 1: Industry GGR up 10.2% YoY to MOP 60,418 mn in 2016Q4 Source: DICJ, CASH Research GGR to be fueled by mass market: In 2017, we expect mass GGR growth of 13%, higher than the 6% VIP GGR growth. There will be a continuous structural change of the Gaming industry by having VIP shift to Mass, to be explained by the challenging environment imposed by the China’s anti- graft campaign and the tightening monetary policy. Meanwhile, the mass market growth will be due to the improvement in infrastructure, ramp of the new projects and the increase in overnight visitation. We see the mass market to be the theme of the Macau gaming industry for the coming five years. Market players with strong mass GGR growth will outperform the industry and validate a higher valuation. The above in formation is provided and distributed by Celestial Securities Limited (“CSL”). CSL is a corporation licensed under the Securi ties and Futures Ordinance. The document is for reference only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever.