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Macau Gaming Summary

Core Content

The document provides an analysis of the Macau gaming sector, focusing on seasonal trends, key players, market dynamics, and investment outlook for the period leading up to and during the summer vacation in 2016. It highlights the potential for growth in the mass market segment and the competitive landscape among major operators.

Main Points

Seasonality and Visitor Trends

• Macau's seasonality is more pronounced in 2016, with visitor arrivals stabilizing and the number of overnight stay visitors increasing.
• July and August are highlighted as good timing for capitalizing on the mass market growth.
• The summer vacation is expected to be more encouraging than the Chinese New Year (CNY) period due to increased hotel room supply and non-gaming amenities.
• Visitor arrivals from mainland China are showing an improving YoY trend.

Key Players and Investment Thesis

• Wynn Macau (1128 HK): Wynn Palace is set to open on August 8, 2016, and is expected to gain market share from City of Dreams. Cost savings from resource relocation have not been fully reflected in current valuations.
• MGM China (2282 HK): A rebound is expected with FY17E earnings, which could be boosted by MGM Cotai. However, potential delays are a key risk.
• Melco Crown (MPEL US): Heavy capital expenditure and pre-opening operating expenses are behind. Studio City is expected to outperform Cotai peers in the long term.
• Galaxy (27 HK): EBITDA continues to improve with Galaxy Macau 2 ramping up. It is currently undervalued compared to its Macau peers, though it may face market share loss in Cotai.

Market Share and EBITDA Projections

• Wynn Macau and MGM China are expected to gain market share, while SJM and Galaxy are likely to lose it.
• EBITDA recovery is expected in 3Q16E, with significant growth in the following quarters for some operators.
• Galaxy's EBITDA is projected to improve by 18% in 2Q16E and 23% in 3Q16E.
• Wynn Macau's EBITDA is expected to grow by 62% in 3Q16E, and Sands China by 42% in 3Q16E.
• Overall EBITDA is projected to increase by 12% in 3Q16E.

Key Pipeline Projects

• Wynn Macau Wynn Palace: Opens in August 2016, with 1,700 rooms and a budget of US$4.0bn.
• Louis XIII: Opens in 4Q16, with 200 rooms and a budget of US$1.1bn.
• Sands China Parisian Macao: Opens in 4Q16, with 3,000 rooms and a budget of US$2.7bn.
• MGM China MGM Cotai: Opens in 1Q17, with 1,500 rooms and a budget of US$3.0bn.
• SJM Lisboa Palace: Opens in 4Q17, with 1,990 rooms and a budget of US$3.9bn.
• Galaxy Galaxy Macau Phase 3 & 4: Opens in 4Q18, with 5,500 rooms and a budget of US$6.5-7.7bn.

Valuation and Performance Metrics

• The 1-year forward P/E is 9% higher than the 5-year average, indicating potential for outperformance.
• The 1-year forward EV/EBITDA is 9% lower than the 5-year average, suggesting undervaluation.
• Galaxy is noted as being inexpensive relative to its peers, while Wynn Macau and Sands China have higher valuations.
• Market share is expected to shift in favor of Cotai operators, especially Wynn Macau and MGM China.

Investment Recommendations

• The industry rating is OVERWEIGHT, suggesting the sector is expected to outperform the market.
• Wynn Macau and MGM China are highlighted as potential BUY candidates.
• Galaxy and SJM are considered NEUTRAL due to potential market share losses.
• Sands China is noted as having a stable business with high dividend returns, but it is seen as less attractive due to changing investor preferences.

Key Information

• GGR (Gaming Revenue): GGR for Jan-May 2016E fell by 11.9% YoY, with a projected 3% YoY decline for 2016E. A sharp recovery is expected in the second half of 2016E.
• VIP and Mass Market: VIP is expected to decline by 9% YoY in 2016E, while the mass market is projected to increase by 5% and 11% YoY in 2016E and 2017E respectively.
• Hotel Room Supply: The number of hotel rooms under casino operators is expected to increase by 52% by FY18E, contributing to the growth of the mass market.
• Investment Risks: Potential delays in key projects such as Parisian Macao and MGM Cotai are highlighted as key risks for investors.

Summary Table

Conclusion

The document emphasizes the potential for growth in the Macau gaming sector, particularly in the mass market segment, driven by increased hotel room supply and non-gaming amenities. It suggests that investors should consider timing their investments around the summer vacation period, especially with the opening of new projects like Wynn Palace and MGM Cotai. While some operators like Galaxy and SJM may face market share losses, others like Wynn Macau and MGM China are positioned for significant growth and are recommended for investment.