20160407-美银美林-镇海炼油化工股份-01128.HK-1Q_results_beat_by_15__Increasing_visibility_bodes_well_for_Cotai__upgrade_to_Buy_15页_877kb

Wynn Macau Limited Summary

Core Content

Wynn Macau Limited (Wynn) has been upgraded from "Underperform" to "Buy" by BofA Merrill Lynch due to strong first-quarter (1Q) results and increased confidence in its Cotai project. The upgrade is based on the stabilization of gross gaming revenue (GGR) and improved visibility into the project's potential.

Main Points

• 1Q16 Performance: Wynn reported property EBITDA of US$187-195 million, which is 11% lower than the previous year but 19% higher than the previous quarter. This exceeded expectations and consensus by 15%.
• Price Objective (PO) Increase: The price objective was raised by 59% from HK$10.10 to HK$16.10, incorporating the expected full-year contribution from the Cotai project and adjusting the target multiple from 12x to 14x.
• Cotai Project: The Cotai project is considered a key growth driver for Wynn, with the potential to significantly boost EBITDA. The company is expected to have a strong product offering and a better chance of a successful launch due to its established brand and execution capabilities.
• Leverage and Dividend: Wynn has improved its leverage ratios and has sufficient credit facilities to fund its projects and pay dividends. The company announced a special dividend of HK$0.60 per share, and its free cash flow (FCF) is expected to reach 14% in 2017.
• Valuation: The stock is currently trading at 11x EV/EBITDA for 2017E, which is seen as undervalued compared to its historical average and that of its peers. The 14x target multiple is still below the historical average of 16x and the target multiple for Sands (15x).
• Earnings Growth: The 2017E and 2018E EBITDA estimates are 23% and 28% above consensus, respectively, while EPS is expected to be 25% and 41% higher than previous estimates.

Key Information

• Dividend Yield: Expected to rise to 6% in 2017, up from 3% in 2016.
• Free Cash Flow Yield: Projected to increase from -2.5% in FY16 to +14% in FY17.
• Leverage Ratio: The total debt to EBITDA ratio is expected to peak at 4.2x in 2016, which is below the covenant requirement of 4.5x.
• Balance Sheet Flexibility: Wynn has expanded its credit facilities to HK$23.7 billion, providing flexibility to fund projects and pay dividends.
• Covenant Amendment: The amendment has reduced leverage concerns and improved the company's financial flexibility.
• Stock Data: The current price is HK$11.54, with a 52-week range of HK$6.84–HK$19.68. The company's market value is HK$59,875 million, and it has a free float of 27.7%.

Investment Rationale

• Wynn's strong 1Q performance and improved visibility into the Cotai project have led to a more optimistic outlook.
• The company's track record and brand strength are seen as key factors in the success of the Cotai project.
• The upgrade to "Buy" reflects the increased confidence in the project's potential and the company's ability to manage its debt and generate FCF.

Valuation Comparison

• Macau Gaming Stocks:
  • Galaxy Entertainment: EV/EBITDA 11.0x–11.9x, P/E 22.5x–25.3x, Dividend Yield 1.2%–1.2%
  • SJM Holdings: EV/EBITDA 6.7x–7.0x, P/E 16.5x–13.3x, Dividend Yield 3.7%–3.7%
  • Wynn Macau: EV/EBITDA 15.6x–11.2x, P/E 33.4x–15.0x, Dividend Yield 3.0%–6.1%
  • Sands China: EV/EBITDA 13.6x–13.2x, P/E 21.1x–19.6x, Dividend Yield 6.7%–6.7%
  • Melco Crown: EV/EBITDA 8.8x–7.2x, P/E 24.2x–8.4x, Dividend Yield 0.8%–5.5%
  • MGM China: EV/EBITDA 9.2x–8.8x, P/E 24.4x–14.8x, Dividend Yield 1.8%–2.7%
• US Gaming Stocks:
  • Las Vegas Sands Corp.: EV/EBITDA 13.1x–12.6x, P/E 19.8x–20.2x, Dividend Yield 6%–6%
  • Wynn Resorts Ltd.: EV/EBITDA 16.8x–13.3x, P/E 30.9x–21.1x, Dividend Yield 2%–2%
  • MGM Resorts: EV/EBITDA 9.5x–7.9x, P/E 38.0x–24.4x, Dividend Yield 0%–0%
  • Boyd Gaming Corp: EV/EBITDA 8.4x–8.0x, P/E 15.3x–12.6x, Dividend Yield 0%–0%

Financial Highlights

• EBITDA:
  • 2016E: HK$5,584.6 million
  • 2017E: HK$8,349.0 million
• EPS:
  • 2016E: HK$0.35
  • 2017E: HK$0.77
• Dividend per Share:
  • 2016E: HK$0.35
  • 2017E: HK$0.77
• Free Cash Flow:
  • 2016E: HK$-1,462 million
  • 2017E: HK$8,274 million

Key Assumptions

• The Cotai project is expected to contribute significantly to EBITDA in 2017.
• Wynn's operating cash flow is expected to cover its cash outflow requirements before paying dividends.
• The company's leverage ratio is expected to remain below covenant requirements.

Conclusion

Wynn Macau Limited is showing signs of recovery and growth, driven by the stabilization of GGR and the potential success of its Cotai project. The upgrade to "Buy" reflects improved financial flexibility, strong earnings growth, and the potential for higher returns due to its strong brand and execution ability. The company is expected to maintain a healthy dividend yield and free cash flow in the coming years.