Return of the VIPs; adding Wynn to top picks with Galaxy, MPEL

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1 Deutsche Bank Markets Research Asia Hong Kong Consumer Hotels / Leisure / Gaming Industry Date 3 January 213 Recommendation Change Return of the VIPs; adding Wynn to top picks with Galaxy, MPEL From Premium Mass to VIPs 212 was the year of the Premium Mass. Galaxy & MPEL, which focused on this segment, saw their share prices rise the most (+113% & +75% respectively). We think 213 will be marked by the return of the VIPs. Leading indicators, such as fine wine prices, suggest an imminent recovery in high-end spending. Junkets also believe that pent-up VIP demand is about to be released. Galaxy & Wynn are the biggest beneficiaries given their high VIP exposure. We upgrade Wynn from Hold to Buy and add it to our top picks alongside Galaxy (Buy) and MPEL (Buy). In 213, we see biggest share price upside in Galaxy, where our new target price of HK$41.2 implies 32% upside. The Three D s Demand, Divergence & Dividends In 213, investors will focus on the Three D s. (1) Demand After six months of lackluster VIP growth, junkets have noticed a sudden surge in VIP demand since early December, particularly from northern China. We see this as the start of the VIP recovery cycle. This prompts us to raise 213 EPS by 1-15%. (2) Divergence The much-anticipated Zhuhai high-speed rail station opened on 31 December. Visitor growth will likely resume, making the divergence between Cotai and Peninsula more apparent. We forecast Cotai operators to enjoy strong earnings growth of 26-3% whereas Peninsula operators could see only single-digit earnings growth. (3) Dividends Peninsula operators offer c.6% dividend yield. Hence, we see 1-15% share price upside even for our least preferred stocks, SJM (Hold) & MGM China (Hold). Galaxy Top pick in 213 Even after last year s rally, we still think Galaxy will offer the most upside in 213. Last year, Galaxy proved its strength in VIP but its mass table productivity was still uninspiring. As of 3Q12, Galaxy s mass table yield was only US$8.8k/table/day, i.e. 17% below Cotai peers. This year, we expect yield management tools to help it close the gap. Expanding at 25% EPS CAGR over the next three years but only trading at 14x PE, Galaxy remains one of the most attractively priced growth stocks in Asia. Buy ratings on four stocks: Galaxy, MPEL, Sands and Wynn We raise gaming revenue growth from 8% to 11% in 213, driven by 5% VIP growth and 25% mass growth. We raise target prices across the board and upgrade Wynn and Sands from Hold to Buy. We now have Buys on four stocks: Galaxy (TP HK$41.2), MPEL (TP US$22.4), Sands (TP HK$44.2) and Wynn (TP HK$26.4). Key risk is if VIP recovery proves to be short-lived. Figure 1: sector valuation 2 Jan 213 Rating Target price Upside EV/EBITDA PE DB EPS growth PEG Div Yield 213E 213E 213E 214E 212E 212E Galaxy Buy HK$ % 1.5x 14.x 26% 23%.7x.% Melco Crown Buy US$ % 1.x 17.3x 29% 38%.7x.% MGM China Hold HK$ % 9.x 12.1x 7% 9% nm 6.2% Sands China Buy HK$ % 15.1x 19.9x 3% 25%.9x 4.% SJM Hold HK$2. 1% 1.7x 14.x 6% 6% nm 6.1% Wynn Buy HK$ % 13.8x 15.8x 7% 11% nm 5.9% average 11.5x 15.5x 17% 19% Source: Deutsche Bank Karen Tang Research Analyst (+852) karen.tang@db.com Top picks Galaxy (27.HK),HKD31.15 Melco Crown (MPEL.OQ),USD17.36 Wynn (1128.HK),HKD21.8 Companies Featured Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 72/4/212. Buy Buy Buy Galaxy (27.HK),HKD31.15 Buy 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) Melco Crown (MPEL.OQ),USD17.36 Buy 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) MGM China (2282.HK),HKD14.42 Hold 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) Sands China (1928.HK),HKD36.45 Buy 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) SJM (88.HK),HKD18.54 Hold 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) Wynn (1128.HK),HKD21.8 Buy 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x)

2 Table Of Contents 213 Outlook... 3 Leading indicators show early signs of VIP recovery... 3 Raise gaming revenue growth from 8% to 11% in New high-speed rail station boosts visitor growth... 5 Wynn & Galaxy biggest beneficiaries of VIP recovery... 5 Smoking ban Smooth transition on January 1; impact limited... 6 Mass market growth remains strong... 7 Driver # 1: Infrastructure improvements... 7 Driver # 2: Rising minimum bets... 9 Driver # 3: Hotel room bottleneck getting relieved Earnings and ratings changes Margin expansion from favorable mix shift towards mass market Bigger earnings revisions for Cotai operators Higher than consensus on Galaxy & MPEL Expect further sector re-rating in Company section Galaxy (Buy): Top pick; Our 213 EBITDA 11% above consensus MPEL (Buy): Leader in premium mass... 2 MGM China (Hold): Solid dividend yield but hotel room constraint Sands China (Buy): Upgrade from Hold to Buy with HK$44.2 TP SJM (Hold): Good dividend yield but smoking ban impact likely Wynn (Buy): Biggest beneficiary of VIP recovery Appendix A: Company P&L... 3 Appendix B: Market share gross gaming revenue Overall gaming revenue market share VIP revenue market share VIP rolling VIP rolling market share Mass market revenue market share Page 2 Deutsche Bank AG/Hong Kong

3 213 outlook Leading indicators show early signs of VIP recovery Fine wine prices up 3% since mid November Over 9% of VIP players are ultra-rich mainland Chinese. To monitor the spending patterns of Chinese tycoons, we look at the market prices of expensive French fine wines, such as Lafite, Latour and Petrus, among others. Specifically, we track the Fine Wine 5 index, which represents market prices of the 5 most heavily traded French and Italian fine wines. After falling 14-16% from its peak in March 212, the index remained flat between July and October. In early November, the index started to show some signs of recovery. By 28 December, the index rose to 32.1, up 3% from the trough in mid November. In particular, the index rose 2.% during December, the first month-on-month increase since February 212. Figure 2: French fine wine price yoy vs gaming revenue yoy 12% 1% 8% 6% 4% 2% % -2% Jan-7 Jul-7 gaming revenue yoy (RHS) French fine wine index yoy (LHS) 7% correlation with 1-month lead Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Source: government, The London International Vintners Exchange Jul-11 Jan-12 Jul-12 6% 5% 4% 3% 2% 1% % -1% -2% -3% Figure 3: China luxury car sales vs. gaming revenue yoy 14% 12% 1% 8% 6% 4% 2% % China luxury car sales yoy* gaming revenue yoy 74% correlation with 3-month lead Aug-Nov rebound to 22-29% yoy vs trough of 11% in June Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 *Luxury car sales include sales of Audi, Mercedes and BMW (incl Mini) in China. These brands account for c. 8% of luxury car sales in China. Source: German auto company data, government, Deutsche Bank China luxury auto sales also seem to be picking up In China, the top three German car brands Audi, Mercedes and BMW (including Mini) represent almost 8% of the country s total luxury car sales. Sales growth of these three car brands recovered from a 11% yoy trough in June to 22-29% yoy over August- November. Historically, China luxury car sales have been a good indicator of gaming revenue with a three-month lead (74% correlation). We raise gaming revenue growth forecast from 8% to 11% for 213 On the back of improving leading indicators, we lift our gaming revenue growth forecast from 8% to 11% for 213, driven by: VIP revenue growth of 5% (up from %) and Mass revenue growth of 25% (up from 22%). Deutsche Bank AG/Hong Kong Page 3

4 Figure 4: gaming revenue yoy growth 8% 7% 6% 5% 4% 3% 2% 1% % -1% -2% 62% 1Q 8 48% 2Q 8 28% 3Q 8 Source: DICJ, Deutsche Bank estimates -3% -13% -12% 4Q 1Q 2Q % 3Q 9 57% 5% 4Q 9 1Q 1 77% 2Q 1 49% 52% 43% 46%48% 33% 27% 3Q 1 4Q 1 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 13% 2Q 12 6% 1%11% 3Q 12 DB forecast 4Q 213E 12E Raising VIP revenue growth to 5% in 213E In November, junket VIP rolling surprisingly rose 7% yoy to HK$519bn. This is the first growth in junket VIP rolling since May (flat or down 2-7% yoy over June-October). In December, gaming revenue rose 2% yoy to MOP28.2bn, a new monthly record, beating market expectations. These positive data affirm our view that China s demand for luxury goods has started to recover. Incorporating this change in demand patterns, we raise s 213E VIP growth from % to 5% yoy. Figure 5: gaming revenue Figure 6: junket VIP rolling growth (yoy) MOPbn Gaming revenue(lhs) yoy(rhs) % 5% 4% 3% 8% 7% 6% 5% 4% 4% 3% 71% 65% 58%59% 55% 51% 44% 42% 33% 3%3% 24% +7% yoy in Nov v s. down or flat over Jun-Oct 1 5-1/11 3/11 5/11 7/11 9/11 11/11 1/12 3/12 5/12 7/12 9/12 11/12 2% 1% % 2% 1% % 12% 14% 13% 1% %% -1% -2%-3% -7% 1/11 3/11 5/11 7/11 9/11 11/11 1/12 3/12 5/12 7/12 9/12 11/12 7% Source: government, Deutsche Bank estimates Source: government, Deutsche Bank estimates Figure 7: industry yoy growth by segment 99% 1% VIP yoy Mass yoy 8% 6% 6% 71% 57% 62% 48% 5% 52% 4% 2% % -2% 26% 15% 2% 4% -19% -19% 1Q 9 2Q 9 3Q 9 32% 33% 37% 33% 31% 31% 36% 39% 32% 38% 36% 3% 24% 27% 31% 25% 4Q 9 1Q 1 2Q 1 3Q 1 4Q 1 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 7% 2Q 12-1% 3Q 12 2% 5% 4Q 213E 12E Source: government, Deutsche Bank estimates Page 4 Deutsche Bank AG/Hong Kong

5 New high-speed rail station boosts visitor growth The Zhuhai station of the Guangzhou-Zhuhai intercity rail (which is located next to s Gongbei border gate) started operations on 31 December 212. With this new link, a visitor from Wuhan (Central China) can travel directly to by high speed train within about four hours vs. 14 hours previously (see page 7 for more details). In 212, visitor arrivals to remained stagnant at 28m as the 5% growth in overnight visitors was offset by a 4% decline in day-trippers. With the new Zhuhai station, we think visitor growth will resume in 213. We raise our 213 mass revenue growth forecast from 22% to 25% yoy, driven by the following factors. 1% growth in overnight visitor arrivals: The 5,8 hotel rooms at Sands Cotai Central released the bottleneck on s hotel capacity. Typically, visitor growth picks up significantly after a new hotel opens. 15% growth in gaming spend per visitor: We believe Sands Cotai Central s large number of hotel rooms and diverse entertainment offerings should help increase visitor length of stay and in turn their gaming spend. In addition, we believe expanding premium mass programs at properties like City of Dreams and Galaxy should have a positive impact on gaming spend per visitor, as premium mass players typically spend more than grind mass players. Figure 8: mass market revenue by drivers 4% 35% 3% 25% 2% 15% 1% 5% % -5% -1% 15% 19% -3% Gaming spend per visitor yoy Overnight visitor arrivals yoy 37% 21% 28% 1% 16% 18% 13% 15% -2% 33% 15% 19% 36% 8% 31% 5% 28% 26% High-speedrail impact 25% 1% 15% 2% 8% 12% E 213E 214E Source: Deutsche Bank estimates, DSEC Wynn & Galaxy biggest beneficiaries of VIP recovery We think 213 will be marked by the return of the VIPs. Leading indicators, such as fine wine prices, suggest an imminent recovery in high-end spending. Junkets also believe that pent-up VIP demand is about to be released. After six months of lackluster VIP growth, junkets have noticed a sudden surge in VIP demand since early December, particularly from northern China. We see this as the start of the VIP recovery cycle. Galaxy and Wynn are the biggest beneficiaries given their high VIP exposure. We upgrade Wynn from Hold to Buy, and add it to our top picks alongside Galaxy and MPEL. Deutsche Bank AG/Hong Kong Page 5

6 Figure 9: Revenue mix of operators (213E) Figure 1: EBITDA mix of operators (213E) 1% 8% 6% 4% 2% % 41% 36% 29% 25% 29% 26% 13% 45% Sands China 1% 5% 8% 2% 3% 63% 66% 67% 68% 71% SJM Melco Crown VIP 61% Wynn Galaxy MGM China Mass gaming VIP 1% 8% 6% 4% 2% % 51% 62% 61% 6% 57% 26% 5% 4% 6% VIP 33% 22% 33% 34% 34% Sands China Melco Crown SJM MGM China 4% 37% 18% 39% 45% Galaxy Wynn Mass gaming Nongaming Nongaming VIP Source: Deutsche Bank estimates Source: Deutsche Bank estimates Smoking ban Smooth transition on 1 January; impact limited From 1 January 213, 's smoking ban will cover not only restaurants (effective since 1 January 212), but also casino gaming floors. Under the laws, casinos need to allocate at least 5% of gaming floor area as non-smoking areas. Non-smoking areas need to be separated from smoking areas by either: (i) four-meter wide transition areas, (ii) two-meter high partitions or (iii) air curtains or special ventilation systems. For smokers violating the law, the fine will be MOP4 (US$5). Casinos will only be liable if they fail to have appropriate warning signs or sell cigarettes inappropriately. We visited several casinos in on 1 January; all casinos we visited have set up clear signs. For example, we saw in Galaxy that smoking is allowed on all the high-limit tables in the Pavilion areas, while for the remaining mass floor, all tables on the left side are for non-smoking (right side for smoking). While the smoking tables looked slightly busier (8% occupied at 5pm), the non-smoking tables were also reasonably busy (6% occupied). MGM has also included all high-limit tables in the smoking areas. MGM management said that they have complied with all the requirements, including improving ventilation systems to improve air quality. Separately, 42 casino visitors were fined MOP4 each for smoking in non-designated areas on 1 January. In Australia, a complete 1% smoking ban in public areas (including mass casino floors) came into effect in various states over The average impact on mass gaming revenue was 5-1% in the first year of the smoking ban implementation. Since 's ban is only on 5% of the floor space, and 8% of 's overall gaming revenue is generated on 2% of the gaming floor space, we think the impact on will be very limited. Page 6 Deutsche Bank AG/Hong Kong

7 Mass market growth remains strong Driver # 1: Infrastructure improvements Zhuhai station links Gongbei to China s high-speed rail network The much-anticipated Zhuhai south station finally opened on 31 December. This brings the high-speed rail very close to the border as the station is within a 1 minute walk to s Gongbei border gate. This opening also reduces the travelling time between Gongbei and Guangzhou to only 8 minutes (vs minutes by bus). The travelling between Zhuhai station and Guangzhou South station costs RMB7 per 2ndclass ticket (or RMB9 per first-class ticket). On holidays, Zhuhai station would have 35 trains arriving from Guangzhou South station during 6:3am to 11:pm (or 25 trains during 7am to 1:4pm on weekdays). More importantly, the Guangzhou station is also the hub for China s high-speed railway, which links major cities such as Wuhan and Beijing (the rail link to Beijing opened on 26 December 212). The average train speed is >3km/hr, hence the travel time i) from Wuhan in central China to is reduced from 14 hours to four and ii) from Beijing to is reduced from about 2 hours to eight hours. Overall, these transport infrastructure improvements should help deepen its penetration further into China. The six provinces/cities along the Beijing-Guangzhou high-speed railway have a combined population of 432m (32% of China), with GDP per capita of RMB37, (vs. the Chinese average of RMB35,). Figure 11: high-speed rail network Source: Deutsche Bank, Press articles Deutsche Bank AG/Hong Kong Page 7

8 Capacity expansion at Gongbei Border Gate also likely to be completed soon Gongbei Border Gate, which connects northern to southern Zhuhai, is the biggest entry point to for visitors. In YTD October 212, 48% of visitors travelled to via this border gate. According to government data, all border gates connecting Zhuhai and handled a total of 1m passengers in 211 (average of 274k passengers/day). In order to cope with increasing visitor traffic, the expansion project at Gongbei Border Gate is currently under construction. We believe the expansion will be completed in the next one to three months. Upon completion, Gongbei immigration point s capacity should increase from the current c.26k passengers/day to 35k passengers/day. Hengqin boundary may extend opening hours In late October, both and Zhuhai governments preliminarily agreed to extend the opening hours of Hengqin Border Gate from the current 9am-8pm to 8am-1pm. This border gate currently handles only about 4% of visitor traffic. But given Zhuhai government s plans to develop Hengqin, we think this policy should have a modest impact on visitation over the longer term. Overnight visitors tend to spend more per trip Because the high-speed rail is likely to bring more visitors from outside of Guangdong province to, we think it will help to increase spend per visitor. Below are two key takeaways from our proprietary survey, which gathered data from 11,435 visitors at the three main border gates in in 211. Visitors from outside Guangdong stay longer: 8% of visitors from outside Guangdong spend at least one night in whereas only 37-5% of visitors from Guangdong and HK visitors do this. Visitors from outside Guangdong spend twice more per trip: Visitors from outside Guangdong province typically spend HK$15,7 per trip, which is more than twice that of Guangdong or HK visitors (HK$7,5 and HK$5,7 for Guangdong and HK visitors, respectively). Figure 12: How long will you stay in? Figure 13: How much will you spend on this trip? 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Overnight visitros Day Trippers 2% 5% 63% 8% 5% 37% HK Guangdong Rest of China HK$ 18, 16, 14, 12, 1, 8, 6, 4, 2, - Gaming loss Non-gaming spend 1 visitor from Rest of China = 2 visitors from HK/ or Guangdong 5,7 3,9 7,5 5,2 1,8 2,3 15,7 8,9 6,8 HK Guangdong Rest of China Source: Deutsche Bank Source: Deutsche Bank Visitor mix change toward overnight visitors has started already Visitor arrival growth to slowed substantially from 16% yoy in 2H11 to a decline of 2%yoy in 3Q12. That said, visitor arrivals from the key overnight visitor market (China Ex-Guangdong province) have remained strong at 13% yoy in YTD November. As such, the percentage of visitors from China Ex-Guangdong rose from 27% in early 211 to 36% by November 212. This is reflected in the accelerating trend of overnight visitor Page 8 Deutsche Bank AG/Hong Kong

9 growth (+6% yoy by November- 212 vs. % in May 212). We think this would feed into higher mass revenue growth as visitors from China Ex-Guangdong typically stay longer (c. 8% of them are overnight visitors) and spend more. Figure 14: Visitor arrival growth by country/ province Figure 15: Overnight vs. day tripper visitor growth (yoy) Overnight visitor Day tripper 35% 25% 15% 5% -5% -15% -25% Visa restrictions 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 China Guangdong Total HK + Taiwan 3% 25% 2% 15% 1% 5% % -5% -1% -15% Ov ernight visitor growth accelerating vs. declining day trippers Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Source: Deutsche Bank, DSEC Source: Deutsche Bank, DSEC Driver # 2: Rising minimum bets In 212, to counter the twin constraints of table cap and slow VIP growth, casinos started to focus on raising mass table yield (revenue per table). In 3Q12, s mass revenue per table reached US$8,681/day, up 3% yoy. A key investor question is whether this mass market growth rate is sustainable. For the next two years, we think mass market growth should be sustainable at 2-25% per year, as the rising average minimum bet, which has been a key driver for the past two years, has more room to grow. In order to analyze the potential for higher minimum bets, we spent a Friday every month walking the mass gaming floors of the seven biggest casinos in. From 2pm to 8pm, we tallied the min bet size of over 1, tables on each occasion. We were able to enter most of the high-limit and premium mass areas. For some of the private lounges that we could not enter, we either made an estimate based on our experience from previous casino tours or checked with casino management afterwards. To be consistent, we only counted open baccarat tables. We ignored other games, such as blackjack or sci-bo, which are not consistent with baccarat play limits. On average, we estimate that the average mass market minimum bet in the Big Seven casinos has risen by 11% from HK$1,236 in late June to HK$1,37 in mid November. Based on our November table count, 27% of tables are in premium mass (minimum bets HK$2, or above), 25% are in high-limit mass (HK$1,-1,5), 44% are in middle-mass and 4% are in grind mass (HK$2 or less). Deutsche Bank AG/Hong Kong Page 9

10 Figure 16: Distribution of mass market tables by minimum bet size Avg min bet: HK$1,236 (no. of tables counted) 1,2 1, % 22% 5% 2% Jun 29, Friday Source: Deutsche Bank estimates +11% HK$1,37 27% 25% 44% 4% Nov 16, Friday Premium mass HK$2, High limit mass HK$1,-HK$1,5 Middle mass HK$3-HK$8 Grind Mass HK$2 Figure 17: Mass table yield (revenue per table per day, US$) 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, - 3Q12 +3% yoy 8,242 8,211 8,681 7,545 6,32 6,442 6,747 5,577 5,19 4,715 4,255 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Source: Company data, government Which casinos have the highest exposure to premium mass? Every casino has a different definition for their premium mass segment. To be consistent, we use the following categorization for this study: Premium mass: minimum bet HK$2, or above; High-limit mass: minimum bet HK$1,-1,5; Middle mass: minimum bet HK$3-8; Grind mass: minimum bet HK$2 or below. The following shows the distribution of mass market tables in the Big Seven casinos by their minimum bet limits. Key observations include the following. City of Dreams has the highest exposure to premium mass (49%) Galaxy has the second highest exposure to premium mass (37%) Sands Cotai Central has raised its premium mass tables from 7% in June to 14% Grand Lisboa (9%) and Sands Cotai Central (13%) have the highest exposure to grind mass Venetian s strength is in high limit mass (HK$1,-1,5 minimum bet) MGM & Wynn s ability to grow premium mass is constrained by a limited stock of hotel rooms Page 1 Deutsche Bank AG/Hong Kong

11 Figure 18: Distribution of mass market tables by min bet Figure 19: Premium / high limit mass market area size (Friday 16 November) Grind mass Middle mass High limit mass Premium mass Opening Casino Premium / high limit # of HK$2 HK$3-HK$8 HK$1-HK$1,5 HK$2, date mass area tables City of Dreams 11% 4% 49% Galaxy 47% 14% 37% 2Q 21 Wynn Wynn Encore / Wynn Club 24 Grand Lisboa 9% 51% 2% 2% 4Q 21 MGM Supreme Lounge 15-2 MGM Grand 54% 31% 15% Sands Cotai Central 13% 61% 13% 14% 1Q 211 City of Dreams High limit West 15-2 Venetian 35% 48% 17% 4Q 211 MGM Platinum Lounge 15-2 Wynn 3% 54% 13% 3% 1Q 212 Venetian Venetian high limits area 66 Big 7 casino avg 4% 44% 25% 27% 2Q 212 Galaxy Pavilion Club 23 % 25% 5% 75% 1% 2Q 212 City of Dreams near Grand Hyatt entrance 2 Source: Deutsche Bank estimates Source: Company data, Press reports, Deutsche Bank site visits Which casino has been attacking the premium mass segment most aggressively? Between our June and November table counts, we found that Sands Cotai Central and City of Dreams have added the most tables with minimum bets at HK$2, or above (Sands Cotai Central from 7% to 14% of mass tables and City of Dreams from 43% to 49%). We think City of Dreams premium lounge near the Grand Hyatt lobby has attracted many premium mass players who used to play at Wynn Encore. According to these players, the two areas share a few similar characteristics: i) both have easy access (adjacent to hotel lobby) but are away from the busiest tourist entrance; ii) both have a relatively limited number of tables (2-24 tables) and therefore have a quieter atmosphere and iii both have tables with very high betting limits, some with minimum bets as high as HK$1,. For years, Wynn dominated the premium mass segment, and always had the highest mass table yield (revenue per table). But in 2Q12, City of Dreams saw its mass table yield rising to US$11.4k/table/day, and overtook Wynn for the first time. (Note: Plaza casino also overtook Wynn in 2Q12 but we exclude it from our comparison because it is a much smaller casino with only 36 mass market tables.) Figure 2: Mass table win/day (US$) Figure 21: Mass table win/day (US$) 3Q12 14, 12, 1, 8, 6, 4, 2, City of Dreams Wynn City of Dreams overtookwynn for the first time in 2Q12 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Source: Company data, Deutsche Bank estimates #of rooms: 14, 12, 1, 8, 6, 4, 2, 1,4 rooms 11,6 11,3 City of Dreams 1,1 rooms Wynn 587 rooms 1,3 9,9 9,6 MGM Grand Source: Company data, Deutsche Bank estimates 2,95 rooms Venetian 431 rooms Grand Lisboa 2,2 rooms 8,8 Galaxy c.2, rooms 5,8 Sands Cotai Central For City of Dreams, we think its focus on premium mass segment has been a key driver of the rising mass market hold percentage, and therefore EBITDA margins. The following figure plots the relationship between number of hotel rooms and mass market Deutsche Bank AG/Hong Kong Page 11

12 hold percentage. The more hotel rooms a casino has, the better its ability in attracting premium mass customers by offering them free hotel rooms as comps. Figure 22: Mass market hold vs. EBITDA margin (3Q12) Property EBITDA margin (HK GAAP) 4% 35% 3% 25% 2% Sands (289 rooms) 15% Sands Cotai 1% Central Altira (c. 2, rooms) 5% (216 rooms) StarWorld (59 rooms) Galaxy (2,2 rooms) City of Dreams (1,4 rooms) Venetian (2,95rooms) Wynn (1,1 rooms) MGM (587 rooms) % 15% 2% 25% 3% 35% Mass market hold % Source: Company data, Deutsche Bank estimates Figure 23: Promo allowances (as % of gross gaming revenue) 4.5% % of GGR 1H11 2H11 1H12 4.% 4.% 3.8% Most aggressive: 3.6% 3.5% +5bps hoh 3.4% 3.3% 3.1% 3.% 3.% 2.6% 2.6% 2.6% 2.7% 2.5% 2.5% 2.4% 2.1% 2.% 2.% 1.5% 1.%.5%.% Melco Crown MGM China Source: Company data, Deutsche Bank calculations Sands China Wynn Average Galaxy has more room to lift minimum bets and expand margins From 2Q11 to 3Q12, Galaxy has focused on raising its mass market hold percentage from 18% to 3% by lengthening customer stay. At 3% hold percentage, it is already near the best-in-class ratio (32% by Venetian). Next, we think Galaxy will try to close the table yield gap. In 3Q12, Galaxy s mass table only yielded US$8.8k/table/day, at a 25% discount to the best-in-class (US$11.6k by City of Dreams) Galaxy is now trying to raise table yields by focusing on premium mass customers and therefore lifting the average bet size. Also, we believe it has more room to penetrate this segment by offering more of its 2,2 hotel rooms as comps. This should help expand margins further in 213. Figure 24: Galaxy s mass hold vs. EBITDA margin Figure 25: Mass table yield (revenue/table/day; US$) 3Q12 3% 27% 24% 21% 18% 15% Mass market hold % (LHS) Property EBITDA margin (luck-adj, HK GAAP) (RHS) 3% 28% 3% 15% 15% 18% 2Q11 Source: Company data 3Q11 21% 16% 24% 4Q11 17% 1Q12 27% 2Q12 18% 3Q12 22% 25% 2% 15% 1% 5% % #of rooms: 14, 12, 1, 8, 6, 4, 2, 1,4 rooms MPEL City of Dreams 1,1 rooms Wynn 587 rooms Average ex-galaxy and Sands Cotai Central MGM Grand Source: Company data, Deutsche Bank estimates. 2,95 rooms Venetian 431 rooms SJM Grand Lisboa 2,2 rooms Galaxy 3,6 rooms Galaxy and Sands Cotai Central should close the gap during next 12 months Sands Cotai Central Page 12 Deutsche Bank AG/Hong Kong

13 Driver # 3: Hotel room bottleneck being relieved We believe one of the bottlenecks for growing visitor volumes (and mass revenue) is the availability of quality hotel rooms in. This bottleneck should be considerably relived in 213 as Sands Cotai Central is opening about 5,7 four to five star hotel rooms over 2Q12-1Q13. This is a 26% addition to end-211 hotel rooms in. With more hotel rooms, visitors tend to stay longer and gamble longer, which could lead to both higher mass drop and higher mass hold. Figure 26: Hotel rooms in 3, 25, 2, 15, 1, Non casino Other Casinos Sands China 9,168 1,832 12,978 Sands Cotai Central adds 5,7 hotel rooms over 2Q12-1Q13, 26% increase to the hotel rooms in as of end ,356 2,91 17,49 19,216 16,148 27,41 28,41 5, E 213E Source: Deutsche Bank In contrast to growth in hotel rooms, the near-term growth of the gaming tables is restricted by the government table cap. For 213, we expect only about 2 more tables to open at Sands Cotai in Central Phase 2. The next gaming table supply would come in 215, when new Cotai projects start operations. We expect the government to approve about 4 gaming tables each for the five Cotai projects (Galaxy Phase 2, Melco Crown s Cotai project, MGM Cotai, SJM Cotai and Wynn Cotai). Overall, this means would add 2,2 gaming tables over , implying a 7% E CAGR. Figure 27: Capacity by gaming tables (by year end) No of tables 9, 8, 7, 6, 5, 4, 3, 2, 1, 1,388 2,762 4,375 4,17 4,77 4,791 Sands Cotai Central P2 Galaxy P2 Studio City 6,5 6,5 5,342 5,5 5,7 5,7 MGM/ SJM/ Wynn Cotai 7, E 213E 214E 215E 216E 217E Wynn SJM MGM China Melco Crown Sands China Galaxy Source: Government data, Deutsche Bank estimates Deutsche Bank AG/Hong Kong Page 13

14 Earnings and ratings changes Margin expansion from favorable mix shift toward mass market Earnings forecast revision Mass market gaming has higher margins (3-35%) vs. VIP gaming (1-15%). As such, with the higher growth in mass market gaming, we expect EBITDA margins to expand in 213 despite cost pressures from labour and junket commissions. We expect s EBITDA margin (HK GAAP) to expand from 18.% in 212E to 19.% in 213E. Factoring this in, we raise our EBITDA forecasts for the casino operator stocks by 3-13%. Target price changes We also raise our target 213 EV/EBITDA multiple by 2 points for Melco Crown. This is because we believe Melco Crown will be a key beneficiary of the strong mass market growth in 213E due to its focus on premium mass market. Separately, we now add i) the Parisian (Site 3) project valuation to Sands China, ii) our Philippines project valuation to Melco Crown iii) and ascribe 1% of the estimated value creation from the other five Cotai projects to the target price of each operator (vs. 5% valuation creation ascribed previously). This is done to factor in the improving visibility on the Cotai projects and the Melco Crown Philippines project. Rating changes - We also upgrade Wynn from Hold to Buy. We think Wynn will benefit from the VIP demand recovery given it has the highest exposure to VIP gaming (45% of 213 EBITDA). We upgrade Sands China from Hold to Buy as we believe it will be the biggest beneficiary of the strong mass market growth in 213E. Figure 28: Rating, target price and EBITDA forecast changes Stock Listi. curr. Repor curr. Rec Change in TP EV/EBITDA multiple New EBITDA Old EBITDA EBITDA revision New Old New Old Change New Old 212E 213E 214E 212E 213E 214E 212E 213E 214E Galaxy HKD HKD Buy Buy % ,17 11,887 14,25 9,636 1,684 12,387 4% 11% 13% Melco Crown USD USD Buy Buy % ,45 1, ,15 5% 7% 11% MGM China HKD HKD Hold Hold % 9 9 5,347 5,775 6,21 5,431 5,628 5,792-2% 3% 7% Sands China HKD USD Buy Hold % ,92 2,572 3,91 1,876 2,311 2,728 2% 11% 13% SJM HKD HKD Hold Hold % 1 1 7,841 8,316 8,87 7,8 7,87 8,541 1% 6% 3% Wynn HKD HKD Buy Hold % ,678 8,254 9,67 8,151 8,26 8,515-6% 3% 6% Source: Deutsche Bank estimates Bigger earnings revisions for Cotai operators We believe Cotai-based operators, namely Galaxy, Melco Crown and Sands China, are likely to benefit from the strong visitor growth in 213 as they have much larger hotel room inventories. As such, we raise E EBITDA forecasts for these three operators the most (7-13%). Higher than consensus on Galaxy & MPEL Our EBITDA forecasts for Galaxy and Melco Crown are 1-16% above consensus. We believe the Street has not fully factored in the strong growth potential of premium mass operations for both these operators. Page 14 Deutsche Bank AG/Hong Kong

15 Figure 29: Deutsche Bank forecasts vs. IBES consensus Company Curr. Deutsche Bank forecasts Consensus forecasts % diff (Deutsche Bank vs. consensus) 212E 213E 214E 212E 213E 214E 212E 213E 214E Galaxy HKD 1,17 11,887 14,25 9,655 1,682 12,257 4% 11% 14% Melco Crown USD 925 1,45 1, ,57 6% 1% 16% MGM China HKD 5,347 5,775 6,21 5,278 5,62 6,27 1% 3% -1% Sands China USD 1,92 2,572 3,91 1,96 2,475 2,913 1% 4% 6% SJM HKD 7,841 8,316 8,87 7,617 8,438 9,428 3% -1% -7% Wynn HKD 7,678 8,254 9,67 8,9 8,684 9,614-4% -5% -6% Sector USD 6,83 8,34 9,239 6,726 7,731 8,818 2% 4% 5% Source: Deutsche Bank estimates, IBES consensus We expect further sector re-rating in 213 The sector is trading at 11.5x 213E EBITDA, near the historical average (11x). On a PE basis, stocks are trading at 15.4x 213E EPS. This is still at a big discount to Chinese consumer discretionary PE (22.4x). We expect further re-rating in 213. Figure 3: Consensus sector 12-month forward EV/EBITDA Std Div Avg 11.x -1 Std Div 6 4 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Source: Datastream, IBES consensus, Deutsche Bank Deutsche Bank AG/Hong Kong Page 15

16 Page 16 Deutsche Bank AG/Hong Kong Figure 31: Gaming valuation 2/1/213 Ticker Rating Price Mkt EV/EBITDA PE EBITDA EBITDA EPS PEG Div Div PB ND/E FCF cap (x) (x) US$m growth growth (x) Yield Payout (x) yield local cur US$m 12E 13E 14E 12E 13E 14E 12E 13E 14E 12E 13E 14E 12E 13E 14E 12E 12E 12E 12E 12E 12E Galaxy 27.HK Buy , ,293 1,534 1,81 74% 19% 18% 88% 26% 23%.7.% % 6. 1% 5.8% Melco Crown MPEL.OQ Buy , ,45 1,231 14% 13% 18% 28% 29% 38%.7.% % % 2.2% MGM China 2282.HK Hold , % 8% 8% 9% 7% 9% nm 6.2% 8% % 8.3% Sands China 1928.HK Buy , ,92 2,572 3,91 22% 34% 2% 18% 3% 25%.9 4.% 131% % 3.9% SJM 88.HK Hold , ,12 1,73 1,136 13% 6% 6% 16% 6% 6% nm 6.1% 9% % 6.1% Wynn 1128.HK Buy , ,65 1,17-3% 8% 1% % 7% 11% nm 5.9% 1% % 6.% simple average % 15% 13% 26% 17% 19%.8 3.7% 67% % 5.4% weighted average 98, ,83 8,34 9,239 2% 18% 15% 23% 19% 19% Korea Grand Korea Leisure* 1149.KS NR , % 15% 7% 125% 4% 7% nm 3.6% 46% 5.9-2%.5% Kangwon Land* 3525.KS NR , % 21% 12% -16% 26% 14%.9 2.9% 52% % na Paradise Co* 3423:KS NR 18. 1, % 25% 1% 2% 26% 1% % 31% % na Korea average % 2% 1% 13% 19% 1% % 43% %.5% SE Asia Berjaya Sports Toto BSTB.KL Hold 4.5 1, % 2% 6% 13% 2% 7% nm 6.3% 91% % 6.2% Genting Berhad GENT.KL Hold , ,25 2,538 2,736-14% 13% 8% -21% 3% 1% nm.7% 1% 1.6-2% na Genting Malaysia GENM.KL Buy 3.6 6, % 5% 5% 5% 5% 6% nm 2.% 25% % 5.% Genting Spore GENS.SI Hold , ,44 1,166 1,289-22% 12% 11% -4% 19% 16% 1.7.7% 2% % 1.% NagaCorp* 3918.HK NR 4.7 1, % 24% 13% na 2% 17%.7 4.9% 6%. % na SE Asia average % 11% 8% -11% 1% 11% % 41% 3.6 5% 4.1% US Caesars Entertainment CZR.OQ Hold nm nm nm nm 1,8 1,823 na -42% 81% na nm nm nm nm.% % nm nm nm Las Vegas Sands LVS.N Buy , na na 3,164 3,846 na -1% 22% na 6% 11% na na 2.1% 47% % 2.2% MGM Resorts MGM.N Buy , nm nm nm 1,595 1,776 1,847 nm 11% 4% 29% nm na na.% %.7 113% 21.5% Wynn Resorts WYNN.OQ Buy , ,438 1,566 1,653-7% 9% 6% -3% 19% 11% na 7.9% 172% nm nm 9.1% US average % 31% 5% 11% 15% 11% na 2.5% 55% % 1.9% China Consumer Discretionary Belle 188.HK Buy , ,116 1,341 1,66 15% 2% 2% 14% 21% 21% % 3% % 1.8% Chow Tai Fook 1929.HK Buy , ,141 1,1 1,377 8% -4% 25% 73% -15% 28% nm.7% 15% % -7.1% Esprit 33.HK Hold , % 1% 4% -9% 13% 57% % 22%.8-1% -6.3% Golden Eagle Retail 338.HK Hold 19. 4, % 19% 19% 3% 17% 16% % 31% % -.5% Li & Fung 494.HK Buy , ,3 1,489 1,767-1% 45% 19% 3% 47% 21%.7 2.5% 6% % -.1% Lifestyle 1212.HK Buy , % 1% 12% 16% 15% 14% % 41% 3.6 1% -1.1% Parkson Retail 3368.HK Hold 6.8 2, % 14% 11% -2% 13% 14% % 45% 2.8 3% 2.1% Prada 1913.HK Buy , ,1 1,346 1,543 41% 34% 15% 68% 41% 16%.8 1.4% 3% 5.3-1%.2% China Consumer Discretionary average % 19% 2% 8% 33% 23% % 59% 3.8 3% -1.4% China Consumer Staples China Food 56.HK Buy 7.2 2, % 22% 16% 45% 23% 21% % 37% 2.8 5% -.8% China Mengniu Dairy 2319.HK Hold , % 29% 18% -8% 24% 19% 1. 1.% 22% %.% China Resources Ent 291.HK Buy , ,44 1,163 1,4 36% -19% 2% 28% -31% 28% nm 2.2% 4% % 5.7% Hengan 144.HK Buy , % 24% 2% 33% 25% 2% % 61% 6.9-9% 2.2% Huabao lnt'l 336.HK Buy 3.8 1, % 1% 15% 9% -1% 16% % 4% 2.5-2% 8.1% Sun Art Retail 688.HK Hold , ,39 1,298 22% 23% 25% 25% 22% 27% % 4% 5.5-5% 1.4% Tingyi 322.HK Buy , ,319 1,543 1,781 44% 17% 15% 16% 49% 2% % 62% 7.2 3%.7% Tsingtao Brewery 168.HK Buy , % 21% 17% 2% 23% 2% 1.4.7% 2% % -.3% Wumart 125.HK Buy , % 19% 22% 15% 2% 24% % 44% % 2.7% China Consumer Staples average % 15% 19% 18% 17% 22% % 41% % 2.2% Global Luxury average % 11% 12% 26% 12% 14% % 38% 5. -3% 2.4% Source: Deutsche Bank, DataStream * Based on IBES consensus estimates 3 January 213

17 Figure 32: gaming operator price performance 2/1/213 Company Mkt Cap Price YTD 1m 3m 6m 12m Q12 2Q12 3Q12 4Q12 LTM LTM % from % from T/O Beta US$m local cur hi low LTM hi LTM low (US$m) 27.HK Galaxy 16, % 8% 2% 66% 117% 62% 113% 51% -11% 36% 2% % 126% MPEL.OQ Melco Crown 9, % 13% 28% 57% 74% 53% 75% 42% -16% 17% 29% % 85% HK MGM China 7, % % 5% 27% 37% na 38% 4% -17% 15% 7% % 42% HK Sands China 37, % 9% 26% 51% 58% 32% 55% 38% -19% 18% 23% % 69% HK SJM 13, % % 7% 26% 43% 3% 42% 25% -1% 18% 8% % 49% HK Wynn 14, % -1% 4% 26% 9% 11% 7% 16% -21% 16% 3% % 46% average 3% 5% 15% 42% 56% 32% 55% 35% -16% 2% 15% -3% 69% MSCI HK 12,364.9 % 2% 4% 14% 22% -19% 24% 13% -6% 12% 5% 12, , % 25% MSCI China 62.8 % 6% 13% 15% 16% -2% 19% 1% -8% 4% 13% % 22% MSCI China Consumer Discretionary % 1% 26% 25% 12% -23% 12% 1% -17% 1% 26% % 38% MSCI China Consumer Staples 1, % 1% 1% 1% 1% -13% 5% 6% -8% 6% 4% 1, ,59.9-3% 15% Source: Deutsche Bank, DataStream, Bloomberg Finance LP Figure 33: Earnings forecast comparison for gaming stocks 212E 213E US$m Galaxy Melco MGM Sands SJM Wynn Industry Galaxy Melco MGM Sands SJM Wynn Industry Crown China China Crown China China Market share 19% 13% 1% 19% 27% 12% 1% 18% 14% 1% 22% 25% 11% 1% yoy +3ppt -2ppt -1ppt +3ppt -2ppt -2ppt -1ppt 1ppt ppt +3ppt -2ppt -1ppt Volume measures VIP rolling 178,82 124,898 91, ,72 226, , , , ,624 13,496 16,19 231,82 115, ,787 Mass drop 4,573 4,238 2,451 9,69 14,281 2,799 37,952 5,989 5,223 2,896 13,459 16,773 3,239 47,58 Slot handle 3,5 5,992 4,794 11,6 3,813 4,766 33,429 3,662 6,658 4,99 14,517 3,988 4,54 38,319 Direct VIP (% of VIP rolling) 1% 11% 8% 18% % 1% 7% 2% 9% 7% 18% % 7% 6% yoy VIP rolling yoy 22% -4% 1% 39% -4% -3% 6% % 16% 14% 13% 2% -3% 6% Mass drop yoy 63% 2% 11% 3% 14% 1% 22% 31% 23% 18% 4% 17% 16% 25% Slot handle yoy 65% 25% 31% 71% 2% -12% 29% 22% 11% 4% 31% 5% -5% 15% Capacity No of tables yoy 24% % % 13% % 2% 6% % % -1% 11% 1% 2% 3% No of slots yoy 18% 15% 6% 34% -3% -6% 13% 1% % 1% 28% % 1% 9% No of hotel rooms yoy 4% % % 6% % % 32% % % % 61% % % 29% Table yield Blended VIP & mass 27,126 21,248 22,853 14,369 15,53 23,346 18,39 28,251 24,771 28,62 16,411 16,8 25,759 19,785 VIP rev (US$/table/day) 51,74 27,87 34,859 24,163 29,866 31,521 31,296 49,688 31,368 38,146 26,57 27,73 31,63 31,864 Mass rev (US$/table/day) 8,513 12,9 9,8 8,712 7,532 11,51 8,83 11,646 15,6 12,16 1,93 8,969 13,466 1,88 Slot rev (US$/slot/day) Revenue VIP gross revenue 5,525 3,672 2,774 4,116 6,816 3,351 26,284 5,29 4,122 3,15 4,81 6,71 3,464 27,546 Mass gaming revenue 1,511 1, ,56 3, ,45 2,4 1, ,66 3,69 1,16 12,757 Slot revenue , ,931 Gross gaming revenue 7,236 5,19 3,765 7,24 1,148 4,46 38,9 7,562 5,915 4,261 9,27 1,591 4,729 42,235 Gross non-gaming revenue , , ,464 Net revenue (US GAAP) 5,333 4,8 2,85 6,515 5,824 3,681 28,237 5,711 4,659 3,13 8,63 6,13 3,925 32,13 yoy VIP gross revenue 22% -3% 1% 39% % -7% 7% -4% 12% 12% 17% -2% 3% 5% Mass gaming revenue 12% 4% 22% 36% 14% 7% 33% 35% 3% 19% 43% 17% 18% 27% Slot revenue 59% 15% 34% 35% 2% -12% 18% 16% 5% 9% 41% 5% 1% 15% Gross gaming revenue 34% 5% 6% 38% 4% -5% 14% 5% 16% 13% 28% 4% 6% 11% Gross non-gaming revenue 81% 1% 4% 35% 12% 4% 24% 2% 5% 1% 42% 5% 4% 23% Earnings Property EBITDA 1, , ,166 7,93 1,69 1, ,593 1,26 1,268 8,351 Group EBITDA 1, ,92 1, ,83 1,534 1, ,572 1,73 1,65 8,34 DB EPS na na DPS na na yoy Property EBITDA yoy 71% 13% 11% 22% 14% -3% 2% 19% 14% 9% 34% 5% 9% 18% Group EBITDA yoy 74% 14% 8% 22% 13% -3% 2% 19% 13% 8% 34% 6% 8% 18% DB EPS yoy 88% 28% 9% 18% 16% % 26% 29% 7% 3% 6% 7% EBITDA margin EBITDA margin (HK GAAP) 17.% 18.1% 18.3% 26.7% 1.% 22.2% 18.% 19.5% 17.7% 17.5% 27.9% 1.1% 22.5% 19.% yoy change 3.2ppt 1.5ppt.3ppt -3.4ppt.8ppt.4ppt 1.ppt 2.5ppt -.4ppt -.8ppt 1.2ppt.1ppt.3ppt 1.ppt Balance Sheet Net debt/ (cash) (285) 1,545 (2,335) (731) (1,229) (75) 558 (292) 1,643 (1,879) 286 (389) Net gearing 1% 15% Net cash 28% Net cash Net cash Net cash Net cash 13% Net cash 28% Net cash 27% Net cash Source: Deutsche Bank estimates Deutsche Bank AG/Hong Kong Page 17

18 Company section Galaxy (Buy): Top pick; our 213E EBITDA 11% above consensus Galaxy launched its premium mass program in 2Q12. We think it has more room to penetrate this segment by offering more of its 2,2 hotel rooms as comps. Based on our estimates, 37% of Galaxy s mass tables had a minimum bet size of HK$2, as of early November, the second highest in. Trading at 1x 213 EV/EBITDA and 14x 213 PE, we believe the stock offers very good value for its strong earnings growth (24% E EPS CAGR). In mid December, Galaxy mgmt unveiled details of Phases 3 & 4 of Galaxy. Phase 3 will include i) 4, hotel rooms (vs. 3,5 rooms from Phase 1 & 2), ii) a casino with capacity to host up to 6 tables and 2, slots (Phase 1 & 2: 95 tables & 2,5 slots) and iii) a 1k-seat performance hall and two theatres. Management plans to submit these building plans to the government in 1H13 and hopes to start construction in 2H13. Capex for Phase 3 is likely to be HK$4-5bn, and funding can be supported by internal cashflow with some debt financing. Phase 4 will have.5m sqft of mainly conference & convention (MICE) facilities. Assuming 15% ROIC, 11x EV/EBITDA, 15% discount rate and opening, we estimate that Phase 3 will be worth HK$9.9bn or HK$2.4/shr. However, we think it is too early to ascribe value to our target price as building plans are yet to be approved by the government. Our current target price only incorporates Phase 3 at land value. We value Galaxy on an SOTP basis. We value: i) current gaming operations at 11x 213E EV/EBITDA, ii) Phase 2 of Galaxy at HK$4.3/share, iii) the 1m sf GFA undeveloped Cotai land bank at HK$1,psf land value and iv) the construction materials business at book value. Our target EV/EBITDA multiple for Galaxy is in line with the average trading multiple of its peers (11.5x). Figure 34: Galaxy SOTP valuation 213E EBITDA Target Valuation HK$m multiple (x) HK$m HK$/shr % of EV StarWorld 3,378 x 11 = 38, % City Clubs 176 x 11 = 2,12.5 1% Galaxy Phase 1 8,455 x 11 = 96, % Construction materials 459 1x PB = 2, % Corporate net expenses (581) x 11 = (6,623) (1.6) -4% Existing businesses 11, , % Galaxy Phase 2 25% ROIC, 13% disc rate 18, % Cotai landbank (1m sf GFA) HK$1,psf land value 1, 2.4 6% Enterprise value 16, % Net cash (ex Phase 2 capex) End , Minorities End 213 (781) (.2) Target valuation 172, Source: Deutsche Bank estimates Downside risks include: i) market share loss at Galaxy after Sands Cotai Central ramps up, ii) construction delays or capex increases of Galaxy Phase 2. Page 18 Deutsche Bank AG/Hong Kong

19 Model updated:3 January 213 Running the numbers Asia Hong Kong Galaxy Reuters: 27.HK Buy Bloomberg: 27 HK Price (3 Jan 13) HKD Target Price HKD Week range HKD Market Cap (m) HKDm 13,27 USDm 16,774 Company Profile Galaxy is one of the six gaming license holders in. It has two flagship casinos, Galaxy and StarWorld, and four small City Clubs casinos. Phase 2 of Galaxy is under construction with a target opening in mid Phase 2 has the capacity to host 5 gaming tables, 1, slots and 1,35 hotel rooms. Galaxy has further 1.5m sf GFA land in Cotai available for future development. The company also has a legacy construction material business. Price Performance Jan 11Apr 11Jul 11 Oct 11Jan 12Apr 12Jul 12 Oct 12 Galaxy Margin Trends HANG SENG INDEX (Rebased) E 13E 14E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 13E 14E Sales growth (LHS) ROE (RHS) E 13E 14E Net debt/equity (LHS) Net interest cover (RHS) Fiscal year end 31-Dec E 213E 214E Financial Summary DB EPS (HKD) Reported EPS (HKD) DPS (HKD) BVPS (HKD) Weighted average shares (m) 3,938 3,945 4,125 4,174 4,174 4,174 Average market cap (HKDm) 9,139 2,32 59,745 13,27 13,27 13,27 Enterprise value (HKDm) 11,732 25,47 64,138 13, , ,991 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (HKDm) Sales revenue 12,233 19,262 41,178 57,529 6,237 67,74 Gross profit 1,161 2,231 5,749 1,17 11,887 14,25 EBITDA 1,161 2,231 5,749 1,17 11,887 14,25 Depreciation ,38 1,64 1,64 1,64 Amortisation EBIT 62 1,721 4,51 8,23 1,73 12,21 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 1, ,62 7,57 9,56 11,697 Income tax expense Minorities Other post-tax income/(expense) Net profit 1, ,4 7,31 9,258 11,35 DB adjustments (including dilution) DB Net profit 417 1,479 3,955 7,373 9,258 11,35 Cash Flow (HKDm) Cash flow from operations 1,541 2,128 5,664 8,177 11,123 13,26 Net Capex -2,727-5,597-4,529-4,451-5,651-9,8 Free cash flow -1,186-3,469 1,135 3,726 5,472 3,46 Equity raised/(bought back) 2 1,287 Dividends paid Net inc/(dec) in borrowings ,583 3,533 5,333 Other investing/financing cash flows ,682 Net cash flow -2, ,273 9,59 5,472 3,46 Change in working capital ,587-1, Balance Sheet (HKDm) Cash and other liquid assets 3,516 4,428 7,71 16,856 22,468 26,68 Tangible fixed assets 11,589 16,82 21,991 24,848 28,95 37,111 Goodwill/intangible assets 1,391 1,32 1,27 1, Associates/investments 1,39 1,65 1,177 1,177 1,177 1,177 Other assets 1,426 1,571 3,625 4,625 4,625 4,625 Total assets 18,963 25,186 35,764 48,566 58,25 69,621 Interest bearing debt 5,843 9,426 11,673 17,6 17,6 17,6 Other liabilities 4,685 6,185 9,448 9,448 9,448 9,448 Total liabilities 1,528 15,612 21,121 26,454 26,454 26,454 Shareholders' equity 8,169 9,197 14,222 21,532 3,79 42,14 Minorities ,27 Total shareholders' equity 8,435 9,575 14,643 22,112 31,57 43,167 Net debt 2,327 4,998 3, ,462-9,62 Key Company Metrics Sales growth (%) DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Karen Tang karen.tang@db.com Deutsche Bank AG/Hong Kong Page 19

20 MPEL (Buy): Leader in premium mass We rate Melco Crown a Buy as i) City of Dreams focus on premium mass should allow it to outgrow peers in 213 (as of mid November, 49% of City of Dreams mass tables had minimum bets above HK$2,, the highest in ) and ii) trading at 9.8x 213E EV/EBITDA, the stock looks to be pricing in a free option for two growth opportunities (Cotai and the Philippines). In early December, Melco Crown announced that it is acquiring a 93% stake in a Philippines-listed company, called Manchester International Holdings (MIH.PS), for a net purchase cost of US$5m (PHP2m). Upon completion, this company will be used to manage Melco Crown s Philippines business, including the Belle Grande project. Melco Crown plans to invest US$6m in Belle Grande and is likely to share roughly 5% of the property EBITDA. Management targets opening Phases 1 & 2 together in 1H14. We expect the project to have about 3 tables, 1,2 slots and 8 hotel rooms. Assuming a 2% ROIC, first full-year EBITDA would be US$12m, applying MPEL s current trading multiple of 1x EV/EBITDA and a discount rate of 13%, value accretion could be US$469m, or US$.8 per MPEL share, i.e. 5% of current share price. We value Melco Crown s current operations at 1x 213E EV/EBITDA, its Cotai project (6% stake) at US$1.4/share and its Philippines project at US$.9/share. Our target EV/EBITDA multiple for Melco Crown is at a discount to the average trading multiple of its peers (11.5x), which we believe is fair given the historical volatility in quarterly earnings. Figure 35: Melco Crown SOTP valuation 213E EBITDA Target Valuation US$m multiple (x) US$m US$/shr % of EV Altira 139 x 1 = 1, % City of Dreams 953 x 1 = 9, % Mocha Clubs 41 x 1 = % Corporate expenses (89) x 1 = (888) (1.6) -9% Enterprise value 1,45 x 1 = 1, % Net debt End Cotai project (6% stake) 2% ROIC, 13% disc rate Philippines project 2% ROIC, 13% disc rate Target valuation 12, Source: Deutsche Bank estimates Key downside risks are: i) significant market share loss at City of Dreams after Sands Cotai Central ramps up, ii) higher-than-expected bad debt provisions as a result of greater working capital support to junket operators and iii) cost overruns or construction delays in its Cotai and Philippines projects. Page 2 Deutsche Bank AG/Hong Kong