20150818-大和证券-A_falling_house_of_cards_47页_3mb

Summary of "A Falling House of Cards" Report

Core Content

This report provides a detailed analysis of the Macau Gaming Sector, focusing on the downward revision of earnings forecasts and the challenges facing the industry due to various macroeconomic and operational factors. The report highlights the discrepancy between market expectations and Daiwa's revised forecasts, emphasizing the unrealistic nature of the consensus EBITDA growth assumptions.

Main Views and Key Information

• EBITDA Forecast Revision:

  • Daiwa has revised the 2015E Gross Gaming Revenue (GGR) down to -34% YoY, from -21%, indicating sustained weakness across all operating segments.
  • The consensus forecasts imply a 17% sequential EBITDA growth for 2H15, which is deemed highly unrealistic.
  • Daiwa's EBITDA forecast for 2015E is 11% below the Bloomberg consensus and predicts a 40% YoY decline. They also forecast a 15% YoY decline in EBITDA for 2016E, which is 33% below the consensus forecast.

• Macau Gaming Sector Trends:

  • Mass Segment: No recovery is expected. Mass and premium mass revenue trends are correlated with UnionPay transaction volumes, which have declined since 2014. The loosening of transit visa rules is unlikely to significantly boost mass revenue.
  • VIP Segment: Operating trends suggest no recovery. Junket operators have experienced significant table and market share losses. New property openings like GM2 have not led to improved business, and further table reallocations are expected to increase risks for operators.
  • CNY Depreciation and Liquidity Constraints: These factors are still negatively impacting the sector, and the market continues to underestimate their effects.

• Stock Recommendations:

  • The sector is considered over-owned and expensive, with an EV/EBITDA multiple of 18.8x and a PER of 30.5x for 2015E.
  • Daiwa prefers cost-defensive operators such as SJM and MGM, which remain their top picks.
  • Galaxy is downgraded to Sell due to its expensive valuation and immediate cost pressures from GM2's opening.
  • Operators with early openings, such as Melco and Wynn, are advised to be avoided.

• Junket Watch List:

  • The report includes an updated junket watch list with on-the-ground table counts and estimated market shares for major operators in Macau.
  • It highlights the significant table and market share losses for mid-sized junkets and the potential for more closures in the coming months.

• Sector-Level EBITDA Expectations:

  • The sector's EBITDA for 2015E is forecasted to fall by 40% YoY, with further contraction expected in 2016E.
  • The report outlines the expected EBITDA changes for each operator and their respective EBITDA margins and growth rates.

Key Risks

• Macroeconomic Factors: Further depreciation of the CNY and continued economic weakness in China could negatively impact GGR.
• Operational Pressures: Rising costs, liquidity constraints, and the negative impact of new property openings (e.g., GM2 and Studio City) are significant challenges.
• Market Misjudgment: The market's optimistic expectations for a recovery are seen as unrealistic and may lead to downward revisions and sector derating.

Summary Table of EBITDA Forecasts

Revised EBITDA Forecasts and Market Expectations

• Consensus vs. Daiwa:
  • Consensus expects a 17% sequential EBITDA growth for 3Q/4Q15, but Daiwa's revised forecast shows a -9% sequential growth.
  • The consensus for 2015E EBITDA is HKD49.638bn, while Daiwa's forecast is HKD44.086bn, a 11% difference.
  • For 2016E, the consensus forecasts 12% YoY growth, but Daiwa believes this is also unrealistic, expecting a 33% lower EBITDA than the consensus.

Conclusion

The report concludes that the Macau Gaming Sector is facing significant challenges, including declining GGR, rising costs, and liquidity issues. It emphasizes the need for a more conservative outlook and highlights the importance of cost-defensive operators in the current environment. The market's optimistic expectations are seen as unsustainable, and Daiwa anticipates downward revisions and a sector derating as more clarity emerges on the sector's performance.