20140127-DBS_Group-Gaming_Sector_Hold_your_bets_25页_526kb

DBS Group Research Summary - Equity (27 January 2014)

Core Content

The report provides an analysis of the Macau gaming sector performance in 4Q13 and offers a valuation and investment strategy for key players. It highlights the disconnect between market expectations and actual fundamentals, particularly in the VIP segment, and recommends a shift towards yield-focused stocks for downside protection.

Main Points

• 4Q13 EBITDA Growth: The gaming sector experienced a strong 4Q13, with the industry's EBITDA growing by +31% y-o-y and +8% q-o-q.
• VIP Market Growth: The VIP segment grew by +13% y-o-y in 2013 and +12% q-o-q in 4Q13, but the growth rate is seen as overestimated.
• Mass Market Growth: The mass market showed stronger growth, with +40% y-o-y and +13% q-o-q in 4Q13, contributing significantly to overall EBITDA growth.
• GGR Performance: 4Q13 GGR reached MOP100.1bn, with the mass market accounting for 65% of the EBITDA increase.
• Sector Outlook: The report suggests that the sector may experience a correction due to overvalued expectations, especially in the VIP segment.
• Downgrade to Galaxy: Galaxy is downgraded to Hold due to stretched valuations, with a current EV/EBITDA of 18.6x compared to the sector's 16.4x.
• Preferred Stocks: Sands and SJM are highlighted for their yield and downside protection, with Sands having a 4% yield and SJM a 5% yield.
• 2014 GGR Target: The overall GGR target for 2014 remains at 15%, with the consensus estimating 17-20%.
• VIP GGR Assumption: The report estimates a 8% VIP GGR for 2014, lower than the consensus upper estimate of 14%, due to the segment's low margin and sensitivity to policy changes.
• Company-Specific Risks: Each company has specific risks, including market share loss, operational delays, and margin pressure.

Key Insights

• VIP Segment Volatility: The VIP market is highly sensitive to regulatory changes and has limited impact on overall EBITDA.
• Mass Market Dominance: The mass market is seen as the more stable and profitable segment, with growth driven by higher bet sizes rather than increased visits.
• Valuation Concerns: The sector is overvalued, with some stocks trading at a premium that may not be justified by fundamentals.
• Recommendation: Investors are advised to switch to yield stocks like Sands and SJM for better downside protection, with Sands being the top choice due to its growth potential and reasonable valuation.

Summary Table

Key Property Comparison

• EBITDA and GGR Growth: Galaxy and MPEL led in EBITDA growth, with Galaxy showing the highest increase at +44% y-o-y.
• Market Share: Galaxy gained the most market share in 4Q13, increasing by +2.56 ppts q-o-q.
• Table Allocation: Concerns are raised over Galaxy's table allocation for Galaxy Macau Phase II, with expectations of 400 tables but doubts over its feasibility.

Regional Gaming Peer Comparison

Strategy and Stock Picks

• Downgrade Galaxy to Hold: Due to overvaluation and uncertainty around table allocation for Galaxy Macau Phase II.
• Buy Recommendations: Sands, MPEL, and SJM are recommended for their yield and growth potential.
• Yield Focus: Sands and SJM are preferred for downside protection, with Sands offering higher growth potential and a more reasonable valuation.
• Sector Correction: The report anticipates a correction in the gaming sector, with valuations potentially adjusting to 14-15x FY14F EV/EBITDA.

Conclusion

The report emphasizes the need for investors to reassess their positions in the gaming sector due to overhyped expectations, especially in the VIP segment. It suggests a shift towards yield-focused stocks like Sands and SJM for better risk management and value appreciation.