Macau Gaming Sector Update 27 February 2012

Transcription

1 Macau Gaming Sector Update 27 February 2012 Source: Platinum Research Platinum Broking 1

2 TABLE OF CONTENTS SECTION 1 INDUSTRY OUTLOOK... P Background and history... P Long history of gambling in Macau... P New era of Macau gaming with more players... P Macau overview... P Location... P Demographics... P Economy mainly driven by tourism... P Macau gaming sector overview... P Increasing Macau gaming revenue... P The unique traits of Macau s gaming sector... P Contribution of gaming sector to the economy... P Existing gaming facilities... P Cap on number of gaming tables... P Number of casinos... P Future developments... P Cotai Strip as the future of Macau s gaming sector... P Sands Cotai Central... P Macao Studio City... P Macau gaming sector outlook... P Healthy growth of gross gaming revenue... P Operators market share... P.11 SECTION 2 RECOMMENDATIONS... P MGM China... P Sands China... P SJM Holdings... P.21 SECTION 3 APPENDICES... P.24 Platinum Broking 2

3 SECTION 1 INDUSTRY OUTLOOK 1.1 Background and History Long history of gambling in Macau The Portuguese government legalised gambling in Macau in 1847 in order to generate revenues, and Macau has been called the Monte Carlo of the Orient since then. 90 years later, the government introduced the first casino monopoly system, by granting the only concession to the Tai Xing Company in However, the major breakthrough in the Macau gaming sector, as it is now, occurred in 1962, when Sociedade de Turismo e Diversões de Macau ( STDM ), the parent company of Sociedade de Jogos de Macau ( SJM ), was granted the monopoly concession. With its successful operations in the Macau gaming sector, STDM was able to extend its monopoly licence in 1986 for another 15 years, with the extension expiring at the end of Six casino operators in Macau at present In 1999, Macau was handed back to the People s Republic of China, but there was no change in policy with regard to the gaming sector. There was a dramatic change to the framework of the gaming sector in 2001, when the Macau government ended the casino monopoly concession system. The government granted concessions to three casino operators, namely SJM Holdings, Galaxy Entertainment and Wynn Resorts. These operators subsequently granted sub-concessions to MGM China, Sands China and Melco Crown respectively. Exhibit 1: Macau Gaming Concession / Subconcession Holders Macau Government Concessionaire SJM Holdings (Expiry: Mar 2020) Galaxy Entertainment (Expiry: Jun 2022) Wynn Macau (Expiry: Jun 2022) Subconcessionaire MGM Grand Paradise (Expiry: Mar 2020) Venetian Macau Limited (Expiry: Jun 2022) Melco Crown (Expiry: Jun 2022) Source: Platinum Research New era of Macau gaming with more players There are now six casino operators with licences to operate gaming houses, on the condition that they pay the gaming taxes and levies imposed by the government and that they commit to invest in Macau a certain designated amount, ranging from US$500 million to US$1.1 billion. All of them have met the investment targets to which they committed; more detailed information about the special gaming taxes and levies is set out in Exhibit 2. Exhibit 2: Special Gaming Tax and Levies for Each Casino Operator Gaming Taxes and Levies to Macau government Special Gaming Tax Annual Gaming Premium Contribution to a Public Foundation Contribution to Macau Government SJM Holdings Galaxy Entertain. Sands China Wynn Macau Melco Crown MGM China 35.0% of gross gaming revenue (GGR) MOP30.0m per annum fixed premium MOP300,000 per annum per VIP gaming table MOP150,000 per annum per mass market gaming table MOP1,000 per annum per electric or mechanical gaming machine 1.6% of GGR 1.4% of GGR* 2.4% of GGR Sources: DICJ, Platinum Research * SJM Holdings agreed to contribute only 1.4% of gross gaming revenue and be jointly responsible with STDM for Macau s navigation channel dredging service Platinum Broking 3

4 With the introduction of five further casino operators, competition in the Macau gaming sector became fierce, but it had a positive impact in terms of attracting more tourists because of the broader range of attractions available. As examples, the openings of Sands Macao and Wynn Macau in 2004 and 2006 were both milestones in the development of the Macau gaming industry, creating significant uplifts in gaming revenue. In particular, as Macau is the only place in Greater China where gambling is legalised, the gaming sector has experienced extremely rapid growth, driven by the inflows of tourists from mainland China. As a result, Macau overtook the Las Vegas Strip as the biggest gambling market in the world by revenue in 2006, generating more than five times the revenue earned on the Las Vegas Strip in Macau Overview Location Macau lies on the west side of the Pearl River Delta region, bordering Zhuhai in Guangdong to the north and situated 60km west of Hong Kong. Macau consists of the Macau Peninsula and two islands called Taipa and Coloane. The two islands are connected by the Cotai district, which is mostly reclaimed land. There are three bridges connecting the Macau Peninsula to the islands. At the end of 2010, the total area of Macau was indicated to be 29.7 sq km, although this continues to increase as a result of continuing reclamation projects Demographics The most recent statistics (as at the end of the third quarter of 2011) show that the population of Macau was estimated to be 560,100, 15.8% of which were non-resident workers. Macau s population growth is mainly driven by the influx of mainland migrant workers, since Macau has a relatively low birth rate. As illustrated in Exhibit 3, the age dependency ratio, namely the ratio of the population aged either under 15 or over 65 to the working population, has kept declining over the last 20 years, from 48.7% in 1991 to 25.3% in 2010, during which the compound annual growth rate (CAGR) of the population was 2.5%. A large proportion of the work force is working in tourism-related fields, with the percentages set out in Exhibit 4 below. Exhibit 3: Macau Population and Age Dependency Ratio Exhibit 4: Percentage of Working Population by Industries People 600, , , , , , , Population Age Dependency Ratio 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cultural, recreational and gaming Hotels and restaurants Wholesale and retail Construction Other industries Sources: DSEC, Platinum Research Sources: DSEC, Platinum Research Tourist industry is becoming the most important sector driving job creation in Macau The gaming and hospitality industries are now the top two employers in Macau: the gaming industry was responsible for employing 19.9% of Macau s working population in 2010, up 9ppts from 10.9% in 2001, while hotels and restaurants accounted for a further 13.6% of the work force in 2010, up 2.5ppts over the last 10 years. These statistics serve to reinforce the importance of tourism to the economy of Macau, which will be covered in the following section Economy mainly driven by tourism With its dense urban environment, Macau was nominated the world s 4 th most congested city in Macau s natural environment, with no arable land, pastures, forest or woodland, has made its economy heavily dependent on service industries, and more specifically the tourism inflows attracted by casinos. Platinum Broking 4

5 Exhibit 5: Quarterly GDP and YoY Growth Rate MOPb Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Quarterly GDP YoY growth rate Sources: DSEC, Platinum Research YoY % Exhibit 6: Macau Visitor Arrivals Thousand Arrivals 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Mainland Hong Kong Taiwan Others Sources: DSEC, Platinum Research In the last 10 years, Macau s economy has grown significantly, supported by the booming service industry and the rapidly increasing number of tourists. As demonstrated in Exhibits 5 and 6, the trend of quarterly GDP and visitor arrivals are highly correlated. GDP grew at a CAGR of 16.4% from 2001 to 2010, and the real growth rate of Macau s GDP is expected to reach 27.1% in 2011, higher than the 26.4% seen in With strong economic growth, Macau s GDP per capita stood at US$49,745 in 2010, surpassing the comparable numbers for China, Taiwan and Hong Kong of US$4,430, US$18,603 and US$31,758 respectively. Expenditure by tourists from Mainland China is the key, in both gaming and non-gaming service sector In the most recent 10-year period, total visitor arrivals to Macau increased at a CAGR of 10.5%, while the number of visitor arrivals from mainland China grew at a CAGR of 19.3%. Currently, the number of visitors from mainland China is the main driver of the tourist industry in Macau for two key reasons: Macau s proximity to the mainland makes it an extremely convenient destination for Chinese visitors, who are now travelling to Macau in greater numbers and spending more than visitors from other regions, thanks to an increase in Chinese disposable income. Overall, average per capita spending by visitors in the fourth quarter of 2011 was MOP1,820 per head, but mainland Chinese spent more at around MOP2,325 per capita. Hong Kong and Taiwanese visitors spent less, with an average of MOP917 and MOP1,262 respectively. Macau s economy, of which more than 95% has some form of exposure to the tourist industry, has enjoyed sustainable growth and falling unemployment rates in the past few years, mainly as a result of the strong tourist inflows from mainland China. 1.3 Macau Gaming Sector Overview Gaming revenue generated in Macau was over five times that of the Las Vegas Strip in Increasing gross gaming revenue Gross gaming revenue has enjoyed stable growth in the past few years. From 2001 to 2011, annual gaming revenue in Macau grew by a CAGR of 31%, while the Las Vegas Strip s gaming revenue was relatively flat over the period, and even declined after 2007, due to the weakened appetite for gambling after the global financial crisis. As illustrated in Exhibit 7, Macau s gross gaming revenues overtook those of the Las Vegas Strip in 2006, and its growth has accelerated since then. Exhibit 7: Gaming Revenue of Macau and Las Vegas Strip US$m 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Macau Las Vegas Strip Macau YOY Grow th Las Vegas Strip YoY Grow th Source: DSEC, Nevada Gaming Control Board, Platinum Research 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% In 2011, gross gaming revenues in Macau increased by 42.2% YoY to MOP267.9 billion, while December s monthly revenue rose by 25.0% YoY to MOP23.6 billion. This monthly revenue growth rate was the lowest since September 2009, due to the effect of a high base in 2010 and Platinum Broking 5

6 negative market sentiment. We see this as a sign that the growth of gaming revenue in Macau is normalising but we still expect the industry to experience a healthy growth in 2012, which will be elaborated later. Macau casino operators generate most of their revenue from gaming, with high dependence on VIP gaming The unique traits of Macau s gaming sector The main point of differentiation for the Macau gaming sector is its focus on gaming revenue, driven particularly by VIP gaming. Casino resorts on the Las Vegas Strip generate half of their revenue from non-gaming activities, while Macau casino operators rely heavily on gaming revenue. In 2010, among the six casino operators in Macau, Sands China had the largest exposure to non-gaming activities, earning 11.6% of total revenue from them. The lowest exposure to such activities was recorded by SJM Holdings, which had only 0.7% of its revenue from non-gaming activities in This data underlines the view that Macau is mainly a gaming centre, with most tourists coming specifically to gamble. Although the development of other attractions, such as stage shows or the promotion of meetings, incentives, conferences and exhibitions ( MICE ) is encouraged by the government, gaming remains the highlight of Macau. As it is the only city in Greater China where gambling is legal, it is able to attract an ever-increasing number of tourists to play. The main revenue driver in the gaming sector is the VIP segment, as mentioned above. Exhibit 8 shows clearly the importance of VIP gaming to the whole gaming industry in Macau, as it represented 73% of total revenue in Exhibit 8: Macau Gross Gaming Revenue by Segment 280, ,000 MOPm 140,000 70,000 0 ` VIP Baccarat Mass Market Baccarat Slot Machines Others Source: DICJ, Platinum Research Macau has a unique VIP gaming sector business model, cooperating with junket operators In contrast to the mass market segment, VIP players are focused on gaming rather than on experiencing the broader environment. Macau has its own VIP gaming business model, which was developed by SJM Holdings while it operated its monopoly. At present, this business model continues to be adopted by the other casino operators in Macau. Under the business model, casino operators outsource VIP marketing to junket operators, agents and collaborators, who have better knowledge about potential customers, such as their wealth and creditworthiness. The process works as follows: firstly, casino operators grant credit to junket operators in the form of rolling chips. Then, junket operators extend the credit to VIP patrons through junket agents and/or collaborators, and VIP players use the rolling chips to gamble in VIP rooms. Later, junket operators get their money back from VIP patrons, and repay credits to casino operators. In this model, both casinos and junket operators are exposed to the credit risk of a default by a VIP player. However, junket agents and collaborators, who have a direct relationship with the VIP patrons, should have more knowledge about their customers than the casinos, thereby ensuring that credit risk is lowered under this business model. Junket operators get paid commissions from the casino operator, normally on a monthly basis. The junket operators tend to follow one of two alternative remuneration models, the details of which are illustrated in Exhibit 9 on the following page. Platinum Broking 6

7 Exhibit 9: Junket Operators Remuneration Model Junket Operator brings and provides credit to Casino Operator provides VIP Patrons VIP Rooms, Dealers, etc. from gaming Rolling Chip Turnover Profit Risk from low gross gaming win rate Source: Platinum Research Commission Model Agreed 1.25% of rolling chip turnover No risk Cash Chip Won by VIP Patron Gross Gaming Win Win Rate Model Agreed percentage of gross gaming win+incentive allowances Risk sharing with casino operator As shown above, junket and casino operators collaborate to generate profits from their VIP patrons. There are more than 190 licensed junkets in Macau, of which the top 40 have 80% market share. The four largest junket operators are Sun City, Neptune Group, Dore Holdings and Asia Entertainment and Resources. Some concerns about junket operators financial health but negative impact on gaming companies is limited Gaming tax in 11M11 was 83% of the Macau government s total revenue, underlining the importance of the gaming sector Currently, there are concerns about the financial health of some of the junket operators, as credit recovery from Chinese VIP customers might be negatively impacted by the country s slowing economic growth. However, casino operators have indicated as recently as December 2011 that junket operators are meeting their obligations and that no significant delay in repayment was noted. Therefore we see no major negative impact on the casino operators in terms of ability to generate VIP gaming revenue Contribution of gaming sector to the economy Casinos are some of the main attractions for tourists to Macau, and the tourism industry is the main driver of Macau s economy. The gaming sector contributes to economic growth by paying gaming tax, creating jobs, bringing foreign investment and contributing to the expansion of other service industries. In the first 11 months of 2011, the Macau government earned MOP85.5 billion in gaming tax, representing 35% of the total gross gaming revenue earned by the six casino operators. This was 83% of the government s total revenue for the period. Before the liberalisation of the gaming sector in 2001, gaming tax contributed about 50%, but it rose dramatically after the other five concession/subconcession holders joined the gaming market. Therefore, it is difficult to believe that the government would severely limit the future growth of the gaming industry. The percentage of the working population serving in casinos, hotels and restaurants is increasing. This has directly contributed to the falling unemployment rate in Macau. Although the population grew at a CAGR of 2.5% from 2001 to 2010, the unemployment rate declined steadily from 6.3% in 2001 to 2.9% in 2010, excluding the period of the global financial crisis. The main increases in jobs were seen in the construction, cultural, recreational and gaming industries, as well as hotels and restaurants, all of which are related to resort construction and operation. The number of people working in the cultural, recreational and gaming industries increased by 187% from 2001 to 2010, further emphasising the importance of the casinos to the overall economy. Platinum Broking 7

8 Apart from job creation, the gaming sector has brought significant foreign capital into Macau for building new casinos. With the end of the monopoly, foreign casino operators such as Sands China, Wynn Macau, Melco Crown and MGM China were granted licences to operate casinos, on the condition that they would complete the investment target set by the government and that they would pay all special gaming taxes and levies. The committed investment of these four companies amounts to MOP16.4 billion. They are now applying to the government for approval to invest further in new casinos on Cotai Strip, which is solid evidence of their expectations for further growth in Macau. The contribution to other service industries has also been significant. Macau casino operators also own hotels, and the revenue from accommodation, food & beverages and retailing has boomed with the increasing number of tourists staying overnight. Hotel occupancy rates have been rising, with the figure for December 2011 at 89.7%, even though the number of hotel rooms has continuously increased. Exhibit 10: Macau Hotel Rooms and Occupancy Rate Number of Rooms 25,000 23,000 21,000 19,000 17,000 15,000 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Number of Hotel Rooms Hotel Occupancy Rate Source: DICJ, Platinum Research Hotel Occupancy Rate (%) 1.4 Existing Gaming Facilities The Macau government restricts the number of gaming tables, but downside impact on industry is limited Cap on number of gaming tables With the gaming industry booming, driven both by demand from tourists and supply from casino operators, the Macau government appears to be taking measures to control growth. It confirmed that the current limit on the number of tables will remain unchanged, which means that the number of gaming tables should not exceed 5,500 by the end of After that, the number of tables will only be allowed to increase by 3% annually until 2023, in order to maintain the growth of the gaming sector at a healthy level. There were 5,302 gaming tables in Macau as at the end of 2011, meaning that only 198 new gaming tables will be allowed in the coming two years. As Sands Cotai Central will have 200 new gaming tables when it opens in March 2012, with 200 more opening in the second half of 2012, there appears to be no more quota for other casinos to get licences for new gaming tables during this period. We do not see much negative impact on the gaming industry from this growth limit, as observers report that most casinos still have plenty of capacity, with up to 20% of gaming tables in casinos empty most of the time. Exhibit 11: Number of Gaming Tables and Slot Machines Number of Gaming Tables / Slot Machines Platinum Broking Number of Gaming Tables Number of Slot Machines Number of Casinos Source: DICJ, Platinum Research Number of Casinos

9 Proposed 3% growth is sufficient to support new casinos in medium term We believe that the current policy of controlling the number of gaming tables should still be enough to support healthy growth. As seen from Exhibit 11, the number of gaming tables and slot machines increased dramatically from 2002 to 2007, when SJM Holdings was expanding its coverage and the other five operators began operating their new casinos. During this period, the number of gaming tables grew at a CAGR of 66.8%, with a sharp contraction to a CAGR of 4.9% after that period. We do not envisage that the rate of casino construction will be higher than at present, since Macau now has enough casinos to provide tourists with a high quality gambling experience. We do not expect much tightening by the government on the gaming industry. As the gaming industry is helping Macau to generate economic growth and preserve its position as a global gaming centre, we expect that future government policies will be designed to support sustainable development of the gaming sector, rather than being barriers to growth Number of casinos Macau currently has 34 casinos, 23 on the Macau peninsula, six on Taipa Island and five on Cotai Strip. All 23 casinos on the Macau peninsula are the oldest, as casino operators only recently began building casinos on Taipa Island and Cotai Strip. The newest casino, Galaxy Macau, is also situated on Cotai Strip, which may become the new gambling centre of Macau. Exhibit 12: Number of Casinos per Operator by the End of 2011 Macau Peninsula SJM Hldgs Galaxy Enter Sands China Wynn Macau Melco Crown MGM China Total Taipa Island Cotai Strip Total Source: Company Data, Platinum Research SJM Holdings operates 20 casinos, with 16 on the peninsula. Galaxy Entertainment has six casinos, two of which are on Cotai Strip. Sands China also has large exposure on Cotai Strip with the Venetian Macao and the Plaza Macao, while a new casino called Sands Cotai Central will be added to its Cotai portfolio in March The recent performance of each casino operator shows that significant exposure on Cotai Strip is the most important driver for generating profit. SJM Holdings has been losing market share, not only because of its lack of new developments to attract tourists, but also because their existing casinos are all located on the peninsula.. The concept of the Cotai Strip was evolved by Sands China, with the intention of replicating the Las Vegas Strip, and Cotai Strip, in fact, has proved to be far more successful in terms of revenue generation. Galaxy Macau, which drew a lot of attention after its opening in May 2011, was an excellent example, and has seen its market share rise significantly. 1.5 Future developments Cotai Strip as the future of Macau s gaming sector Currently, there are several casino operators looking for opportunities to develop casinos on Cotai Strip, since they see the future of Macau gaming lying in that area. Presence on Cotai Strip is becoming increasingly important for casino operators As a result of closer cooperation with the Chinese government, there are several infrastructure projects in progress, such as the Hong Kong-Zhu Hai-Macau Bridge. Another project under development is on Hengqin Island, Zhuhai in Guangdong province, a special investment zone connected to Cotai Strip by the Lotus Bridge; in 2009, the Macau government decided to build a campus of the University of Macau here. These projects will facilitate travel to Macau for Chinese mainlanders, and position Cotai Strip, rather than the ferry terminal on the peninsula, Platinum Broking 9

10 as their gateway to Macau, providing enormous upside potential for gaming revenues at the casinos located here. Currently, Sands China and Galaxy Entertainment each have two casinos on Cotai Strip, while Melco Crown owns one. SJM Holdings, Wynn Macau and MGM China have all applied for approval to build new casinos on the strip, and SJM Holdings have obtained confirmation in principle (no payment terms have been discussed yet). We expect the government s land grant to Wynn Macau and MGM China soon, since the government has confirmed that they will let all six casino operators have a presence there. Since the applicants are still waiting for government approval, we set out details on two new properties below: Sands Cotai Central An integrated resort, which has been referred to as Parcel 5 & 6, will be developed by Sands China on Cotai Strip, of which Phase 1 is expected to begin operating in March 2012, and Phase 2 in the second half of the year. The new resort is located next to the Venetian Macao and the Plaza Macao, and is expected to be connected to them by footbridges. Sands Cotai Central will have 300,000 sq ft of gaming area, and 5,800 hotel rooms, branded as Conrad, Sheraton and Holiday Inn. Apart from gaming and accommodation facilities, Sands Cotai Central will also have 1.2m sq ft of retail, entertainment and dining facilities, a MICE space and a multi-purpose theatre. Sands Cotai Central will be the main new tourist destination in 2012 With the government cap on gaming tables, Sands China has had to reduce the target number of tables in the new casino from 670 to 540. It was originally thought that 200 new tables would be placed in the new casino both in March 2012 and in the second half of 2012, giving a total of 400 new tables. Now it appears that all the new tables in Macau will be allocated to Sands Cotai Central, and more tables from other Sands China casinos will be moved to the new casino, in order to cope with potentially stronger demand from tourists Macao Studio City A leisure resort, 60% taken over by Melco Crown in June 2011, is planned to be built next to Lotus Bridge on Cotai Strip with television and film production, hotels, retail and gaming facilities. MOP13.7 billion will be invested by Melco Crown in this resort, which will also have 2,000 hotel rooms and 290,000 sq ft of retail space. Construction will be resumed in 2012 and is expected to be completed by Macau Studio City to be completed in FY15; unknown whether it will have gaming area or not It is not clear whether Macao Studio City will get approval for a gaming area. When Melco Crown took over 60% of the property, the management indicated that they wanted to have a gaming floor with gaming tables and 1,200 slot machines, but recent news reports imply that the government has not yet received an application from Melco Crown for a gaming area in Macao Studio City, even though the design was finalised and construction will resume this year. With various casino operators waiting for approval from the government, and the current cap on gaming tables, it is difficult to see how the government could approve a gaming area at Macao Studio City. Macao Studio City will certainly be a major tourist attraction when it opens, since it is the nearest tourist attraction from Hengqin Island and Light Rapid Transit ( LRT ) will have a stop near the property in the future. Its unique non-gaming entertainment facilities will be its main differentiator from other developments on Cotai Strip. Platinum Broking 10

11 1.6 Macau Gaming Sector Outlook Healthy growth in gross gaming revenue The Macau gaming sector has grown fast in the past two years. In 2010 and 2011, gross gaming revenue grew by 57.8% YoY and 42.2% YoY respectively. This high rate of growth is not sustainable, largely due to the increase in base levels and also partially due to the uncertain economic outlook. Exhibit 13: Monthly Gross Gaming Revenue Before and After Global Financial Crisis MOPm 30,000 25,000 20,000 15,000 10,000 5, % Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Gross Gaming Revenue YoY Growth Source: DICJ, Platinum Research 100% 80% 60% 40% 20% 0% -20% January s gross gaming revenue increased by 34.8% YoY to MOP25.0b Macau s gross gaming revenue is expected to rise by 15%-20% YoY in 2012 In the short term, we expect further stable growth in Macau s gaming sector. Chinese New Year fell on 23 January 2012, which boosted tourist inflow and mass gaming market in Macau. While news of continued tight monetary policy by the Chinese government, worries about Chinese provincial government debt and the European debt crisis have all cast shadows over the outlook for the sector, the gross gaming revenue in Macau in January grew by 34.8% YoY to MOP25.0 billion. We expect stable growth as in January for the short term. In the medium term, we expect slower but healthy growth across the whole gaming industry. We anticipate that gaming revenue in Macau will rise at a slower pace in 2012 due to the high base effect of the last two years. However, we still estimate 15%-20% YoY growth, with positive catalysts such as ever increasing numbers of wealthy visitors from mainland China supporting the VIP segment, and the new casinos attracting mass market players and tourists with increasing disposable income. We also expect that more tourists will combine a shopping trip to Hong Kong with a visit to Macau; more tourists from China are coming to Hong Kong to shop to take advantage of the relatively cheaper luxury goods and the RMB s appreciation. In terms of contribution from newly built casinos, we see Sands Cotai Central as the main selling point for the Macau gaming industry in 2012, supported by Galaxy Macau, which began operations in May SJM Holdings, Wynn Macau and MGM China are all waiting for the government to approve their projects on Cotai Strip, and we expect them to successfully obtain licences, given that the government has indicated that it will let all six casino operators have a presence on the strip. However, with the limit on the number of gaming tables, it is likely that new casinos will be built at a much slower pace in the future Operators market share SJM Holdings continues to hold the largest market share, with 20 out of the 34 casinos in Macau. However, the decline in SJM Holdings market share accelerated from 2010 due to tourists increasing awareness of the relatively newer casinos on Cotai Strip. Their drop in market share became more serious in May 2011, when Galaxy Macau began operations, attracting a lot of attention from tourists. In January 2012, SJM took only 27% market share. Platinum Broking 11

12 Exhibit 14: Macau Gaming Market Share per Operator 40% 35% 30% 25% 20% 15% 10% 5% 0% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 SJM Hldgs Galaxy Enter Sands China Source: DICJ, Platinum Research Wynn Macau Melco Crown MGM China SJM and Sands China lost market share with the opening of Galaxy Macau Sands China s market share also declined in 2011, and it was overtaken by Galaxy Entertainment in the rankings after Galaxy Macau began operations. However, Sands China took back its second position again in January 2012, with 19% of the gaming market by revenue, surpassing slightly Galaxy Entertainment s market share of 19%. In the same period, Melco Crown, Wynn Macau and MGM China had market shares of 13%, 13% and 9% respectively. For the whole year of 2011, SJM Holdings was the market leader with a 29% share, followed by Galaxy Entertainment and Sands China, each with 16% (Sands China lagged behind Galaxy Entertainment slightly). Melco Crown, Wynn Macau and MGM China had a market share of 15%, 14% and 10% respectively in We expect no major change in relative market share until February 2012 as there are no new casinos opening. However, we anticipate a rebound in gaming stock prices from the beginning of 2012, based on positive catalysts such as the Chinese New Year season and Sands Cotai Central s opening, which we expect will bring more tourists to Cotai Strip. We would predict further changes in market share after the opening of Sands Cotai Central in March We expect Sands China s market share to increase by 2-3ppts as a result, partly because newly opened casinos are always a major attraction for tourists, and partly because of its relative proximity to the Venetian Macao and the Plaza Macao compared to Galaxy Macau. Due to these direct and synergistic effects, we anticipate Sands China s market share to improve, probably at the expense of SJM Holdings. Other casino operators are expected to have their market share consolidated at current level. On the whole, we remain positive on Macau s gaming industry. We consider that Sands China and MGM China are the best picks, while SJM Holdings should be treated with caution for its decreasing market share; these companies are examined in more detail in the following section. Platinum Broking 12

13 SECTION 2 RECOMMENDATIONS All six casino operators holding gaming concession/subconcessions from the Macau government are listed on the main board of Hong Kong Stock Exchange. The business performance of Macau gaming companies has been impressive, supported by robust growth in revenues and profits, driven by strong demand from tourists from China. Currently, the saturation level of the industry is the main concern for investors, since annual gross gaming revenue growth in 2010 and 2011 was 57.8% and 42.2% YoY respectively. However, we remain optimistic on the outlook for both the short and long term. And, with revenue growth slowing down, due in part to the high base effect, we see that relative market share will become more important in determining whether a gaming company can outperform. Market share is the most important fundamental Since most casino operators share a similar business model, their capability to generate profits mainly depends on how much market share they can take. This will be even more important from 2012, given that the high growth rates in gaming revenue in the past do not seem sustainable, and that the gaming revenue pool is necessarily shared by the six existing operators. So far, the changes in market share have been triggered by new casino openings. As illustrated in Exhibit 14, Galaxy Entertainment s market share jumped from 9% in April 2011 to 15% in June 2011, based mainly on the positive reception to the opening of Galaxy Macau in May We expect Sands China s market share to rise by 2-3ppts from second quarter of 2012 after Sands Cotai Central opens, replicating the phenomenon observed with Galaxy Macau. This might result in a further decline in market share for SJM Holdings. Presence in VIP gaming is another key fundamental at present Currently, the main driver of Macau gaming revenue is VIP gaming. Although the profit margin from VIP business is not as high as the mass market segment, the volume increase in VIP has been much higher, mainly due to the rapid increase in wealthy Chinese visitors to Macau with the help of junket operators. The revenue breakdown by segment for each casino operator in 2010 is presented below. Exhibit 15: 2010 Gaming Revenue by Segment by Operator 40,000 30,000 MOPm 20,000 10,000 - SJM Hldgs Galaxy Enter Sands China Wynn Macau Melco Crow n MGM China VIP market Mass market Slot machine Source: Company Data, Platinum Research As seen from Exhibit 15, most gaming revenue is generated from VIP gaming, so casinos with good relationship with junket operators might get more VIP clients. In the first nine months of 2011, Sands China s revenue growth underperformed the market: Sands China gained revenue growth by 16.3% YoY while the whole Macau gaming sector had an increase by 45.9% YoY during the mentioned period. The main reason was the company s strategy of mainly focusing on the mass market gaming segment, since it generates higher profit margins. But the revenue growth is constrained, and Sands China has therefore changed its strategy to give more importance to VIP gaming. As a result, its performance improved in 4Q11 and regained its market share by 2ppt from October s 14% to November s 16%. It improved further in January 2012 with a 19% share of the Macau gaming sector. With its strong presence in VIP gaming, coupled with good relationships with junket operators, Sands China still appears to offer the best growth potential in the short term. Mass gaming is a good bet for long term growth Mass market grew at a CAGR of 29.3% Platinum Broking 13

14 from 2005 to 2010, which is lower than the 37.1% achieved by VIP. However, mass market has been more stable by being less impacted by economic cycles: it recorded a stable growth at 19.9% YoY in 2009, outperforming the VIP segment with 8.2% YoY growth. With a strong increase in the disposable income of mainland visitors supported by continuous rises in wage levels, we see mass market as a segment relatively resilient to economic downturns. The disposable income of urban households in China increased at a CAGR of 11.8% over the past 10 years, and we expect continued growth in the next few years. For the 12 th five-year plan ( ), the Chinese government showed more attention to improving overall living standards and increasing consumption levels of the population. The government set the target of GDP growth and urban disposable income growth at 7% YoY for the period, while previous five-year plans targeted higher GDP growth rather than urban disposable income growth. Accordingly, the government has been lifting minimum wage levels, which increased 22% YoY in Several provinces raised it further: Sichuan and Jiangxi are lifting minimum wage levels by 23% and 21% from the beginning of 2012, which would also boost the income levels of the middle class. Therefore, we expect further expansion of the middle class in China, who have the potential to support the mass market segment in Macau. Although the growth is not as impressive as in VIP gaming, we anticipate mass market growth to last longer in a more sustainable way. Platinum Broking 14

15 b Recommendation BUY Target Price: HK$17.49 (+31.5%) MGM China (2282.HK) 27 February 2012 SECTOR: GAMING HSI: 21,218 PRICE: HK$13.30 EARNINGS KEY DATA For the fiscal year ended 12/10 12/11 12/12E 12/13E 12/14E Issued Capital (m Shrs) 3,800.0 Turnover (HK$m) 12, , , , ,245.2 Market Cap (HK$m) 52,136.0 Operating Profit (HK$m) 2, , , , ,511.8 Avg. Daily Vol. (6 mths) 8.18 Net Profit (HK$m) 1, , , , , Wk High/Low (HK$) 18.20/8.05 EPS (HK$) Gearing 12/11 (%) Net cash % Change % 25.9% 17.5% 13.9% BV/Share 12/11 (HK$) 1.16 PER (x) Free Float 18.42% DPS (HK$) Major Shareholders MGM Resorts Intl (51.0%) Yield (%) % 4.06% 4.81% 5.49% Ho Chiu King (27.4%) QUARTER RESULTS For the 3 months ended 12/10 12/11 %chg Net Revenues (HK$m) 4, , % Adjusted (HK$m) % Net Profit (HK$m) (31.7%) Note: Differences may arise due to rounding error Source: Platinum Research, Bloomberg SECTION 1 RESULTS BRIEFING FY11 net profit rose by 109.5% YoY to HK$3,279.1m. The main driver was the strong revenue line, which increased by 63.2% YoY to HK$20,293.6m. Also boosting the results was an improved profit margin. Adjusted recorded YoY growth of 74.3% to HK$4,933.0m, and adjusted profit margin advanced by 1.5ppts to 24.3% during the period. Net profit margin expanded by 3.6ppts to 16.2%. As a result, the EPS reached HK$0.863, as compared with HK$0.412 for FY10. Revenue growth outperformed the industry Strong revenue growth on increased volume of VIP gaming segment The revenue from VIP gaming tables increased by 79.9% YoY over the period, while the revenue from mass market tables and slot machines rose by 32.2% and 60.7% respectively. Although the competition for market share was fierce from the newly built Galaxy Macau, MGM China maintained its market share at 10% for FY11. MGM China s performance outperformed the overall Macau gaming market in FY11, with revenue growth higher than the overall 42.2% YoY growth seen in gross gaming revenue. Special dividend of HK$0.816 per share. This translates to a 94.6% payout ratio and a 6.3% dividend yield. The special dividend is expected to be paid on or about 20 March Management commented that they have sufficient resources to finance both their current operations and further expansion, including the development of an integrated resort in Cotai. SECTION 2 COMPANY BACKGROUND A leading casino gaming resort developer, owner and operator in the Great China. The Company holds one of the six gaming concession/subconcessions in Macau and was listed on Platinum Broking 15

16 the main board of Hong Kong Stock Exchange in June It currently owns MGM Grand Macau, a premium integrated casino hotel property on the Macau Peninsula, and is waiting for approval from the government to lease a site of approximately 17.8 acres on Cotai Strip. MGM Resorts International is the main shareholder with an interest of 51%, while Pansy Ho is the next with 27.4%. MGM Macau had a 10% market share by gross gaming revenue in SECTION 3 BUSINESS OUTLOOK Strong VIP segment MGM China has a strong relationship with junkets, and gaming revenue from its VIP segment accounted for 69.2% of total casino revenue. Despite the negative economic conditions, some of its 10 junket operators requested more VIP rooms and a new VIP gaming area with 11 tables in January 2012 before Chinese New Year. MGM China is planning to expand the VIP gaming area with more tables in 2H12. We believe that this is a good indicator of healthy growth in the VIP gaming segment for MGM China. Good relationships with junket operators and large exposure in the mass gaming market will keep market share at healthy level Stable market share Although MGM China has the smallest market share by gross gaming revenue, it has managed to keep its market share stable. Despite the competition from Galaxy Macau, it managed to maintain market share at 10% in FY11. MGM China has historically been more stable in terms of market share, as its business is less influenced by external factors. Firstly, VIP gamblers are more focused on gambling, and not as interested in new properties as the tourists. Secondly, taking negative market sentiment into consideration, MGM Macau has the second largest exposure to mass market after Sands China, in terms of percentage of total gaming revenue. We see it as another factor underpinning the stable market share, since mass market is less volatile than VIP segment. Therefore, MGM Grand Macau has been able to maintain a stable market share, although it is situated on the peninsula. New Cotai project In 4Q11, the management mentioned that they were close to getting a new land grant from the government. The design for their new property on Cotai Strip is finished, with 500 gaming tables, 2,500 slot machines and 1,600 hotel rooms. Management estimates that the cost will be under US$500m (HK$3,890m approximately), and that the project will take two or three years to build. Since then, the government has confirmed that it will provide all casino operators with the opportunity to have a presence on Cotai Strip, so we expect that MGM China will get their licence some time in FY12 or FY13. Turned into net cash by the end of FY11 and expected to generate strong cash flow in the future Strong financial status The market expected at the time of listing that MGM China s gearing would reduce and change to a position of net cash in FY12, but MGM China achieved that milestone in 4Q11. The announcement of a special dividend payment will also boost investors confidence in the company s future operation. With the recent strong cashflow, we doubt that MGM China would need to raise any debt to finance the new Cotai project, since the projected cash balances in FY12 and FY13 should be adequate to meet the estimated construction cost of HK$3,890m. SECTION 4 VALUATION Exhibit 18: Relative Valuation Companies Ticker Last Price Mkt Cap FY10 PER Platinum Broking 16 FY11E PER PER FY10 EV/ FY11E EV/ EV/ Div Margin Yield Net Gearing (HK$) (HK$m) (x) (x) (x) (x) (x) (x) (%) (%) (%) 1 SJM Holdings 880 HK , Net Cash 2 Sands China 1928 HK , Wynn Macau 1128 HK , Net Cash 4 Galaxy Entertain 27 HK , Net Cash 5 MGM China 2282 HK , Net Cash 6 Melco Crown 6883 HK , Simple avg Mkt cap wtd avg Source: Bloomberg, Company Data, Platinum Research

17 Valuation at a significant discount MGM China currently trades at 12.3x FY12 earnings, the lowest among the Macau gaming companies. EV/ multiple analysis also shows MGM China trading at a discount to industry level. The main reason for the lower valuation might be the lowest market share in the industry. The market is expecting the recent robust growth of the Macau gaming sector to slow down, and investors have preferred the leading gaming companies during this transition period. No current presence on Cotai Strip is another concern, since the market is worried about MGM China s posssible loss of market share in the future due to having no casino on the strip. However, we believe that the current valuation is too low. We see Wynn Macau as the closest comparable for MGM China, with only one casino on the peninsula. We set our target price with FY12 EV/ at 11x, our industry target, and at a 10% discount to Wynn Macau s target EV/ multiple of 12.5x, to factor in the smaller market share and narrower margin of MGM China. This implies FY12 PER of 16.1x, still below the current industry level. Given that it has a strong VIP business and relatively large exposure to mass market, we consider the current share price to be undemanding. We anticipate that the gap in valuation between MGM China and its peers will narrow in FY12. After investors gained more confidence in MGM China from its robust FY11 results, outperforming the industry in terms of growth, the valuation gap has already begun narrowing down. The benefit from their new Cotai project will only be seen after two to three years, beyond our forecasting horizon. However, we expect this news to have another positive impact on the share price, if investors are willing to pay more for its potential future growth. Exhibit 19: Share Price Chart (June 2011-February 2012) Source: Reuters Platinum Broking 17

18 b Recommendation HOLD Target Price: HK$33.12 (+16.6%) Sands China (1928.HK) 27 February 2012 SECTOR: GAMING HSI: 21,218 PRICE: HK$28.40 EARNINGS KEY DATA For the fiscal year ended 12/09 12/10 12/11E 12/12E 12/13E Issued Capital (m Shrs) 8,049.2 Turnover (HK$m) 25, , , , ,234.1 Market Cap (HK$m) 226,589.6 Operating Profit (HK$m) 2, , , , ,715.6 Avg. Daily Vol. (6 mths) Net Profit (HK$m) 1, , , , , Wk High/Low (HK$) 31.05/14.90 EPS (HK$) Gearing 06/11 (%) 31.31% % Change % 65.6% 35.8% 46.5% BV/Share 06/11 (HK$) 4.75 PER (x) Free Float 29.71% DPS (HK$) Major Shareholders Las Vegas Sands Corp (70.3%) Yield (%) % 3.06% 4.47% QUARTER RESULTS For the 3 months ended 12/10 12/11 %chg Turnover (HK$m) 8, , % Adjusted (HK$m) 2, , % Note: Differences may arise due to rounding error Source: Platinum Research, Bloomberg SECTION 1 RESULTS BRIEFING 4Q11 adjusted up by 27.3% YoY to HK$3,378.1m The main driver was net revenue growth, up 21.4% YoY to HK$10,127.2m. The Plaza Macao s strong revenue growth (135.7%) to HK$1,683.6m, was the main driver of revenue growth, supported by stable growth in the Venetian Macao (15.5%) to HK$5,946.3m. Sands Macao s performance was flat with 0.5% revenue YoY growth to HK$2,497.4m. Stronger revenue growth in 4Q11 than in 3Q11, by improving its presence in VIP market The revenue growth improved to 21.4% YoY in 4Q11 Sands China had growth of 11% YoY in 3Q11, mainly due to fierce competition from Galaxy Macau and the company s past strategy of focusing on the mass rather than the VIP market. However, with more junket operators and an increasing number of VIP gaming tables in the Plaza Macao, Sands China achieved better revenue and adjusted results in 4Q11. Announced interim dividend of HK$0.58 per share Management commented that they have sufficient capital to support both current operations and further development of properties in Macau, and announced that they would pay an interim dividend of HK$0.58 in February, which translates to a 50% dividend payout ratio. Management further indicated that they might announce a final dividend at the time of the full year results. SECTION 2 COMPANY BACKGROUND A leading multi-use integrated resort developer in Macau The Company, a subsidiary of Las Vegas Sands Corp., holds one of the six gaming concession/subconcessions in Macau. Listed on the main board of Hong Kong Stock Exchange in November 2009, it currently owns three casinos, the Venetian Macao, Sands Macao and the Plaza Macao. The fourth casino, Platinum Broking 18