20140529-大和证券-VIP_segment_feeling_the_pinch_32页_950kb

Summary of Document: VIP Segment Feeling the Pinch

Core Content

This document provides an analysis of the Macau gaming sector, focusing on the current challenges in the VIP segment and the positive outlook for the mass segment. It outlines the firm's updated forecasts, valuation approaches, and stock recommendations, based on recent industry research and market trends.

Main Points

VIP Segment Challenges

• The VIP segment is experiencing liquidity concerns that are more significant than previously anticipated.
• These concerns are primarily due to the Kimren incident, which has led to a contagion effect across the VIP gaming ecosystem, including junket operators, agents, and side-betting affiliates.
• Junket operators are increasingly cautious in extending credit, leading to reduced liquidity and affecting the ability of agents to service VIP clients.
• The credit default issue is causing a decline in VIP GGR growth and VIP rolling volume, which in turn is affecting the overall VIP segment performance.
• The firm has reduced its 2014E VIP GGR growth forecast from 12% to 8% YoY, and has also lowered its 2015 and 2016 growth forecasts.

Mass Segment Growth

• The mass segment is performing strongly, driven by record-high Mainland tourist arrivals.
• The firm has raised its 2014E mass GGR growth forecast to 34% YoY from 32%, and expects similar growth in 2015 and 2016.
• The smoking ban (effective from October 2014) is expected to have minimal impact on the mass segment in the medium term.
• The ban is likely to affect casino operators' ability to implement it in time, especially those without the necessary infrastructure.
• Junket-affiliated agents and pawnshops are a major source of liquidity for the mass segment, with UnionPay cards also playing a role, though the impact of potential restrictions remains uncertain.

Sector Outlook and Stock Recommendations

• The firm reaffirms a positive sector rating but acknowledges near-term uncertainty and more room for negative surprises.
• It lowers its SOTP-based 6-month target prices for all six companies it covers, reflecting updated GGR forecasts and lower EV/EBITDA multiples.
• The top picks are now Sands China and Melco Crown Entertainment, both rated as Buys.
• Wynn Macau and Galaxy Entertainment Group are downgraded to Outperform due to their high VIP exposure.
• The main risks to the sector include macro slowdown in China, tighter VIP credit liquidity, and policy uncertainties.

Key Information

Updated GGR Forecasts

Revised EV/EBITDA Multiples

Stock Recommendations

Sector Risks

• Macro slowdown in China could negatively impact the gaming industry.
• Tighter VIP credit liquidity continues to be a challenge.
• Policy risks include the smoking ban and potential UnionPay restrictions.
• Industry consolidation may occur due to liquidity issues in the VIP segment.

Valuation Approach

• The firm uses the SOTP (Sum of the Parts) method for valuation.
• It assigns EV/EBITDA multiples based on exposure to VIP and mass segments, scale and age of properties, and market share retention expectations.
• The 2015E ROIC assumptions are based on a 20% discount from 2013 ROIC figures.

Conclusion

While the VIP segment faces liquidity and credit challenges, the mass segment is expected to continue its strong growth trajectory, supported by increased tourist arrivals from the Mainland. The firm remains positive on the sector but highlights the need for caution in the short term. It recommends Sands China and Melco Crown Entertainment as top picks, while Wynn Macau and Galaxy Entertainment Group are downgraded due to their high VIP exposure.