Macau Gaming Summary
Core Content
This document is an investment report by China Merchants Securities (HK), published in June 2016, analyzing the Macau gaming sector and providing insights into investment opportunities and market dynamics.
Main Investment Thesis
- Seasonality in Macau is more prominent, especially with the stabilization of visitor arrivals.
- Overnight stay visitors are increasing due to more abundant hotel room supply and non-gaming amenities.
- July and August are expected to be good timing for riding on the mass growth.
- Potential outperformers include:
- Wynn Macau (1128 HK)
- MGM China (2282 HK)
- Melco Crown (MPEL US)
- Galaxy (27 HK)
Key Companies and Rationale
| Company |
Ticker |
Rationale |
| Wynn Macau |
1128 HK |
Wynn Palace on track to open on Aug 8, 2016. Cost-saving through resource relocation from Peninsula to Cotai has not been fully reflected in current valuation. Expect Wynn Palace to gain market share mainly from City of Dreams. |
| MGM China |
2282 HK |
Rebound could be impressive when investors take FY17E earnings into account, which could be boosted by MGM Cotai. However, potential delay is a key risk. |
| Melco Crown |
MPEL US |
Heavy capex and pre-opening opex are behind us. Studio City is expected to outperform its Cotai peers in the longer term. |
| Galaxy |
27 HK |
EBITDA continues to improve with ramp-up of Galaxy Macau 2. Stock is inexpensive, trading at a discount to its Macau peers. Potential market share loss in Cotai. |
| Sands China |
1928 HK |
Stable business with high dividend return, but investors' appetite is shifting from "stable" to "turnaround" stories. Potential delay of Parisian Macao is a risk. |
| SJM |
880 HK |
Earnings contraction due to continued market share loss to new Cotai properties. Both balance sheet and dividends are fragile. |
Key Financial Metrics
Peer Valuation Table
| Company |
Ticker |
Current Px |
Avg T/O (US$mn) |
P/E (x) |
| Galaxy |
27 HK |
26.10 |
47.7 |
26.7 / 20.4 / 19.1 |
| SJM |
880 HK |
4.98 |
6.2 |
11.4 / 17.5 / n.a. |
| Wynn Macau |
1128 HK |
12.16 |
23.8 |
26.2 / 32.4 / 24.4 |
| Sands China |
1928 HK |
29.55 |
58.0 |
21.1 / 22.9 / 21.2 |
| MGM China |
2282 HK |
10.85 |
7.1 |
13.2 / 19.8 / 13.6 |
| Melco Crown |
MPEL US |
14.73 |
44.5 |
4.8 / 0.7 / 0.9 |
Valuation Ratios
| Company |
EV/EBITDA (x) |
ROE (%) |
Dividends Yield (%) |
Net Debt/Equity (%) |
| Galaxy |
12.0 |
10.3 |
1.1 |
(17.4) |
| SJM |
4.8 |
10.6 |
5.0 |
(41.4) |
| Wynn Macau |
18.7 |
58.8 |
4.9 |
599.3 |
| Sands China |
15.4 |
25.0 |
6.7 |
36.0 |
| MGM China |
11.2 |
63.3 |
2.3 |
128.4 |
| Melco Crown |
13.3 |
2.4 |
4.8 |
54.2 |
Visitor Arrivals and Market Trends
- Mainland China visitor arrivals are showing an improving YoY trend.
- July and August are expected to show further improvement with increased hotel room supply and non-gaming amenities.
- Overnight stay visitors continue to record positive growth.
- Cotai is expected to surpass Peninsula in GGR contribution in FY16E.
Key Pipeline Projects
| Opening Time |
Project |
Rooms |
Budget (US$) |
Gaming Capacity |
GFA (sqm) |
Land (sqm) |
| Aug, 2016 |
Wynn Macau Wynn Palace |
1,700 |
4.0bn |
500 tables, 1,000 slots |
636,737 |
205,797 |
| 4Q16 |
Louis XIII |
200 |
1.1bn |
66 tables, 75 slots |
87,800 |
6,040 |
| 4Q16 |
Sands China Parisian Macao |
3,000 |
2.7bn |
450 tables, 2,500 slots |
n.a. |
60,479 |
| 1Q17 |
MGM China MGM Cotai |
1,500 |
3.0bn |
500 tables, 1,500 slots |
391,750 |
71,833 |
| 4Q17 |
SJM Lisboa Palace |
1,990 |
3.9bn |
700 tables, 1,000 slots |
521,435 |
70,500 |
| 4Q18 |
Galaxy Galaxy Macau Phase 3 & 4 |
5,500 |
6.5-7.7bn |
1,000 tables, 3,000 slots |
1,000,000 |
n.a. |
Market Share and EBITDA Projections
- Wynn Macau and MGM China are expected to gain market share.
- SJM and Galaxy are expected to lose market share.
- EBITDA recovery is expected in 3Q16E.
Investment Ratings
| Rating |
Definition |
| OVERWEIGHT |
Expect sector to outperform the market over the next 12 months |
| NEUTRAL |
Expect sector to perform in-line with the market over the next 12 months |
| UNDERWEIGHT |
Expect sector to underperform the market over the next 12 months |
| Rating |
Definition |
| BUY |
Expect stock to generate 10%+ return over the next 12 months |
| NEUTRAL |
Expect stock to generate +10% to -10% over the next 12 months |
| SELL |
Expect stock to generate loss of 10%+ over the next 12 months |
Additional Key Insights
- 1-year forward P/E is 9% higher than the 5-year average.
- 1-year forward EV/EBITDA is 9% lower than the 5-year average.
- GGR in Jan-May 2016 fell 11.9% YoY.
- 2016E GGR is projected to decline 3% YoY, with a sharp recovery in 2H16E.
- June GGR is expected to increase 1% YoY, an improvement from May.
- Cotai issue makers are expected to outperform Peninsula names.
- Shift VIP to mass is expected to outperform "Already mass" due to high operating leverage.
- Start looking into FY17E valuation for better investment opportunities.
Summary
The report highlights the seasonality of the Macau gaming sector, with a focus on July and August as a favorable time to invest. It identifies key players like Wynn Macau, MGM China, Melco Crown, and Galaxy as potential outperformers, emphasizing their growth prospects, cost-saving measures, and market share changes. The report also discusses the increased hotel room supply and non-gaming amenities as factors driving visitor arrivals and overnight stay growth. Cotai is expected to surpass Peninsula in GGR contribution, and the pipeline projects are anticipated to boost the market further. EBITDA recovery is forecasted in the third quarter of 2016. The investment ratings suggest that the sector may outperform, with specific stocks like Wynn Macau and MGM China as top choices. The financial metrics and valuation ratios indicate a discounted valuation for Galaxy and a potential turnaround for Sands China. Investors are advised to consider their financial situation and seek independent advice before making investment decisions.
