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2017-11-15 Macau Industry Update Summary

Core Content

This document provides an update on the Macau gaming and tourism industry, focusing on regulatory changes, concession bidding processes, infrastructure developments, and company valuations as of 15 November 2017.

Main Points

Concession Bidding Process

• The Macau Chief Executive announced in the 2018 Policy Address that more clarity on the concession bidding process would be provided by mid-2018.
• The Legislative Assembly is expected to take 12-24 months to debate, vote, and pass the new gaming concession laws.
• If the process extends beyond the current concessions' expiry in March 2020 for SJM/MGM, the new Chief Executive (elected in December 2019) may extend the current concessions to allow time for the legislative process.
• The previous concession bidding process (2000-2002) involved several stages, including a study by Arthur Andersen, legislative approval, and the invitation of proposals.
• The new concession process is likely to be more complex than a simple license renewal.

Junket Regulations

• The regulator plans to tighten junket regulations starting in January 2018, including closer monitoring of credit records and temporary deposits from unqualified citizens.
• The top 5 junket operators control over 85% of the VIP market and are expected to better handle these regulations due to their stronger financial positions.
• New regulations include stricter requirements for junket operators, such as daily credit records, reporting of large transactions, and compliance with anti-money laundering (AML) guidelines.
• These changes are unlikely to significantly impact VIP Gross Gaming Revenue (GGR) in 2018.

Greater Bay Area Initiative

• The "Guangdong-Hong Kong-Macau Greater Bay Area" initiative aims to boost Macau's infrastructure and tourism growth.
• The HK-Zhuhai-Macau Bridge is a key project expected to reduce travel time between Hong Kong and Macau to 30 minutes, potentially increasing tourist arrivals.
• The bridge is anticipated to boost Chinese visitor growth to 10% in 2018, with the goal of reaching 40 million annual visitors by 2025.
• The initiative could help Macau diversify its economy and establish itself as a global tourism and trade hub.

Company Valuations and Risks

• Macau stocks are trading at 14.0x DB 2018E forward EV/EBITDA, which is at +1 standard deviation from the historical average.
• Wynn Macau is highlighted as a top pick due to its attractive 7% 2018F free cash flow (FCF) yield.
• The document values Macau stocks using the Sum of the Parts (SOTP) method.
• Downside risks include a sharp slowdown in GGR growth and regulatory changes.
• Upside risks include faster-than-expected GGR growth in 2018.

Key Companies and Their Valuation Metrics

Key Risks and Opportunities

• Downside Risks:

  • Sharp slowdown in GGR momentum
  • Regulatory changes

• Upside Risks:

  • Faster-than-expected GGR growth in 2018

Conclusion

The document outlines the evolving regulatory landscape, infrastructure developments, and market dynamics in Macau's gaming and tourism sector. It emphasizes the importance of the upcoming concession bidding process and the potential impact of tighter junket regulations. Wynn Macau is highlighted as a top investment pick due to its strong fundamentals and attractive valuation. The Greater Bay Area initiative and Belt & Road development are seen as opportunities for Macau to expand its economic and tourism reach beyond the Greater China region.