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Macau Gaming Industry Report Summary

Core Content

This report provides an analysis of the Macau gaming industry for the second quarter of 2016 (2Q16), highlighting the sector's performance, market sentiment, and investment outlook. It discusses the impact of seasonality, the effects of new casino openings, and the valuation of key players.

Main Points

• Industry Performance in 2Q16:

  • The industry's EBITDA declined by 5% YoY and 8% QoQ, primarily due to the weak June performance.
  • GGR (Gross Gaming Revenue) fell 9% YoY and 8% QoQ to MOP51,661mn.
  • Mass GGR showed a 1% YoY growth, while VIP GGR declined by 18%.
  • EBITDA margin improved by 1ppt YoY to 22%, driven by the increasing contribution from mass business.

• Market Sentiment and Summer Outlook:

  • The weak June data caused a drag on market sentiment, but the encouraging summer GGR is expected to dominate market perception.
  • July is projected to show a 1% YoY and 18% MoM growth, marking the first positive YoY growth in 25 months.
  • The summer season is anticipated to drive a recovery, with 3Q16E and 4Q16E likely to show improvement due to seasonality and the opening of new casinos.

• Valuation:

  • The sector is undervalued, trading at 19x FY17E P/E and 11x EV/EBITDA, compared to a historical average of 22x and 15x respectively.
  • This implies a discount of 15-25% and presents an opportunity for investors to accumulate shares for potential re-rating.

• Company Performance and Ratings:

  • Wynn Macau (1128 HK): Upgraded to BUY. Its EBITDA is expected to grow sharply with the opening of Wynn Palace on August 22.
  • Galaxy (27 HK): Upgraded to BUY. It is undervalued relative to peers and is expected to benefit from the summer rebound.
  • MGM China (2282 HK): Upgraded to BUY. Its FY17E looks promising with the opening of MGM Cotai in 1Q17E.
  • Sands China (1928 HK): Maintained NEUTRAL. It is well-known for its stable mass business and is still preferred for high yield seekers.
  • Melco Crown (MPEL US): Downgraded to NEUTRAL. Its Studio City ramp-up is slow, and it faces competition from Wynn Palace.
  • SJM (880 HK): Maintained SELL. It faces increasing competition from Cotai and limited catalysts for growth.

Key Information

• Seasonality Impact:

  • June is historically a weak month for GGR, but the encouraging mass GGR growth in 2Q16 suggests a recovery trend.
  • The average length of stay for visitors has increased due to more affordable hotel rooms and a shift in tourist composition towards individual visit scheme (IVS) tourists.

• New Casino Impact:

  • The opening of Wynn Palace and Parisian Macao in late August and mid-September is expected to bring 4,700 new hotel rooms, potentially boosting GGR.
  • These new properties target different segments: Wynn Palace for premium mass players and Parisian Macao for casual mass players.
  • There is a risk of price war in Cotai during the initial period as these new properties compete for market share.

• Operational Metrics:

  • Daily operating expenses (opex) have started to decline since 4Q14, especially in major properties.
  • Galaxy Macau and StarWorld experienced a QoQ EBITDA drop due to the ramp-up of Galaxy Macau Phase 2 and continued competition from Cotai.
  • Galaxy Macau is expected to show a 25% YoY EBITDA growth following its first YoY GGR expansion in 1Q16.

• Investment Recommendations:

  • The report recommends accumulating stocks of companies with strong earnings potential during the summer peak season.
  • The top picks are Wynn Macau and Galaxy, due to their recovery potential and strong market position.
  • Sands China is preferred for high yield seekers, while Melco Crown and SJM are less appealing due to slow ramp-up and increased competition.

Figures and Data Highlights

• Figure 1: 2Q16E EBITDA YoY change shows a decline for the industry, with Galaxy and Sands China showing some stability.
• Figure 2: 2Q16E EBITDA QoQ change indicates a contraction, with Galaxy and Sands China showing relatively better performance.
• Figure 3: IVS vs. package tourist arrivals show a shift towards more IVS tourists, indicating a more stable and higher-spending visitor base.
• Figure 4: Improved length of stay and increase in overnight visitors suggest a positive trend for the mass market.
• Figure 5: Daily opex of key casinos shows a decline since 4Q14, indicating cost optimization efforts.
• Figure 6: Quarterly EBITDA projections show an improvement in 3Q16E and 4Q16E, with Galaxy and Wynn Macau leading the way.
• Figure 7: 1-year forward P/E and EV/EBITDA show the sector is undervalued compared to historical averages.
• Figure 8: EBITDA margin trends suggest an improvement in the mass segment and stabilization in cost structures.

Conclusion

The Macau gaming sector is at a stabilizing stage, with encouraging signs of recovery in the summer months. While the weak June performance dragged down the sector's valuation, the anticipated strong July and August GGR growth could trigger a re-rating. The report recommends a BUY rating for Wynn Macau and Galaxy, and a NEUTRAL rating for Sands China and Melco Crown, while maintaining a SELL rating for SJM due to limited growth prospects. The sector's valuation is considered undemanding, providing an opportunity for investors to capitalize on the potential summer rally.