Initiation: know when to hold ’em Macau Gaming Sector and...

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■ What's new For a sector that has seen a sharp slowdown in revenue growth this year, share prices have done remarkably well year to date. The stocks in our Macau gaming universe have returned an average of 50% YTD versus the HSI’s 19%, and the MSCI China Consumer Discretionary Index’s 3%. Accounting for about 70% of the industry’s total gaming revenue, VIP gaming revenue growth slowed to 9% YoY for 9M12 from 2011 growth of 45% YoY. Weaker macro factors and prudent high-end spending were the main reasons for the faster-than-anticipated deceleration in VIP gaming revenue growth. We forecast VIP gaming revenue to grow by 8% YoY in 2013, in line with Daiwa’s China GDP forecast. Mass-market gaming revenue has been comparatively resilient, delivering 31% YoY growth for 9M12. We forecast mass-market gaming revenue to grow by 20% YoY for 2013, underpinned by a low penetration rate, robust visitor growth, and more retail attractions. These tailwinds are

likely to be propelled by improving infrastructure links for China/Macau. As industry top-line growth begins to normalise, we believe increasing stress will be put on bottom-line growth, rendering monthly headline figures, which are backward-looking and tarnished by volatile win/hold rates and calendar shifts, less relevant. Our top sector pick is Galaxy Entertainment Group (Galaxy), which we think offers the best value for potential earnings growth, followed by Melco Crown Entertainment (Melco) and Sands China (Sands). Of Wynn Macau (Wynn) (Underperform [4]), SJM Holdings (SJM) (Hold [3]) and MGM China Holdings (MGM) (both Hold [3]), we prefer SJM because it has the strongest balance sheet and most reliable dividend yields. Our least preferred stock in our gaming universe is Wynn due to concerns over its continued market-share losses. To differentiate ourselves from our peers, in terms of our analysis of this well-covered sector, we focus on individual properties, and identify which operators are best positioned to gain EBITDA market share and improve their ROI by: 1) optimising their revenue mix, 2) attracting higher quality mass-market players, and 3) maximising table productivity through table redesignations. ■ What's the impact We see better risk-reward profiles emerging as: 1) slowing headline

growth should result in lower policy risk, 2) China’s macro and liquidity environment is improving, and 3) there could be a rebound in high-end spending from 1Q13. Nonetheless, we think company-specific catalysts are more relevant, and would advise investors to cherry-pick at the company level. ■ What we recommend The sector is trading at around 11x 2013E EV/EBITDA multiple, down from the peak of 12.5x in early May 2012. We believe the sector is fairly valued and our target EV/EBITDA for the sector is 11x for 2013. ■ How we differ The downside risks to our Neutral view would include a sharp macro slowdown in China, unexpected liquidity tightening, and visa restrictions. Upside potential would come from the release of significant liquidity into China’s monetary system.

6 November 2012

Initiation: know when to hold ’em and know when to fold ’em

• Focus on earnings quality rather than short-term headline growth • We prefer companies that can strategically maximise per table

productivity and optimise their revenue mix • Sector appears fairly valued. We recommend selective buying and

our top picks are Galaxy, Melco and Sands

Macau Gaming Sector

Key stock calls

Source: Daiwa forecasts.

Consumer Discretionary / Macau

Positive

Neutral (initiation)

Negative

Bing Zhou(852) 2773 [email protected]

Cris Xu(852) 2773 [email protected]

New Prev.Galaxy Entertainment Group (27 HK)Rating BuyTarget 35.00Upside 21.5%Melco Crown Entertainment (MPEL US)Rating OutperformTarget 17.30Upside 16.2%Sands China (1928 HK)Rating OutperformTarget 35.80Upside 13.3%

How do we justify our view?How do we justify our view?

Macau Gaming Sector 6 November 2012

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How do we justify our view?

Growth outlook

Valuation

Earnings revisions

Growth outlook Macau Gaming Sector: gaming revenue growth

We do not expect a V-shaped recovery in gaming revenue going forward, but rather a normalisation of gaming revenue growth, particularly for the VIP market. We forecast VIP gaming revenue growth of 8% YoY for 2013, and mass-revenue gaming revenue growth of 20% YoY. We forecast total gaming revenue to increase by 11% YoY and EBITDA to grow by 16% YoY next year.

Source: DICJ, Daiwa forecasts

Valuation Macau Gaming Sector: 12-month forward EV/EBITDA multiple

Despite a slowing-down in revenue growth, enhancing profitability, strong cash flows and implied dividend payouts over the longer term should help bolster valuations. Our target EV/EBITDA multiple for the sector is 11x, which is in-line with the average since 2011 as we believe the sector’s EBITDA growth of 16% YoY in 2013, should be similar to 2012, based on our forecast. Accordingly, the sector is fairly valued currently, in our view. Moreover, given the short listing history of the Macau operators, and the short operating history of new properties, we assess valuations on an individual operator basis.

Source: Bloomberg, Daiwa forecasts

Earnings revisions Macau Gaming Sector: Bloomberg-consensus EBITDA

forecasts We believe the Bloomberg-consensus EBITDA revisions have bottomed out. The consensus has revised down its sector-wide 2012E and 2013E EBITDA by about 4% and 7%, since the peak in June 2012, respectively.

Source: Bloomberg

Positive

Neutral (initiation)

Negative

(10% )0%

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2005 2006 2007 2008 2009 2010 2011 2012E 2013E

VIP Mass

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Source: Daiwa forecasts

Sector stocks: key indicators

ShareCompany Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chgGalaxy Entertainment Group 27 HK 28.80 Buy 35.00 1.735 2.118Melco Crown Entertainment MPEL US 14.89 Outperform 17.30 0.722 0.851MGM China Holdings 2282 HK 14.14 Hold 13.80 1.207 1.195Sands China 1928 HK 31.60 Outperform 35.80 0.134 0.223SJM Holdings 880 HK 17.92 Hold 17.30 1.159 1.257Wynn Macau 1128 HK 23.35 Underperform 19.30 1.278 1.382

Rating Target price (local curr.) FY1EPS (local curr.)

FY2


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Fundamentals intact ..................................................................................................................... 5

VIP gaming segment: Where do we go from here? .................................................................. 5

Mass-market segment is the future .......................................................................................... 7

Our gaming-revenue forecasts ................................................................................................ 12

Profitability ............................................................................................................................. 13

Keeping the aces ...................................................................................................................... 16

Capital preservation – stress test .......................................................................................... 20

Market share .......................................................................................................................... 22

Glossary ................................................................................................................................... 25

Company Section

Galaxy Entertainment Group ................................................................................................. 26

Melco Crown Entertainment ................................................................................................. 38

Sands China ............................................................................................................................ 50

SJM Holdings ......................................................................................................................... 63

MGM China Holdings ............................................................................................................. 77

Wynn Macau .......................................................................................................................... 87

Contents


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Fundamentals intact

Long-term risk-reward for the sector looks positive, as VIP gaming revenue should normalise and robust mass-market gaming revenue should continue to drive incremental returns

VIP gaming segment: Where do we go from here?

In the past, VIP gaming revenue has been volatile as this business has been highly exposed to policy and liquidity risk. Investors often ask: ‘Will we see a repeat of 2009?’ We believe the short answer is ‘No!’ as 2009 was a combination of one-off events amid a different liquidity environment. We do not think, however, that posing this question is the right way to approach the outlook for the sector. The common argument is to point out that the sharp decline in VIP gaming revenue in 2008-09 could be attributable to the unforeseeable, severe impact of visa restrictions and the tightening of liquidity during the global financial crisis. Subsequently, the sharp rebound in 3Q09 was also linked to the one-off compounded effect of: 1) the CNY4tn stimulus package implemented in November 2008, 2) allowing the floodgates to reopen as visa restrictions began to relax in July 2009. Most importantly, the single-largest propeller of the rebound in VIP gaming revenue was the increased longer-term credit lending from the casinos to the junkets, which had previously operated on short-term funding. This is evident when analyzing the average gaming revenue per visitor from 2009-12, which indicated a substantial jump from MOP4,700 in 1Q09 to MOP6,700 in 1Q10, representing a 43% YoY increase.

Macau Gaming Sector: gaming revenue per visitor

Source: DICJ, DSEC

Conclusively, we think 2008-09 was an anomaly that should only be lightly referenced, and not an event that is perpetually referenced as a historical touchstone. We identify the following key VIP gaming revenue drivers:

• demand-side indicator – M2 growth (the 9-month leading M2 trend has a 73% correlation with the VIP gaming revenue trend),

• supply-side indicator – cage capital (the total available capital for junkets to lend), which represents the amount of available credit in the system, and

• measure of credit quality – junket asset turnover (velocity of money), and changes in the overall number of receivable days.

We see M2 growth as a good 9 month leading indicator of forthcoming demand trends for the VIP segment (73% correlation). Rebounding M2 growth, combined with October’s inflection in gaming revenue, suggests that VIP gaming revenue will be bottoming out in the next 6-12 months. While we believe the latter is largely true, we think that instead of seeing a strong V-shaped recovery, VIP gaming revenue should instead normalise (in line with China’s GDP) over 2012-13.

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Macau Gaming Sector: VIP gaming revenue vs. China’s M2 (9M lag)

Source: DICJ, CEIC

Sufficient credit; demand has been weak While M2 is a good indicator of demand, we believe cage capital, is a good approximation of the supply of credit for the VIP market. We are not concerned that there is insufficient credit in the market to satisfy demand. We arrive at our conclusion using the following calculations and assumptions:

• We reference Asian Entertainment & Resources Limited (AERL, not rated), a junket operator in Macau, which has about USD250m cage capital and about 2.5% market share in Macau, and Neptune Group (about US$1bn cage capital and about 12% market share), and roughly estimate that the available cage capital among the junkets in Macau is in the range of USD8.5-10bn.

• As the rolling-chip volume is a function of both the junket’s available credit and asset turnover, the total cage capital is most likely closer to USD8.5bn as the larger junkets like Jimei, Neptune, Sun City, Golden Group and David Group should have more scale and higher quality VIPs (ie, higher roll multiples) than smaller junkets like AERL.

• On our estimates, the VIP market needs about USD9.5bn in available cage capital in total to deliver 7% YoY revenue growth this year, and only an incremental USD0.8bn to achieve 8% YoY growth in 2013, assuming an average monthly roll of 8x.

• Additional funding gaps can be easily filled by the casino operator or private investors. We note that, as VIP gaming revenue tapers off, the incremental lending requirements should become less stringent.

Macau Gaming Sector: Required incremental cage-capital sensitivity analysis

Average monthly roll (x)

Required incremental cage capital in 2013E (US$bn)

6.0 4.2 6.5 3.1 7.0 2.2 7.5 1.5 8.0 0.8 8.5 0.2 9.0 (0.4) 9.5 (0.9)

10.0 (1.3) Source: Daiwa estimates

Thus, if total available credit is not the biggest concern, then the only plausible explanation for the decline in the rolling chip volume growth since 2H11 could be attributed to one, or a combination, of the following factors:

• a tightening in available credit in the market (our conversations with various junkets suggest that they have pulled back to lending only 70-80% of total available capital)

• lower roll multiples (which is a function of velocity of capital, or junket asset turnover), and

• softening VIP demand due to a decline in liquidity growth in the China economy (ie, money supply).

In our view, a general weakening in the overall demand for gaming has diminished the utilization of capital. However, in the past couple of quarters, we do not think the roll multiple has drastically declined, and instead put the blame for the more prudent deployment of credit on the concerns about higher collection days/default risk amid a tougher macro environment. Having said that, we believe this trend is reversing, and that the junkets have turned more liberal with their credit allocation on the back of improving macro sentiment. Our discussion with operators and junkets suggests the VIP gaming demand should rebound on the back of a recovery of the macro environment and improving political sentiment starting in late 4Q12, early 1Q13. We expect long-term VIP gaming revenue growth to track China’s GDP growth In our view, the rate of VIP gaming revenue growth should have a strong correlation with that of China’s GDP growth as:

• the VIP group profile diversifies into other business segments (VIPs represent a good sample of the underlying businesses that drive the China economy), and

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VIP revenue (LHS) China M2 (9M lag) (RHS)

IVS tightening

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• Gaming regions are shifting away from the current heavy-hitter provinces, namely, Guangdong, Zhejiang, Shaanxi, and Sichuan.

According to our market research, VIP gaming revenue can be broken down according to player profile and region. For example, Guangdong Province accounted for 60%+ of gaming revenue three years ago, but now accounts for only 40%, based on our estimates. Further, our analysis shows that VIP gaming revenue growth is highly correlated (81% correlation) with the weighted average GDP of the most influential provinces – Guangdong, Zhejiang, Shaanxi, and Sichuan.

Macau Gaming Sector: VIP gaming revenue versus GDP in the main provinces (in terms of VIPs)

Source: DICJ, CEIC

Note: the choice of nominal (instead of real) GDP growth is to demonstrate the correlation with VIP gaming revenue growth

Nonetheless, we find it hard to predict short-term changes in VIP gaming revenue growth, due to the volatile nature of the business, and thus believe that China’s GDP growth is the best proxy for gauging long-term VIP gaming revenue growth, with M2 growth the best leading indicator for gaming demand. We forecast VIP gaming revenue to grow by 7% YoY in 2012 (or 1% YoY for 4Q12, rebounding from -1% YoY in 3Q12) and 8% YoY for 2013. Daiwa’s China economics team forecasts M2 growth of 14% YoY in 2012 and 12% YoY in 2013, with real GDP growth of 7.8% YoY in 2012 and 8.0% YoY in 2013.

Macau Gaming Sector: quarterly VIP gaming revenue growth YoY

Source: DICJ

Macau Gaming Sector: annual VIP gaming revenue and YoY

growth


Mass-market segment is the future

Mass-market gaming revenue has been resilient over the past few quarters in light of a weakening VIP gaming revenue environment. We think the following prominent factors have and will continue to underpin the growth of the mass market:

• infrastructure improvements,

• facilitation of visa approvals,

• hotel expansion/retail attractions (ie, City of Dreams’ House Dancing Water, MGM’s butterfly exhibition, Venetian Macao’s Swan Lake on Ice, Bride of the World Final, etc.) and

• low penetration rate. Infrastructure as a foundation for revenue growth Improving infrastructure links from China to Macau continue to promote accessibility between the two geographies.

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Railways connecting the Mainland to Macau

Source: MOR, Daiwa

Furthermore, there are a few developments in Zhuhai and Macau that should take place in the very near term:

• Expansion of the Gongbei Gate (to be completed by the end of 2012),

• Guangzhou-Zhuhai Intercity Railway (to be completed by 1Q13), and

• Guangzhou-Zhuhai Super Highway ending at Hengqin island (expected in 1H13)

And many more developments are planned through to 2017. The completion of the Guangzhou-Zhuhai Intercity Railway would most likely have the biggest impact for mass-market travellers in 2013, as estimates indicate that it has the capacity to handle almost 400,000 travellers a day.

Progress of construction on the intercity railway (picture from early September)

Source: Daiwa

Xuzhou

TaiyuanShijiazhuang Jinan Qingdao

TianjinBeijing Dalian

Shenyang

Harbin

Hong Kong

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NanjingShanghai

ShenzhenGuangzhou

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NanchangChangsha

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Kunming

Chengdu

ChongqingSuining

Lichuan

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Zhengzhou

Wenzhou

Source: Daiwa

Four VerticalBeijing – Shanghai Passenger LineBeijing – Hong Kong Passenger LineBeijing – Harbin Passenger LineSouth East Coastal Passenger Line Four HorizontalXuzhou – Lanzhou Passenger LineShanghai – Kunming Passenger LineQingdao – Taiyuan Passenger LineShanghai Chengdu Passenger Line

Xuzhou

TaiyuanShijiazhuang Jinan Qingdao

TianjinBeijing Dalian

Shenyang

Harbin

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Ningbo

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NanjingShanghai

ShenzhenGuangzhou

HangzhouHefeiWuhan

NanchangChangsha

Yichang

Lanzhou

Kunming

Chengdu

ChongqingSuining

Lichuan

BaojiXian

Zhengzhou

Wenzhou

Source: Daiwa

Four VerticalBeijing – Shanghai Passenger LineBeijing – Hong Kong Passenger LineBeijing – Harbin Passenger LineSouth East Coastal Passenger Line Four HorizontalXuzhou – Lanzhou Passenger LineShanghai – Kunming Passenger LineQingdao – Taiyuan Passenger LineShanghai Chengdu Passenger LineSource: Daiwa




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Developments in Hengqin should create more long-term potential in terms of visitors Hengqin Island is connected to Cotai, Macau’s emerging gaming heart, via the Lotus Bridge and is adjacent to Taipa and Coloane, in Macau. In August 2009, the State of Council officially made Hengqin one of the country’s third state-level strategic new areas, after Pudong in Shanghai and Binhai in Tianjian. According to the development plan, Hengqin is designated to become a pilot region to explore innovative co-operation between Guangdong Province, Hong Kong and Macau. Over the long term, we think the developments in Hengqin Island show the massive potential for the mass-gaming market in Macau, ie, the leisure-infrastructure developments in Hengqin, including a large-scale theme-park-integrated resort and high-quality hotels. Chime-Long, a leading theme-park integrated-resort operator in China, will build the Chime-Long International Ocean Resort on the south-eastern side of Hengqin, and Chime-Long expects to attract 20m tourists a year, which is more than the total number of visitors to Macau in 2011.

Hengqin Island

Source: Galaxy Research Paper

Major hotel and leisure infrastructure development in Hengqin

Project

Expected completion schedule Remark

Chime-Long International Ocean Resort

Phase I: end of 2012 Phase II: 2015-16

The theme-park-integrated resort will include a theme park, Ocean Kingdom, and dolphin-themed hotel projects featuring 1,888 guest rooms. Chime-Long is expected to open in mid-2013 and draw over 20m visitors every year.

Shizimen CBD Main body: end of 2013

The main body will be used for the convention, exhibition and business mix.

Lanqin International Finance Tower

The resort building will feature headquarters international-brand shopping mall and five-star hotel.

Huarong Hengqin Building

The building will house a super five-star hotel and an A-class office building.

Hengqin Phoenix Tree Tower

The resort building will encompass a seven-star hotel and a platinum five-star property hotel.

Source: Hengqin municipal government

Macau Peninsular

Cotai


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Geographical location of Hengqin

Source: Daiwa

Cotai strip map

Source: Daiwa


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Retail and hotel expansion The projects scheduled by the main casino operators suggest some extra 4,000 hotel rooms will be available, as well as other facilities, including shopping malls, restaurants, entertainment, will be added in the coming years. We believe the gradual completion of these projects will enhance the operators’ capacity to accommodate more visitors, lengthen the visitors’ duration of stay and allow it to offer more comps. Mass-market-centric operators will stand to benefit from the new room supply.

Macau Gaming Sector: scheduled projects Scheduled opening date Operator Project

Investment (USD)

Gaming tables

Hotel rooms

early-2013 Sands Sands Cotai Central phase IIB

2,100

mid-2015 Galaxy Galaxy Macau phase II 2.1bn 500 1,350 mid-2015 Melco Studio City phase I 2.9bn 500 1,600 early-2016 Sands Parisian 2.7bn 400 4,000 early-2016 Wynn Wynn Cotai 3.5-4.0bn 500 2,000 late-2016/early-2017 SJM SJM Cotai 2.1bn 700 2,000 late-2016/early-2017 MGM MGM Cotai 2.5bn 500 1,600 Source: Company

Penetration rate is still low Most VIP players entering Macau come through the ‘others’ category of visitors, while most Chinese mass-market players are statistically grouped under Individual Visitation Schemes (IVS), and Group Visitation Schemes (GVS). About 16m Mainland visitors arrived in Macau last year under the two schemes. We think the mass market is still heavily underpenetrated and shows strong revenue-growth potential:

• The Hurun Fortune Report estimates that China has a middle-income group of 145m people, with an annual income of CNY60,000-500,000. Using the middle-income group as the total addressable market, we estimate that the total penetration rate (Mainland visitors to Macau as a percentage of the total population in the middle-income group) of the mass gaming market is about 11%, which is low in our opinion.

• Vistors’ average stay in Macau is less than half of the average stay in Las Vegas. In 2011, the average visitor stayed 1.5 nights in Macau vs. 3.7 days in Las Vegas. We think it is fair to assume that this gap will narrow over time as the retail market and infrastructure improves.

Average length of stay in Macau vs. Vegas

Source: DSEC, Las Vegas Convention and Visitors Authority

The correlating indicators that we use to calculate VIP gaming revenue growth did not gel well in calculating mass-market gaming revenue growth. M2 growth does not have a high correlation with mass-market gaming revenue. Macau Gaming Sector: mass revenue vs. China M2 (9M lag)

Source: DICJ, CEIC

For the mass market, our analysis shows that the growth in people coming to Macau under the IVS has the highest correlation with mass-market gaming revenue growth. Mass-market gaming revenue vs. IVS

Source: DICJ, DSEC

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We forecast a mass-market gaming revenue CAGR of 17% from 2012-14, compared with a 31% CAGR over 2010-12. We think that in a conservative case, with limited growth in the number of visitors, the mass-market revenue should grow by at least 11% a year, organically, which is the current average rate of increase in disposable income per capita in China. IVS visitors to Macau (tightening and relaxing refer to the visa

application process)

Source: DSEC

IVS events

Date Event Jun-2008 IVS tightened from twice a month to once a month Jul-2008 IVS further tightened to once every two months Aug-2008 Stay of Chinese passport-holders visiting Macau before heading to a third

destination shortened from 14 days to 7 days. Those who return to China without proceeding to a third destination will be allowed only a 2-day stay in Macau if applying using the same method. For second offence, future applications will be refused.

Sep-2008 Separate visa required by Mainland Chinese residents for entry into Macau Oct-2008 IVS further tightened to once every three months Sep-2009 IVS relaxed to once a month Oct-2009 IVS re-tighten to once every two months Source: various media reports

Our gaming-revenue forecasts

We expect a normalisation of revenue growth, particularly for the VIP gaming market. We forecast VIP gaming revenue growth of 8% YoY for 2013, and mass-market gaming revenue growth of 20% YoY. We forecast overall gaming revenue to increase by 11% YoY next year and EBITDA to grow by 16% YoY. Macau Gaming Sector: gaming revenue forecasts (VIP and

mass table, and slot machine)


Macau Gaming Sector: monthly gaming revenue

Source: DICJ

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Profitability

It is widely understood that VIP gaming is a commoditised business – high volume, low margins, and limited ‘ownership’ of customer relationships (85-90% of customer relationships are owned by junkets). Gross gaming revenue for the VIP segment in Macau recorded a 40% gaming revenue CAGR from 2006-11. The average EBITDA margin for the VIP business ranged from 8-12%, and a few percentage points higher for direct-VIP gamers who have a direct relationship with the casino operator. Operators that have a higher revenue-share agreement with junkets rank towards the low end of that margin range. VIP gaming economics

Source: Daiwa estimates

The lower margin in the VIP business can be explained largely by the revenue-share agreements between the junkets and the casino operators. Small junkets work with operators on a fixed commission of 1.25% of the 2.85% theoretical win rate. Large junkets with substantive volume operate on a revenue-share basis, which carries more risk than commission-based agreements, but at the same time offers more upside potential for the junket. We estimate the current market breakdown between commission and revenue-based agreements is about 30% and 70%, respectively. The mass-market business has historically grown at a slower pace than the VIP business in Macau, with a 27% gaming revenue CAGR from 2006-11 compared with 40% for the VIP business. The average EBITDA margin in the mass-market segment, is much higher, and can range from 30-40%, due to the near absence of cash rebates to customers. The mass-market operates by giving ‘promotional allowances’ to customers, which can range from 5-15% of total mass-market gaming revenue, depending on the quality of the customer.

Mass-gaming economics

Source: Daiwa estimates

We expect gaming revenue growth trends to reverse in the next few years, as we look for VIP gaming revenue growth to normalise and mass-market gaming revenue to continue to rise given the relatively low penetration rate, infrastructure improvements, and an increasing number of retail attractions. We have already begun to see a meaningful shift in gaming revenue growth trends, as mass-market gaming revenue has risen by 31% for 9M12 compared with VIP gaming revenue of 9%. Even with a shift in growth in gaming revenue dynamics, the key beneficiaries of a critical shift in EBITDA, and incremental ROI can be identified by those that can:

• Continue to expand their EBITDA by attracting a higher quality mass-market gamer, referred to by some operators as the ‘premium mass’ segment,

• Improve the average win per table per day by shifting tables away from poorly performing junkets to better quality ones, and

• Improve the table mix by optimising per-table EBITDA yields by redesignating VIP tables to mass-market, and vice versa.

Premium mass market still misunderstood Our key concern for this segment is the maintenance of EBITDA margins, which can reach the mid-30% level or even 40%. As there are many operators looking to attract these high-quality mass-market players, the casinos are wary of starting a bidding war for customers (by increasing comps) that might eventually reduce margins. We think, however, that successful operators can protect, if not expand margins in this attractive segment. Each casino operator has its own definition of a premium mass-market player. While it is difficult to profile such a player, we believe the properties that are

GGR: HK$100

Gaming tax: HK$39 Junket commission: HK$43 Operator net revenue: HK$18

Opex: HK$6~10

EBITDA margin: 8~12%

~39% of GGR1.25% of rolling

chip volume, which is ~43% of GGR

GGR: HK$100

Gaming tax: HK$39 Operator net revenue: HK$52

Opex: HK$12~22

EBITDA margin: 30~40%

~39% of GGR

Promotional allowance: HK$9

~9% of GGR


- 14 -

best positioned to attract such players generally have the following characteristics:

• High average minimum bet size

• Premium retail: hotel amenities and branding are key

• Premium service – differentiated customized services offered to premium mass customers (e.g. dedicated service personnel assigned to a select few customers)

We believe Galaxy Macau and City of Dreams have the highest average minimum bet size in the industry (City of Dreams has the second-highest average table-bet size, with an average minimum bet of HKD1,500/hand in the regular mass segment, and HKD3,000/hand in the high-limit mass segment). In terms of hotel preference, our recent surveys among high-end mass-market players show that while Venetian Macao and Grand Lisboa attract first-time visitors, returning mass-market players with deep pockets prefer newer, well-branded properties, such as Banyan Tree, Hotel Okura, and to some extent, the Grand Hyatt. Second, a high-quality mass-market business becomes scalable once the revenue per player reaches a certain level. We note the following:

• The level of promotional allowances for rooms, food and beverage, show tickets, golf tickets, as well as differentiated services such as a car service and personal attendants are capped at a certain level. The cap is segregated into tranches dependent on the level of play.

• For newly opened properties, such as Galaxy Macau and City of Dreams, customer-acquisition costs, or marketing costs, are quite low as their novelty value attracts customer flow to Cotai.

• The reinvestment costs for premium mass-market players are lower than for the grind mass market, which means that promotional allowances as a percentage of gaming revenue may not be higher than the average of 9-10%.

• There is debate among investors about using cash rebates or increasing promotional allowances to increase market share, although we contend that: 1) a change in revenue mix towards the mass market will naturally boost EBITDA margins, and 2) such a change mainly applies to older properties on the peninsula that have an undersupply of rooms.

The common understanding among investors is that premium mass rebates and operating expenses are infinitely variable, when in fact they are variable only up to a certain threshold before they turn into a fixed-cost component.

Ultimately, we believe that the operators with strong VIP know-how, and new properties, will have an advantage in developing a successful premium mass-market business. Accordingly, we believe that Galaxy Macau and City of Dreams are the best-positioned in terms of providing comps (such as hotel rooms, and food and beverage services to players), and have built the right product, branding, level of service to attract high-end mass market players.

Table optimisation: the advantage of a select few and the ‘30/10’ rule When the difference between the win per table per day between the VIP and mass tables reaches a certain level, table optimisation becomes crucial in maximising profitability and EBITDA growth. We devise a system to measure the key criteria for table optimisation through changes in table redesignation.

• The 30/10 rule: to simplify our analysis, we assume a 30% EBITDA margin for mass-segment tables, and a 10% EBITDA margin for VIP-segment tables.

• We divide, by property, VIP gaming revenue per table by mass-market gaming revenue per table, and if the outcome is larger than 3, then the property is a prime candidate for a shift in tables away from mass-market segment into VIP segment.

• If the per-table productivity is less than 3, a reallocation of tables from VIP segment to mass-market segment is more appropriate, in our view.

• Branding/positioning/age: external factors that may limit table efficiency include the branding of the property, the implied market positioning, and the age (ie, stage of gaming-revenue growth).

Casino operators have the following table redesignation options within one property, or between/across properties.

• Changing VIP gaming tables to mass-market gaming.

• Changing poorly performing mass-market tables to VIP gaming tables.

• Changing underperforming junket VIP tables to higher performing junkets.

Among the perceived constraints on whether table shifts are achievable are the space limitations of the casino, especially peninsula-based properties. While new Cotai properties face less of a space constraint than their peninsula counterparts, we think the concern is overstated.


- 15 -

VIP to mass market: tables on the main floor operate on a ‘switch-on, switch-off’ basis, such that idle tables are abundant at any given time. The redesignation of tables from VIP segment to mass-market segment does not necessarily mean that the tables are actually uprooted and moved. Instead, tables in use are ‘switched-on’, although within table-cap limitations for the operator. Mass market to VIP: the redesignation of tables from the mass-market segment to the VIP segment is more challenging as it poses more risk and may lead to significant earnings disruptions in the near to mid-term, in our view. For example, if StarWorld and Grand Lisboa were to move tables from mass market into VIP, the operators would have to a) commit with junkets for a relatively longer period in establishing new VIP room contracts (simultaneously making it harder to reverse the act), and, b) risk a period of slower ramp up of these new VIP table yields which may be a drag on earnings. Thus, we do not think this can be done on a large scale by any operator (eg, MGM whose table movements from mass-market to VIP has been small in scale). Properties with limited space overcome the issue by either building extra space, or turning less-productive areas of a casino, such as a spa or lounge area, into a VIP room (eg, MGM). VIP to VIP: the changes here can occur inter-property (City of Dreams), or across properties (Grand Lisboa and Greek Mythology). We believe that our 30/10 rule based on per-table productivity provides a framework for identifying table-optimisation capability, and provides a foundation for projecting future areas of improvement. The latter factor is closely followed in importance by property branding, positioning, and age. Win per VIP table per vs. per mass-market table per day ratio Operator Property 2009 2010 2011 1H12

Sands Venetian Macao 3.1 3.1 3.1 3.1 Sands Macao 1.9 2.2 2.1 2.1 Plaza Macao 0.3 1.0 1.0 2.1 Sands Cotai Central 3.5

Wynn Wynn 3.6 4.7 3.0 3.0 Melco City of Dreams 9.2 6.0 4.2 2.6 Altira 3.4 2.6 1.9 1.3 SJM Grand Lisboa 9.2 8.0 5.9 5.7 Galaxy StarWorld 8.3 12.1 11.4 8.4

Galaxy Macau 13.8 6.6 MGM MGM Macau 5.0 4.6 5.1 3.7

Source: Companies, Daiwa estimates

With reference to the preceding table, our analysis reveals that Wynn’s ratio of 3x is at an ideal level of table optimisation, and thus we see little room for

improvement there. Subsequently, we think further meaningful improvements in EBITDA yields per table through table-redesignation strategies would be challenging. Venetian Macao is another example of a near perfectly balanced property. Melco started moving underperforming junket tables from Altira into City of Dreams this year, which we believe makes sense from a per-table productivity point of view. The average win per VIP table per day at City of Dreams is 45-50% higher than at Altira. Moreover, we believe it will be difficult for Altira to change tables from VIP segment to mass-market segment, as suggested by the 1.3x VIP/mass-market table yield ratio, due to its legacy branding as a VIP property. There are only about 20 mass-market tables at Altira, which means the acquisition cost per mass-market customer would have to increase greatly, and the table units redesignated would have to occur on a significant scale, in order to affect profit significantly. City of Dreams is a property that started redesignating VIP tables for mass-market use at the beginning of this year. Since its opening in 2009, City of Dreams has placed more emphasis on developing VIP business than mass-market business, which could explain why table redesignations in the past have been VIP biased. As the property starts to age, table optimisation plays a more important role, and, based on our metrics, we expect more redesignations in the coming year, from VIP segment to mass-market segment. Galaxy Macau appears to be in a similar position to City of Dreams, albeit with a two-year lag. The property is still in a the early growth stage of its lifecycle, although we think that having plenty of room to optimise table yields in the future is a good call option to have in reserve. MGM is a property that can improve its table mix by redesignating mass-market tables into VIP tables. This is a strategy it started to implement in 3Q11, and we believe this trend will continue over the next few years. Sands seems to have room for improving table optimisation, from VIP gamers to mass-market use, although we think the shortage of tables at Sands Cotai Central may limit redesignations over the near term. Other properties face branding and market positioning constraints. In our view, Plaza Macao would be hard-pressed to redesignate tables from VIP gamers to mass-market use, even though its ratios suggest it may be the optimal strategy.


- 16 -

We believe that, over the next few years, Galaxy, Melco, and Sands have the greatest potential for table-mix optimisation. In the near-term, however, Melco and Sands should be the biggest beneficiaries of table-redesignations strategies, in our view.

Keeping the aces

Selective buying This year marks the second year of consecutive outperformance by the sector against the HSI. YTD, the Macau gaming stocks have risen by 50% compared with a 19% and 3% increase for the HSI and the MSCI China Consumer Discretionary Index, respectively. Despite a slowing-down in revenue growth, enhancing profitability, strong cash flows and implied dividend payouts over the longer term should help bolster valuations. Our target EV/EBITDA multiple for the sector is 11x, which is in-line with the average since 2011 as we believe the sector’s EBITDA growth should remain resilient at the same level of 16% YoY in 2013, comparing to 2012, based on our forecasts. Accordingly, the sector looks fairly valued currently, in our view. Moreover, given the short listing history of the Macau operators, and the short operating history of new properties, we assess valuations on an individual operator basis. Our top pick is Galaxy, with a 22% upside potential from the current share price, followed by Melco, Sands, SJM, MGM, and Wynn. Galaxy. We think a forward-looking premium based on EBITDA growth is the best way to value this stock. Due to the short operating period of Galaxy Macau, we forecast Galaxy’s EBITDA growth to outpace sector EBITDA growth in 2013, as the property’s ROI continues to improve, and thus we believe the stock deserves to trade at a 2013 EV/EBITDA of 12x, or at a 10% premium to our target sector EV/EBITDA multiple, given its superior EBITDA growth prospects.

Galaxy: EBITDA and EBITDA margin

Source: Company, Daiwa forecasts

Galaxy: EV/EBITDA multiple


Sands. In our view, Sands will continue to take market share in 2013. We expect over 50% of the sector’s incremental EBITDA next year to come from new table additions and rises in the gaming revenue and EBITDA margin at Sands Cotai Central. We apply a top-range premium of 40% to our sector target EV/EBITDA multiple to arrive at our fair value for the stock. Sands China: EBITDA and EBITDA margin


9.2%11.6%

14.0%

17.0%18.5%

0%

5%

10%

15%

20%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2009 2010 2011 2012E 2013E

EBITDA (LHS) EBITDA margin (RHS)

(HKDbn)

456789

101112

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)

avg: 7.6x sd+1: 9.3xsd-1: 5.9x

24.5%

29.4%

32.3%

29.5% 29.5%

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012E 2013EEBITDA (LHS) EBITDA margin (RHS)

(USDbn)


- 17 -

Sands China: EV/EBITDA multiple


Melco. We use a narrower EV/EBITDA discount to our sector target EV/EBITDA multiple than the stock’s average discount since 2010 to reflect the company’s expanding EBITDA market share going-forward, and expect overall improvements in table yields from optimisation strategies between Altira and City of Dreams. We use a 10% EV/EBITDA discount to our sector target EV/EBITDA for 2013 to arrive at our target multiple of 10x. Melco: EBITDA and EBITDA margin


Melco: EV/EBITDA multiple


SJM. We think SJM should trade at its past-two-year discount to the sector average of 17%, or a 2013 EV/EBITDA multiple of 9.4x, as we expect the company to lose EBITDA market share, dragged down by stagnating performance at other self-promoted and ‘satellite’ casinos, but the strong balance sheet and most reliable and attractive dividend payout should help support the share price, in our view.

SJM: EBITDA and EBITDA margin


SJM: EV/EBITDA multiple


MGM. We apply a discount of 20% to the sector average over the past two years and arrive at a target multiple of 8x. The company’s retaining its gaming-revenue market share over the past few quarters was largely buoyed by the high win/hold rate, which we don’t think is sustainable. While its EBITDA growth has been at a lower rate than the sector average, and we expect to see its EBITDA market share fall over the next few years as it is the smallest out of the major six operators in Macau.

8

10

12

14

16

18

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 12.7x sd+1: 14.5xsd-1: 10.9x

4.2%

16.3%

21.1% 22.0% 22.6%

0%

5%

10%

15%

20%

25%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2009 2010 2011 2012E 2013E


(USDbn)

5

6

7

8

9

10

11

12

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x) avg: 7.7x sd+1: 9.1xsd-1: 6.4x

6.6%

8.4%9.1%

9.7% 9.9%

0%

2%

4%

6%

8%

10%

12%

0.0

3.0

6.0

9.0

2009 2010 2011 2012E 2013EEBITDA (LHS) EBITDA margin (IFRS) (RHS)

(HKDbn)

2

4

6

8

10

12

14

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 8.1x sd+1: 10.6xsd-1: 5.6x


- 18 -

MGM: EBITDA and EBITDA margin


EBITDA forecasts: Daiwa vs. consensus

EBITDA forecasts in 2013E

Company Reporting cur. Daiwa

(m) Bloomberg Consensus

(m) Diff Galaxy HKD 11,370 10,534 8% Melco USD 1,001 899 11% MGM HKD 5,713 5,687 0% Sands USD 2,461 2,504 -2% SJM HKD 8,044 8,557 -6% Wynn HKD 8,336 8,679 -4% Total HKD 60,466 60,001 1% Source: Bloomberg, Daiwa forecasts

MGM: EV/EBITDA multiple


Wynn. We believe the company’s EV/EBITDA multiple premium to the sector average will narrow going-forward, as the company, despite maintaining a

stable EBITDA margin over the next few years (based on our forecasts), should see its EBITDA and gaming-revenue market share fall. Thus, we forecast Wynn’s premium to the sector average to decline from 20% over the past two years to 10%, and apply a fair-value EV/EBITDA multiple of 12.0x for 2013.

Wynn: EBITDA and EBITDA margin


Wynn: EV/EBITDA multiple


15.3%

22.8% 24.3% 24.7% 25.0%

0%

5%

10%

15%

20%

25%

30%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2009 2010 2011 2012E 2013E


(HKDbn)

6

8

10

12

14

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-1

2

(x)avg: 9.0xsd+1: 10.4xsd-1: 7.6x

23.0%

26.2%27.0% 27.1% 27.1%

20%

22%

24%

26%

28%

0.0

3.0

6.0

9.0


(HKDbn)

6

8

10

12

14

16

18

20

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 12.5xsd+1: 15.0xsd-1: 10.0x


- 19 -

Macau Gaming Sector: valuation comparison

Bloomberg Share price Market cap EV/EBITDA EBITDA

growth (YoY %) PER Div. yield (%) FCF yield (%) Company code (local cur.) (USDm) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM 880 HK 17.92 12.8 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn 1128 HK 23.35 15.5 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg (non-rated companies), Daiwa forecasts

Note: closing prices as of 5 November 2012

Sector valuation


Macau Gaming Sector: EV/EBITDA valuation premium/discount to sector average


8

10

13

15

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

(x)

Galaxy Macau(Phase I)

Sands Cotai Central(Phase I) Sands Cotai

Central(Phase II)

(60%)

(40%)

(20%)

(0%)

20%

40%

60%

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

SJM Galaxy Melco Crown Sands China Wynn Macau MGM China


- 20 -

Macau Gaming Sector: snapshot (as at 1H12) Gross gaming revenue breakdown Gross gaming revenue breakdown Company Number of gaming tables VIP Mass Peninsula Cotai Gross gaming revenue market share Gaming-table market share Galaxy 814 81% 19% 44% 56% 21% 15% Melco 627 71% 29% 3% 97% 13% 11% MGM 426 73% 27% 100% 0% 10% 8% Sands 1,354 58% 42% 20% 80% 18% 25% SJM 1,784 68% 32% 100% 0% 27% 32% Wynn 493 76% 24% 100% 0% 12% 9% Source: Companies, Daiwa estimates

Macau Gaming Sector: flagship property snapshot

Operator Property Opening date Investment

(US$) Casino area

(sq ft.) Gaming tables Hotel rooms Sands Venetian Macao Aug-2007 3.0bn 550,000 490 2,900 Sands Macao May-2004 465m 229,000 350 290 Plaza Macao Aug-2008 995m 70,000 160 360 Sands Cotai Central Phase I: Apr-2012

Phase II: Sep-2012 4.4bn 300,000 360 5,800

Wynn Wynn Macau Wynn: Sep-2006 Encore: Apr-2010

1.75bn 265,000 490 1,000

Melco City of Dreams Jun-2009 2.5bn 420,000 450 1,400 Altira May-2007 584m 183,000 180 200 SJM Grand Lisboa Casino: Feb-2007

Hotel: Dec-2008 980m 270,000 410 430

Galaxy StarWorld Oct-2006 426m 140,000 190 500 Galaxy Macau Phase I: May-2011 2.1bn 420,000 450 2,260 MGM MGM Macau Dec-2007 1.25bn 284,000 420 600 Source: Companies

Capital preservation – stress test

Earnings power value The difficulty with the gaming sector lies in the predictability of future earnings, which have proven to be highly susceptible to policy risk. In our bear-case scenario (assuming 0% gaming revenue growth YoY in 2H12E, implying 6% decline YoY in gaming revenue in 4Q12E, or a 3% HoH decline in 2H12E, thus we use 1.97 as an adjusting factor), we adopt a valuation method based on earnings power, which truncates the benefit of all future EBITDA growth and expansion. This value-based methodology allows us to value gaming operators in an unprecedented scenario that the industry gross gaming revenue sees a 0% rate of change YoY for 2H12. Our calculation is based on the following formula.

• (1H12 adjusted EBITDA – maintenance capex) * 1.97

• We divide the result of the above by the WACC

• We add the company’s cash balance and subtract its total debt

• Then we divide the number by the total number of shares outstanding

The result yields a theoretical value per share for each operator, assuming no future EBITDA growth. Our findings show that SJM’s share price has the most attractive valuations compared with its peers. Risks The downside risks to our sector view include a significant slowdown in China’s and Hong Kong’s economies, and restrictions being imposed on Mainland visitors to Macau.


- 21 -

Macau Gaming Sector: earnings power value Company Galaxy Melco MGM Sands SJM Wynn Reporting currency HKDm USDm HKDm USDm HKDm HKDm For the period ended 1H12 adjusted EBITDA 4,712 446 2,746 873 3,812 3,932 less: maintenance capex 1,400 100 164 71 271 323

3,312 346 2,582 802 3,541 3,609 x 1.97 ( bear-case scenario: 0% revenue growth YoY in 2H12E) 6,525 682 5,086 1,581 6,976 7,110 WACC 11% 13% 12% 9% 11% 10% Earnings power value 57,740 5,368 44,227 17,564 66,442 74,060 add: net cash (debt) 665 (893) 955 (1,909) 17,442 3,395 Equity value 58,405 4,475 45,183 15,655 83,884 77,455 Outstanding shares (million) 4,248 552 3,800 8,056 5,572 5,188 Equity value per share based on earnings power (local currency) 13.7 8.1 11.9 15.2 15.1 14.9 Share price (local currency) 28.8 14.9 14.1 31.6 17.9 23.4 Overvaluation based on earnings power 109% 84% 21% 108% 19% 56% Source: Company, Daiwa estimates

Macau Gaming Sector: free cash flow

Free cash flow per share (reporting cur.) DPS (reporting cur.) Free cash flow yield % Dividend yield % Company Reporting cur. 2010 2011 2012E 2013E 2010 2011 2012E 2013E 2012E 2013E 2012E 2013E Galaxy HK$ (0.62) 0.28 1.45 1.72 n.a. n.a. n.a. n.a. 5.0 6.0 n.a. n.a. Melco US$ 0.33 1.16 0.53 0.03 n.a. n.a. n.a. n.a. 3.6 0.2 n.a. n.a. MGM HK$ 0.82 1.59 1.30 0.49 n.a. n.a. 0.82 0.82 9.2 3.4 5.8 3.5 Sands US$ 0.13 0.08 0.10 0.23 n.a. n.a. 0.15 0.16 2.4 5.5 3.9 4.4 SJM HK$ 1.36 1.42 1.12 1.08 0.09 0.35 0.73 0.99 6.3 6.0 5.5 6.0 Wynn HK$ 1.14 1.73 1.34 0.72 0.19 0.76 1.20 1.20 5.7 3.1 5.1 3.0 Average 5.4 4.0 5.1 4.2 Source: Company, Daiwa forecasts


- 22 -

Market share

Macau Gaming Sector: overall gaming revenue market share 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E

Sands 24% 19% 17% 16% 14% 16% 16% 18% 18% 19% 20% 19% 22% Venetian Macao 14% 11% 9% 10% 8% 9% 9% 9% 7% 9% 8% 8% 8% Sands Macao 8% 6% 5% 5% 4% 4% 5% 5% 4% 4% 4% 4% 4% Plaza Macao 2% 3% 3% 2% 2% 3% 2% 4% 4% 3% 3% 4% 4% Sands Cotai Central 0% 0% 0% 0% 0% 0% 0% 0% 3% 4% 5% 3% 6% Wynn 15% 15% 14% 15% 13% 13% 14% 13% 12% 12% 12% 12% 12% Wynn Macau 15% 15% 14% 15% 13% 13% 14% 13% 12% 12% 12% 12% 12% Melco 12% 14% 15% 15% 15% 14% 14% 14% 13% 14% 14% 14% 13% City of Dreams 5% 8% 9% 9% 10% 9% 9% 9% 9% 9% 10% 9% 10% Altira 7% 5% 5% 5% 5% 4% 5% 4% 3% 4% 4% 4% 3% Mocha Club 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% SJM 29% 31% 32% 30% 28% 27% 29% 27% 27% 26% 25% 26% 25% Grand Lisboa 8% 9% 9% 10% 10% Self-promoted casinos 9% 6% 5% 4% 4% Satellite casinos 13% 17% 16% 13% 11% Galaxy 12% 11% 11% 13% 19% 20% 16% 19% 21% 19% 19% 19% 19% StarWorld 8% 9% 9% 8% 9% 8% 9% 7% 8% 7% 7% 7% 7% City Clubs 4% 2% 2% 2% 1% 1% 2% 1% 1% 1% 1% 1% 1% Galaxy Macau 0% 0% 0% 4% 9% 10% 6% 10% 11% 11% 10% 11% 10% MGM 9% 9% 11% 11% 10% 11% 11% 10% 10% 10% 10% 10% 10% MGM Macau 9% 9% 11% 11% 10% 11% 11% 10% 10% 10% 10% 10% 10% Peninsula 73% 73% 74% 71% 66% 65% 69% 64% 62% 61% 60% 61% 59% Cotai/Taipa 27% 27% 26% 29% 34% 35% 31% 36% 38% 39% 40% 39% 41% Source: Companies, Daiwa estimates and forecasts

Macau Gaming Sector: rolling chip market share

2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Sands 19% 15% 13% 12% 11% 13% 12% 15% 15% 17% 16% 16% 18% Venetian Macao 11% 7% 7% 7% 6% 6% 6% 6% 5% 5% 5% 5% 5% Sands Macao 6% 5% 4% 4% 4% 3% 4% 3% 3% 3% 3% 3% 3% Plaza Macao 2% 3% 2% 2% 2% 3% 2% 6% 4% 4% 4% 4% 4% Sands Cotai Central 0% 0% 0% 0% 0% 0% 0% 0% 3% 4% 5% 3% 5% Wynn 15% 16% 16% 16% 14% 14% 15% 15% 14% 13% 13% 14% 13% Wynn Macau 15% 16% 16% 16% 14% 14% 15% 15% 14% 13% 13% 14% 13% Melco 16% 16% 17% 16% 15% 15% 16% 13% 13% 15% 14% 14% 13% City of Dreams 6% 9% 10% 10% 9% 9% 10% 9% 9% 10% 9% 9% 9% Altira 10% 7% 7% 6% 6% 6% 6% 5% 5% 5% 5% 5% 4% Mocha Club 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% SJM 26% 30% 31% 30% 27% 26% 28% 26% 26% 25% 25% 25% 24% Grand Lisboa 7% 9% 10% 11% 12% Self-promoted casinos 10% 6% 4% 3% 3% Satellite casinos 9% 15% 14% 11% 10% Galaxy 14% 14% 13% 15% 21% 22% 18% 21% 22% 21% 21% 21% 21% StarWorld 10% 12% 10% 10% 11% 10% 10% 10% 10% 9% 9% 9% 10% City Clubs 4% 2% 2% 2% 1% 2% 2% 2% 1% 2% 2% 2% 1% Galaxy Macau 0% 0% 0% 3% 10% 10% 6% 10% 11% 10% 10% 10% 10% MGM 10% 9% 11% 11% 11% 11% 11% 10% 10% 10% 11% 10% 11% MGM Macau 10% 9% 11% 11% 11% 11% 11% 10% 10% 10% 11% 10% 11% Peninsula 71% 73% 75% 73% 67% 66% 70% 65% 63% 61% 62% 63% 62% Cotai/Taipa 29% 27% 25% 27% 33% 34% 30% 35% 37% 39% 38% 37% 38% Source: Companies, Daiwa estimates and forecasts


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Macau Gaming Sector: VIP gaming revenue market share 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E


Macau Gaming Sector: Mass gaming revenue market share 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E



- 24 -

Macau gaming sector: EBITDA market share 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Sands 42% 32% 30% 26% 25% 26% 27% 27% 25% 28% 29% 27% 31% Venetian Macao 28% 21% 18% 17% 16% 17% 17% 16% 13% 17% 15% 15% 15% Sands Macao 12% 8% 7% 6% 5% 5% 6% 6% 4% 5% 5% 5% 5% Plaza Macao 2% 3% 5% 3% 4% 4% 4% 4% 4% 3% 4% 4% 4% Sands Cotai Central 0% 0% 0% 0% 0% 0% 0% 0% 3% 3% 6% 3% 8% Wynn 25% 23% 22% 21% 19% 19% 20% 17% 18% 17% 17% 17% 15% Wynn Macau 25% 23% 22% 21% 19% 19% 20% 17% 18% 17% 17% 17% 15% Melco 5% 13% 11% 16% 17% 15% 15% 15% 13% 13% 14% 14% 14% City of Dreams 3% 8% 7% 10% 11% 11% 10% 12% 11% 11% 12% 11% 11% Altira 1% 3% 3% 5% 5% 3% 4% 3% 2% 2% 2% 2% 2% Mocha Club 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% SJM 14% 16% 17% 16% 14% 14% 15% 14% 14% 13% 13% 14% 13% Grand Lisboa 11% 9% 9% 9% 8% Self-promoted casinos 2% 3% 3% 2% 2% Satellite casinos 2% 4% 4% 3% 2% Galaxy 6% 7% 7% 10% 15% 16% 12% 16% 19% 20% 17% 18% 18% StarWorld 6% 7% 7% 6% 7% 6% 6% 6% 7% 6% 7% 6% 6% City Clubs 0% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Galaxy Macau 0% 0% 0% 3% 8% 9% 6% 10% 12% 13% 10% 11% 12% MGM 8% 9% 12% 11% 10% 10% 11% 10% 12% 9% 10% 10% 10% MGM Macau 8% 9% 12% 11% 10% 10% 11% 10% 12% 9% 10% 10% 10% Peninsula 67% 64% 67% 62% 55% 55% 59% 55% 55% 51% 52% 53% 49% Cotai/Taipa 33% 36% 33% 38% 45% 45% 41% 45% 45% 49% 48% 47% 51% Source: Companies, Daiwa estimates and forecasts

Macau gaming sector: gaming tables market share

2011 2012E 2013E 2014E 2015E 2016E 2017E Sands 21% 25% 27% 27% 23% 25% 22% Venetian Macao 11% 9% 9% 9% 7% 7% 6% Sands Macao 8% 6% 6% 6% 5% 5% 4% Plaza Macao 2% 3% 3% 3% 2% 2% 2% Sands Cotai Central 7% 9% 9% 8% 7% 6% Parisian Macao 5% 5% Wynn 9% 9% 9% 9% 7% 13% 11% Wynn Macau 9% 9% 9% 9% 7% 6% 6% Wynn Cotai 7% 6% Melco 12% 11% 11% 11% 17% 15% 13% City of Dreams 8% 8% 8% 8% 7% 6% 5% Altira 4% 3% 3% 3% 3% 2% 2% Studio City 7% 7% 6% SJM 33% 32% 31% 31% 26% 23% 28% Grand Lisboa 7% 7% 7% 7% 6% 5% 5% Other self-promoted 7% 7% 6% 6% 6% 5% 4% Satellite casinos 19% 18% 17% 17% 15% 13% 11% SJM Cotai 8% Galaxy 17% 16% 15% 15% 21% 18% 16% StarWorld 4% 3% 3% 3% 3% 3% 2% City Clubs 5% 4% 4% 4% 4% 3% 3% Galaxy Macau 8% 8% 8% 8% 14% 12% 11% MGM 8% 8% 7% 7% 6% 6% 10% MGM Macau 8% 8% 7% 7% 6% 6% 5% MGM Cotai 6% Peninsula 66% 62% 61% 61% 52% 46% 39% Cotai 34% 38% 39% 39% 48% 49% 56% Source: Companies, DICJ, Daiwa forecasts


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Glossary

Glossary Term Definition Cage A secure room at a casino with a facility that allows patrons to exchange cash for chips required to participate in gaming activities, or to exchange chips for

cash. Cage capital The available working capital in a junket’s funding pool to lend to VIP gamers. Comps The compensation to gamers represented by, but not limited to, hotel rooms, food and beverage, and retail coupons. Direct VIP/in-house VIP An internal marketing programme whereby the casino operator directly markets its casino resorts to gaming clients, including to high-end or premium players. Drop The sum of chips exchanged by gamers at the gaming table and the amount of cash deposited in a gaming table’s drop box. Grind mass The low-end mass-market. Gross gaming revenue The total win generated by all casino gaming activities combined, calculated before commissions and discounts are deducted. Junket/junket operator/gaming promoter Individuals or corporations licensed by and registered with the Macau Government to promote games of fortune and chance or other casino games to

patrons, through the arrangement of certain services, including the extension of credit, transportation, accommodation, dining and entertainment. Their activity is regulated by the Gaming Promoters Regulation.

Non-rolling chip drop The amount of table game drops in the mass-market table-game segment. Promotional allowance The retail value of rooms, food and drink, as well as retail and other services, given to guests without charge to attract gamers to stay at their property Roll multiples The number of times a junket is able to roll over its working capital. Rolling chip A chip that is used to track the VIP wagering volume for the purpose of calculating commissions and other allowances payable to gaming promoters and

casino operators' individual VIP players. Win rate/hold rate The sum won (calculated before discounts and commissions) as a percentage of the drop or rolling chip volume. Source: Companies, compiled by Daiwa


■ Investment case Galaxy Entertainment Group’s (Galaxy) share price has seen an impressive return of 100%+ YTD, outperforming the sector by about 50%, but we still see more upside. We believe Galaxy has the most favourable balance among our coverage universe in terms of its property mix, and runs a low risk of cannibalisation. In light of market-share shifts from the Macau Peninsula to Cotai, flagship property StarWorld’s VIP gaming revenue market share remains resilient, while Galaxy Macau continues to gain more gaming-revenue and EBITDA market share. We expect StarWorld to be one of the first properties to benefit from a rebound in VIP gaming revenue. In the meantime, we see ample room for Galaxy Macau to further ramp-up its gaming revenue, and believe that it gravitating gradually towards the premium mass market would

drive overall margins and incremental returns. Among the Macau gaming companies we cover, we forecast Galaxy to be the second-largest EBITDA contributor in 2013, adding around 19% of the industry’s incremental EBITDA. ■ Catalysts We see significant upside for Galaxy in 2013 as VIP gaming revenue rebounds, although catalysts could come as early as 4Q12 should there be any sequential change in EBITDA vs. the street’s anticipation of flat HoH growth for 2H12. ■ Valuation We believe this stock offers the best value for growth in the sector, and as such it is our top sector pick. We forecast Galaxy’s total EBITDA to rise by 18% YoY for 2013, outperforming our EBITDA growth forecast for the sector of 16% YoY. We contend that Galaxy deserves to trade at a 12.0x 2013E EV/EBITDA multiple, at a 10% premium to our target sector EV/EBITDA of 11x, on the back of its superior EBITDA growth. We initiate coverage with a Buy (1) rating and EV/EBITDA-based six-month target price of HKD35.00.

■ Risks We believe the key company-specific downside risk to our bullish stance would be a slower-than-expected ramp-up for Galaxy Macau and market-share loss to Sands Cotai Central.

Consumer Discretionary / Hong Kong 27 HK

6 November 2012

Galaxy Entertainment Group

Initiation: time to double down

• Still see decent upside potential despite the 100%-plus share-price rally YTD

• Galaxy Macau still in ramp-up mode; EBITDA margin and property ROI have plenty of room to expand

• Stock poised to be a market-share gainer, and is our top buy in Macau

Source: FactSet, Daiwa forecasts

Consumer Discretionary / Hong Kong

Galaxy Entertainment Group27 HK

Target (HKD): 35.00Upside: 21.5%5 Nov price (HKD): 28.80

Buy (initiation)

OutperformHoldUnderperformSell

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Share price performance

Galaxy Ent (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 13.20-29.05Market cap (USDbn) 15.633m avg daily turnover (USDm) 53.51Shares outstanding (m) 4,207Major shareholder Lui Family (58.6%)

Financial summary (HKD)Year to 31 Dec 12E 13E 14ERevenue (m) 56,632 61,336 66,928Operating profit (m) 7,660 9,132 10,325Net profit (m) 7,298 8,910 10,395Core EPS (fully-diluted) 1.735 2.118 2.471EPS change (%) 142.9 22.1 16.7Daiwa vs Cons. EPS (%) 0.7 7.7 6.4PER (x) 16.6 13.6 11.7Dividend yield (%) 0.0 0.0 0.0DPS 0.000 0.000 0.000PBR (x) 5.6 4.0 3.0EV/EBITDA (x) 12.3 9.8 8.1ROE (%) 40.8 34.3 29.2

Bing Zhou(852) 2773 8782

[email protected]



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Growth outlook Galaxy: EBITDA and EBITDA margin

We believe Galaxy’s gaming revenue mix will improve in 2013. On our forecasts, the company’s exposure to the mass market will increase from 14% in 2011 to 21% in 2012 and 25% in 2013. In addition, the continuous ramp-up of Galaxy Macau and the high operating leverage for the premium mass business should also help enhance the company’s EBITDA margin in 2012 and 2013. Therefore, we forecast the company’s overall EBITDA margin to expand from 17.0% in 2012 to 18.5% in 2013.


Valuation Galaxy: 12-month forward EV/EBITDA multiple

We forecast Galaxy’s total EBITDA to rise by 18% YoY for 2013, outperforming that for the sector of 16% over the same period. While we think the entire sector is currently fairly valued, trading at a 2013E EV/EBITDA multiple of around 11x, we contend that Galaxy deserves to trade at a premium of 10%, which implies a 12.0x 2013E EV/EBITDA multiple.


Earnings revisions Galaxy: EBITDA consensus forecasts

Despite the consensus upward revisions YTD to the 2012 and 2013 EBITDA forecasts for Galaxy, we believe the consensus forecasts still underestimate the potential in Galaxy Macau. We expect Galaxy to demonstrate significant outperformance in both revenue and EBITDA vs. the market. Accordingly, our EBITDA forecasts are 2% and 8% above the Bloomberg consensus for 2012 and 2013, respectively.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

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avg: 7.6x sd+1: 9.3xsd-1: 5.9x

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Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EStarWorld property EBITDA (HKDm) n.a. 578 983 2,037 2,955 3,472 3,790 3,977Galaxy Macau property EBITDA (HKDm) n.a. n.a. n.a. n.a. 2,581 5,945 7,364 8,663

StarWorld property EBITDA margin (%) n.a. 8.1 10.2 12.3 13.1 15.8 16.0 16.0

Galaxy Macau property EBITDA margin (%) n.a. n.a. n.a. n.a. 15.8 18.4 21.0 22.0

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGaming and entertainment 11,481 8,917 10,987 18,020 39,612 54,980 59,601 65,106Sales of construction materials 1,554 1,603 1,245 1,242 1,574 1,653 1,735 1,822Other Revenue 0 0 0 0 0 0 0 (0)Total Revenue 13,035 10,520 12,233 19,262 41,186 56,632 61,336 66,928Other income 0 0 0 0 0 0 0 0COGS (11,383) (7,492) (9,230) (15,162) (30,861) (39,947) (42,513) (45,824)SG&A (1,986) (4,088) (2,656) (2,829) (7,000) (9,026) (9,691) (10,780)Other op.expenses 0 0 0 0 0 0 0 0Operating profit (334) (1,060) 347 1,271 3,325 7,660 9,132 10,325Net-interest inc./(exp.) (338) (238) (121) (49) (339) (488) (315) (55)Assoc/forex/extraord./others 197 (11,761) 1,008 (263) 75 192 167 212Pre-tax profit (476) (13,058) 1,233 959 3,061 7,364 8,984 10,482Tax (26) 1,503 (76) (45) (32) (51) (54) (57)Min. int./pref. div./others (36) 165 (9) (16) (26) (15) (20) (30)Net profit (reported) (538) (11,390) 1,149 898 3,004 7,298 8,910 10,395Net profit (adjusted) (538) (11,390) 1,149 898 3,004 7,298 8,910 10,395EPS (reported)(HKD) (0.160) (2.893) 0.292 0.228 0.728 1.735 2.118 2.471EPS (adjusted)(HKD) (0.160) (2.893) 0.292 0.228 0.728 1.735 2.118 2.471EPS (adjusted fully-diluted)(HKD) (0.160) (2.893) 0.291 0.226 0.714 1.735 2.118 2.471DPS (HKD) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000EBIT (334) (1,060) 347 1,271 3,325 7,660 9,132 10,325EBITDA 1,461 544 1,119 2,231 5,749 9,612 11,370 12,879

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EProfit before tax (476) (13,058) 1,233 959 3,061 7,364 8,984 10,482Depreciation and amortisation 1,413 1,144 541 511 1,248 1,821 1,838 1,854Tax paid (10) (18) (21) (29) (103) (35) (54) (57)Change in working capital 93 (618) 962 514 1,555 124 (73) 94Other operational CF items (405) 11,654 (1,151) 151 (63) (188) (242) (345)Cash flow from operations 614 (897) 1,565 2,106 5,698 9,086 10,453 12,029Capex (1,304) (1,526) (2,359) (4,545) (4,510) (3,000) (3,200) (6,200)Net (acquisitions)/disposals 221 38 27 (43) (69) 0 0 0Other investing CF items 244 71 82 (154) (334) 236 315 373Cash flow from investing (839) (1,417) (2,250) (4,742) (4,913) (2,764) (2,885) (5,827)Change in debt (105) 103 (536) 5,282 3,499 (173) (3,000) (2,000)Net share issues/(repurchases) 3,949 1 2 38 162 0 0 0Dividends paid 0 0 0 0 0 0 0 0Other financing CF items (1,182) 20 (1,307) (1,833) (2,045) 9 0 0Cash flow from financing 2,661 124 (1,841) 3,487 1,616 (163) (3,000) (2,000)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 2,436 (2,190) (2,526) 850 2,402 6,159 4,568 4,202Free cash flow (689) (2,423) (794) (2,439) 1,188 6,086 7,253 5,829

Financial summary


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Balance sheet (HKDm)

Key ratios (%)


Company profile

Galaxy Entertainment Group (Galaxy) is one of the six gaming operators in Macau. Its flagship property is the StarWorld Hotel, opened in 2006, and it also operates four City Club casinos. The company opened its first integrated resort, Galaxy Macau, in Cotai in May 2011. Galaxy’s origins were in construction materials, when it was previously called KWah Construction. In 2005, the controlling Lui Family sold the casino concession into the company and subsequently changed the name to Galaxy.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ECash & short-term investment 8,288 6,058 3,552 4,451 7,260 13,298 17,746 21,828Inventory 90 94 85 87 138 136 156 156Accounts receivable 1,039 1,608 895 853 1,579 1,645 1,735 1,827Other current assets 340 194 94 145 307 383 383 383Total current assets 9,758 7,953 4,626 5,536 9,283 15,463 20,021 24,195Fixed assets 4,731 6,481 7,175 12,394 17,469 18,833 20,380 24,911Goodwill & intangibles 16,701 3,319 6,091 6,137 6,063 5,878 5,693 5,508Other non-current assets 571 899 1,071 1,119 2,949 3,011 3,058 3,150Total assets 31,761 18,652 18,963 25,186 35,764 43,185 49,152 57,765Short-term debt 495 436 1,383 2,283 1,142 1,500 1,500 1,500Accounts payable 3,902 4,255 4,116 5,244 8,829 9,094 9,131 9,318Other current liabilities 21 11 66 481 22 38 38 38Total current liabilities 4,418 4,702 5,565 8,008 9,993 10,632 10,669 10,856Long-term debt 6,011 6,276 4,460 7,144 10,531 10,000 7,000 5,000Other non-current liabilities 2,395 401 503 460 597 597 597 597Total liabilities 12,823 11,378 10,528 15,612 21,121 21,229 18,266 16,453Share capital 394 394 394 395 417 417 417 417Reserves/R.E./others 18,013 6,617 7,774 8,801 13,805 21,102 30,013 40,408Shareholders' equity 18,407 7,011 8,169 9,197 14,222 21,520 30,430 40,825Minority interests 532 263 267 378 421 436 456 486Total equity & liabilities 31,761 18,652 18,963 25,186 35,764 43,185 49,152 57,765EV 118,774 120,614 122,085 124,841 124,196 117,927 110,452 104,308Net debt/(cash) (1,782) 654 2,291 4,975 4,413 (1,798) (9,246) (15,328)BVPS (HKD) 4.677 1.780 2.072 2.326 3.407 5.115 7.233 9.704

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ESales (YoY) 179.2 (19.3) 16.3 57.5 113.8 37.5 8.3 9.1EBITDA (YoY) 234.3 (62.8) 105.8 99.3 157.7 67.2 18.3 13.3Operating profit (YoY) n.a. n.a. n.a. 266.8 161.6 130.4 19.2 13.1Net profit (YoY) n.a. n.a. n.a. (21.8) 234.3 142.9 22.1 16.7Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. (22.6) 216.5 142.9 22.1 16.7Gross-profit margin 12.7 28.8 24.5 21.3 25.1 29.5 30.7 31.5EBITDA margin 11.2 5.2 9.2 11.6 14.0 17.0 18.5 19.2Operating-profit margin n.a. n.a. 2.8 6.6 8.1 13.5 14.9 15.4ROAE n.a. n.a. 15.1 10.3 25.7 40.8 34.3 29.2ROAA n.a. n.a. 6.1 4.1 9.9 18.5 19.3 19.4ROCE n.a. n.a. 2.5 7.6 14.7 25.6 25.1 23.7ROIC (1.9) (8.5) 3.5 9.6 19.6 38.8 43.4 43.1Net debt to equity n.a. 9.3 28.0 54.1 31.0 n.a. n.a. n.a.Effective tax rate n.a. n.a. 6.1 4.7 1.0 0.7 0.6 0.5Accounts receivable (days) 24.2 45.9 37.3 16.6 10.8 10.4 10.1 9.7Current ratio (x) 2.2 1.7 0.8 0.7 0.9 1.5 1.9 2.2Net interest cover (x) n.a. n.a. 2.9 25.8 9.8 15.7 29.0 188.1Net dividend payout n.a. n.a. 0.0 0.0 0.0 0.0 0.0 0.0

Financial summary continued …


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Doubling down

We think Galaxy will continue to exert its industry dominance as the most balanced player, with stable VIP market share and ample upside in the mass-market segment

‘Luck is the residue of design’

Undeniably, VIP gaming revenue this year for Galaxy has been buoyed by high VIP win rates. While we think win rates over the long run will normalise to the 2.85% level (the theoretical win rate for Baccarat, which is the only game played in VIP rooms), YoY comparisons may be tough for the rest of this year, and barely easier in 2013. Irrespective of robust growth in rolling chip volumes, total VIP gaming revenue is still highly sensitive to movements in the win-rate percentage. This is particularly true for Galaxy Macau, which may see volatile win rates as the property is new and needs time to ramp up. Win rates are a function of customer quality, average bet size, customer stickiness (duration of playing time), and luck. StarWorld averaged a VIP win rate of 2.88% in 1H11 vs. 3.18% in 2H11. For Galaxy Macau, as the property began operations in 2Q11, the average win rate for 2H11 was 3.15%.

VIP win rate Operator Property 1H11 2H11 1H12 Sands Venetian Macao 3.09% 2.81% 2.82%

Sands Macao 2.86% 2.71% 3.17% Plaza Macao 3.14% 2.71% 2.92% Sands Cotai Central n.a. n.a. 3.12%

Wynn Wynn Macau 2.80% 3.06% 2.68% Melco City of Dreams 2.65% 3.05% 3.00%

Altira 2.95% 3.06% 2.91% SJM Grand Lisboa 2.70% 2.48% 2.89%

Other self-promoted 2.76% 3.15% 2.81% Satellite casinos 3.00% 3.16% 3.10%

Galaxy StarWorld 2.88% 3.18% 2.92% Galaxy Macau 3.60% 3.15% 3.19%

MGM MGM Macau 3.00% 3.04% 3.20% Average 2.95% 2.96% 2.98% Source: Companies

Property strength can be quantified Luck, or higher win rates, are less relevant when we measure: a) StarWorld’s stable market share on the Macau Peninsula and Galaxy Macau’s rapid gains in Cotai market share, and b) the strong incremental ROI growth for Galaxy Macau due to increasing operating leverage. We believe rolling chip volume is a better proxy to evaluate the property’s long-term growth prospective in VIP business. StarWorld’s resilient market share in both rolling chip volume and mass-market gaming revenue is impressive, considering that it is one of the oldest major VIP properties on the Macau Peninsula.

StarWorld: rolling chip volume and mass-market gaming revenue market share

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Rolling chip 10% 10% 11% 10% 10% 10% Mass 3% 3% 3% 3% 3% 3% Source: Company, Daiwa estimates

In just one year, Galaxy Macau has increased its EBITDA market share from 3% in 2Q11 to 12% by 2Q12. As we believe Cotai will continue to take away revenue from the historically successful Macau Peninsula properties, Galaxy Macau should continue to gain both gaming revenue and EBITDA market share going forward. Galaxy Macau: EBITDA market share

Source: Company, Daiwa estimates and forecasts

We contend that ROI is one of the most relevant metrics for Macau, as it is used internally by managements to gauge the performance of a particular property. In our view, ROI is a good indicator of property quality and strength, and we define ROI as current property EBITDA divided by total investment cost of the project. We find that the conventional argument of ROI is wrong in the sense that older properties should naturally have higher ROI because of their historically lower cost bases. Our analysis shows that current

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execution capabilities of the managements in regards to branding and the ability to capture the intended market designate the level of ROI a particular property can achieve.

Property normalised ROI Investment cost Normalised ROI Operator Property Opening date (USD) 2010 2011 Sands Venetian Macao Aug-2007 3.0bn 24% 32%

Sands Macao May-2004 465m 79% 63%

Plaza Macao Aug-2008 995m 21% 27%

Sands Cotai Central Ph I: Apr-2012 Ph II: Sep-2012 4.4bn

Wynn Wynn Macau Wynn: Sep-2006 Encore: Apr-2010 1.75bn 49% 67%

Melco City of Dreams Jun-2009 2.5bn 12% 23%

Altira May-2007 584m 19% 26%

SJM Grand Lisboa Casino: Feb-2007 Hotel: Dec-2008 980m 42% 74%

Galaxy StarWorld Oct-2006 426m 54% 39%

Galaxy Macau May-2011 2.1bn 8% MGM MGM Grand Dec-2007 1.25bn 27% 41% Source: Company, Daiwa estimates

Cotai properties typically will have lower ROIs due to their inherent second-mover disadvantage. A well-placed mass-market property with relatively higher investment costs can generate higher ROIs than an early-mover VIP property. For example, Venetian Macao, albeit with 1.5x the number of tables as Melco’s Altira, can generate a higher normalized ROI at 5x the initial investment. The latter also reinforces our belief that a successful mass-market property on Cotai should be the most lucrative investment proposition going forward. As of 3Q12, Galaxy Macau’s past 12-month normalised ROI was 19% (vs. Venetian Macao’s 35% in the same period), which leaves stark room for improvement, as the property is still in a ramp-up period and has strong ability to capture high quality mass players. At 450 tables, we think a normalized ROI of 45% is achievable next year, which would put the property a footstep ahead of Venetian Macao of 40%, on the back of Galaxy Macau’s superior EBITDA per table per day, based on our forecasts.

Galaxy Macau and Venetian Macao: normalized ROI


‘The Cotai Magnet’

Galaxy Macau’s opening in May 2011 greatly fuelled Cotai migration – more specifically, general mass and premium mass migration. Since 2Q11, Macau Peninsula has seen gaming-revenue market share drop from 71% to 62%, with VIP gaming-revenue market share dropping from 72% to 63%, and mass market gaming-revenue market share declining from 69% to 60% by 2Q12. Galaxy Macau, as a single property, contributed 30% to total Cotai revenue in 2Q12. We expect Cotai to continue to benefit from both increased mass visitations to Macau, as well as market-share gains from the Macau peninsula. Macau Peninsula and Cotai: gaming revenue market share

Source: Company, DICJ, Daiwa estimates and forecasts

Galaxy Macau ramp-up has plenty of upside Most investors know that the future potential of Macau lies with mass market growth. Two prominent factors drive mass market volume and profitability:

• The premium mass business is highly profitable and growing rapidly, with EBITDA margins ranging from 40%+ depending on the size of the bet. Almost all gaming operators are now focused on gaining share in this lucrative customer segment.

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• Unique retail attractions create stickiness which improves both customer flow and duration of play (eg, Galaxy’s sky wave pool, Melco’s House of Dancing Waters, Venetian Macao’s ZAIA, MGM Macau’s Butterfly Exhibition).

We think the best measurement of a property’s ability to improve high-quality mass-market player retention can be defined as the incremental change in EBITDA per dollar vs. per dollar increase in gaming revenue. We compare our analysis across select properties that are well regarded to have a very strong presence in the mass market segment. These properties include Venetian Macao, City of Dreams, MGM Macau, and Galaxy Macau.

Incremental EBITDA per dollar vs. per dollar increase in gaming revenue (HKD) 2Q11 3Q11 4Q11 1Q12 2Q12 Venetian Macao 0.37 0.92 0.48 0.35 NM City of Dreams 0.32 0.25 0.35 0.52 0.33 MGM Macau 0.22 0.15 0.16 0.23 0.83 Galaxy Macau 0.16 0.16 0.17 0.19 0.20 Source: Company, Daiwa estimates

Note: NM = not meaningful as the company reported negative EBITDA that quarter

We find that Galaxy Macau is ramping up nicely but still has meaningful upside when compared to peers that have very strong mass-market businesses. As of 2Q12, Galaxy Macau only had HKD0.2 gains on EBITDA from an additional increase in gaming revenue dollar, which is substantially lower than Venetian Macao’s past 4-quarter average of HKD0.58 incremental EBITDA per dollar increase in gaming revenue.

Daiwa forecasts

Our forecasts are driven by underlying assumptions in the following categories:

• Average rolling chip volume/ non-rolling drop per table per day

• Implied normalized ROI per property

• VIP and mass gaming revenue mix

• Cross-checking with market-share movements per property

Top-line growth tamed by win rates We forecast the company’s growth rate in total rolling chip volume to remain solid at 11% YoY for 2013. Meanwhile, the revenue growth rate in 2013 is likely to normalise to 8% YoY, tamed by the high VIP win rate registered for 9M11.

Galaxy: revenue and YoY change


Gaming revenue mix to drive margin expansion We believe Galaxy’s gaming revenue mix will improve in 2013, driven by the increasing mass-market revenue proposition of Galaxy Macau. We forecast the company’s exposure to the mass market to increase from 21% in 2012 and 25% in 2013. In addition, the continuous ramp-up of Galaxy Macau and the high operating leverage for the premium mass business should also help enhance the company’s EBITDA margin in 2013. Therefore, we forecast the company’s overall EBITDA margin to expand from 17.0% in 2012 and 18.5% in 2013. Galaxy: gaming revenue mix


12.2 19.3

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56.6 61.3

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Galaxy: EBITDA and EBITDA margin


FCF continues to improve Galaxy Macau Phase II is expected to open in mid-2015. Upon completion, Phase II will feature an additional 500 gaming tables, 1,000 slot machines and 1,350 hotel rooms. The budgeted capex is around HKD16bn, according to management. The respective capex should be well covered by Galaxy’s internal resources, given what we see as its strong operating cash flow. Accordingly, we expect the company’s free cash flow to improve substantially in 2012 and 2013. Galaxy: free cash flow


Valuation

As Galaxy Macau only opened in 2011, this makes Galaxy hard to value based on historical premiums/discounts to average market multiples. Consequently, we think the best way to value the stock is to give a premium/discount to the average market multiple based on implied growth premiums. We forecast Galaxy’s total EBITDA to rise by 18% YoY for 2013, outperforming the sector’s 16% YoY change over the same period. We contend that Galaxy deserves to trade at a premium of 10% to our target sector EV/EBITDA of 11.0x, which implies a 12.0x 2013E EV/EBITDA multiple. Accordingly, we derive a six-month target price of HKD35.00 and initiate coverage with a Buy (1) rating.

Galaxy: EV/EBITDA based valuation (HKDm) 2013E EBITDA 11,370 target EV/EBITDA multiple 12.0x Enterprise value 136,441 Gross cash 19,431 Total debt 8,500 Net cash / (debt) 10,931 Equity value 147,371 Number of shares (m) 4,207 Target price (HKD) 35.00 Source: Daiwa forecasts

Risks In our view, the risks for Macau gaming companies are very macro- and policy-driven. A tightening of liquidity in China would negatively impact VIP gaming revenue, and travel restrictions would adversely impact mass-market gaming revenue. We believe the key company-specific downside risk to our bullish stance would be a slower-than-expected ramp-up in gaming revenue for Galaxy Macau.

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Galaxy: 12-month forward EV/EBITDA multiple Galaxy: EV/EBITDA multiple premium/discount to sector



Macau gaming sector: valuation table

Share price as of Nov-5 Market cap EV/EBITDA

EBITDA growth YoY (%) PER Div. yield (%) FCF yield (%)

Company Ticker (local cur.) (USDbn) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco Crown MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM China 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands China 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM 880 HK 17.92 12.9 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn Macau 1128 HK 23.35 15.6 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg forecasts for non-rated stocks, Daiwa forecasts for rated stocks

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avg: -26%


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StarWorld: property model (HKDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling chip volume 151,000 158,000 180,000 175,000 664,000 176,100 163,000 147,064 161,000 647,164 722,843 YoY change 48.0% 22.5% 31.4% 19.0% 28.9% 16.6% 3.2% -18.3% -8.0% -2.5% 11.7% Sequential change 2.7% 4.6% 13.9% -2.8% 0.6% -7.4% -9.8% 9.5% Win rate 2.94% 2.83% 3.28% 3.09% 3.10% 2.70% 3.16% 3.00% 2.85% 2.92% 2.85% VIP gross revenue 4,436 4,464 5,900 5,400 20,200 4,754 5,146 4,416 4,589 18,905 20,601 YoY change 53.0% 24.0% 37.2% 31.7% 35.6% 7.2% 15.3% -25.2% -15.0% -6.4% 9.0% Sequential change 8.2% 0.6% 32.2% -8.5% -12.0% 8.2% -14.2% 3.9% Number of VIP tables 100 100 100 100 100 100 100 100 100 100 100 Average rolling chip per VIP table per day (HKDm) 16.8 17.4 19.6 19.0 18.2 19.4 17.9 16.0 17.5 17.7 19.8 YoY change 48.0% 22.5% 31.4% 19.0% 28.9% 15.3% 3.2% -18.3% -8.0% -2.8% 12.0% Sequential change 5.0% 3.5% 12.7% -2.8% 1.7% -7.4% -10.8% 9.5% Average win per VIP table per day (HKD) 492,889 490,549 641,304 586,957 553,425 522,418 565,495 480,000 498,750 517,932 564,412 YoY change 53.0% 24.0% 37.2% 31.7% 35.6% 6.0% 15.3% -25.2% -15.0% -6.4% 9.0% Sequential change 10.6% -0.5% 30.7% -8.5% -11.0% 8.2% -15.1% 3.9% Non-rolling chip drop 1,900 2,100 2,300 2,300 8,600 2,392 2,368 2,627 2,576 9,963 10,929 YoY change 20.3% 47.9% 27.8% 27.8% 30.3% 25.9% 12.8% 14.2% 12.0% 15.8% 9.7% Sequential change 5.6% 10.5% 9.5% 0.0% 4.0% -1.0% 10.9% -1.9% Win rate 19.1% 17.4% 18.8% 21.7% 18.9% 23.6% 23.0% 23.5% 24.0% 23.5% 22.0% Mass table gross revenue 362 366 433 500 1,661 564 545 618 618 2,345 2,404 YoY change 26.1% 55.1% 39.7% 56.3% 44.1% 55.8% 48.9% 42.7% 23.6% 41.2% 2.5% Sequential change 13.1% 1.1% 18.3% 15.5% 12.8% -3.4% 13.4% 0.0% Number of mass tables 94 94 94 94 94 94 94 94 94 94 94 Average non-rolling chip drop per mass table per day (HKD) 224,586 245,499 265,957 265,957 250,656 279,635 276,830 303,770 297,872 289,588 318,547 YoY change 20.3% 47.9% 27.8% 27.8% 30.3% 24.5% 12.8% 14.2% 12.0% 15.5% 10.0% Sequential change 7.9% 9.3% 8.3% 0.0% 5.1% -1.0% 9.7% -1.9% Average win per mass table per day (HKD) 42,790 42,787 50,069 57,817 48,412 65,934 63,713 71,462 71,489 68,354 70,080 YoY change 26.1% 55.1% 39.7% 56.3% 44.1% 54.1% 48.9% 42.7% 23.6% 41.2% 2.5% Sequential change 15.6% 0.0% 17.0% 15.5% 14.0% -3.4% 12.2% 0.0% Table gaming gross revenue 4,798 4,830 6,333 5,900 21,861 5,318 5,691 5,034 5,207 21,250 23,005 YoY change 50.5% 25.9% 37.4% 33.5% 36.2% 10.8% 17.8% -20.5% -11.8% -2.8% 8.3% Number of tables 194 194 194 194 194 194 194 194 194 194 194 Average win per table per day (HKD) 271,035 272,843 357,746 333,286 308,728 300,410 321,480 284,367 294,125 300,095 324,890 Slot handle 1,050 1,020 917 1,038 4,025 930 840 882 1,038 3,690 3,875 slot hold rate 6.7% 4.8% 6.3% 6.2% 6.0% 6.7% 7.1% 6.7% 6.7% 6.8% 6.5% Slot machine gross revenue 70 49 58 64 241 62 60 59 70 251 252 YoY change 52.2% 8.9% 16.0% -3.0% 16.4% -11.4% 22.4% 1.7% 8.7% 4.0% 0.5% Number of slot machine 254 254 254 254 254 254 254 254 254 254 254 Average win per slot per day (HKD) 3,062 2,120 2,482 2,739 2,600 2,682 2,596 2,525 2,976 2,702 2,716 Gross gaming revenue (GGR) 4,868 4,879 6,391 5,964 22,102 5,380 5,751 5,093 5,276 21,500 23,257 Non-gaming revenue 86 68 85 121 360 104 103 100 102 409 431 Property revenue 4,954 4,947 6,476 6,137 22,514 5,484 5,854 5,193 5,379 21,910 23,688 YoY change 49.7% 25.2% 36.3% 35.4% 36.1% 10.7% 18.3% -19.8% -12.4% -2.7% 8.1% Sequential change 9.3% -0.1% 30.9% -5.2% -10.7% 6.8% -11.3% 3.6% Property EBITDA 664 685 779 827 2,955 852 906 843 871 3,472 3,790 YoY change 79.9% 33.0% 37.1% 41.4% 45.1% 28.3% 32.3% 8.2% 5.4% 17.5% 9.2% Sequential change 13.5% 3.2% 13.7% 6.2% 3.0% 6.3% -7.0% 3.4% Property EBITDA margin (IFRS) 13.4% 13.8% 12.0% 13.5% 13.1% 15.5% 15.5% 16.2% 16.2% 15.8% 16.0% Property EBITDA margin (US GAAP) 23.0% 23.0% 21.0% 25.3% 23.0% 26.0% 26.0% 26.0% 25.9% 26.0% 26.7% Property ROI 20.0% 20.6% 23.4% 24.9% 88.9% 25.6% 27.3% 25.4% 26.2% 104.5% 114.1% Normalized ROI 16.0% 21.8% 0.3% 12.5% 39.0% 33.6% 12.2% 18.6% 26.2% 90.6% 114.1% Source: Company, Daiwa forecasts


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Galaxy Macau: property model (HKDm) 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12E 2012E 2013E Days in operation 47 92 92 231 91 91 92 92 366 365 Rolling chip volume 50,000 163,000 167,000 380,000 171,393 186,407 173,295 180,360 711,455 780,462 YoY change 272.8% 6.3% 8.0% 87.2% 9.7% Sequential change 226.0% 2.5% 2.6% 8.8% -7.0% 4.1% Win rate 3.60% 3.00% 3.30% 3.20% 2.99% 3.37% 3.30% 2.85% 3.13% 2.85% VIP gross revenue 1,800 4,890 5,510 12,200 5,120 6,280 5,720 5,140 22,260 22,243 YoY change 248.9% 17.0% -6.7% 82.5% -0.1% Sequential change 171.7% 12.7% -7.1% 22.7% -8.9% -10.1% Number of VIP tables 150 150 150 150 150 150 150 150 150 150 Average rolling chip per VIP table per day (HKDm) 7.1 11.8 12.1 11.0 12.6 13.7 12.6 13.1 13.0 14.3 YoY change 92.6% 6.3% 8.0% 18.2% 10.0% Sequential change 66.5% 2.5% 3.8% 8.8% -8.0% 4.1% Average win per VIP table per day (HKD) 255,319 354,348 399,275 352,092 375,092 460,073 414,493 372,483 405,469 406,268 YoY change 80.2% 17.0% -6.7% 15.2% 0.2% Sequential change 38.8% 12.7% -6.1% 22.7% -9.9% -10.1% Non-rolling chip drop 2,400 5,000 5,700 13,100 5,871 6,029 6,297 7,125 25,322 32,829 YoY change 0.0% 0.0% 0.0% 0.0% 0.0% 151.2% 25.9% 25.0% 93.3% 29.6% Sequential change 0.0% 108.3% 14.0% 3.0% 2.7% 4.4% 13.1% Win rate 16.7% 20.9% 23.8% 21.7% 27.1% 28.3% 29.9% 30.0% 28.9% 30.0% Mass table gross revenue 400 1,045 1,355 2,800 1,593 1,707 1,885 2,138 7,323 9,849 YoY change 326.8% 80.4% 57.7% 161.5% 34.5% Sequential change 161.3% 29.7% 17.6% 7.2% 10.4% 13.4% Number of mass tables 300 300 300 300 300 300 300 300 300 300 Average non-rolling chip drop per mass table per day (HKD) 170,213 181,159 206,522 189,033 215,055 220,842 228,152 258,152 230,619 299,805 YoY change 0.0% 0.0% 0.0% 0.0% 0.0% 29.7% 25.9% 25.0% 22.0% 30.0% Sequential change 0.0% 6.4% 14.0% 4.1% 2.7% 3.3% 13.1% Average win per mass table per day (HKD) 28,369 37,862 49,094 25,571 58,352 62,527 68,297 77,446 66,872 89,942 YoY change 120.4% 80.4% 57.7% 161.5% 34.5% Sequential change 33.5% 29.7% 18.9% 7.2% 9.2% 13.4% Table gaming gross revenue 2,200 5,935 6,865 15,000 6,713 7,987 7,605 7,278 29,583 32,092 YoY change 263.0% 28.1% 6.0% 97.2% 8.5% Number of tables 450 450 450 450 450 450 450 450 450 450 Average win per table per day (HKD) 104,019 143,357 165,821 91,324 163,932 195,043 183,696 175,791 180,108 195,384 Slot handle 1,800 4,000 4,300 10,100 4,346 4,354 5,345 4,730 18,775 21,591 Slot hold rate 6.3% 6.6% 6.3% 6.4% 6.9% 6.2% 5.9% 6.5% 6.3% 6.5% Slot machine gross revenue 114 262 269 645 298 271 313 307 1,189 1,403 YoY change 137.7% 19.5% 14.3% 84.4% 18.0% Number of slot machine 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 Average win per slot per day (HKD) 2,021 2,373 2,437 1,473 2,729 2,482 2,835 2,785 2,716 3,204 Gross gaming revenue (GGR) 2,314 6,197 7,134 15,645 7,011 8,258 7,918 7,585 30,772 33,495 Non-gaming revenue 54 269 390 713 327 368 391 389 1,476 1,570 Property revenue 2,388 6,466 7,521 16,375 7,338 8,651 8,309 7,974 32,248 35,065 YoY change 262.3% 28.5% 6.0% 96.9% 8.7% Sequential change 170.8% 16.3% -2.4% 17.9% -3.9% -4.0% Property EBITDA 376 973 1,232 2,581 1,304 1,565 1,800 1,276 5,945 7,364 YoY change 316.2% 85.0% 3.6% 130.3% 23.9% Sequential change 158.8% 26.6% 5.8% 20.0% 15.0% -29.1% Property EBITDA margin (IFRS) 15.7% 15.0% 16.4% 15.8% 17.8% 18.1% 21.7% 16.0% 18.4% 21.0% Property EBITDA margin (US GAAP) 22.0% 23.0% 23.3% 23.0% 26.0% 26.0% 29.0% 21.6% 25.7% 28.3% Property ROI 2.3% 5.9% 7.5% 15.6% 7.9% 9.5% 10.9% 7.7% 36.0% 44.6% Normalized ROI 0.0% 4.4% 2.9% 7.6% 6.5% 3.6% 6.2% 7.7% 24.0% 44.6% Source: Company, Daiwa forecasts


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Appendix

Galaxy: key management profile Name Age Position Experience Dr. Lui Che Woo 82 Chairman and Executive Director Dr. Lui is the founder of the company. He has over 50 years’ experience in quarrying, construction materials and property

development. Dr. Lui was a Committee Member of Chinese People’s Political Consultative Conference, a member of the Selection Committee for the First Government of the HKSAR and a member of the Election Committee of the HKSAR. Dr Lui is the father of Mr Francis Lui Yiu Tung and Ms. Paddy Tang Lui Wai Yu.

Mr. Francis Lui Yiu Tung 56 Deputy Chairman and Executive Director Mr. Francis Lui is a member of the National Committee of the Chinese People’s Political Consultative Conference. Mr. Joseph Chee Ying Keung 54 Executive Director Mr. Chee is the Managing Director of the Construction Materials Division of the company. He has over 25 years of broad

experience in the construction materials industry. Source: Company

Galaxy: shareholding structure

Source: Company

StarWorld Galaxy Macau

Source: Company Source: Company

Lui Family

Galaxy

Public

58.6% 41.4%


Investment case

We think Melco will continue to benefit from the migration of gamer traffic to Cotai, albeit with smaller incremental market-share gains than Cotai giants Sands and Galaxy. We believe the short-term EBITDA growth will be capped in 2012, as Altira struggles to expand its share of the VIP market. In the meantime, City of Dreams should be able to offset most of the negative impact as the property accounts for the majority of the company’s EBITDA. Additional potential from table-optimisation strategies at City of Dreams should raise group margins and per-table productivity in 2013. Although we do not price new projects into our forecasts, a new casino venture in the Philippines could emerge as a diverse new income stream in late 2013 or early

2014, while Studio City’s likely opening in 2015 should enhance Melco’s mass-market presence in Cotai.

Catalysts We think the Bloomberg-consensus EBITDA forecast is too low for 2013, with YoY growth of only 3%. We believe the company’s 3Q12 and 4Q12 results will surprise the market on the upside due to strong performance at City of Dreams, leading to the consensus forecasts for 2013 being raised.

Valuation We expect the stock’s discount to the sector EV/EBITDA multiple to narrow going forward, due to the company’s increasing EBITDA mix from Cotai. It has traded at a 23% discount to the sector average since 2010, although we use a 10% discount to arrive at our fair-value multiple of 10.0x 2013E EV/EBITDA. We believe this multiple is appropriate, as Melco’s EBITDA was depressed until 2009, when it launched City of Dreams, which now accounts for 85% of the company’s total property EBITDA. We initiate coverage with an Outperform (2) rating and six-month target price of USD17.30.

Risks The downside risks to our view would include continued falls in VIP gaming revenue at Altira, and significant market-share loss to Sands and Galaxy.


6 November 2012

Melco Crown Entertainment

Initiation: focusing on profitability

• Melco is gradually finding a balance in optimising VIP tables at Altira, and mass-market tables at City of Dreams

• We think the operator will continue to benefit from Cotai migration, and attract mass-market share from the peninsula

• Dynamic long-term roadmap: Studio City and new Philippines project should help drive long-term revenue growth



Melco Crown EntertainmentMPEL US

Target (USD): 17.30Upside: 16.2%

5 Nov price (USD): 14.89

BuyOutperform (initiation)

HoldUnderperformSell

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155000

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Dec-11 Mar-12 Jun-12 Sep-12


Melco (LHS) Relative to HSI (RHS)

(USD) (%)

12-month range 8.72-16.00Market cap (USDbn) 8.203m avg daily turnover (USDm) 42.47Shares outstanding (m) 551Major shareholder Melco Leisure (33.2%)

Financial summary (USD)Year to 31 Dec 12E 13E 14ERevenue (m) 4,003 4,423 4,825Operating profit (m) 502 611 724Net profit (m) 398 469 587Core EPS (fully-diluted) 0.722 0.851 1.066EPS change (%) 34.6 17.9 25.3Daiwa vs Cons. EPS (%) 3.4 9.8 3.9PER (x) 20.6 17.5 14.0Dividend yield (%) 0.0 0.0 0.0DPS 0.000 0.000 0.000PBR (x) 2.4 2.1 1.8EV/EBITDA (x) 10.6 9.3 8.2ROE (%) 12.6 13.0 14.1

Bing Zhou(852) 2773 8782

[email protected]

Cris Xu(852) 2773 8736

[email protected]



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Growth outlook Melco: EBITDA

We forecast EBITDA growth of 13% for 2013. We forecast the company’s EBITDA margin to expand from 22.0% for 2012 to 22.6% for 2013, due to an increase in the proportion of mass-market revenue, although this will be offset somewhat by margin deterioration at Altira.


Valuation Melco: EV/EBITDA multiple

We expect the stock’s discount to the sector EV/EBITDA multiple to narrow going forward, due to the company’s increasing EBITDA mix from Cotai. It has traded at a 23% discount to the sector average since 2010, although we use a 10% discount to arrive at our fair-value multiple of 10.0x 2013E EV/EBITDA, which is 1SD higher than its past-2-year discount. We believe this multiple is appropriate, as Melco’s EBITDA was depressed until 2009, when it launched City of Dreams, which now accounts for over 85% of its total 2012E EBITDA.

Source: Bloomberg

Earnings revisions Melco: consensus earnings revisions

We think the Bloomberg-consensus EBITDA forecast is too low for 2013, with YoY growth of only 3%. We believe the company’s 3Q12 and 4Q12 results may surprise the market on the upside due to strong performance at City of Dreams, leading to the consensus forecasts for 2013 being raised.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

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(x) avg: 7.7x sd+1: 9.1xsd-1: 6.4x

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Key assumptions

Profit and loss (USDm)

Cash flow (USDm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

City of Dreams property EBITDA (USDm) n.a. n.a. 57 326 594 765 896 1,048

Altira property EBITDA (USDm) (22) 163 14 134 246 156 157 146City of Dreams property EBITDA margin (%) n.a. n.a. 10 20 24 27 28 28

Altira property EBITDA margin (%) (8.1) 12.4 2.1 15.6 21.0 16.1 15.9 15.5

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGaming 348 1,392 1,279 2,513 3,628 0 0 0Non-gaming 11 24 54 129 203 0 0 0Other Revenue 0 0 0 0 0 4,003 4,423 4,825Total Revenue 358 1,416 1,333 2,642 3,831 4,003 4,423 4,825Other income 0 0 0 0 0 0 0 0COGS (188) (768) (737) (1,362) (1,949) (2,024) (2,205) (2,407)SG&A (366) (647) (867) (1,187) (1,437) (1,478) (1,607) (1,694)Other op.expenses 0 0 0 0 0 0 0 0Operating profit (196) 1 (272) 93 445 502 611 724Net-interest inc./(exp.) 18 8 (31) (93) (110) (107) (106) (104)Assoc/forex/extraord./others (2) (13) (5) (9) (48) 0 (38) (35)Pre-tax profit (180) (4) (309) (10) 287 395 467 586Tax 1 1 0 (1) 2 (3) (3) (3)Min. int./pref. div./others 0 0 0 0 0 5 5 5Net profit (reported) (178) (2) (308) (11) 289 398 469 587Net profit (adjusted) (178) (2) (308) (11) 289 398 469 587EPS (reported)(USD) (0.436) (0.006) (0.631) (0.020) 0.540 0.722 0.851 1.066EPS (adjusted)(USD) (0.436) (0.006) (0.631) (0.020) 0.540 0.722 0.851 1.066EPS (adjusted fully-diluted)(USD) (0.436) (0.006) (0.631) (0.020) 0.536 0.722 0.851 1.066DPS (USD) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000EBIT (196) 1 (272) 93 445 502 611 724EBITDA (24) 157 56 430 809 880 1,001 1,131

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EProfit before tax (180) (4) (309) (10) 287 395 467 586Depreciation and amortisation 115 128 223 328 367 366 375 387Tax paid 0 0 0 0 0 0 0 0Change in working capital 104 (148) (59) 43 16 16 (10) 15Other operational CF items 15 13 32 40 74 9 12 17Cash flow from operations 55 (11) (112) 402 745 786 844 1,005Capex (668) (1,096) (968) (227) (106) (493) (827) (977)Net (acquisitions)/disposals 0 2 4 0 (290) 0 0 0Other investing CF items (304) 180 (180) 37 (190) 0 0 0Cash flow from investing (973) (914) (1,144) (190) (585) (493) (827) (977)Change in debt 500 912 271 41 589 (26) 200 0Net share issues/(repurchases) 723 0 384 0 0 0 0 0Dividends paid 0 0 0 0 0 0 0 0Other financing CF items (54) (8) (1) (23) (32) 0 0 0Cash flow from financing 1,169 905 653 18 558 (26) 200 0Forex effect/others 0 0 0 0 0 0 0 0Change in cash 251 (20) (603) 229 717 267 217 28Free cash flow (614) (1,107) (1,080) 175 639 293 17 28

Financial summary


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Balance sheet (USDm)

Key ratios (%)


Company profile

Melco Crown (Melco) is one of the six gaming operators in Macau formed as a joint venture between Melco International of Hong Kong and the Crown Casino brand of Australia. The operator opened Altira in 2007, focusing on the VIP segment, and City of Dreams in 2009, targeting the mass market. It also operates Mocha slot-machine halls across the Macau Peninsula and Taipa. In June 2011, the operator also announced the acquisition of a 60% stake in Macau Studio City in Cotai.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ECash & short-term investment 1,134 883 449 609 1,158 1,425 1,642 1,670Inventory 1 3 9 15 15 25 46 51Accounts receivable 49 70 262 260 307 326 402 439Other current assets 16 17 17 17 26 26 26 26Total current assets 1,201 973 737 900 1,506 1,802 2,116 2,185Fixed assets 1,428 2,542 3,234 3,100 3,598 3,783 4,292 4,939Goodwill & intangibles 915 857 800 743 686 628 571 514Other non-current assets 77 123 91 141 480 480 480 480Total assets 3,620 4,495 4,863 4,884 6,270 6,693 7,459 8,118Short-term debt 0 0 45 203 0 500 500 500Accounts payable 6 2 9 9 12 20 24 24Other current liabilities 478 445 468 464 591 628 711 768Total current liabilities 484 447 522 676 603 1,148 1,235 1,292Long-term debt 615 1,528 1,754 1,637 2,326 1,800 2,000 2,000Other non-current liabilities 93 111 78 49 153 153 153 153Total liabilities 1,192 2,087 2,354 2,361 3,082 3,101 3,388 3,445Share capital 13 13 16 16 16 16 16 16Reserves/R.E./others 2,415 2,395 2,493 2,507 2,940 3,349 3,833 4,441Shareholders' equity 2,429 2,409 2,509 2,523 2,956 3,366 3,850 4,457Minority interests 0 0 0 0 231 226 221 216Total equity & liabilities 3,620 4,495 4,863 4,884 6,270 6,693 7,459 8,118EV 7,685 8,850 9,555 9,436 9,604 9,306 9,284 9,251Net debt/(cash) (520) 645 1,350 1,231 1,168 875 858 830BVPS (USD) 5.515 5.468 4.717 4.714 5.365 6.108 6.986 8.089

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ESales (YoY) 893.0 295.0 (5.9) 98.2 45.0 4.5 10.5 9.1EBITDA (YoY) n.a. n.a. (64.5) 671.9 88.1 8.7 13.8 13.1Operating profit (YoY) n.a. n.a. n.a. n.a. 381.1 12.7 21.7 18.6Net profit (YoY) n.a. n.a. n.a. n.a. n.a. 37.7 17.9 25.3Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. 34.6 17.9 25.3Gross-profit margin 47.6 45.8 44.7 48.4 49.1 49.4 50.2 50.1EBITDA margin n.a. 11.1 4.2 16.3 21.1 22.0 22.6 23.5Operating-profit margin n.a. 0.1 n.a. 3.5 11.6 12.5 13.8 15.0ROAE n.a. n.a. n.a. n.a. 10.5 12.6 13.0 14.1ROAA n.a. n.a. n.a. n.a. 5.2 6.1 6.6 7.5ROCE n.a. 0.0 n.a. 2.1 9.0 8.8 9.8 10.5ROIC (11.8) 0.0 (7.9) 2.4 11.0 11.3 12.9 13.8Net debt to equity n.a. 26.8 53.8 48.8 39.5 26.0 22.3 18.6Effective tax rate n.a. n.a. n.a. n.a. n.a. 0.7 0.6 0.5Accounts receivable (days) 25.4 15.4 45.5 36.0 27.0 28.8 30.1 31.8Current ratio (x) 2.5 2.2 1.4 1.3 2.5 1.6 1.7 1.7Net interest cover (x) n.a. n.a. n.a. 1.0 4.1 4.7 5.8 7.0Net dividend payout n.a. n.a. n.a. n.a. 0.0 0.0 0.0 0.0



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We like its prospects

We expect City of Dreams to make up for the shortcomings at Altira, and believe Melco’s chances of building a long-term, sustainable mass-market franchise are promising.

Striking a balance

Altira has been a persistent thorn in the side of Melco. The VIP-focused property continues to lose VIP gaming revenue market share and its poor location in Taipa, combined with budding properties in Cotai, lead to us be cautious about its outlook. In our view, the future performance of Melco in Macau lies in the hands of City of Dreams, and later on, Studio City. We expect City of Dreams to be the main driver of both revenue and EBITDA growth for the foreseeable future, due to management’s realigned commitment to building a high-quality mass-market business. After less than three years of operation, the property already accounts for 85% of the group’s total property EBITDA. Altira: cleaning out the closet Altira’s recent sub-par performance in gaming revenue growth can be attributed to: 1) the fact that the property is relatively old and is off the beaten track, 2) it has the lowest mass-market mix of any casino in Macau, which has led the property to miss out on most of the subsequent rises in EBITDA margin and ROI enjoyed by its peers, and 3) an undersupply of rooms that are operating at an occupancy rate of 97%. This year for Altira has indeed been difficult, as overall VIP revenue has fallen sharply, and last year’s high win-rate makes YoY comparisons unattractive. Thus, we believe that Melco’s strategic move to shift low-performing VIP tables from Altira to City of Dreams will enhance the future EBITDA growth of the group.

• The win per table per day rates at the low-end tables at Altira were almost certainly well below the average of about USD20,000, which is the normalised win-rate.

• The average VIP win per table per day at City of Dreams is currently 45-50% higher than that at Altira.

• The tables can easily be reallocated to City of Dreams’ VIP business, where relationships with good-quality junkets can deliver higher win per table.

Moreover, with marginally less compensation ability, and a falling market share, we fear that Altira’s EBITDA margin and ROI will deteriorate gradually as the company may have no choice but to share more revenue with junkets in an attempt to reduce further declines.

Melco: market shares in the VIP segment 2009 2010 2011 2012E 2013E

Altira 10% 7% 6% 5% 4% City of Dreams 5% 9% 9% 9% 8% Source: Company, DICJ, Daiwa estimate and forecasts

Location of Altira

Source: Company

City of Dreams: VIP to mass-market reversal City of Dreams had been positioned as a premium property since it opened in 2009, although the strategy had originally focused on VIP market share, which explains why the property’s average number of VIP tables rose from about 130 at the end of 2009 to about 180 at the end of 2011, with the average mass-market table count shrinking from about 340 to about 240 for the respective years.


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Recently, there has been a shift of focus in the strategy, resulting in table redesignations. We think this has been due mainly to the following:

The stronger average revenue CAGR of 130% from the mass market (partially due to a gradual rise in hold rates) than from the VIP segment, a CAGR of 116%, from 2009-11.

The optimisation of table yields by taking away tables from lower-performing (in terms of gaming revenue) junkets and redesignating them to mass-market floor tables, with a decent win per table and higher EBITDA margin.

The company expecting a higher EBITDA contribution from mass-market tables in the future. Although City of Dreams’ average VIP per table revenue is almost 3x that of its mass-market tables, mass-segment profitability is improving gradually due to the inflow of more higher-quality mass-market players, which should drive the total average mass-market EBITDA margin to more than 3x that of the VIP segment.

Similar table breakdowns between the VIP and mass segments (we expect that for the mass market to be slightly higher by the end of 2012), which suggests that the total EBITDA is now more weighted towards the mass market than the VIP segment.

We believe City of Dreams’ success in the overall mass market and its development as a brand for the premium mass market are due to the following:

A renewed focus and commitment to developing a high-end mass-market business. City of Dreams has the second-highest average table-bet size, with an average minimum bet of HKD1,500/hand in the regular mass segment, and HKD3,000/hand in the high-limit mass segment.

Low customer-acquisition costs as players naturally gravitate towards Cotai due to new property launches (eg, Galaxy Macau, Sands Cotai Central).

Since the beginning of 2010, City of Dreams has seen its revenue market share rise from 8% to 9% at the end of 2Q12. Concurrently, the property’s EBITDA market share has increased from 9% to 11%. We expect Sands Cotai Central and Galaxy Macau to continue to ramp up in terms of gaming revenue and account for the lion’s share of EBITDA, although the overall market share of City of Dreams should remain relatively stable over 2013.

City of Dreams: gaming revenue and EBITDA market share 2009 2010 2011 2012E 2013E

Gaming revenue in Macau 5% 8% 9% 9% 10% Gaming revenue in Cotai 17% 31% 29% 25% 23% EBITDA in Macau 3% 8% 10% 11% 11% EBITDA in Cotai 9% 24% 25% 24% 22%

Source: Company, DICJ, Daiwa estimates and forecasts

Table optimisation

As stated in our investment thesis on table optimisation in the sector part of this report, we believe that when the productivity per table between the VIP and mass-market segments reaches a certain level, table optimisation becomes crucial to maximise property profitability. Melco started moving underperforming junket tables from Altira into City of Dreams this year, which we believe makes sense from a per-table productivity point of view. The average VIP win per table per day at City of Dreams is 45-50% higher than at Altira. Moreover, it would be difficult for Altira to move tables to cater to the mass segment, given a 1.3x VIP/mass-market table-yield ratio, due to its legacy branding as a VIP property. There are about only 20 mass-market tables at Altira, which means the acquisition cost per mass-market customer would have to greatly increase, and the table units moved would have to be on a significant scale, in order to affect profit significantly. City of Dreams started redesignating VIP tables to the mass-market segment at the beginning of this year. Since its opening in 2009, City of Dreams has placed considerable emphasis on developing a VIP business rather than attracting mass-market gamers, which could explain why table redesignation in the past has had a bias towards the VIP segment. As the property starts to age, table optimisation plays a more important role, and we expect more redesignations in the coming year from VIP to mass-market tables.


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VIP GGR per table vs. mass-market GGR per table ratio Operator Property 2009 2010 2011 1H12 Sands Venetian Macao 3.1 3.1 3.1 3.1

Sands Macao 1.9 2.2 2.1 2.1 Plaza Macao 0.3 1.0 1.0 2.1 Sands Cotai Central 3.5

Wynn Wynn Macau 3.6 4.7 3.0 3.0 Melco City of Dreams 9.2 6.0 4.2 2.6 Altira 3.4 2.6 1.9 1.3 SJM Grand Lisboa 9.2 8.0 5.9 5.7 Galaxy StarWorld 8.3 12.1 11.4 8.4

Galaxy Macau 13.8 6.6 MGM MGM Macau 5.0 4.6 5.1 3.7 Source: Company, Daiwa estimates

The Philippines: the new frontier

Following an initial memorandum of agreement in July, Melco recently (October 25) entered into a formal co-operation agreement with its Philippines partners, including the SM Group, Belle Corporation (Belle) and PremiumLeisure and Amusement (PLAI), to develop jointly an integrated casino resort in the Philippines. Melco will be named on the gaming licence and each party will have a first right of refusal on any future developments. The Philippine Amusement and Gaming Corporation (PARCOR) requires a USD1bn minimum capital commitment for the project. Accordingly, the initial investment is USD625m, with the Philippines parties contributing the land and building structure, with an aggregated value of not less than USD325m. After the infrastructure works, Melco has agreed to contribute to building fit-out and furniture, gaming equipment, inventory and supplies, and entertainment facilities, with an aggregate value of not less than USD325m. The remaining capital commitment of USD350m will also be split 50/50 by Melco and the Philippine parties. Together with a certain amount of working capital, Melco’s total investment is expected by management to be USD600m, out of which USD325m will be funded by debt. Melco is entitled to retain all the profit from non-gaming operations and 50% of the gaming profit after the deduction of a monthly fee paid to PLAI.

Since the project is only at the development stage, we do not factor in any value from the Philippine project into our forecasts.

Studio City

Melco acquired a 60% interest in the Studio City project for USD360m in July 2011. Around USD260m was paid to eSun (Not rated) and USD100m was paid to New Cotai, the 40% joint-venture partner in Studio City. The initial capex of USD100m for piling work was completed by the previous owner. Melco’s Studio City project, which has a target opening date of mid-2015, is a strategically well-placed property, in our view. Studio City phase I will have 1,600 hotel rooms, up to 500 tables and 1,500 slot machines with a focus on the mass market. Studio City is located opposite the entry point to Cotai from Hengqin Island, an area that will see significant infrastructure improvements, both on the island itself and to Cotai in the coming few years. These improvements include amusement parks and hotels on Hengqin Island, as well as a bridge connecting Zhuhai Airport to Hengqin Island. These two major developments should allow for the seamless flow of visitors into Macao. Compared with the pending Cotai projects of Melco’s peers (including Wynn, MGM and SJM), it is worth noting that although the land area of Studio City is only 70% of Wynn’s Cotai site, the planned GFA is similar. This makes Melco and Wynn the largest new Cotai properties in terms of GFA.

Pending projects in Cotai

Operator Project Opening date Land area

(sqm) Land premium

(HK$m) GFA

(sqm) Melco Studio City mid-2015 140,789 1,361 707,000 MGM MGM Cotai 2017 71,833 1,253 372,000 SJM SJM Cotai 2017 70,468 2,088 521,000 Wynn Wynn Cotai 2016 206,390 1,397 637,000 Source: Company

Studio City is well-positioned to attract visitors from Hengqin Island. The 150,000-sq-m property will be the first gaming site visitors see after crossing the bridge and clearing immigration. We estimate that the second phases of Chimelong’s resort will be completed by the time Studio City opens in 2015, which should help in driving mass-market players onto Cotai.


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Map of Cotai with all projects completed

Source: Daiwa

Our forecasts

We expect Melco’s VIP rolling-chip per table to increase as the company continues to build tables with high-quality junkets. We forecast total revenue to grow by 10% YoY for 2013.

Melco: revenue

Source: Company Daiwa forecasts

Meanwhile, we forecast the company’s EBITDA to rise by 14% YoY for 2013. We expect EBITDA margins to expand from 22.0% in 2012 to 22.6% in 2013, due to an increase in the proportion of mass-market revenue, although we believe this will be offset partially by margin deterioration at Altira.

Melco: EBITDA and EBITDA margin


Valuation

We expect the stock’s discount to the sector EV/EBITDA multiple to narrow going forward, due to the company’s increasing EBITDA mix from Cotai. It has traded at a 23% discount to the sector average since 2010, although we use a 10% discount to arrive at our fair-value multiple of 10.0x 2013E EV/EBITDA. We believe this multiple is appropriate, as Melco’s EBITDA was volatile until 2009, when it launched City of Dreams, which now accounts for over 85% of its total 2012E EBITDA. We initiate coverage with an Outperform (2) rating and six-month target price of USD17.30.

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Risks The sector wide downside risk includes a significant deterioration in China’s economy and a restriction on visa applications. The company-specific risks include continued fall in VIP gaming revenue at Altira, and significant market share loss to Sands and Galaxy.

Melco: EV/EBITDA based valuation (USDm) 2013E EBITDA 1,001 Target EV/EBITDA multiple 10.0x Enterprise value 10,007 Gross cash 2,007 Total debt 2,500 Net cash/(debt) (493) Equity value 9,514 Number of shares (ADR) (m) 551 Target price (USD) (ADR) 17.30 Source: Daiwa forecasts

Melco: 12-month forward EV/EBITDA multiple Melco: EV/EBITDA multiple premium/discount to sector

Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts



growth YoY (%) PER Div. yield (%) FCF yield (%) Company code (local cur.) (USDbn) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM 880 HK 17.92 12.8 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn 1128 HK 23.35 15.5 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg (non-rated stocks), Daiwa forecasts; note: prices as of close on 5 November 2012

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5%

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avg: -23%


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City of Dreams: property model (USDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling-chip volume 18,800 19,300 20,300 20,400 78,800 19,200 19,100 21,348 21,132 80,781 85,144 YoY change 91.8% 58.2% 41.0% 32.5% 52.3% 2.1% -1.0% 5.2% 3.6% 2.5% 5.4% Sequential change 22.1% 2.7% 5.2% 0.5% -5.9% -0.5% 11.8% -1.0% win rate 2.50% 2.80% 3.10% 3.00% 2.89% 3.00% 3.00% 2.85% 2.85% 2.92% 2.85% VIP gross revenue 470 540 629 612 2,277 576 573 608 602 2,360 2,427 YoY change 57.2% 92.6% 28.5% 37.0% 50.8% 22.6% 6.0% -3.3% -1.6% 3.6% 2.8% Sequential change 5.2% 15.0% 16.5% -2.7% -5.9% -0.5% 6.2% -1.0% Number of VIP tables 174 180 184 188 181 205 215 215 205 210 193 Average rolling chip per VIP table per day (USDm) 1.2 1.2 1.2 1.2 1.2 1.0 1.0 1.1 1.1 1.1 1.2 YoY change 43.3% 16.0% 26.4% 17.0% 24.6% -14.3% -17.1% -10.0% -5.0% -11.9% 15.0% Sequential change 19.1% -1.9% 1.8% -1.6% -12.7% -5.1% 10.6% 3.8% Average win per VIP table per day (USD) 30,013 32,991 37,175 35,384 34,471 30,876 29,287 30,759 31,934 30,701 34,447 YoY change 17.5% 41.2% 15.3% 21.0% 23.3% 2.9% -11.2% -17.3% -9.8% -10.9% 12.2% Sequential change 2.6% 9.9% 12.7% -4.8% -12.7% -5.1% 5.0% 3.8% Non-rolling chip drop 647 751 731 811 2,940 865 823 840 973 3,501 4,731 YoY change 34.9% 55.2% 39.5% 41.7% 42.8% 33.8% 9.6% 15.0% 20.0% 19.1% 35.1% Sequential change 13.0% 16.0% -2.6% 11.0% 6.7% -4.9% 2.2% 15.8% win rate 22.5% 23.6% 25.5% 25.7% 24.4% 28.8% 29.0% 27.5% 27.5% 28.2% 28.0% Mass table gross revenue 146 177 186 208 717 249 239 231 268 986 1,325 YoY change 51.1% 70.3% 67.1% 65.5% 54.7% 71.2% 34.7% 24.0% 28.4% 22.6% 25.0% Sequential change 15.6% 21.7% 5.2% 11.8% 19.6% -4.3% -3.1% 15.8% Number of mass tables 240 240 240 240 240 230 230 230 240 233 252 Average non-rolling chip drop per mass table per day (USD) 29,949 34,364 33,098 36,730 33,562 41,343 39,298 39,717 44,076 41,147 51,434 YoY change 56.3% 81.0% 39.5% 41.7% 54.7% 38.0% 14.4% 20.0% 20.0% 22.6% 25.0% Sequential change 15.5% 14.7% -3.7% 11.0% 12.6% -4.9% 1.1% 11.0% Average win per mass table per day (USD) 6,739 8,110 8,440 9,440 8,189 11,907 11,396 10,922 12,121 11,593 14,402 YoY change 75.0% 98.7% 67.1% 65.5% 75.5% 76.7% 40.5% 29.4% 28.4% 41.6% 24.2% Sequential change 18.1% 20.3% 4.1% 11.8% 26.1% -4.3% -4.2% 11.0% Table gaming gross revenue 616 718 816 820 2,995 825 812 840 870 3,346 3,751 YoY change 55.7% 86.6% 35.7% 43.3% 53.3% 34.1% 13.1% 2.9% 6.0% 11.7% 12.1% Number of tables 414 420 424 428 421 436 445 445 445 443 445 Average win per table per day (USD) 16,666 18,991 20,962 21,030 19,450 21,016 19,846 20,507 21,248 20,649 23,095 Slot handle 511 569 530 567 2,177 685 728 716 709 2,837 3,404 slot hold rate 6.3% 6.1% 6.5% 5.8% 6.2% 5.8% 5.5% 5.5% 5.5% 5.6% 5.5% Slot machine gross revenue 32 35 34 33 134 40 40 39 39 159 187 YoY change 45.9% 30.3% 34.6% 9.8% 29.5% 24.5% 15.1% 14.7% 18.7% 18.2% 18.1% Number of slot machines 1,294 1,290 1,435 1,468 1,372 1,374 1,379 1,379 1,379 1,378 1,380 Average win per slot per day (USD) 275 298 260 243 268 319 321 310 307 314 372 Gross gaming revenue 648 753 850 853 3,129 865 852 879 909 3,505 3,939 Commission, rebate and discount (196) (199) (218) (215) (853) (207) (224) (231) (229) (891) (946)

as a % of VIP gross revenue 41.7% 36.8% 34.6% 35.2% 37.5% 35.9% 39.0% 38.0% 38.0% 37.7% 39.0% as a % of Rolling chip volume 1.0% 1.0% 1.1% 1.1% 1.1% 1.1% 1.2% 1.1% 1.1% 1.1% 1.1%

Net gaming revenue (NGR) 452 554 632 638 2,275 658 628 648 680 2,614 2,992 Non-gaming revenue 49 54 55 58 216 59 56 57 59 231 255 Property revenue 86 151 171 187 2,491 198 184 187 196 2,846 3,247 YoY change 48.8% 96.5% 36.3% 42.4% 52.1% 43.3% 12.6% 2.6% 6.3% 14.2% 14.1% Sequential change 2.4% 21.5% 13.0% 1.3% 3.0% -4.5% 3.1% 4.9% Property EBITDA 86 151 171 187 594 198 184 187 196 765 896 YoY change 21.3% 252.7% 48.4% 91.0% 82.2% 130.2% 21.8% 9.6% 5.0% 28.7% 17.1% Sequential change -12.0% 75.9% 12.7% 9.4% 6.1% -6.9% 1.4% 4.9% Property EBITDA margin (IFRS) 11.3% 18.5% 20.0% 21.2% 17.8% 22.1% 21.0% 20.0% 20.2% 20.5% 21.4% Property EBITDA margin (US GAAP) 17.2% 24.9% 24.8% 26.8% 23.9% 27.6% 26.9% 26.5% 26.5% 26.9% 27.6% Property ROI 3.4% 6.1% 6.8% 7.5% 23.8% 7.9% 7.4% 7.5% 7.8% 30.6% 35.8% Normalised ROI 6.1% 6.4% 4.8% 6.2% 22.5% 6.8% 6.2% 7.5% 7.8% 28.3% 35.8% Source: Company, Daiwa forecasts


- 48 -

Altira property model (USDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling-chip volume 12,700 13,200 13,200 12,100 51,200 10,900 10,200 10,553 10,429 42,081 40,917 YoY change 28.3% 38.9% 38.9% 6.1% 27.2% -14.2% -22.7% -20.1% -13.8% -17.8% -2.8% Sequential change 11.4% 3.9% 0.0% -8.3% -9.9% -6.4% 3.5% -1.2% win rate 2.80% 3.10% 3.20% 2.90% 3.03% 3.10% 2.70% 2.85% 2.85% 2.88% 2.85% VIP gross revenue 356 409 422 351 1,551 338 275 301 297 1,211 1,166 YoY change 28.3% 34.6% 64.7% 6.1% 32.4% -5.0% -32.7% -28.8% -15.3% -21.9% -3.7% Sequential change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Number of VIP tables 182 182 182 181 182 176 164 150 150 160 150 Average rolling chip per VIP table per day (USDm) 0.8 0.8 0.8 0.7 0.8 0.7 0.7 0.8 0.8 0.7 0.7 YoY change 35.3% 42.8% 42.8% 9.7% 30.6% -12.2% -14.2% -3.0% 4.0% -6.8% 4.0% Sequential change 17.0% 2.8% -1.1% -7.8% -6.3% 0.4% 11.9% -1.2% Average win per VIP table per day (USD) 21,709 24,707 25,227 21,073 23,353 21,098 18,453 21,794 21,538 20,684 21,299 YoY change 35.3% 38.3% 69.2% 9.7% 36.0% -2.8% -25.3% -13.6% 2.2% -11.4% 3.0% Sequential change 13.0% 13.8% 2.1% -16.5% 0.1% -12.5% 18.1% -1.2% Non-rolling chip drop 140 148 150 145 582 150 139 257 253 800 1,170 YoY change 96.3% 93.1% 54.5% 9.1% 54.3% 7.7% -5.9% 71.7% 75.0% 37.5% 46.3% Sequential change 5.4% 5.8% 1.5% -3.5% 4.0% -7.6% 85.1% -1.7% win rate 17.7% 15.8% 15.7% 17.5% 16.6% 17.1% 17.7% 17.5% 17.5% 17.5% 17.5% Mass table gross revenue 25 23 24 25 97 26 25 45 44 140 205 YoY change 133.2% 67.6% 37.9% 29.9% 83.7% 4.1% 5.4% 91.3% 75.0% 20.0% 10.0% Sequential change 26.9% -5.6% 0.8% 7.5% 1.6% -4.3% 83.0% -1.7% Number of mass tables 25 24 18 18 21 18 18 30 30 24 32 Average non-rolling chip drop per mass table per day (USD) 62,044 67,628 90,519 87,319 75,903 91,819 84,860 93,235 91,685 91,049 100,154 YoY change 96.3% 101.1% 114.6% 51.6% 83.7% 48.0% 25.5% 3.0% 5.0% 20.0% 10.0% Sequential change 7.7% 9.0% 33.8% -3.5% 5.2% -7.6% 9.9% -1.7% Average win per mass table per day (USD) 10,982 10,685 14,212 15,281 12,600 15,701 15,020 16,316 16,045 15,897 17,527 YoY change 133.2% 74.6% 91.5% 80.4% 88.2% 43.0% 40.6% 14.8% 5.0% 26.2% 10.3% Sequential change 29.7% -2.7% 33.0% 7.5% 2.8% -4.3% 8.6% -1.7% Table gaming gross revenue 380 433 446 376 1,648 364 300 346 342 1,351 1,371 YoY change 32.1% 36.1% 63.0% 7.5% 33.7% -4.4% -30.6% -22.5% -9.2% -18.0% 1.5% Number of tables 207 206 200 199 203 190 182 180 180 183 182 Average win per table per day (USD) 20,652 23,026 24,621 20,630 22,231 20,732 18,270 20,881 20,622 20,169 20,636 Slot handle slot hold rate Slot machine gross revenue YoY change Number of slot machines Average win per slot per day (USD) Gross gaming revenue 380 433 446 376 1,648 364 300 346 342 1,351 1,371 Commission, rebate and discount (122) (129) (125) (116) (505) (111) (100) (102) (101) (414) (420)


Net gaming revenue (NGR) 258 304 321 260 1,143 253 200 244 240 937 951 Non-gaming revenue 8 8 8 8 31 8 8 8 8 33 34 Property revenue 41 73 79 53 1,174 55 26 38 37 970 985 YoY change 34.6% 35.1% 76.1% 9.3% 36.6% -1.7% -33.1% -23.4% -7.1% -17.4% 1.5% Sequential change 8.3% 17.3% 5.6% -18.5% -2.6% -20.1% 20.8% -1.2% Property EBITDA 41 73 79 53 246 55 26 38 37 156 157 YoY change 88.5% 99.2% 174.0% 14.7% 84.2% 34.1% -64.4% -52.1% -29.8% -36.6% 0.3% Sequential change -11.4% 77.9% 7.9% -32.6% 3.6% -52.8% 45.3% -1.2% Property EBITDA margin (IFRS) 10.6% 16.6% 17.4% 13.8% 14.7% 14.8% 8.4% 10.7% 10.7% 11.3% 11.1% Property EBITDA margin (US GAAP) 15.5% 23.5% 24.0% 19.9% 21.0% 21.1% 12.5% 15.0% 15.0% 16.1% 15.9% Property ROI 7.0% 12.5% 13.5% 9.1% 42.2% 9.4% 4.5% 6.5% 6.4% 26.8% 26.8% Normalised ROI 8.1% 6.9% 5.6% 8.1% 26.4% 4.8% 7.1% 6.5% 6.4% 24.7% 26.8% Source: Company, Daiwa forecasts


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Appendix

Melco: key management profile Name Age Position Experience Mr. Lawrence Yau Lung Ho 35 Co-chairman, CEO and executive director Mr. Ho has served as the company's co-chairman and CEO since December 2004. He is responsible for the overall

strategic planning and management of the company. Mr. James Douglas Packer 45 Co-chairman and non-executive director Mr. Packer has served as the company's co-chairman since March 2005. He is the executive chairman of Crown. Source: Company

Melco: shareholding structure

Source: Company

Melco: City of Dreams Melco: Altira


Crown Asia

Melco

Public

33.2% 33.6%

Melco Leisure

33.2%


Investment case We believe Sands’ long-term investment case is compelling, given its increasing prominence on Cotai with the opening of Sands Cotai Central (SCC) in April 2012, as well as its favourable gaming revenue mix and growing premium mass business. We expect Sands to continue to improve on its already best-in-class 25% EBITDA market share over time.

However, further share-price upside over the next few months could be challenged by one significant hurdle – new table allocations at SCC, which, in the event that the new allocations do not materialise, could result in prolonged disruption of Venetian Macao and Sands Macao, from where tables have already been reallocated to SCC. Nonetheless, our base-case assumption is for the full allotment

of 200 tables to be given to SCC by January 2013, as guided by management. If this scenario materialises, we forecast Sands to account for over 50% of the Macau gaming industry’s incremental EBITDA next year. In our bear-case scenario, we assume no additional table allotments for SCC. Our sensitivity analysis shows that if: 1) the new tables arrive in late 2013/early 2014, and 2) no further table reallocations are given to SCC, our 2013 EBITDA forecast for Sands would be negatively affected by 8%.

Catalysts Securing new tables from the government and any upside surprises in special dividends should be the next pivotal points for Sands and could serve as a sentiment-based share-price catalysts.

Valuation With Sands’ dominant EBITDA market share, we expect its valuation premium to expand above its average of 26% since 2010. We therefore apply the top-of-the-range past-two-year premium of 40% to our sector target EV/EBITDA multiple of 11x. We initiate coverage with an Outperform (2) rating and six-month target price of HKD35.80, based on a target 2013E 15.4x EV/EBITDA multiple.

Risks Risks to our call include: 1) delays in obtaining new tables, 2) a longer-than-expected ramp-up at SCC, 3) lower-than-expected market-share gains due to competition from Galaxy Macau.


6 November 2012

Sands China

Initiation: winner, winner, chicken dinner

• We expect Sands to gain the most market share in 2013, accounting for over 50% of the industry’s incremental EBITDA

• The impact on revenue from the table shifts to Sands Cotai Central remain an overhang until the new tables are allotted

• Our base-case scenario calls for Sands’ leadership premium to expand in 2013; coverage initiated with an Outperform rating



Sands China1928 HK

Target (HKD): 35.80Upside: 13.3%5 Nov price (HKD): 31.60



1

2

3

4

5

85

95

105

115

125

18

22

26

29

33



Sands Chn (LHS) Relative to HSI (RHS)

(HKD) (% )

12-month range 20.00-32.70Market cap (USDbn) 32.833m avg daily turnover (USDm) 43.54Shares outstanding (m) 8,051Major shareholder Las Vegas Sands (70.3%)

Financial summary (USD)Year to 31 Dec 12E 13E 14ERevenue (m) 6,281 8,335 9,468Operating profit (m) 1,158 1,867 2,323Net profit (m) 1,078 1,792 2,305Core EPS (fully-diluted) 0.134 0.223 0.286EPS change (%) (4.8) 66.2 28.6Daiwa vs Cons. EPS (%) (17.3) (4.1) (1.3)PER (x) 30.4 18.3 14.2Dividend yield (%) 3.9 4.4 5.6DPS 0.160 0.178 0.229PBR (x) 6.1 5.5 4.8EV/EBITDA (x) 18.5 13.7 11.5ROE (%) 19.7 31.6 36.0

Bing Zhou(852) 2773 [email protected]

Cris Xu(852) 2773 [email protected]



- 51 -

Growth outlook Sands: EBITDA and EBITDA margin

We expect the EBITDA margins for the Venetian Macao and Sands Macao to remain robust in 2013. We forecast SCC to enhance its EBITDA margin from 20.6% in 2012 to 24.5% in 2013, and for it to contribute USD617m in EBITDA to the group in 2013. We forecast Sands’ EBITDA to grow by 33% YoY for 2013.


Valuation Sands: EV/EBITDA multiple and valuation premium

With Sands’ dominant EBITDA market share, we believe its valuation premium should expand above its past 2-year average of 26%. We therefore apply the top-of-the-range historical premium of 40% to our target sector EV/EBITDA of 11x. Accordingly, we base our six-month target price of HKD35.80 on a target 2013E EV/EBITDA multiple of 15.4x and 2013E EBITDA.


Earnings revisions Sands: consensus EBITDA-forecast revision

The Bloomberg consensus has revised down its EBITDA forecasts for 2013 by 14% since June, because the initial number of new tables allotted to SCC when it first opened was lower than previously guided for by management. We are more cautious than the consensus on SCC’s ramp-up in gaming revenue and EBITDA margin. Thus, our 2012-13 EBITDA forecasts are slightly lower (2%) than those of the consensus.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

24.5%

29.4%

32.3%

29.5% 29.5%

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2.5

3.0


(USDbn)

8

10

12

14

16

18

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 12.7x sd+1: 14.5xsd-1: 10.9x

1.5

2.0

2.5

3.0



(USDbn)



1

2

3

4

5


- 52 -

Key assumptions

Profit and loss (USDm)

Cash flow (USDm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EVenetian Macao property EBITDA (USDm) 145 497 555 810 1,023 1,060 1,187 1,308

Sands Macao property EBITDA (USDm) 374 214 243 318 351 342 382 414

Plaza Macao property EBITDA (USDm) n.a. 7 40 114 218 260 286 304

Sands Cotai Central property EBITDA (USDm) n.a. n.a. n.a. n.a. n.a. 208 617 891

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGaming 1,846 2,670 2,889 3,664 4,231 5,566 7,291 8,188Non-gaming 120 384 413 479 649 715 1,043 1,281Other Revenue 0 0 0 0 0 0 0 0Total Revenue 1,966 3,053 3,301 4,142 4,881 6,281 8,335 9,468Other income 0 0 0 0 0 0 0 0COGS (909) (1,343) (1,436) (1,848) (2,119) (2,837) (3,661) (4,095)SG&A (813) (1,417) (1,495) (1,509) (1,559) (2,287) (2,807) (3,050)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 244 294 370 786 1,202 1,158 1,867 2,323Net-interest inc./(exp.) (48) (118) (150) (115) (45) (72) (71) (14)Assoc/forex/extraord./others 0 0 (6) 0 (22) (5) 0 0Pre-tax profit 196 176 214 670 1,135 1,081 1,796 2,309Tax 0 (0) (0) (4) (2) (3) (4) (4)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 196 176 214 666 1,133 1,078 1,792 2,305Net profit (adjusted) 196 176 214 666 1,133 1,078 1,792 2,305EPS (reported)(USD) 0.031 0.028 0.033 0.083 0.141 0.134 0.223 0.286EPS (adjusted)(USD) 0.031 0.028 0.033 0.083 0.141 0.134 0.223 0.286EPS (adjusted fully-diluted)(USD) 0.031 0.028 0.033 0.083 0.141 0.134 0.223 0.286DPS (USD) 0.000 0.000 0.000 0.000 0.149 0.160 0.178 0.229EBIT 244 294 370 786 1,202 1,158 1,867 2,323EBITDA 514 686 809 1,216 1,576 1,852 2,461 2,907

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EProfit before tax 196 176 214 670 1,135 1,081 1,796 2,309Depreciation and amortisation 120 305 375 359 324 355 464 474Tax paid 0 (0) (0) (0) (4) (3) (4) (4)Change in working capital (95) (340) (96) 133 (174) 12 65 176Other operational CF items 53 122 227 222 119 266 142 108Cash flow from operations 274 263 719 1,384 1,401 1,711 2,463 3,062Capex (1,712) (1,974) (386) (346) (781) (924) (650) (1,150)Net (acquisitions)/disposals (24) (24) 5 4 2 0 0 0Other investing CF items 281 80 108 (756) 782 19 29 19Cash flow from investing (1,455) (1,918) (272) (1,099) 3 (904) (621) (1,131)Change in debt 1,551 672 (670) 131 356 (309) (600) (500)Net share issues/(repurchases) 0 0 1,701 0 0 0 0 0Dividends paid 0 0 0 0 0 (1,202) (1,288) (1,434)Other financing CF items (205) 965 (971) (260) (289) (92) (100) (33)Cash flow from financing 1,346 1,637 59 (129) 67 (1,603) (1,988) (1,966)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 166 (17) 506 157 1,471 (796) (146) (35)Free cash flow (1,438) (1,710) 334 1,038 620 788 1,813 1,912

Financial summary


- 53 -

Balance sheet (USDm)

Key ratios (%)


Company profile

Sands China is one of the six gaming operators in Macau and operates the Sands Macao, Venetian Macao, Plaza Macao and Sands Cotai Central. The company recently unveiled its plan for a new resort on the Cotai Parcel 3 site. The new resort will be named the Parisian and will be opposite the Sands Cotai Central and next to the Four Seasons. Management expects it to have 3,000 hotel rooms, with a budgeted capex of about USD2.5-3.0bn.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ECash & short-term investment 499 542 926 1,178 2,495 1,699 1,553 1,518Inventory 8 11 10 9 10 12 21 20Accounts receivable 240 288 295 292 557 639 691 712Other current assets 0 0 0 0 0 0 0 0Total current assets 747 841 1,231 1,479 3,063 2,351 2,265 2,250Fixed assets 3,803 5,510 5,525 5,503 6,250 6,651 6,836 7,513Goodwill & intangibles 6 46 41 35 32 32 32 32Other non-current assets 353 490 831 1,458 784 798 798 798Total assets 4,908 6,887 7,628 8,475 10,128 9,831 9,931 10,593Short-term debt 6 44 136 387 80 100 100 100Accounts payable 912 1,982 829 960 1,180 1,323 1,489 1,729Other current liabilities 0 0 0 4 2 1 1 1Total current liabilities 919 2,027 965 1,351 1,262 1,424 1,590 1,830Long-term debt 2,935 3,599 2,951 2,746 3,329 3,000 2,400 1,900Other non-current liabilities 7 13 13 15 21 0 0 0Total liabilities 3,861 5,638 3,929 4,112 4,612 4,424 3,990 3,730Share capital 0 0 80 80 80 80 80 80Reserves/R.E./others 1,048 1,250 3,618 4,282 5,435 5,327 5,861 6,782Shareholders' equity 1,048 1,250 3,699 4,362 5,516 5,407 5,941 6,862Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 4,909 6,888 7,628 8,475 10,128 9,831 9,931 10,593EV 35,271 35,930 34,990 34,784 33,743 34,229 33,775 33,311Net debt/(cash) 2,443 3,101 2,162 1,955 914 1,401 947 482BVPS (USD) 0.167 0.199 0.460 0.542 0.685 0.672 0.738 0.852

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ESales (YoY) 53.5 55.3 8.1 25.5 17.8 28.7 32.7 13.6EBITDA (YoY) 12.4 33.4 17.9 50.3 29.6 17.5 32.9 18.1Operating profit (YoY) (35.5) 20.5 25.9 112.4 53.0 (3.7) 61.2 24.4Net profit (YoY) (47.8) (10.4) 21.7 211.7 70.0 (4.8) 66.2 28.6Core EPS (fully-diluted) (YoY) (47.8) (10.4) 18.7 149.2 69.9 (4.8) 66.2 28.6Gross-profit margin 53.8 56.0 56.5 55.4 56.6 54.8 56.1 56.7EBITDA margin 26.2 22.5 24.5 29.4 32.3 29.5 29.5 30.7Operating-profit margin 12.4 9.6 11.2 19.0 24.6 18.4 22.4 24.5ROAE 20.6 15.3 8.6 16.5 22.9 19.7 31.6 36.0ROAA 5.1 3.0 2.9 8.3 12.2 10.8 18.1 22.5ROCE 7.8 6.6 6.3 11.0 14.6 13.3 22.0 26.9ROIC 9.3 7.5 7.2 12.8 18.8 17.5 27.2 32.6Net debt to equity 233.1 248.2 58.4 44.8 16.6 25.9 15.9 7.0Effective tax rate n.a. 0.1 0.1 0.6 0.2 0.2 0.2 0.2Accounts receivable (days) 23.9 31.6 32.2 25.9 31.7 34.8 29.1 27.0Current ratio (x) 0.8 0.4 1.3 1.1 2.4 1.7 1.4 1.2Net interest cover (x) 5.1 2.5 2.5 6.8 26.8 16.1 26.3 167.6Net dividend payout 0.0 0.0 0.0 0.0 106.0 119.5 80.0 80.0



- 54 -

Winner, winner, chicken dinner1

As Sands should have the only new room and table supply coming online until 2015, we expect it to meaningfully increase its EBITDA market share. Our analysis indicates that Sands could account for 50% of the industry’s incremental EBITDA in 2013.

The biggest winner in 2013

We think Sands’ long-term investment case is compelling. Its increasing prominence on Cotai with the opening of SCC in April 2012, as well as its favourable gaming revenue mix and growing premium mass business should position the operator to become the biggest market-share gainer in 2013 among the casino operators in Macau. We expect Sands to continue to improve on its already best-in-class 25% EBITDA market share over time. If we benchmark the speed at which SCC is ramping up against that of the Venetian Macao, a 20% normalised ROI would be achievable for SCC by 2014, based on our forecasts. The Venetian Macao achieved a 19% normalised ROI within three years of its inception date, but progress was hampered by the financial crisis in 2008. We forecast SCC’s normalised ROI to reach 14% next year, on the back of property EBITDA growth of 200% YoY.

Ramping up progress: Venetian Macao vs. SCC Venetian Macao 2007 2008 2009 EBITDA margin 22% 26% 28% Normalised ROI 6% 15% 19% SCC 2012E 2013E 2014E EBITDA margin 21% 25% 28% Normalised ROI 5% 14% 20% Source: Company, Daiwa forecasts

1 Legend has it that years ago every casino in Las Vegas offered a 3-piece chicken dinner with a potato and a vegetable for USD1.79. A standard bet back then was USD2.0, hence when you won a bet you had enough for a chicken dinner. (Source: Urban Dictionary)

Based on our forecasts, Sands would be the biggest market-share gainer in 2013. With the help of SCC, we expect to company to account for over 50% of the industry’s incremental EBITDA next year. Macau Gaming Sector: contribution in incremental EBITDA in

2013

Source: Daiwa forecasts

As well as the new gaming tables (ie, existing tables and the 200 to be obtained early next year), SCC should also be the only new hotel with room capacity in 2013 among all the gaming operators. SCC Phase IIA opened in September 2012, and includes about 2,000 hotel rooms. Phase IIB began in October 2012 with a further 2,000 Sheraton-branded hotel rooms. According to management, Phase III is set to open in late-2013, and will include a fourth luxury St. Regis-branded hotel with about 3,500 rooms. Upon the full ramp-up of Phase IIB and later Phase III, Sands would account for 27% and about 40%, respectively, of the market share in Macau in terms of total gaming tables and 4/5-star hotel inventory. Added hotel-room capacity is instrumental in attracting traffic and enhancing the duration of play. In our view, SCC will be a big contributor in further solidifying Sands’ position as the dominant mass-market operator, and concurrently driving the group’s total EBITDA growth over time as hold rates improve. We forecast SCC to account for 25% of group EBITDA in 2013. Sands: Sands Cotai Central

Source: Company

Sands China51.8%

Wynn Macau5.8%

Melco11.3%

SJM6.3%

Galaxy19.2%

MGM China5.6%


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Parcel 3 update Sands recently unveiled the plans for its new resort on the Cotai Parcel 3 site. The resort will be called ‘The Parisian’ and will be built as a replica of the Eiffel Tower. There is a similar type of resort on the Las Vegas Strip, but this is a new concept for Macau. The Parisian would be opposite the SCC and next to the Four Seasons, and Sands expects it to have 3,000 hotel rooms. The resort is being built with a budgeted capex of about USD2.5-3.0bn. Given that the project is still at the conceptual stage and has yet to receive a table quota, we believe it is currently too early to ascribe a value to the Parisian.

The elephant in the room

SCC: near-term growing pains The opening of SCC Phase I and Phase IIA added around 360 and 160 gaming tables, respectively, for Sands. However, owing to the delay in getting further tables from the Macau Government, since April 2012 the company has shifted around 320 tables from the Venetian Macao and Sands Macao to SCC to make SCC fully operational. We think the reallocation of tables has unfavourably impacted Sands’ overall EBITDA growth, as otherwise we would have expected stronger EBITDA growth from Venetian Macao and Sands Macao. Based on our forecasts, SCC has to deliver a USD18,200 average win per table per day in 2012 to make up the difference in potential EBITDA gap from the properties that have temporarily lost tables. The projected average win table yield represents an 80% increase on the SCC’s debut performance in 2Q12 and 3Q12, which seems unachievable to us by the end of 2012. All eyes on the new tables, and why there may be reason for concern The cannibalisation issue should be resolved once the new tables come online. Sands is eyeing another 200 tables that should be approved by the Macau Government in January 2013. If these materialise, the company’s dominant market share in tables would be further strengthened from 25% in 2012 to 27% in 2013. While the reallocation of tables has been acknowledged by the market, we believe investors are still cautiously optimistic on the stock, and have not fully discounted the impact on Sands’ gaming revenue of a prolonged disruption caused by an extended constraint on tables.

Our sensitivity analysis shows that if our worst-case scenario were to materialise and the allotment of the 200 new tables were delayed until 2013 or early 2014, our 2013 EBITDA forecast could be affected by 8%. In addition, if the number of new tables is less than what we expect, this could spell downside risk to our 2013 EBITDA forecast as well.

2013E EBITDA-to-table allotment sensitivity analysis schedule Timeline Downside to base-case EBITDA for 2013E Early 2013 0.0% Mid-2013 -4.2% Late 2013/early 2014 -8.4% Source: Daiwa forecasts

2013E EBITDA-to-table allotment sensitivity analysis schedule

Number of new tables Downside to base-case EBITDA for 2013E 0 -8.4% 50 -6.3% 100 -4.2% 150 -2.1% 200 0.0% Source: Daiwa forecasts

The following factors have tempered our optimism about the new table allotment: 1. Sands currently has about 1,350 tables in total, which represents a 25% share of the total number of gaming tables in Macau. A further 200 tables would bring that count up to a 27% table share. It is worth noting that, if we exclude the gaming tables in SJM’s satellite casinos, Sands currently is the largest single gaming-table owner among the casino operators in Macau, ahead of the second largest one by more than 60%, and would be 80% if Sands were to obtain the 200 new tables. 2. Table cap – based on the current table-cap regulation of 5,500 tables in 2013, adding the additional 200 tables would take the industry over that cap. In fact, around 150 new tables would bring the total number to 5,500. With a 3% rise in the table cap each year from 2013, Macau’s new casinos will have to share about 2,000 tables over the next 10 years. We believe it makes sense for the government to allocate the new tables to the operators with small gaming-table market shares first. Ramping up Sands Cotai Casino We forecast SCC to achieve normalised ROIs of 14% in in 2012 and 20% in 2013, by referencing the ramp-up progress of Venetian Macao since its inception in 2007. Based on this, we have constructed our base case, whereby we estimate that SCC should be able to deliver a USD11,600 average win per table per day and a 24.5% EBITDA margin in 2013.


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Ramping up progress: Venetian Macao vs. SCC Venetian Macao 2007 2008 2009 EBITDA margin 22% 26% 28% Normalised ROI 6% 15% 19% SCC 2012E 2013E 2014E EBITDA margin 21% 25% 28% Normalised ROI 5% 14% 20% Source: Company, Daiwa forecasts

In our worst-case scenario, if SCC were to register an average win per table per day of only USD9,600 and a 20.5% EBITDA margin, the downside to our 2013 EBITDA forecasts would be 28% for SCC and 9% for the group as a whole.

2013E SCC EBITDA sensitivity analysis to SCC’s average win per table per day and SCC’s EBITDA margin EBTIDA margin/average win per table per day (USD) 9,600 10,600 11,600 12,600 13,600 20.5% -9% -7% -5% -3% -1% 22.5% -7% -5% -2% 0% 2% 24.5% -5% -3% 0% 3% 5% 26.5% -3% 0% 2% 5% 8% 28.5% -1% 2% 5% 8% 11% Source: Daiwa estimates

Daiwa forecasts

Our forecasts are driven by the following underlying assumptions:

• Average rolling chip volume/non-rolling drop per table per day

• Implied normalised ROI per property

• VIP and mass-gaming revenue mix

• Cross-checking with the market-share movements per property

Given SCC’s continuous ramp-up and the expected new table allotments in early 2013, we forecast Sands to deliver 33% YoY revenue growth for 2013, and for its overall gaming market share to expand from 19% in 2012, to 22% in 2013. Sands: revenue


We expect the EBITDA margins for the Venetian Macao and Sands Macao to remain robust in 2013. We forecast SCC to enhance its EBITDA margin from 20.6% in 2012 to 24.5% in 2013, and for it to contribute USD617m in EBITDA to the group in 2013. We forecast Sands’ EBITDA to grow by 33% YoY for 2013.

Sands: property EBITDA margin 2009 2010 2011 2012E 2013E

Venetian Macao 28.0% 33.7% 36.3% 36.8% 37.0% Sands Macao 26.7% 27.5% 27.5% 28.2% 28.5% Plaza Macao 15.5% 22.8% 32.2% 25.3% 25.4% SCC 20.6% 24.5% Source: Company, Daiwa forecasts

Sands: EBITDA and EBITDA margin


Leader premium should be sustainable, more for its superior EBITDA growth

We like Sands’ highest exposure among the Macau operators to Cotai and the mass market. In our view, the establishment of SCC, despite the near-term headwinds during the ramp-up stage, has secured the company’s superior position ahead of its peers, at least until the next round of new casino openings expected to be in 2015 at the earliest. We believe Sands will continue to take substantial market share and expect it to account for over 50% of the Macau gaming industry’s incremental EBITDA next year. The stock is trading currently at a 19% premium to the sector average since 2010, and we believe the cumulative premium reflects the operator’s strong execution ability and its market-leader positioning. With the further improvements that we see in its already-dominant EBITDA market share, we believe Sands’ valuation premium should expand above its past-2-year trading average. We therefore apply the top-of-the-range historical premium of 40% to our target sector multiple of 11x.

3.3 4.1

4.9

6.3

8.3

0%

5%

10%

15%

20%

25%

30%

35%

0.0

3.0

6.0

9.0


(USDbn)

24.5%

29.4%

32.3%

29.5% 29.5%

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2.5

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(USDbn)


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We initiate coverage with an Outperform (2) rating and six-month target price of HKD35.80, based on a target 2013E EV/EBITDA multiple of 15.4x and 2013E EBITDA of USD2.5bn.

Sands: EV/EBITDA valuation USDm 2013E EBITDA 2,461 Target EV/EBITDA multiple 15.4x Enterprise value 37,903 Gross cash 1,553 Total debt 2,500 Net cash/(debt) (947) Equity value 36,956 Number of shares (m) 8,051 Target price (USD) 4.59 Target price (HKD) 35.80 Source: Daiwa forecasts

Risks On top of the macro risk and visa restriction risk, key company-specific risks to our forecasts and bullish call would include: 1) delays in obtaining new tables, 2) a longer-than-expected ramp-up of gaming revenue at SCC, and 3) lower-than-expected market-share gains due to competition from Galaxy Macau.

Sands: 12-month-forward EV/EBITDA multiple Sands: 12-month-forward EV/EBITDA premium to sector


Macau Gaming Sector: valuation table

Share price Market cap EV/EBITDA EBITDA

growth YoY (%) PER Div. yield (%) FCF yield (%) Company Ticker (local cur.) (USDbn) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco Crown MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM China 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands China 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM 880 HK 17.92 12.8 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn Macau 1128 HK 23.35 15.5 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg forecasts for non-rated stocks, Daiwa forecast for rated stocks

Note: prices as of close on 5 November 2012

8

10

12

14

16

18

Jan-1

0

Mar-1

0

May-1

0

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0

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0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 12.7x sd+1: 14.5xsd-1: 10.9x

0%

10%

20%

30%

40%

50%

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

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Nov-1

0

Jan-1

1

Mar-1

1

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1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

avg: 26%


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Venetian Macao: property model (USDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling chip volume 12,389 13,370 12,707 13,551 52,017 13,802 11,162 11,199 11,518 47,681 51,496 YoY growth 23.3% 36.9% 15.1% 14.8% 22.0% 11.4% -16.5% -11.9% -15.0% -8.3% 8.0% Sequential growth 5.0% 7.9% -5.0% 6.6% 1.8% -19.1% 0.3% 2.8% Win rate 2.69% 3.46% 2.66% 2.95% 2.95% 2.93% 2.68% 3.32% 2.85% 2.94% 2.85% VIP gross revenue 333 463 338 400 1,534 404 299 372 328 1,404 1,468 YoY growth 13.6% 41.0% 0.4% 13.3% 17.2% 21.3% -35.3% 10.0% -17.9% -8.5% 4.6% Sequential growth -5.5% 38.8% -26.9% 18.3% 1.2% -26.0% 24.3% -11.7% Non-rolling chip drop 981 1,024 1,074 1,100 4,179 1,106 1,021 1,141 1,045 4,312 5,088 YoY growth 6.4% 14.1% 12.3% 14.4% 11.8% 12.7% -0.3% 6.2% -5.0% 3.2% 18.0% Sequential growth 2.0% 4.4% 4.9% 2.4% 0.5% -7.7% 11.8% -8.4% Win rate 27.9% 25.6% 27.6% 28.2% 27.3% 30.7% 30.6% 31.3% 30.0% 30.7% 30.0% Mass table gross revenue 274 262 296 310 1,141 339 312 357 313 1,322 1,527 YoY growth 18.2% 17.8% 16.5% 14.4% 16.5% 24.1% 19.1% 20.4% 1.1% 15.9% 15.4% Sequential growth 0.9% -4.2% 13.1% 4.6% 9.4% -8.0% 14.3% -12.2% Table gaming gross revenue 607 725 634 710 2,675 744 612 729 642 2,726 2,994 YoY growth 15.6% 31.6% 7.3% 13.8% 16.9% 22.6% -15.6% 14.9% -9.6% 1.9% 9.8% Average number of tables 598 600 589 577 591 570 485 504 425 496 504 Average win per table per day (USD) 11,268 13,269 11,705 13,371 12,402 14,334 13,860 15,720 16,412 15,016 16,276 Slot handle 743 858 897 1,066 3,565 1,241 1,149 1,263 1,120 4,772 5,249 Slot hold rate 6.9% 6.7% 6.4% 5.9% 6.4% 5.6% 5.2% 4.9% 5.0% 5.2% 5.5% Slot machine gross revenue 51 57 57 63 228 69 60 62 56 247 289 YoY growth 3.3% 15.4% 3.5% 23.0% 9.8% 35.5% 3.9% 7.8% -11.0% 8.3% 16.8% Average number of slot machines 2,151 2,154 2,057 2,089 2,112 2,282 2,220 2,155 2,155 2,203 2,200 Average win per slot per day (USD) 263 295 303 328 297 334 295 312 282 306 360 Gross gaming revenue (GGR) 658 782 692 773 2,903 813 671 791 698 2,973 3,283 Commission, rebate and discount (105) (134) (105) (132) (493) (139) (110) (120) (115) (484) (514)

as a % of VIP gross revenue 31.4% 28.9% 31.1% 32.9% 32.1% 34.5% 36.7% 32.2% 35.0% 35.0% 35.0% as a % of rolling chip volume 0.8% 1.0% 0.8% 1.0% 0.9% 1.0% 1.0% 1.1% 1.0% 1.0% 1.0%

Net gaming revenue (NGR) 553 649 587 641 2,411 674 562 671 583 2,489 2,769 Non-gaming revenue 85 87 102 123 409 99 88 102 101 389 438 Property revenue 638 735 689 764 2,819 773 649 773 684 2,879 3,207 YoY growth 16.1% 26.6% 11.0% 15.5% 17.1% 21.1% -11.7% 12.1% -10.6% 2.1% 11.4% Sequential growth -3.5% 15.2% -6.3% 10.9% 1.1% -16.0% 19.0% -11.5% Property EBITDA 228 258 253 283 1,023 282 229 299 249 1,060 1,187 YoY growth 34.4% 34.0% 19.5% 20.2% 26.3% 23.4% -11.3% 18.3% -11.9% 3.5% 12.0% Sequential growth -3.1% 13.1% -2.2% 12.1% -0.5% -18.7% 30.5% -16.6% Property EBITDA margin (IFRS) 30.7% 29.7% 31.8% 31.6% 30.9% 30.9% 30.2% 33.5% 31.2% 31.5% 31.9% Property EBITDA margin (US GAAP) 35.8% 35.1% 36.7% 37.1% 36.3% 36.5% 35.3% 38.7% 36.5% 36.8% 37.0% Property ROI 7.6% 8.6% 8.4% 9.4% 34.1% 9.4% 7.6% 10.0% 8.3% 35.3% 39.6% Normalized ROI 8.3% 5.9% 9.2% 9.0% 32.4% 9.0% 8.3% 8.2% 8.3% 33.8% 39.6% Source: Company, Daiwa forecasts


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Sands Macao: property model (USDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling chip volume 8,269 7,753 7,903 7,612 31,537 6,434 6,165 6,819 6,470 25,887 27,181 YoY growth 29.1% 7.4% 25.9% 1.3% 15.0% -22.2% -20.5% -13.7% -15.0% -17.9% 5.0% Sequential growth 10.1% -6.2% 1.9% -3.7% -15.5% -4.2% 10.6% -5.1% Win rate 2.75% 2.98% 2.65% 2.77% 2.79% 3.73% 2.58% 2.96% 2.85% 3.03% 2.85% VIP gross revenue 227 231 209 211 880 240 159 202 184 785 775 YoY growth 11.6% 4.9% 11.2% -7.7% 4.9% 5.5% -31.2% -3.6% -12.5% -10.8% -1.3% Sequential growth -0.4% 1.6% -9.4% 0.7% 13.8% -33.7% 26.9% -8.6% Non-rolling chip drop 689 714 723 687 2,812 708 717 739 770 2,934 3,374 YoY growth 16.8% 18.2% 11.2% 2.7% 11.9% 2.8% 0.5% 2.3% 12.0% 4.3% 15.0% Sequential growth 2.9% 3.6% 1.3% -4.9% 3.0% 1.3% 3.1% 4.1% Win rate 20.3% 20.0% 20.0% 21.7% 20.5% 21.2% 19.7% 20.8% 20.5% 20.5% 20.5% Mass table gross revenue 140 143 145 149 576 150 141 154 158 603 692 YoY growth 16.8% 14.2% 9.6% 11.4% 13.0% 7.3% -1.0% 6.4% 5.8% 4.6% 14.7% Sequential growth 4.4% 2.1% 1.3% 3.2% 0.6% -5.9% 8.8% 2.6% Table gaming gross revenue 367 374 354 360 1,456 390 300 356 342 1,388 1,466 YoY growth 13.5% 8.3% 10.6% -0.6% 8.0% 6.2% -19.6% 0.5% -4.9% -4.7% 5.6% Average number of tables 416 414 413 413 414 399 348 313 248 327 348 Average win per table per day (USD) 9,824 9,926 9,303 9,482 9,632 10,733 9,500 12,347 14,997 11,598 11,543 Slot handle 436 463 537 621 2,056 663 612 596 590 2,461 2,707 Slot hold rate 6.5% 5.8% 5.3% 4.8% 5.5% 4.4% 4.1% 4.2% 4.5% 4.3% 5.0% Slot machine gross revenue 28 27 28 30 113 29 25 25 27 106 135 YoY growth 28.1% 20.0% 14.5% 21.9% 19.8% 3.0% -6.5% -11.9% -10.9% -6.4% 27.9% Average number of slot machines 1,133 1,157 1,109 1,165 1,141 1,093 1,158 1,205 1,205 1,165 1,158 Average win per slot per day (USD) 277 257 280 279 273 295 240 226 239 248 320 Gross gaming revenue (GGR) 396 401 382 390 1,569 419 325 381 369 1,494 1,602 Commission, rebate and discount (80) (77) (83) (78) (328) (78) (61) (73) (66) (278) (279)


Net gaming revenue (NGR) 316 324 300 312 1,241 341 265 308 302 1,216 1,323 Non-gaming revenue 7 7 8 9 34 8 7 8 8 30 30 Property revenue 323 331 307 321 1,275 349 272 315 310 1,246 1,353 YoY growth 13.7% 9.5% 6.7% 0.5% 7.2% 8.1% -17.9% 2.6% -3.5% -2.3% 8.6% Sequential growth 28.7% 28.9% 24.6% 27.4% 30.7% 26.3% 25.7% 26.8% Property EBITDA 93 96 76 88 351 107 71 81 83 342 382 YoY growth 32.7% 17.7% 2.7% -6.0% 10.4% 15.6% -25.4% 6.9% -5.4% -2.4% 11.5% Sequential growth -0.9% 3.2% -20.8% 16.0% 21.9% -33.4% 13.5% 2.7% Property EBITDA margin (IFRS) 23.0% 23.4% 19.4% 22.0% 21.9% 25.0% 21.5% 20.8% 22.1% 22.5% 23.4% Property EBITDA margin (US GAAP) 28.7% 28.9% 24.6% 27.4% 27.5% 30.7% 26.3% 25.7% 26.8% 27.5% 28.2% Property ROI 19.9% 20.6% 16.3% 18.9% 75.4% 23.0% 15.3% 17.4% 17.9% 73.6% 82.0% Normalized ROI 21.7% 18.4% 19.7% 20.2% 79.5% 10.8% 18.9% 15.8% 17.9% 63.4% 82.0% Source: Company, Daiwa forecasts


- 60 -

Plaza Macao: property model (USDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling chip volume 3,948 3,356 4,161 7,520 18,984 12,703 9,207 8,963 8,648 39,521 42,682 YoY growth 6.1% -30.7% -12.2% 63.9% 6.1% 221.8% 174.4% 115.4% 15.0% 108.2% 8.0% Sequential growth -13.9% -15.0% 24.0% 80.7% 68.9% -27.5% -2.7% -3.5% Win rate 3.90% 2.25% 2.90% 2.61% 2.88% 2.83% 3.05% 2.58% 2.85% 2.83% 2.85% VIP gross revenue 154 76 121 196 547 360 281 231 246 1,118 1,216 YoY growth 66.9% -49.2% -17.4% 176.0% 19.4% 133.5% 271.9% 91.6% 25.6% 104.5% 8.8% Sequential growth 116.5% -51.0% 59.8% 62.7% 83.2% -21.9% -17.7% 6.6% Non-rolling chip drop 82 97 108 101 388 106 91 111 111 419 461 YoY growth -16.8% 1.4% 9.2% 2.8% -0.8% 28.5% -6.1% 3.0% 10.0% 7.9% 10.0% Sequential growth -16.3% 17.6% 11.0% -5.9% 4.5% -14.1% 21.8% 0.6% Win rate 40.1% 37.6% 38.9% 44.4% 40.3% 41.7% 43.9% 32.6% 40.0% 39.3% 40.0% Mass table gross revenue 33 36 42 45 156 44 40 36 45 165 184 YoY growth 31.9% 34.2% 44.0% 38.4% 37.8% 33.6% 9.6% -13.7% -0.9% 5.3% 11.9% Sequential growth 1.7% 10.3% 14.9% 7.5% -1.8% -9.5% -9.6% 23.4% Table gaming gross revenue 187 112 163 241 703 404 321 267 291 1,283 1,401 YoY growth 59.4% -36.4% -7.2% 132.8% 23.0% 115.8% 186.6% 64.5% 20.6% 82.4% 9.2% Average number of tables 118 118 127 139 125 165 159 149 149 156 149 Average win per table per day (USD) 17,596 10,420 13,964 18,928 15,360 26,933 22,227 19,503 21,230 22,540 25,758 Slot handle 188 201 202 244 834 198 199 215 195 807 848 slot hold rate 6.5% 5.4% 6.4% 4.8% 5.7% 6.0% 5.4% 4.4% 5.0% 5.2% 5.5% Slot machine gross revenue 12 11 13 12 48 12 11 9 10 42 47 YoY growth 46.3% 79.8% 98.5% 26.8% 57.8% -2.4% -0.7% -26.7% -16.7% -11.9% 11.4% Average number of slot machines 193 190 182 176 185 176 183 188 188 184 183 Average win per slot per day (USD) 697 627 766 728 704 740 649 546 564 622 698 Gross gaming revenue (GGR) 199 123 175 253 751 416 332 277 301 1,325 1,447 Commission, rebate and discount (40) (24) (35) (69) (171) (134) (92) (82) (81) (389) (414)


Net gaming revenue (NGR) 160 98 141 184 579 282 240 195 219 936 1,034 Non-gaming revenue 11 22 29 33 96 17 26 30 17 90 94 Property revenue 171 121 169 216 676 299 266 225 236 1,026 1,128 YoY growth 67.2% -16.2% 5.4% 135.7% 35.7% 74.6% 120.4% 32.8% 9.3% 51.8% 10.0% Sequential growth 33.5% 31.1% 35.3% 29.1% 22.6% 28.8% 24.2% 26.0% Property EBITDA 57 38 60 63 218 68 77 54 61 260 286 YoY growth 193.8% 13.9% 22.1% 416.4% 91.4% 17.8% 103.7% -8.9% -2.4% 19.5% 10.2% Sequential growth 369.7% -34.4% 58.8% 5.5% 7.1% 13.5% -29.0% 13.0% Property EBITDA margin (IFRS) 27.2% 25.9% 29.3% 22.1% 25.7% 15.6% 21.4% 17.7% 19.3% 18.4% 18.6% Property EBITDA margin (US GAAP) 33.5% 31.1% 35.3% 29.1% 32.2% 22.6% 28.8% 24.2% 26.0% 25.3% 25.4% Property ROI 5.8% 3.8% 6.0% 6.3% 21.9% 6.8% 7.7% 5.5% 6.2% 26.1% 28.8% Normalized ROI 1.6% 5.8% 5.8% 8.1% 21.3% 7.0% 5.8% 7.9% 6.2% 27.0% 28.8% Source: Company, Daiwa forecasts


- 61 -

Sands Cotai Central: property model (USDm) 2Q12 3Q12 4Q12E 2012E 2013E Days in operation 81 92 92 265 365 Rolling chip volume 6,821 9,055 10,413 26,289 48,635 YoY growth 85.0% Sequential growth 32.8% 15.0% Win rate 3.12% 2.28% 2.85% 2.72% 2.85% VIP gross revenue 213 206 297 716 1,386 YoY growth 93.6% Sequential growth -3.0% 43.8% Non-rolling chip drop 389 542 705 1,636 3,763 YoY growth 130.0% Sequential growth 39.2% 30.0% Win rate 21.5% 20.7% 22.5% 21.7% 24.0% Mass table gross revenue 84 112 159 354 903 YoY growth 154.8% Sequential growth 34.0% 41.3% Table gaming gross revenue 297 319 455 1,070 2,289 YoY growth 113.8% Average number of tables 362 356 522 413 540 Average win per table per day (USD) 10,112 9,729 9,481 9,773 11,614 Slot handle 665 1,032 1,084 2,782 6,955 slot hold rate 4.0% 3.1% 4.5% 3.9% 5.0% Slot machine gross revenue 27 32 49 107 348 YoY growth 223.8% Average number of slot machines 819 1,086 1,500 1,135 2,200 Average win per slot per day (USD) 397 320 353 357 433 Gross gaming revenue (GGR) 323 351 504 1,178 2,637 Commission, rebate and discount (74) (79) (101) (253) (471)

as a % of VIP gross revenue 34.6% 38.0% 34.0% 34.0% 34.0% as a % of Rolling chip volume 1.1% 0.9% 1.0% 1.0% 1.0%

Net gaming revenue (NGR) 250 272 403 925 2,166 Non-gaming revenue 16 24 41 81 352 Property revenue 266 296 445 1,006 2,517 YoY growth 150.2% Sequential growth 19.5% 18.1% 23.0% Property EBITDA 52 54 102 208 617 y-o-y growth 196.8% sequential growth 3.7% 90.4% Property EBITDA margin (IFRS) 15.3% 14.3% 18.7% 16.5% 20.6% Property EBITDA margin (US GAAP) 19.5% 18.1% 23.0% 20.6% 24.5% Property ROI 1.2% 1.2% 2.3% 4.7% 14.0% Normalized ROI 0.8% 2.4% 2.3% 5.5% 14.0% Source: Company, Daiwa forecasts


- 62 -

Appendix

Key management profile Name Age Position Experience Sheldon Gary Adelson 78 Chairman, non-executive director Mr. Adelson has been the chairman and CEO of Las Vegas Sands since 2004. He has extensive experience in the

convention, trade show and tour and travel businesses. Edward Matthew Tracy 59 President, CEO and executive director Mr. Tracy has over 20 years of hands-on management and development experience in the gaming and hospitality industry. Toh Hup Hock 42 CFO, Executive VP and Executive Director Mr. Toh had a 15-year career with General Electric Company (GE) before joining Sands China. Source: Company

Shareholding structure

Source: Company

Sands: Venetian Macao Sands: Sands Macao


Sands: Plaza Macao Sands: Sands Cotai Central


Las Vegas Sands

Sands China

Public

70.3% 29.7%

Sheldon Adelson48.1%


Investment case

We see Grand Lisboa as an impressive property that continues to gain revenue market share as a result of its strong VIP business. The property’s EBITDA market share, however, is declining, due to a less favourable mass-market mix. Moreover, SJM’s total market shares, in terms of both gaming revenue and EBITDA, have been dragged down by the underperforming ‘other self-promoted’ and ‘satellite’ casinos, which have much lower gaming revenue growth and lower EBITDA margins. Fortunately for SJM, near-term infrastructure improvements should benefit the Macau Peninsula and thus the company, as it has the largest casino network on the peninsula. We expect mass-market gaming revenue to see some tailwinds in 2013,

especially for the more mass-focused other self-promoted casinos and satellite casinos, which should benefit from an increasing number of day trippers from Zhuhai. Aside from a lack of strong share-price catalysts that we see in the short term, our analysis shows that the share price has found support whenever the 12-month forward dividend yield is about 4% (excluding special dividends). Thus, we would expect the share price to find a support level in a down market (if one were to occur) based on its strong balance sheet, sound FCF yield, and it being the only operator in Macau with an official dividend policy.

Catalysts While we like SJM’s fundamentals, we find it hard to identify share-price catalysts. Still, an increase in the dividend payout could be a positive catalyst, although EBITDA-growth catalysts remain absent, in our view.

Valuation We assign a target 9.4x EV/EBITDA multiple to our 2013 EBITDA forecast, implying a 15% discount to our sector multiple, in line with SJM’s average discount since 2011. We initiate coverage with a Hold (3) rating and a six-month target price of HKD17.30.

Risks An upside catalyst would be a stronger-than-expected rebound in VIP gaming revenue, while downside risks include a worse-than-expected performance at SJM’s satellite and other self-promoted casinos.


6 November 2012

SJM Holdings

Initiation: Old Faithful

• We see SJM as having the most defensive profile among all the Macau gaming operators

• Strong balance sheet provides room for rising dividend payouts • But growth profile is deteriorating: Grand Lisboa is the only

property preventing a rapid fall in market share for the company



SJM Holdings880 HK

Target (HKD): 17.30Downside: 3.5%

5 Nov price (HKD): 17.92

BuyOutperformHold (initiation)

UnderperformSell

1

2

3

4

5

85

93

100

108

115

11

13

15

17

19



SJM Hdg (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 11.70-18.06Market cap (USDbn) 12.873m avg daily turnover (USDm) 12.99Shares outstanding (m) 5,567Major shareholder STDM (55.0%)

Financial summary (HKD)Year to 31 Dec 12E 13E 14ERevenue (m) 76,508 80,937 85,023Operating profit (m) 6,212 6,754 7,188Net profit (m) 6,453 6,999 7,463Core EPS (fully-diluted) 1.159 1.257 1.341EPS change (%) 21.6 8.5 6.6Daiwa vs Cons. EPS (%) (1.7) (5.3) (9.8)PER (x) 15.5 14.3 13.4Dividend yield (%) 5.5 6.0 6.4DPS 0.985 1.069 1.140PBR (x) 5.1 4.7 4.4EV/EBITDA (x) 10.8 9.9 9.6ROE (%) 35.1 34.5 34.2

Bing Zhou(852) 2773 8782

[email protected]

Cris Xu(852) 2773 8736

[email protected]



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Growth outlook SJM: EBITDA

For 2013, we forecast 6% YoY revenue growth and 8% YoY EBITDA growth, driven mainly by gains in Grand Lisboa’s VIP market share due to the full-year addition of almost 25% more tables for VIP gaming (the tables were moved from the company’s from Greek Mythology Casino on Taipa to Grand Lisboa in October 2012).


Valuation SJM: EV/EBITDA multiple

We assign a target 9.4x EV/EBITDA multiple on our 2013 EBITDA forecast, implying a 15% discount to our sector multiple of 11x, which is in line with the stock’s average discount since 2011. Interestingly, based on our analysis SJM’s discount to the sector average EV/EBITDA seems to have a historical floor, presumably because of its attractive dividend yields. Our analysis shows that since 2009 the share price has found support once the 12-month forward dividend yield (excluding special dividends) is about 4%.


Earnings revisions SJM: EBITDA consensus EBITDA forecasts

Our 2013 EBITDA forecast is 6% lower than that of the Bloomberg consensus, as we are less optimistic about the EBITDA margins of SJM’s self-promoted casinos, for which an improving gaming revenue mix are likely to be offset by a rise in player-acquisition costs.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

6.6%

8.4%9.1%

9.7% 9.9%

0%

2%

4%

6%

8%

10%

12%

0.0

3.0

6.0

9.0


(HKDbn)

2

4

6

8

10

12

14

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 8.1x sd+1: 10.6xsd-1: 5.6x

7.0

7.5

8.0

8.5

9.0



(HKDbn)


UnderperformSell

1

2

3

4

5


- 65 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGrand Lisboa property gaming EBITDA (HKDm) n.a. n.a. 1,654 2,562 3,756 4,508 5,102 5,488

Other self-promoted casinos EBITDA (HKDm) n.a. n.a. 261 895 1,226 1,176 1,173 1,230

Satellite casinos EBITDA (HKDm) n.a. n.a. 246 1,164 1,658 1,485 1,432 1,491Grand Lisboa property gaming EBITDA margin (%) n.a. n.a. 17.5 16.4 16.5 16.1 15.6 15.8

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGaming 32,147 27,992 34,066 57,195 75,514 75,881 80,243 84,306Non-gaming 81 173 287 458 578 627 695 717Other Revenue 0 0 0 0 0 0 0 0Total Revenue 32,227 28,165 34,353 57,653 76,092 76,508 80,937 85,023Other income 0 0 0 0 0 0 0 0COGS (24,976) (21,164) (26,702) (47,437) (63,408) (63,189) (66,899) (70,262)SG&A (5,864) (6,307) (6,756) (6,627) (7,389) (7,107) (7,284) (7,574)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 1,387 694 895 3,590 5,295 6,212 6,754 7,188Net-interest inc./(exp.) 60 (90) (162) (142) 47 244 252 284Assoc/forex/extraord./others 46 68 79 85 4 60 60 60Pre-tax profit 1,493 672 812 3,532 5,346 6,516 7,066 7,532Tax (0) (17) (18) (18) (35) (38) (42) (43)Min. int./pref. div./others 40 141 112 45 (3) (25) (25) (25)Net profit (reported) 1,534 796 907 3,559 5,308 6,453 6,999 7,463Net profit (adjusted) 1,534 796 907 3,559 5,308 6,453 6,999 7,463EPS (reported)(HKD) 0.409 0.184 0.181 0.692 0.964 1.159 1.257 1.341EPS (adjusted)(HKD) 0.409 0.184 0.181 0.692 0.964 1.159 1.257 1.341EPS (adjusted fully-diluted)(HKD) 0.409 0.184 0.181 0.648 0.953 1.159 1.257 1.341DPS (HKD) 0.000 0.760 0.091 0.351 0.730 0.985 1.069 1.140EBIT 1,387 694 895 3,590 5,295 6,212 6,754 7,188EBITDA 0 1,600 2,269 4,858 6,923 7,446 8,044 8,584

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EProfit before tax 1,493 672 812 3,532 5,346 6,516 7,066 7,532Depreciation and amortisation 577 775 1,115 1,177 1,121 1,098 1,144 1,190Tax paid (199) (0) (17) (18) (20) (47) (42) (43)Change in working capital (705) (995) 1,793 3,330 1,310 289 546 321Other operational CF items (76) 170 359 245 652 (177) (114) (134)Cash flow from operations 1,090 623 4,063 8,266 8,408 7,679 8,599 8,866Capex (4,279) (2,163) (1,371) (846) (569) (1,422) (2,604) (5,880)Net (acquisitions)/disposals 6 6 0 3 4 6 0 0Other investing CF items 277 26 (1,492) (3,859) (246) (2,022) 355 360Cash flow from investing (3,996) (2,130) (2,862) (4,702) (811) (3,439) (2,249) (5,520)Change in debt 4,908 936 (702) (1,030) (1,040) 628 (400) (300)Net share issues/(repurchases) 0 3,626 0 347 100 0 0 0Dividends paid 0 (3,500) (300) (716) (2,095) (4,142) (5,528) (5,989)Other financing CF items 288 (218) 1,891 37 (140) (417) (104) (76)Cash flow from financing 5,196 844 889 (1,363) (3,175) (3,931) (6,032) (6,365)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 2,291 (664) 2,090 2,202 4,421 309 319 (3,019)Free cash flow (3,189) (1,540) 2,692 7,420 7,839 6,257 5,995 2,986

Financial summary


- 66 -


Key ratios (%)


Company profile

SJM Holdings (SJM) is one of six gaming operators in Macau. Its parent, Sociedade de Turismo e Diversões de Macau (STDM), had the gaming monopoly in Macau until the Macau Government granted more gaming concessions in 2002. It operates Grand Lisboa, Lisboa, Oceanus, Jal Alai and 14 satellite casinos across the Macau Peninsula and Taipa.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ECash & short-term investment 6,595 6,129 8,631 15,258 20,646 23,112 23,431 20,412Inventory 21 43 52 56 69 69 76 81Accounts receivable 793 930 1,233 1,258 1,318 1,393 1,487 1,584Other current assets 412 200 346 827 246 1 1 1Total current assets 7,821 7,302 10,263 17,399 22,279 24,575 24,996 22,078Fixed assets 9,227 10,422 10,985 10,291 9,552 11,095 12,082 16,295Goodwill & intangibles 65 52 46 40 33 33 33 33Other non-current assets 927 1,144 2,073 1,160 1,155 1,669 1,679 1,689Total assets 18,039 18,921 23,367 28,889 33,020 37,372 38,789 40,095Short-term debt 127 1,020 1,040 1,259 3,072 2,500 2,000 2,000Accounts payable 5,662 4,583 6,895 10,021 11,339 11,703 12,350 12,772Other current liabilities 360 69 85 91 388 422 422 422Total current liabilities 6,148 5,671 8,020 11,371 14,799 14,625 14,772 15,194Long-term debt 4,808 4,824 5,690 3,072 0 1,200 1,300 1,000Other non-current liabilities 523 989 1,137 1,271 974 1,935 1,569 1,203Total liabilities 11,479 11,484 14,847 15,714 15,773 17,759 17,640 17,396Share capital 291 5,000 5,000 5,455 5,522 5,522 5,522 5,522Reserves/R.E./others 6,074 2,287 3,455 7,683 11,686 14,027 15,538 17,063Shareholders' equity 6,365 7,287 8,455 13,138 17,208 19,549 21,060 22,585Minority interests 195 149 65 38 39 64 89 114Total equity & liabilities 18,039 18,921 23,367 28,889 33,020 37,372 38,789 40,095EV 98,173 99,492 97,783 88,718 82,110 80,286 79,582 82,316Net debt/(cash) (1,660) (285) (1,901) (10,927) (17,574) (19,412) (20,131) (17,412)BVPS (HKD) 1.697 1.457 1.691 2.409 3.116 3.512 3.783 4.057

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ESales (YoY) (5.8) (12.6) 22.0 67.8 32.0 0.5 5.8 5.0EBITDA (YoY) n.a. n.a. 41.8 114.1 42.5 7.6 8.0 6.7Operating profit (YoY) (40.4) (50.0) 28.9 301.2 47.5 17.3 8.7 6.4Net profit (YoY) (36.7) (48.1) 13.9 292.6 49.1 21.6 8.5 6.6Core EPS (fully-diluted) (YoY) (36.7) (55.0) (1.8) 258.6 47.1 21.6 8.5 6.6Gross-profit margin 22.5 24.9 22.3 17.7 16.7 17.4 17.3 17.4EBITDA margin 0.0 5.7 6.6 8.4 9.1 9.7 9.9 10.1Operating-profit margin 4.3 2.5 2.6 6.2 7.0 8.1 8.3 8.5ROAE 27.4 11.7 11.5 33.0 35.0 35.1 34.5 34.2ROAA 10.3 4.3 4.3 13.6 17.1 18.3 18.4 18.9ROCE 17.0 5.6 6.3 21.9 28.0 28.5 28.3 28.7ROIC 51.8 11.2 12.7 80.6 547.8 (9,740.0) 1,101.9 226.7Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Effective tax rate 0.0 2.5 2.2 0.5 0.7 0.6 0.6 0.6Accounts receivable (days) 8.0 11.2 11.5 7.9 6.2 6.5 6.5 6.6Current ratio (x) 1.3 1.3 1.3 1.5 1.5 1.7 1.7 1.5Net interest cover (x) n.a. 7.7 5.5 25.3 n.a. n.a. n.a. n.a.Net dividend payout 0.0 413.1 50.0 50.8 75.7 85.0 85.0 85.0



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Preservation of capital

We think the company’s strong balance sheet and stable dividend yield offer downside protection for the share price. However, we see limited near-term catalysts that would boost SJM’s EBITDA growth above most of its peers; initiate coverage with a Hold rating.

The tourniquet

We believe Grand Lisboa has accumulated impressive brand equity over the past five years. The strength and integrity of the brand is evident in the property’s ability to gain market share continuously since it opened in 2007, while other players on the peninsula have gradually been losing share to casinos in Cotai. Much of Grand Lisboa’s success can be attributed to SJM’s strong relationship with junkets, which operate 100% of the VIP rooms, and in turn have helped build the casino into a VIP powerhouse, in our view. We note that Grand Lisboa has been able to gain total rolling-chip share since 2009, amid the shift in traffic to Cotai. Grand Lisboa: rolling-chip market share

Source: Company, Daiwa estimates

However, going forward, we believe Grand Lisboa will find it incrementally harder to gain market share. With only 405 rooms and an occupancy rate of up to 93% in 1H12, compared with 78% only two years ago, the company will have to find more innovative ways of compensating both VIP and mass-market players over the long term.

SJM moved 40 tables from Greek Mythology (20 VIP/20 mass market), one of SJM’s satellite casinos, into a new VIP room in Grand Lisboa at the beginning of October this year. We expect these changes to secure Grand Lisboa’s VIP market share for at least the next 12 months.

Grand Lisboa: average number of VIP tables and VIP market share


Regardless of Grand Lisboa’s continued strong market positioning, total group market share continues to be eroded by less palatable performances at SJM’s other self-promoted and satellite casinos. The company has 14 other self-promoted casinos and 3 satellite casinos, which gives it the largest casino network in Macau. SJM: revenue breakdown


SJM has a grandfathered commission-sharing contract with its satellite casinos, from which it receives 3-5% of the satellite casinos’ EBITDA. These other casinos are losing market share as a group, in terms of both gaming revenue and EBITDA. Moreover, these casinos have dragged down the company’s overall gaming revenue and EBITDA market shares over the past 12-18 months, due to falls in gaming revenue growth, and reduced EBITDA margins. Pressure may continue to come from players’ continued migration to newer casinos in Cotai. Satellite casinos may bear the brunt of all challenges, as we think the recent 40 tables shifted to Grand Lisboa should abrade gaming revenue over the near term.

7%

9%

10%11%

6%

7%

8%

9%

10%

11%

2009 2010 2011 1H12

6%

7%

8%

9%

10%

11%

12%

0

50

100

150

200

2009 2010 2011 2012E 2013E

Average number of VIP tables (LHS) VIP market share (RHS)

18 19 21 25 27

19 13 11 10 9

63 68 68 66 64

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012E 2013EGrand Lisboa Other self-promoted casinos Satellite casinos


- 68 -

SJM: EBITDA breakdown


SJM: overall gaming revenue market share

(%) 2009 2010 2011 2012E 2013E Grand Lisboa 8 9 9 10 10 Other self-promoted casinos 9 6 5 4 4 Satellite casinos 13 17 16 13 11 Total 29 31 29 26 25 Source: Company, Daiwa estimates and forecasts

Beneficiary of external infrastructure improvements Being property focused on VIP gamers, Grand Lisboa has historically been a net loser in the mass-market segment. Grand Lisboa, and indeed SJM as a whole, has one of the highest proportions of day trippers of all operators, which impedes strong growth in average win per table per day and creates volatile hold rates. Thus, this property has seen declines in mass-market revenue share over the past two years. Grand Lisboa: mass-market market share


The completion of the Guangzhou-Zhuhai Intercity Railway (which connects to the peninsula) next year combined with the easing of visa restrictions for Mainland visitors to Macau should provide a cushion against further disruptions in Grand Lisboa’s mass-market share. In addition, we think relatively cheaper accommodation in Zhuhai should be incrementally positive for both the other self-promoted and satellite

casinos as their low table limits are more appealing to the grind (ie, low-end) mass and day-tripper market segment.

Fortress-like balance sheet

Best-in-class liquidity metrics Over the past few years, SJM has had the best track record in terms of improving solvency metrics. The company is the only listed Macau casino operator that has been in a net-cash position since 2009. Concurrently, it has had the best net debt-to-equity and EBITDA-to-gross interest coverage ratios among its peers.

Macau Gaming Sector: net debt-to-equity ratios (%) 2009 2010 2011 2012E 2013E Galaxy 28 54 31 net cash net cash Melco 54 49 40 26 22 MGM 1,888 268 net cash net cash net cash Sands 58 45 17 26 16 SJM net cash net cash net cash net cash net cash Wynn 74 26 net cash net cash net cash Source: Company, Daiwa forecasts

Macau Gaming Sector: EBITDA-to-gross interest coverage

ratios (x) 2009 2010 2011 2012E 2013E Galaxy 8 38 14 16 22 Melco 2 5 7 8 9 MGM 2 6 20 23 23 Sands 5 10 30 20 25 SJM 11 23 56 69 77 Wynn 10 23 31 32 37 Source: Company, Daiwa forecasts

A bird in the hand is worth two in the bush SJM is the only operator that has a publicly announced dividend-payout policy (50%), although the company paid out 51% in 2010, and 76% in 2011 (a special dividend of HKD1.2bn), and we think there may be reason to expect more. SJM just announced, on 19 October 2012, that it had accepted the Macau Government’s proposed Land Concession Contract for a plot of land in Cotai, south of Wynn’s new Cotai site there. SJM’s new site is expected to feature 700 gaming tables, 1,000 slots and 2,000 hotel rooms on the site, and the company has plans to invest a total of around USD2.1bn. As SJM was late to the game in Cotai, it has a lot of cash and draws down debt mainly to maintain healthy relationships with its creditors. The company’s net-cash position has continued to improve, with HKD17.6bn in net cash at the end of 2011 and HKD18.1bn at the end of 1H12. We forecast net cash to rise to HKD19.4bn at the end of 2012.

77 57 58 64 67

12

19 18 16 15

11 24 24 20 18

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012E 2013EGrand Lisboa Other self-promoted casinos Satellite casinos

9%

8%9%

8%

7%

8%

9%

10%

2009 2010 2011 1H12


- 69 -

As the FCF yield is a decent proxy for dividend yield, we think the company can maintain an implied FCF or dividend of over 6%, should the capex for SJM’s new site be spread over four years (from late-2013 to late-2016). This looks even more plausible when we take into account SJM’s impressive cash reserves. Thus, we contend that a long-term sustainable total dividend-payout ratio above 2011’s 76% is not unreasonable.

Macau Gaming Sector: FCF and dividend yield Free cash flow yield % Dividend yield % Company 2012E 2013E 2012E 2013E Galaxy 5.0 6.0 n.a. n.a. Melco 3.6 0.2 n.a. n.a. MGM 9.2 3.4 5.8 3.5 Sands 2.4 5.5 3.9 4.4 SJM 6.3 6.0 5.5 6.0 Wynn 5.7 3.1 5.1 3.0 Average 5.4 4.0 5.1 4.2 Source: Company, Daiwa forecasts

SJM Cotai: location

Source: Daiwa

Daiwa forecasts

Our forecasts are driven by underlying assumptions in the following categories:



• VIP and mass gaming revenue mix

• Market-share gains per property

• Cross-checking with market-share movements per property

For 2013, we forecast 6% YoY revenue growth and 8% YoY EBITDA growth, driven mainly by gains in Grand Lisboa’s VIP market share due to the full-year addition of almost 25% more tables for VIP gaming (the tables were moved from the company’s Greek Mythology Casino on Taipa to Grand Lisboa in October 2012). We

forecast SJM’s total gaming revenue market share to remain at 24% for the VIP segment for 2012-13, and its share of the mass-market segment to decline from 29% for 2012 to 26% for 2013.

SJM: revenue and YoY growth


34.4

57.7

76.1 76.5 80.9

0%

20%

40%

60%

80%

0.0

15.0

30.0

45.0

60.0

75.0

90.0


(HKDbn)


- 70 -

We forecast Grand Lisboa’s property gaming EBITDA margin to fall to 15.6% for 2013 from 16.1% for 2012, due to more aggressive promotions in the mass-market segment. The product-mix changes toward the mass market should be more offset by higher promotions at the other self-promoted casinos. We forecast the company’s overall EBITDA margin to expand by 20bps for 2013 to 9.9% on an IFRS basis (implied US GAAP EBITDA margin of 17.6%).

SJM: property gaming EBITDA margin 2009 2010 2011 2012E 2013E

Grand Lisboa 17.5% 16.4% 16.5% 16.1% 15.6% Other self-promoted casinos 2.6% 7.8% 10.2% 10.4% 10.0% Source: Company, Daiwa forecasts

SJM: EBITDA and EBITDA margin


Valuation

We assign a target 9.4x EV/EBITDA multiple on our 2013E EBITDA forecast, implying a 15% discount to our sector multiple of 11x, which is in line with the stock’s average discount since 2011. Accordingly, our

six-month target is HKD17.30 and we initiate the coverage with a Hold (3) rating.

SJM: EV/EBITDA based valuation (HKDm) 2013E EBITDA 8,044 target EV/EBITDA multiple 9.4x Enterprise value 75,617 Gross cash* 24,019 Total debt 3,300 Net cash / (debt) 20,719 Equity value 96,336 Number of shares (m) 5,567 Target price (HKD) 15.80

Source: Daiwa forecasts; *includes long-term deposits included in other non-current assets

Interestingly, SJM’s discount to the sector average EV/EBITDA has a historical floor, presumably because of its attractive dividend yields. Our analysis shows that since 2009 the share price has found support once the 12-month forward dividend yield (excluding special dividends) is about 4%.

SJM: share price versus 12-month forward dividend yield


SJM: 12-month forward EV/EBITDA multiple SJM: EV/EBITDA multiple premium discount to sector


6.6%

8.4%9.1%

9.7% 9.9%

0%

2%

4%

6%

8%

10%

12%

0.0

3.0

6.0

9.0


(HKDbn)

0

1

2

3

4

5

0

5

10

15

20

25

Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12Share price (LHS) 12-month forward dividen yield (RHS)

(HKD) (%)

4%

2

4

6

8

10

12

14

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 8.1x sd+1: 10.6xsd-1: 5.6x

(40%)

(30%)

(20%)

(10%)

0%

10%

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

avg: -15%


- 71 -

Macau gaming sector: valuation comparison


growth YoY (%) PER Div. yield (%) FCF yield (%) Company code (local cur.) (USDbn) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM 880 HK 17.92 12.8 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn 1128 HK 23.35 15.5 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg, Daiwa forecasts

Note: closing prices as of 5 November 2012


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Stress test

The difficulty with the gaming sector lies in the predictability of future earnings, which have proven to be highly susceptible to policy risk. In our bear-case scenario (assuming 0% gaming revenue growth YoY in 2H12E, implying 6% decline YoY in gaming revenue in 4Q12E, or a 3% HoH decline in 2H12, thus we use 1.97 as an adjusting factor), we adopt a valuation method based on earnings power, which truncates the benefit of all future EBITDA growth and expansion. This value-based methodology allows us to value gaming operators in an unprecedented scenario that the industry gross gaming revenue sees a 0% rate of change YoY for 2H12E. Our calculation is based on the following formula.

• (1H12 adjusted EBITDA – maintenance capex) * 1.97

• We divide the result of the above by the WACC

• We add the company’s cash balance and subtract its total debt

• Then we divide the number by the total number of shares outstanding

The result yields a theoretical value per share for each operator, assuming no future EBITDA growth. Our findings show that SJM’s share price has the most attractive valuations compared with its peers. Upside potential and downside risk We would see the upside catalyst as a stronger-than-expected rebound in VIP gaming revenue, while downside risks include a deterioration in China’s economy, a tightening of liquidity in the company, and/or the sudden implementation of visa restrictions. Besides policy risk, other risk factors include a worse-than-expected performance at SJM’s satellite and other self-promoted casinos.

Earnings power value under bear-case scenario (2H12E)

Company Galaxy Melco MGM Sands SJM Wynn Reporting currency HKDm USDm HKDm USDm HKDm HKDm For the period ended 1H12 adjusted EBITDA 4,712 446 2,746 873 3,812 3,932 less: maintenance capex 1,400 100 164 71 271 323

3,312 346 2,582 802 3,541 3,609 x 1.97 ( bear-case scenario: 0% revenue growth YoY in 2H12E) 6,525 682 5,086 1,581 6,976 7,110 WACC 11% 13% 12% 9% 11% 10% Earnings power value 57,740 5,368 44,227 17,564 66,442 74,060 add: net cash (debt) 665 (893) 955 (1,909) 17,442 3,395 Equity value 58,405 4,475 45,183 15,655 83,884 77,455 Outstanding shares (million) 4,248 552 3,800 8,056 5,572 5,188 Equity value per share based on earnings power (local currency) 13.7 8.1 11.9 15.2 15.1 14.9 Share price (local currency) 28.8 14.9 14.1 31.6 17.9 23.4 Overvaluation based on earnings power 109% 84% 21% 108% 19% 56% Source: Daiwa estimates


- 73 -

Grand Lisboa: property model (HKDm) 1H11 2H11 2011 1H12 2H12E 2012E 2013E Days in operation 181 184 365 182 184 366 365 Rolling chip volume 188,669 225,647 653,533 309,712 343,821 742,649 871,111 YoY change 64.2% 52.4% 57.7% 17.2% 10.4% 13.6% 17.3% Sequential change 37.3% 11.0% 5.6% 4.5% win rate 2.70% 2.48% 2.59% 2.89% 2.85% 2.87% 2.85% VIP gross revenue 8,362 8,534 16,896 10,492 10,818 21,310 24,827 YoY change 75.2% 30.9% 49.6% 25.5% 26.8% 26.1% 16.5% Sequential change 28.2% 2.1% 22.9% 3.1% Average number of VIP tables 119 135 127 132 162 147 182 Average rolling chip per VIP table per day (HKDm) 14.4 13.8 14.1 15.1 12.7 13.8 13.1 YoY change 18.6% -0.7% 8.1% 5.1% -8.0% -2.1% -5.0% Sequential change 3.2% -3.7% 9.2% -15.7% Average win per VIP table per day (HKD) 388,217 343,559 364,482 436,722 362,922 396,082 373,726 YoY change 26.6% -14.7% 2.5% 12.5% 5.6% 8.7% -5.6% Sequential change -3.6% -11.5% 27.1% -16.9% Mass table gross revenue 2,630 2,819 5,449 2,985 3,171 6,156 7,367 YoY change 39.6% 38.7% 39.1% 13.5% 12.5% 13.0% 19.7% Sequential change 29.4% 7.2% 5.9% 6.2% Average number of mass tables 252 230 241 231 231 231 231 Average win per mass table per day (HKD) 57,662 66,612 61,940 71,001 74,605 72,813 87,375 YoY change 33.5% 46.5% 39.7% 23.1% 12.0% 17.6% 20.0% Sequential change 26.8% 15.5% 6.6% 5.1% Table gaming gross revenue 10,992 11,353 22,345 13,477 13,989 27,466 32,194 YoY change 65.1% 32.7% 46.9% 22.6% 23.2% 22.9% 17.2% Average number of tables 371 365 368 363 393 378 413 Average win per table per day (HKD) 163,691 169,044 166,356 203,993 193,453 198,528 213,564 Slot machine gross revenue 231 222 453 236 231 467 513 YoY change 36.7% 12.1% 23.4% 2.2% 4.2% 3.2% 9.8% Average number of slot machines 756 776 766 763 770 767 767 Average win per slot per day (HKD) 1,691 1,555 1,619 1,703 1,633 1,666 1,832 Property gaming revenue 11,223 11,575 22,797 13,713 14,220 27,933 32,707 YoY change 64.4% 32.3% 46.3% 22.2% 22.9% 22.5% 17.1% Sequential change 28.2% 3.1% 18.5% 3.7% Non-gaming revenue 278 308 586 314 336 650 723 Property gaming EBITDA 1,823 1,933 3,756 2,233 2,275 4,508 5,102 YoY change 62.3% 34.3% 46.6% 22.5% 17.7% 20.0% 13.2% Sequential change 26.7% 6.0% 15.5% 1.9% Property gaming EBITDA margin (IFRS) 16.2% 16.7% 16.5% 16.3% 16.0% 16.1% 15.6% Non-gaming EBITDA 97 106 185 87 94 217 225 Property ROI 25.1% 26.6% 51.7% 30.3% 31.0% 61.3% 69.5% Normalized ROI 31.2% 43.2% 74.3% 28.4% 31.0% 59.4% 69.5% Source: Company, Daiwa forecasts


- 74 -

Other self-promoted casinos: property model (HKDm) 1H11 2H11 2011 1H12 2H12E 2012E 2013E Days in operation 181 184 365 182 184 366 365 Rolling chip volume 147,530 117,509 252,448 129,694 122,754 226,185 214,288 YoY change -12.1% 4.5% -4.8% -11.3% -9.5% -10.4% -5.3% Sequential change 10.4% -5.4% -6.3% -3.4% Win rate 2.76% 3.15% 2.95% 2.81% 2.85% 2.83% 2.85% VIP gross revenue 3,585 3,864 7,449 3,236 3,167 6,403 6,107 YoY change -16.5% 14.7% -2.8% -9.7% -18.0% -14.0% -4.6% Sequential change 6.4% 7.8% -16.3% -2.1% Average number of VIP tables 54 58 56 50 50 50 50 Average rolling chip per VIP table per day (HKDm) 13.3 11.5 12.35 12.6 12.1 12.36 11.74 YoY change -2.3% 4.5% 0.4% -4.7% 5.0% 0.1% -5.0% Sequential change 20.5% -13.3% 9.9% -4.5% Average win per VIP table per day (HKD) 366,833 362,069 364,428 355,579 344,210 349,876 334,642 YoY change -7.2% 14.7% 2.5% -3.1% -4.9% -4.0% -4.4% Sequential change 16.2% -1.3% -1.8% -3.2% Mass table gross revenue 2,123 2,012 4,135 2,234 2,227 4,461 5,116 YoY change 27.0% 15.8% 21.3% 5.2% 10.7% 7.9% 14.7% Sequential change 22.2% -5.2% 11.0% -0.3% Average number of mass tables 325 321 323 323 323 323 323 Average win per mass table per day (HKD) 36,088 34,065 35,070 37,999 37,471 37,735 43,396 YoY change 46.2% 24.8% 35.2% 5.3% 10.0% 7.6% 15.0% Sequential change 32.2% -5.6% 11.5% -1.4% Table gaming gross revenue 5,708 5,876 11,584 5,470 5,394 10,864 11,223 YoY change -4.3% 15.1% 4.7% -4.2% -8.2% -6.2% 3.3% Average number of tables 379 379 379 373 373 373 373 Average win per table per day (HKD) 83,208 84,261 83,739 80,576 78,589 79,577 82,437 Slot machine gross revenue 223 205 428 228 236 464 509 YoY change 32.7% 3.5% 16.9% 2.2% 15.0% 8.4% 9.7% Average number of slot machines 1,271 1,271 1,271 Average win per slot per day (HKD) 921 997 1,097 Property gaming revenue 5,931 6,081 12,012 5,698 5,629 11,327 11,732 YoY change -3.3% 14.7% 5.1% -3.9% -7.4% -5.7% 3.6% Sequential change 11.8% 2.5% -6.3% -1.2% Property gaming EBITDA 672 554 1,226 624 552 1,176 1,173 YoY change 50.3% 23.7% 37.0% -7.1% -0.4% -4.1% -0.2% Sequential change 50.0% -17.6% 12.6% -11.6% Property gaming EBITDA margin (IFRS) 11.3% 9.1% 10.2% 11.0% 9.8% 10.4% 10.0% Source: Company, Daiwa forecasts


- 75 -

Satellite casinos: property model (HKDm) 1H11 2H11 2011 1H12 2H12E 2012E 2013E Days in operation 181 184 365 182 184 366 365 Rolling chip volume 272,501 382,180 924,066 488,077 435,989 771,817 751,425 YoY change 79.1% 14.1% 41.1% -15.8% -17.2% -16.5% -2.6% Sequential change 27.7% -10.7% -5.8% -12.2% win rate 3.00% 3.16% 3.08% 3.10% 2.85% 2.98% 2.85% VIP gross revenue 14,662 13,772 28,434 12,742 10,287 23,029 21,416 YoY change 70.2% 22.0% 42.8% -13.1% -25.3% -19.0% -7.0% Sequential change 29.8% -6.1% -7.5% -19.3% Average number of VIP tables 402 422 412 431 411 421 411 Average rolling chip per VIP table per day (HKDm) 6.7 5.6 6.14 5.2 4.8 5.01 5.01 YoY change 29.7% -7.3% 8.6% -21.9% -15.0% -18.5% 0.0% Sequential change 10.8% -16.3% -6.7% -8.9% Average win per VIP table per day (HKD) 201,506 177,365 189,083 162,443 136,022 149,452 142,756 YoY change 23.2% -0.9% 9.9% -19.4% -23.3% -21.0% -4.5% Sequential change 12.6% -12.0% -8.4% -16.3% Mass table gross revenue 5,427 6,271 11,698 6,501 6,496 12,997 13,766 YoY change 14.4% 23.3% 19.0% 19.8% 3.6% 11.1% 5.9% Sequential change 6.7% 15.6% 3.7% -0.1% Average number of mass tables 596 598 597 610 590 600 590 Average win per mass table per day (HKD) 50,304 56,993 53,682 58,560 59,842 59,187 63,922 YoY change 39.6% 33.4% 37.0% 16.4% 5.0% 10.3% 8.0% Sequential change 17.8% 13.3% 2.8% 2.2% Table gaming gross revenue 20,089 20,043 40,132 19,243 16,783 36,026 35,181 YoY change 50.4% 22.4% 35.0% -4.2% -16.3% -10.2% -2.3% Average number of tables 998 1,020 1,009 1,041 1,001 1,021 1,001 Average win per table per day (HKD) 111,211 106,793 108,970 101,567 91,121 96,407 96,291 Slot machine gross revenue 291 283 574 305 290 595 623 YoY change 42.6% 16.5% 28.4% 4.8% 2.3% 3.6% 4.7% Average number of slot machines 1,934 1,888 1,911 1,840 1,840 1,840 1,840 Average win per slot per day (HKD) 832 815 823 907 855 883 927 Property gaming revenues 20,380 20,326 40,706 19,548 17,073 36,621 35,804 YoY change 50.3% 22.3% 34.9% -4.1% -16.0% -10.0% -2.2% Sequential change 22.6% -0.3% -3.8% -12.7% Property gaming EBITDA 829 829 1,658 802 683 1,485 1,432 YoY change 58.2% 29.5% 42.4% -3.3% -17.6% -10.4% -3.6% Sequential change 29.5% 0.0% -3.3% -14.8% Property gaming EBITDA margin (IFRS) 4.1% 4.1% 4.1% 4.1% 4.0% 4.1% 4.0% Source: Company, Daiwa forecasts


- 76 -

Appendix

SJM: key management members

Name Age Position Experience Ho Hung Su, Stanley 90 Chairman and executive director Mr. Ho has been the Chairman of SJM since 2001. He founded STDM in 1962. So Shu Fai 60 CEO and executive director Mr. So joined STDM in 1976 and has over 35 years of experience in the casino business.

Ng Chi Sing 60 COO and executive director Mr. Ng is responsible for overseeing SJM’s operations. He joined STDM in 1978 and has more than 30 years of experience in the casino business

Source: Company

Shareholding structure

Source: Company

SJM: Grand Lisboa SJM: Oceanus


STDM

SJM

Public

55.0% 36.7%

Leung On Kei

8.3%

Lanceford: 31.6%Shun Tak (242 HK): 11.5%

Henry Fok Ying Tung Foundation: 27.0%Cheng Yu-tung: 10.0%

Winnie Ho: 7.0%Others: 12.9%


Investment case

MGM has the smallest presence of the six major gaming operators in Macau, and we do not expect this to change any time soon. Its seemingly stable gaming revenue market share has so far been buoyed largely by a favourable win rate (ie, mostly luck factor), which we believe is unsustainable. We expect MGM’s gaming-revenue growth to slow over the next few years, as more than 70% of its revenue comes from VIPs, and it has no presence in Cotai. However, our analysis shows that MGM Macau should be able to improve its table mix by redesignating mass-market tables to VIP gamers, but to a lesser degree than its peers. We estimate this would raise MGM’s EBITDA margin slightly, but not enough to turn around the EBITDA market-

share loss we expect for the company in 2012 and 2013. Of all the new projects in Cotai, we think MGM will see the largest increase in new tables, likely to start operating in late 2016/early 2017. Although MGM has solid operating cash-flow generation, we forecast its free cash flow yield to drop in 2013 due to the capex required for the Cotai project, and consequently its dividend yield. We see SJM as a better dividend play.

Catalysts MGM’s current EV/EBITDA valuation appears undemanding but we believe there is a lack of identifiable share-price catalysts over the medium term.

Valuation We believe the current EV/EBITDA valuation discount to the sector average is unlikely to narrow, unless MGM sees a significant market-share recovery. However, significant downside to the current share price looks limited, in our view, given the company’s sound balance sheet. We initiate coverage with a Hold (3) rating and six-month target price of HKD13.80, based on a 9.0x target EV/EBITDA multiple applied to our 2013E EBITDA, in line with MGM’s discount to the sector average since its IPO in 2011.

Risks An upside catalyst to our call would be higher-than-expected win rates. The downside risks include faster-than-expected market-share loss and more aggressive revenue-share schemes with junkets to protect market share.


6 November 2012

MGM China Holdings

Initiation: ‘luck is a fact, but should not be a factor’

• Seemingly resilient market share appears to be due to luck, and looks unsustainable

• Table reallocations from mass to VIP should lift EBITDA margin, but may not be enough to drive EBITDA market share

• Valuation looks undemanding, but discount spread should remain in the mid-term; looks fairly priced, initiate with Hold



MGM China Holdings2282 HK




UnderperformSell

1

2

3

4

5

85

95

105

115

125

9

11

12

14

15



MGM China (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 9.43-14.66Market cap (USDbn) 6.933m avg daily turnover (USDm) 4.46Shares outstanding (m) 3,800Major shareholder MGM Resorts (51.0%)

Financial summary (HKD)Year to 31 Dec 12E 13E 14ERevenue (m) 21,270 22,872 24,731Operating profit (m) 4,351 4,737 5,189Net profit (m) 4,585 4,539 4,902Core EPS (fully-diluted) 1.207 1.195 1.290EPS change (%) 39.8 (1.0) 8.0Daiwa vs Cons. EPS (%) 1.6 (3.8) (8.6)PER (x) 11.7 11.8 11.0Dividend yield (%) 5.8 3.5 3.5DPS 0.816 0.500 0.500PBR (x) 9.0 7.2 5.1EV/EBITDA (x) 9.7 9.2 9.1ROE (%) 88.2 67.3 54.1

Bing Zhou(852) 2773 8782

[email protected]

Cris Xu(852) 2773 8736

[email protected]



- 78 -

Growth outlook MGM: EBITDA and EBITDA margin

Despite the loss of gaming-revenue market share that we expect for MGM over 2012-13 and beyond, we forecast a slight improvement in its EBITDA margin for 2013, on the back of table-optimisation measures. We forecast the company’s EBITDA to rise by 9% YoY for 2013.


Valuation MGM: EV/EBITDA multiple

We believe that unless MGM can achieve a significant recovery in market share, the stock’s EV/EBITDA valuation discount to the sector average is unlikely to narrow any time soon. Fundamentally, a significant recovery in the company’s revenue and EBITDA market share looks unlikely to us over the next two years. We assign a 9.0x target EV/EBITDA multiple to value MGM, in line with its discount to the sector’s average EV/EBITDA multiple since its listing in 2011. We believe significant share-price downside is limited by the company’s solid cash flow-generating abilities and healthy balance sheet. Source: Bloomberg, Daiwa forecasts

Earnings revisions MGM: consensus EBITDA forecasts

The Bloomberg-consensus EBITDA forecast for 2013 has trended down by 5% since January this year. Although our EBITDA forecast for 2013 is in line with that of the Bloomberg consensus, we believe concerns about MGM’s market-share loss will persist. Thus, we do not expect any significant upside revisions going forward, unless the company is able to register a much better win-rate.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

15.3%

22.8% 24.3% 24.7% 25.0%

0%

5%

10%

15%

20%

25%

30%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2009 2010 2011 2012E 2013E


(HKDbn)

6

8

10

12

14

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-1

2

(x)avg: 9.0xsd+1: 10.4xsd-1: 7.6x

5.0

5.5

6.0

6.5

Jan-1

2Ja

n-12

Jan-1

2Fe

b-12

Feb-1

2Ma

r-12

Mar-1

2Ap

r-12

Apr-1

2Ma

y-12

May-1

2Ju

n-12

Jun-1

2Ju

l-12

Jul-1

2Ju

l-12

Aug-1

2Au

g-12

Sep-1

2Se

p-12

Oct-1

2Oc

t-12


(HKDbn)


UnderperformSell

1

2

3

4

5


- 79 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

MGM Macau property EBITDA (HKDm) n.a. 941 1,179 2,831 5,046 5,489 5,993 6,529

MGM Macau property EBITDA margin (%) n.a. 13.6 15.3 22.8 24.9 25.8 26.2 26.4

MGM Macau ROI (%) n.a. 9.7 12.1 29.0 51.8 56.3 61.5 67.0MGM Macau normalized ROI (%) n.a. 6.6 21.9 26.9 41.0 41.2 61.5 67.0

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGaming 0 6,618 7,467 12,102 19,965 20,945 22,558 24,426Non-gaming 0 298 260 332 329 325 315 305Other Revenue 0 0 0 0 0 0 0 0Total Revenue 0 6,916 7,727 12,435 20,294 21,270 22,872 24,731Other income 0 0 0 0 0 0 0 0COGS 0 (3,433) (4,029) (6,480) (10,817) (11,271) (12,274) (13,334)SG&A 0 (3,368) (3,334) (3,934) (5,509) (5,649) (5,861) (6,208)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 0 115 364 2,021 3,967 4,351 4,737 5,189Net-interest inc./(exp.) 0 (442) (531) (449) (228) (190) (197) (286)Assoc/forex/extraord./others 0 31 1 (5) (1) 0 0 0Pre-tax profit 0 (296) (166) 1,566 3,738 4,161 4,540 4,903Tax 0 (0) (1) (0) (459) 425 (0) (0)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 0 (297) (167) 1,566 3,279 4,585 4,539 4,902Net profit (adjusted) 0 (297) (167) 1,566 3,279 4,585 4,539 4,902EPS (reported)(HKD) n.a. (0.078) (0.044) 0.412 0.863 1.207 1.195 1.290EPS (adjusted)(HKD) n.a. (0.078) (0.044) 0.412 0.863 1.207 1.195 1.290EPS (adjusted fully-diluted)(HKD) n.a. (0.078) (0.044) 0.412 0.863 1.207 1.195 1.290DPS (HKD) 0.000 0.000 0.000 0.000 0.816 0.816 0.500 0.500EBIT 0 115 364 2,021 3,967 4,351 4,737 5,189EBITDA 0 941 1,179 2,831 4,933 5,256 5,713 6,194

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EProfit before tax 0 (296) (166) 1,566 3,738 4,161 4,540 4,903Depreciation and amortisation 0 747 793 778 747 790 856 875Tax paid 0 (0) (0) (0) 0 (34) (0) (0)Change in working capital 0 (822) (248) 432 1,373 195 376 251Other operational CF items 0 486 634 584 498 387 414 515Cash flow from operations 0 114 1,013 3,360 6,356 5,499 6,186 6,543Capex 0 (527) (243) (249) (297) (560) (4,335) (7,455)Net (acquisitions)/disposals 0 (12) (1) (6) (7) (11) 0 0Other investing CF items 0 0 0 0 0 (437) (228) (228)Cash flow from investing 0 (540) (243) (255) (303) (1,008) (4,563) (7,683)Change in debt 0 1,029 254 (648) (1,800) 64 1,300 2,400Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid 0 0 0 0 (476) (3,101) (3,101) (1,900)Other financing CF items 0 (425) (496) (2,509) (110) (229) (245) (331)Cash flow from financing 0 603 (242) (3,157) (2,385) (3,266) (2,046) 169Forex effect/others 0 0 0 0 0 0 0 0Change in cash 0 178 527 (53) 3,668 1,225 (423) (971)Free cash flow 0 (414) 770 3,111 6,059 4,939 1,851 (912)

Financial summary


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Key ratios (%)


Company profile

MGM China is one of the six gaming operators in Macau, and operates the MGM Macau. Opened in December 2007, MGM Macau has 587 rooms and suites and a 29,000-sq-m casino that has more than 400 gaming tables and 1,000 slot machines. In 1H12, the operator obtained the right to lease 17.8 acres of land in Cotai.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ECash & short-term investment 0 1,448 1,976 1,923 5,590 6,815 6,393 5,421Inventory 0 41 44 64 79 91 106 117Accounts receivable 0 358 841 1,137 549 653 734 772Other current assets 0 50 95 169 66 84 84 84Total current assets 0 1,897 2,956 3,293 6,285 7,644 7,316 6,395Fixed assets 0 6,215 5,815 5,380 4,996 4,884 8,528 15,275Goodwill & intangibles 0 1,428 1,301 1,174 1,047 921 794 668Other non-current assets 0 478 396 377 361 1,604 1,535 1,466Total assets 0 10,018 10,468 10,224 12,689 15,053 18,174 23,803Short-term debt 0 401 1,063 0 207 420 1,000 2,000Accounts payable 0 1,488 1,735 2,706 3,466 3,813 4,333 4,688Other current liabilities 0 217 210 150 214 468 468 468Total current liabilities 0 2,106 3,008 2,857 3,887 4,701 5,801 7,156Long-term debt 0 6,067 5,659 5,887 3,929 3,780 4,500 5,900Other non-current liabilities 0 1,427 1,550 0 459 589 361 133Total liabilities 0 9,600 10,216 8,743 8,275 9,070 10,662 13,189Share capital 0 973 973 973 14,234 14,234 14,234 14,234Reserves/R.E./others 0 (554) (721) 508 (9,820) (8,251) (6,722) (3,620)Shareholders' equity 0 418 251 1,481 4,414 5,984 7,512 10,614Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 0 10,018 10,468 10,224 12,689 15,053 18,174 23,803EV 53,732 58,751 58,478 57,696 52,278 51,117 52,839 56,211Net debt/(cash) 0 5,019 4,746 3,964 (1,454) (2,615) (893) 2,479BVPS (HKD) n.a. 0.110 0.066 0.390 1.162 1.575 1.977 2.793

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ESales (YoY) n.a. n.a. 11.7 60.9 63.2 4.8 7.5 8.1EBITDA (YoY) n.a. n.a. 25.3 140.0 74.3 6.5 8.7 8.4Operating profit (YoY) n.a. n.a. 216.0 454.7 96.4 9.7 8.9 9.5Net profit (YoY) n.a. n.a. n.a. n.a. 109.4 39.8 (1.0) 8.0Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. 109.4 39.8 (1.0) 8.0Gross-profit margin n.a. 50.4 47.9 47.9 46.7 47.0 46.3 46.1EBITDA margin n.a. 13.6 15.3 22.8 24.3 24.7 25.0 25.0Operating-profit margin n.a. 1.7 4.7 16.2 19.6 20.5 20.7 21.0ROAE n.a. n.a. n.a. 180.8 111.3 88.2 67.3 54.1ROAA n.a. n.a. n.a. 15.1 28.6 33.1 27.3 23.4ROCE n.a. 3.3 5.3 28.2 49.8 46.4 40.8 32.9ROIC n.a. 4.2 7.0 38.7 82.8 137.5 94.8 52.6Net debt to equity n.a. 1,199.4 1,888.1 267.7 n.a. n.a. n.a. 23.4Effective tax rate n.a. n.a. n.a. 0.0 12.3 n.a. 0.0 0.0Accounts receivable (days) n.a. 9.4 28.3 29.0 15.2 10.3 11.1 11.1Current ratio (x) n.a. 0.9 1.0 1.2 1.6 1.6 1.3 0.9Net interest cover (x) n.a. 0.3 0.7 4.5 17.4 22.9 24.0 18.1Net dividend payout n.a. n.a. n.a. 0.0 94.6 67.6 41.9 38.8



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‘Luck is a fact, but should not be a factor’

MGM Macau’s seemingly stable VIP market share has been buoyed largely by high win rates, which look unsustainable, in our view. We expect continued market share loss, both in terms of revenue and EBITDA, until its new Cotai property opens in late 2016/early 2017.

What lies beneath all the luck?

With only one property in Macau at present, MGM has the smallest revenue and EBITDA market share among the six major casino operators in Macau. Looking at MGM’s revenue market share, it could be argued that its VIP market share has held up quite well while its mass-market revenue share has seen been slipping gradually QoQ over the past two years (except in 2Q12, when the company saw an extraordinarily high win rate). Our analysis shows that the company’s seemingly stable VIP gaming-revenue market share has been underpinned by high win rates. However, when we look at its rolling-chip market share, which we believe is a good proxy for normalised VIP gaming-revenue growth rates, we find that MGM’s rolling-chip market share has been trending downwards since 1Q11. MGM: rolling-chip market share vs. VIP gross gaming-revenue

market share


MGM: mass revenue market share vs. hold rates


While we expect a rebound in rolling-chip market share from table reallocation from the mass-market to the VIP segment, however, we think these movements should not be enough to offset the company’s gaming revenue and EBITDA market-share losses. Our key metric of relative earnings performance – EBITDA market share – indicates that MGM has been an underperformer, like most properties without a Cotai presence. We think MGM Macau will continue to lose both gaming-revenue and EBITDA market share until its new Cotai property launches, which we expect to open in late 2016/early 2017, for the following reasons:

• We expect slowing revenue over the next two years as the property’s revenue mix is more than 70% weighted to VIPs.

• Cotai operators provide tough competition for MGM in gaining mass-market share, which is likely to result in slower EBITDA growth than its peers.

• MGM is running out of rooms to comp to players, with an average hotel occupancy rate of 97%.

• Table optimisation should help, but is unlikely to be enough to offset EBITDA market-share loss, in our view.

MGM: EBITDA market share


9%

10%

11%

12%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Rolling chip VIP gaming revenue

8%

8%

9%

9%

10%

10%

23%

24%

25%

26%

27%

28%

29%

30%

31%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12Hold rate (LHS) Mass gaming revenue market share (RHS)

6%

7%

8%

9%

10%

11%

12%

2009 2010 2011 2012E 2013E


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Table optimisation should enhance profitability

MGM Macau is a property that should be able to improve its table mix further, albeit to a lesser degree compared with its closest competing resort, Melco’s City of Dreams, which we think has the biggest headroom to improve table productivity). We think MGM can improve its overall profitability by reallocating mass-market tables for VIP use. MGM moved 10 tables from the mass-market to the VIP segment just before Golden Week in October 2012. Our analysis indicates that this trend may continue, and we forecast continued table shifts from the mass-market to the VIP segment in 2013, although unit movements should be smaller in scale.

Average win per VIP table to mass table ratio (x) Operator Property 2009 2010 2011 1H12 Sands Venetian Macao 3.1 3.1 3.1 3.1



Galaxy Macau 13.8 6.6 MGM MGM Macau 5.0 4.6 5.1 3.7 Source: Companies, Daiwa estimates

MGM Macau’s EBITDA margins should register improvements for 2012-13E, on our estimates. However, its overall EBITDA growth rate should underperform our projected EBITDA growth rate for the sector by 16.5% YoY for 2013. We forecast MGM Macau’s EBITDA to register 9% YoY growth next year. MGM Macau: property EBITDA and property EBITDA margin


Cotai project may be the most meaningful for MGM

In 3Q12, MGM received approval from the Macau Government for the concession of a site in Cotai. The company has identified a site of approximately 17.8 acres, which is in the middle of Sands Cotai Central and Wynn Cotai. The construction work would take around 36 months, according to the company. The company’s total planned budget for this project is around USD2.5bn (HKD19.5bn) for an integrated casino resort, featuring 500 gaming tables, 2,500 slots and 1,600 hotel rooms. As we expect the Cotai project to open in late 2016/early 2017, we have yet to assign a value for the new property in our model. Ostensibly, among all the peninsula properties that have new projects coming to market in the next 5-6 years, we think MGM may see the largest incremental impact in the number of tables and room count. The operator’s new Cotai project should increase its total table count by over 110% and its room count by over 300%.

Macau Gaming Sector: new gaming tables planned

Operator Project Planned opening

date Current number of

gaming tables

Number of tables planned in pending projects & increase

vs. current

Galaxy

Galaxy Macau Phase II mid-2015 810 500 62%

Melco Studio City Phase I mid-2015 630 500 79%

Wynn Wynn Cotai early-2016 490 500 102% SJM SJM Cotai late-2016/early-2017 1,780 700 39% MGM MGM Cotai late-2016/early-2017 430 500 116% Source: Company, Daiwa estimates

Strong balance sheet, but not the sector’s best yield stock, in our view

We assume capex for MGM of HKD4.3bn (USD0.5bn) and HKD7.5bn (USD0.9bn) for 2013 and 2014, respectively. Consequently, we expect a decline in its dividend payouts until its capex commitments are resolved. We still expect the company to pay dividends going forward, however, considering its strong net cash position (HKD5bn as at 30 June 2012) and sound operating cash flow. Taking into account the company’s capital commitment of USD2.5bn for the new Cotai project over the next three years, we think a DPS of HKD0.50 is reasonable to expect for 2013E, which implies a 3.5% dividend yield at MGM’s current share price.

1.2

2.8

5.0 5.5

6.0

0%

5%

10%

15%

20%

25%

30%

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

2009 2010 2011 2012E 2013E

Property EBITDA (LHS) Property EBITDA margin (RHS)

(HKDbn)


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We prefer SJM as a yield stock, which we believe offers a more visible payout ratio due to: 1) its stronger balance sheet, 2) a formal dividend payout policy, and 3) higher dividend yields for 2012E and 2013E based on our DPS forecasts and at the current share price.

Macau Gaming Sector: FCF and dividend yield Free cash flow yield % Dividend yield % Company 2012E 2013E 2012E 2013E Galaxy 5.0 6.0 n.a. n.a. Melco 3.6 0.2 n.a. n.a. MGM 9.2 3.4 5.8 3.5 Sands 2.4 5.5 3.9 4.4 SJM 6.3 6.0 5.5 6.0 Wynn 5.7 3.1 5.1 3.0 Average 5.4 4.0 5.1 4.2 Source: Company, Daiwa forecasts

Daiwa forecasts

Our revenue and earnings forecasts for MGM are driven by our underlying assumptions for the following categories:



• Its VIP and mass gaming revenue mix

• Our analysis of market-share movements per property in the sector.

We forecast MGM to deliver revenue growth of 8% YoY for 2013, and expect its overall gaming revenue market share to decline from 11% in 2011 to 10% in 2013E. MGM: revenue and YoY revenue growth


We expect MGM’s EBITDA margin to improve slightly over 2012-13, on the back of its table optimisation measures. We forecast the company’s EBITDA to grow by 9% YoY for 2013.

MGM: EBITDA and EBITDA margin


As noted above, our capex forecasts are HKD4.3bn and HKD7.5bn for 2013 and 2014, respectively, mainly for the company’s investment in its Cotai project. We believe the capex will be covered by the company’s strong operating cash flow generation that we expect over the same period (HKD11.7bn in total for 2012E and 2013E) and sound cash on hand (HKD7.3bn as at the end of 3Q12).

Valuation

The MGM stock has traded at an average discount of 18% to the sector average’s one-year-forward EV/EBITDA multiple since its listing in 2010. We believe this reflects investors’ concerns over MGM’s potential market-share loss going forward. In our view, unless the company can deliver a significant recovery in its market share, its valuation discount is unlikely to narrow any time soon. Fundamentally, a significant recovery in revenue and EBITDA market share is unlikely. We assign a 9.0x target EV/EBITDA multiple to value MGM, in line with its discount to the sector’s average EV/EBITDA multiple since its listing in 2011. Of note, we believe MGM’s share price downside may be protected to a certain extent by the company’s solid cash flow-generating capabilities and healthy balance sheet. We initiate coverage with a Hold (3) rating and six-month target price of HKD13.80. Catalysts and risks The key upside potential to our call could be higher-than-expected win rates. The main downside risks would include faster-than-expected market-share loss and more aggressive revenue-share schemes with junkets to protect its market share.

0%

10%

20%

30%

40%

50%

60%

70%

0

5

10

15

20

25

2009 2010 2011 2012E 2013E

Revenue (LHS) YoY growth (RHS)

(HKDbn)

15.3%

22.8% 24.3% 24.7% 25.0%

0%

5%

10%

15%

20%

25%

30%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2009 2010 2011 2012E 2013E


(HKDbn)


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MGM: EV/EBITDA based valuation (HKDm) 2013E EBITDA 5,713 Target EV/EBITDA multiple 9.0x Enterprise value 51,419 Gross cash 6,404 Total debt 5,500 Net cash 904 Equity value 52,323 Number of shares (m) 3,800 Target price (HKD) 13.80 Source: Daiwa estimates and forecasts

MGM: EV/EBITDA multiple MGM: EV/EBITDA valuation premium/discount to sector


Macau Gaming Sector: valuation summary

Bloomberg Share price as at Nov-5 Market cap Daiwa EV/EBITDA

EBITDA growth YoY (%) PER Div. yield (%) FCF yield (%)

Company code (local cur.) (USDbn) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy* 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco Crown* MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM China* 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands China* 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM* 880 HK 17.92 12.8 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn Macau* 1128 HK 23.35 15.5 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg (US companies), *Daiwa forecasts (Macau companies)

6

8

10

12

14

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-1

2

(x)avg: 9.0xsd+1: 10.4xsd-1: 7.6x

(35%)

(30%)

(25%)

(20%)

(15%)

(10%)

(5%)

0%

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-1

2

avg: -18%


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MGM Macau: property model (HKDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling-chip volume 164,373 173,549 179,515 184,200 701,305 173,464 162,839 170,536 185,174 692,012 829,897 YoY change 94.0% 110.4% 83.0% 29.4% 72.1% 5.5% -6.2% -5.0% 0.5% -1.3% 19.9% Sequential change 15.4% 5.6% 3.4% 2.6% -5.8% -6.1% 4.7% 8.6% win rate 2.90% 3.10% 2.90% 3.20% 3.00% 3.20% 3.30% 3.00% 2.85% 3.06% 2.85% VIP gross revenue 4,779 5,420 5,206 5,905 21,244 5,528 5,320 5,070 5,277 21,195 23,652 YoY change 92.8% 153.3% 99.8% 27.2% 79.1% 15.7% -1.8% -2.6% -10.6% -0.2% 11.6% Sequential change 3.0% 13.4% -4.0% 13.4% -6.4% -3.8% -4.7% 4.1% Number of VIP tables 191 194 194 210 200 218 217 213 227 219 247 Average rolling chip per VIP table per day (HKDm) 9.56 9.83 10.06 9.53 9.61 8.74 8.25 8.70 8.87 8.64 9.21 YoY change 72.7% 84.4% 60.4% 15.8% 54.6% -8.6% -16.1% -13.5% -7.0% -9.2% -0.9% Sequential change 16.1% 2.8% 2.3% -5.2% -8.3% -5.7% 5.5% 1.9% Average win per VIP table per day (HKD) 278,400 306,500 274,600 305,600 291,500 278,100 270,000 258,300 252,703 264,732 262,349 YoY change 71.8% 121.6% 64.8% 13.6% 54.6% -0.1% -11.9% -5.9% -17.3% -9.2% -0.9% Sequential change 3.5% 10.1% -10.4% 11.3% -9.0% -2.9% -4.3% -2.2% Non-rolling chip drop 4,154 4,220 4,309 4,401 17,095 4,677 4,521 4,772 4,707 18,676 18,709 YoY change 21.4% 20.7% 13.0% 13.2% 17.0% 12.6% 7.1% 10.7% 6.9% 9.2% 0.2% Sequential change 6.8% 1.6% 2.1% 2.1% 6.3% -3.3% 5.6% -1.4% win rate 26.6% 27.8% 26.0% 26.6% 26.7% 27.5% 30.4% 29.6% 27.0% 28.6% 28.0% Mass table gross revenue 1,105 1,177 1,120 1,171 4,566 1,286 1,375 1,413 1,271 5,344 5,239 YoY change 46.7% 43.3% 27.7% 17.9% 32.6% 16.4% 16.8% 26.1% 8.5% 17.0% -2.0% Sequential change 11.2% 6.6% -4.8% 4.5% 9.8% 6.9% 2.8% -10.0% Number of mass tables 232 219 219 214 220 208 209 193 199 202 179 Average non-rolling chip drop per mass table per day (HKD) 198,965 211,734 213,867 223,546 212,895 247,082 237,691 268,760 257,077 252,300 286,360 YoY change 46.4% 51.7% 37.0% 21.0% 22.3% 28.8% 22.5% 41.0% 16.9% 18.5% 13.5% Sequential change 7.5% 11.7% -4.6% 5.5% 14.5% 6.3% 9.8% -12.6% Average win per mass table per day (HKD) 52,800 59,000 56,300 59,400 56,800 68,000 72,300 79,400 69,411 72,188 80,181 YoY change 46.4% 51.7% 37.0% 21.0% 38.2% 28.8% 22.5% 41.0% 16.9% 27.1% 11.1% Sequential change 7.5% 11.7% -4.6% 5.5% 14.5% 6.3% 9.8% -12.6% Table gaming gross revenue 5,884 6,598 6,326 7,076 25,810 6,813 6,695 6,482 6,548 26,539 28,891 YoY change 82.0% 122.8% 81.6% 25.6% 68.6% 15.8% 1.5% 2.5% -7.5% 2.8% 8.9% Number of tables 423 413 413 424 420 426 426 406 426 421 426 Average win per table per day (HKD) 154,552 175,550 166,498 181,405 168,364 175,749 172,700 173,551 167,081 172,233 185,804 Slot handle 7,091 6,867 6,700 7,676 28,354 9,015 9,542 9,187 8,827 36,571 40,960 slot hold rate 5.8% 5.5% 5.3% 5.9% 59.9% 5.5% 5.8% 5.6% 5.5% 29.0% 12.0% Slot machine gross revenue 410 375 355 449 1,590 491 554 513 485 2,044 2,253 YoY change 119.3% 68.1% 41.5% 35.6% 60.2% 19.8% 47.6% 44.5% 8.2% 28.6% 10.2% Number of slot machines 1,126 1,158 1,126 1,267 1,184 1,242 1,252 1,262 1,262 1,255 1,252 Average win per slot per day (HKD) 4,000 3,600 4,300 3,800 3,700 4,300 4,900 4,400 4,181 4,452 4,930 Gross gaming revenue 6,294 6,973 6,681 7,525 27,400 7,304 7,249 6,996 7,034 28,583 31,143 Commission, rebate and discount (1,711) (1,857) (1,900) (2,029) (7,435) (1,933) (1,821) (1,931) (1,953) (7,637) (8,586)


Net gaming revenue (NGR) 4,584 5,118 4,782 5,496 19,965 5,371 5,428 5,065 5,081 20,945 22,558 Non-gaming revenue 82 80 74 79 329 77 77 89 82 325 315 Property revenue 4,666 5,197 4,856 5,575 20,294 5,448 5,505 5,154 5,163 21,270 22,872 YoY change 77.7% 113.2% 69.2% 23.8% 63.2% 16.8% 5.9% 6.1% -7.4% 4.8% 7.5% Sequential change 3.6% 11.4% -6.6% 14.8% -2.3% 1.1% -6.4% 0.2% Property EBITDA 1,147 1,326 1,181 1,366 5,046 1,382 1,555 1,235 1,317 5,489 5,993 YoY change 105.8% 171.6% 77.9% 21.8% 78.3% 20.5% 17.3% 4.5% -3.6% 8.8% 9.2% Sequential change 2.2% 15.6% -10.9% 15.6% 1.2% 12.6% -20.6% 6.6% Property EBITDA margin (IFRS) 18.0% 18.8% 17.5% 18.0% 18.2% 18.7% 21.2% 17.4% 18.5% 19.0% 19.0% Property EBITDA margin (US GAAP) 24.6% 25.5% 24.3% 24.5% 24.9% 25.4% 28.3% 24.0% 25.5% 25.8% 26.2% Property ROI 11.8% 13.6% 12.1% 14.0% 51.8% 14.2% 16.0% 12.7% 13.5% 56.3% 61.5% Normalised ROI 10.9% 9.1% 11.2% 7.4% 41.0% 7.9% 8.4% 10.0% 13.5% 41.2% 61.5% Source: Company, Daiwa forecasts


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Appendix

MGM: key management profile Name Age Position Experience Pansy Catilina Chiu King Ho 49 Chairperson and Executive Director Ms. Ho is the Managing Director of Shun Tak Holdings (since 1999), Director of MGM Grand Paradise

(since June 2005), and a Member of Macau Government SAR Tourism development committee. James Joseph Murren 50 Co-chairperson and Executive Director Mr. Murren is also the President, Chairman of the Corporate Board and Chief Executive Officer of

MGM Resorts International (since 2008). Chen Yau Wong 58 Executive Director Mr. Wong is also the director of MGM Grand Paradise (since 2007). William Joseph Hornbuckle 54 Executive Director Mr. Hornbuckle is the Chief Marketing Officer for MGM Resorts International. In this role, he provides

corporate oversight for all marketing functions across MGM Resorts International’s properties, including its joint venture operations with MGM Macau.

Grant R. Bowie 54 CEO and Executive Director Mr. Bowie has over 20 years of experience working in the hospitality industry. Source: Company

MGM: current shareholding structure

Source: Company

MGM Macau

Source: Company

MGM Resorts

MGM China

Public

51.0% 21.6%

Pansy Ho

27.4%


Investment case

We think the addition of gaming table capacity in Cotai, in an effort to lure gamers away from the Macau Peninsula, has taken a toll on Wynn’s market share as the company has seen its gaming revenue market share drop for the past three quarters. Meanwhile, Galaxy Macau has been the key in raising Cotai’s market share, and we expect this to continue as that property’s gaming revenue growth keeps ramping up. In the next 6-12 months, we expect Sands Cotai Central (SCC) to help win market share from the peninsula. With Galaxy Macau and SCC positioned at the helm of the VIP and mass-market segments, respectively, we believe it will be difficult for Wynn to maintain its market share with no presence in Cotai and a conservative junket revenue-sharing policy. The company has been lauded by

investors for its ability to maintain profitability. We contend, however, that its EBITDA margin stability is beginning to look less appealing when its peers are expanding their EBITDA margins through: 1) table redesignation, 2) increasing the proportion of mass-market revenue, and 3) attracting high-quality premium mass gamers. We expect Wynn to achieve less-than-sector average growth in both gaming revenue and EBITDA for 2013, implying continued EBITDA market-share deterioration.

Catalysts We suggest investors avoid looking at monthly gaming-revenue market-share movement, as short-term numbers are highly sensitive to win rates. Long term, we expect gradual losses in EBITDA market share, which measures the true underlying performance.

Valuation While we believe Wynn’s strong track record warrants an EV/ EBITDA premium to the sector average, we think this premium will narrow gradually as losses in market share persist. We initiate coverage with an Underperform (4) rating and six-month target price of HKD19.30 based on a 2013E target EV/ EBITDA multiple of 12.0x, a

10% premium to our sector target multiple of 11x.

Risks Upside catalysts include a significant recovery in market share and better-than-expected special dividend.


6 November 2012

Wynn Macau

Initiation: light at the end of a very long tunnel

• Wynn is likely to keep losing market share until catalysts emerge in 2016

• Strategies to maximise table yields may be capped over the near term due to the already optimized status

• Previous valuation premium to the sector expected to narrow; coverage initiated with an Underperform (4) rating



Wynn Macau1128 HK



BuyOutperformHoldUnderperform (initiation)

Sell

1

2

3

4

5

70

80

90

100

110

14

17

20

22

25



Wynn Macau (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 14.80-24.90Market cap (USDbn) 15.633m avg daily turnover (USDm) 14.72Shares outstanding (m) 5,188Major shareholder Wynn Resorts (72.3%)

Financial summary (HKD)Year to 31 Dec 12E 13E 14ERevenue (m) 28,836 30,726 32,150Operating profit (m) 6,831 7,358 7,798Net profit (m) 6,632 7,172 7,454Core EPS (fully-diluted) 1.278 1.382 1.437EPS change (%) 12.0 8.1 3.9Daiwa vs Cons. EPS (%) 0.2 (2.1) (9.1)PER (x) 18.3 16.9 16.3Dividend yield (%) 5.1 3.0 1.8DPS 1.200 0.691 0.431PBR (x) 27.3 15.0 9.1EV/EBITDA (x) 15.3 14.4 13.7ROE (%) n.a. n.a. 69.9

Bing Zhou(852) 2773 8782

[email protected]

Cris Xu(852) 2773 8736

[email protected]



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Growth outlook Wynn: EBITDA and EBITDA margin

We forecast Wynn’s EBITDA to rise by 7% YoY for 2013, in line with the company’s revenue growth over the period. We expect the company’s gaming-revenue mix to be relative stable over the next few years. With little room for Wynn to lift average win per table per day through a table redesignation strategy, we believe it will be difficult for the company to enhance its EBITDA margin going forward.


Valuation Wynn: 12-month forward EV/EBITDA multiple

We believe the stock still deserves to trade at an EV/EBITDA multiple premium to the sector average due to its proven track record in maintaining profitability, but that less of a premium is now justified, given that market-share pressure is likely to persist in terms of both gaming revenue and EBITDA. We expect the premium to narrow further going forward, and therefore assign a 12.0x target EV/EBITDA multiple to Wynn.


Earnings revisions Wynn: Consensus EBITDA forecasts

While the Bloomberg consensus has revised down Wynn’s EBITDA by 14% for 2013 since January 2012, respectively, we still see further downside given the likelihood of further market-share losses. Our 2013 EBITDA forecast is therefore 4% lower than the Bloomberg consensus.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

23.0%

26.2%27.0% 27.1% 27.1%

20%

22%

24%

26%

28%

0.0

3.0

6.0

9.0


(HKDbn)

6

8

10

12

14

16

18

20

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 12.5xsd+1: 15.0xsd-1: 10.0x

7.5

8.0

8.5

9.0

9.5

10.0

10.5

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-1

2


(HKDbn)

BuyOutperformHoldUnderperform (initiation)

Sell

1

2

3

4

5


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Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EWynn Macau property EBITDA (HKDm) 2,840 3,790 3,916 6,963 9,331 9,097 9,617 10,063Wynn Macau property EBITDA margin (%) 26.2 25.8 27.8 31.0 31.6 31.5 31.3 31.3

Wynn Macau ROI (%) 20.8 27.8 28.7 51.0 68.4 66.6 70.5 73.7Wynn Macau normalized ROI (%) 19.1 26.3 28.2 48.6 66.7 67.4 70.5 73.7

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EGaming 10,198 13,883 13,186 21,058 27,756 27,144 28,940 30,323Non-gaming 660 827 891 1,381 1,742 1,692 1,786 1,827Other Revenue 0 0 0 0 0 0 0 0Total Revenue 10,858 14,711 14,077 22,439 29,498 28,836 30,726 32,150Other income 0 0 0 0 0 0 0 0COGS (5,068) (7,004) (6,742) (10,811) (14,364) (13,844) (14,771) (15,428)SG&A (4,352) (5,375) (4,920) (6,931) (9,151) (8,161) (8,597) (8,924)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 1,438 2,331 2,414 4,697 5,982 6,831 7,358 7,798Net-interest inc./(exp.) (38) (226) (312) (253) (210) (190) (168) (322)Assoc/forex/extraord./others (9) (123) (29) 23 122 0 0 0Pre-tax profit 1,392 1,982 2,074 4,466 5,894 6,641 7,190 7,476Tax (17) 57 (6) (44) 27 (8) (18) (22)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 1,375 2,040 2,069 4,422 5,921 6,632 7,172 7,454Net profit (adjusted) 1,375 2,040 2,069 4,422 5,921 6,632 7,172 7,454EPS (reported)(HKD) 0.275 0.408 0.410 0.852 1.141 1.278 1.382 1.437EPS (adjusted)(HKD) 0.275 0.408 0.410 0.852 1.141 1.278 1.382 1.437EPS (adjusted fully-diluted)(HKD) 0.275 0.408 0.410 0.852 1.141 1.278 1.382 1.437DPS (HKD) 0.000 1.604 0.195 0.760 1.200 1.200 0.691 0.431EBIT 1,438 2,331 2,414 4,697 5,982 6,831 7,358 7,798EBITDA 2,449 3,138 3,242 5,876 7,951 7,828 8,336 8,768

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014EProfit before tax 1,392 1,982 2,074 4,466 5,894 6,641 7,190 7,476Depreciation and amortisation 484 697 718 990 1,016 887 868 861Tax paid (613) 0 (21) (7) (16) (16) (18) (22)Change in working capital 449 (115) 1,330 1,004 1,608 252 191 (35)Other operational CF items 703 605 416 425 914 279 282 439Cash flow from operations 2,414 3,170 4,517 6,878 9,417 8,042 8,514 8,719Capex (2,210) 0 (12,561) (963) (445) (1,082) (4,780) (6,340)Net (acquisitions)/disposals (102) (1,533) (2,246) (21) (623) 0 (0) 0Other investing CF items 4,868 13 (151) (31) (438) (53) (195) (182)Cash flow from investing 2,556 (1,520) (14,958) (1,016) (1,506) (1,135) (4,976) (6,522)Change in debt 419 3,900 0 (3,117) (187) (1,603) 2,300 3,500Net share issues/(repurchases) 0 0 14,490 0 1 0 0 0Dividends paid 0 (8,320) (1,009) (3,943) (6,225) (6,226) (3,586) (2,236)Other financing CF items (331) (219) (355) (213) (196) (241) (226) (393)Cash flow from financing 87 (4,639) 13,126 (7,272) (6,608) (8,070) (1,512) 870Forex effect/others 0 0 0 0 0 0 0 0Change in cash 5,058 (2,989) 2,685 (1,410) 1,304 (1,163) 2,026 3,067Free cash flow 204 3,170 (8,044) 5,915 8,972 6,960 3,734 2,379

Financial summary


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Key ratios (%)


Company profile

Wynn Macau is one of the six gaming operators in Macau, and operates the Wynn Macau and Encore. Since opening in 2006, Wynn Macau has established a strong premium-market position, and achieved above-industry-level net wins per table and slot machine. Encore opened in 2010. The company's Cotai project is under construction and expected to open in early-2016.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ECash & short-term investment 5,534 2,544 5,229 3,819 5,261 4,298 6,528 9,595Inventory 114 199 203 174 180 166 203 247Accounts receivable 342 208 325 485 750 721 797 815Other current assets 133 166 161 431 111 302 302 302Total current assets 6,124 3,118 5,918 4,910 6,302 5,486 7,830 10,960Fixed assets 6,384 7,047 8,528 8,352 7,693 7,916 11,848 17,347Goodwill & intangibles 401 398 398 398 398 398 398 398Other non-current assets 644 553 747 688 2,967 2,689 2,424 2,365Total assets 13,553 11,117 15,592 14,348 17,360 16,489 22,501 31,070Short-term debt 0 0 0 0 2,303 1,200 2,000 3,000Accounts payable 730 487 727 1,018 1,050 1,026 1,217 1,130Other current liabilities 1,647 1,711 2,826 3,963 5,972 6,664 6,912 7,165Total current liabilities 2,377 2,198 3,553 4,981 9,325 8,890 10,129 11,295Long-term debt 4,045 7,973 8,017 4,950 2,501 2,000 3,500 6,000Other non-current liabilities 162 208 251 121 1,505 1,154 820 486Total liabilities 6,584 10,379 11,821 10,051 13,332 12,044 14,449 17,781Share capital 0 0 1,929 158 159 159 159 159Reserves/R.E./others 6,970 738 1,842 4,139 3,870 4,287 7,893 13,131Shareholders' equity 6,970 738 3,771 4,297 4,028 4,445 8,051 13,289Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 13,553 11,117 15,592 14,348 17,360 16,489 22,501 31,070EV 119,650 126,568 123,927 122,270 120,682 120,042 120,111 120,544Net debt/(cash) (1,489) 5,429 2,788 1,131 (457) (1,098) (1,028) (595)BVPS (HKD) 1.394 0.142 0.727 0.828 0.777 0.857 1.552 2.562

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014ESales (YoY) 373.4 35.5 (4.3) 59.4 31.5 (2.2) 6.6 4.6EBITDA (YoY) 622.0 28.1 3.3 81.2 35.3 (1.6) 6.5 5.2Operating profit (YoY) n.a. 62.1 3.6 94.5 27.4 14.2 7.7 6.0Net profit (YoY) (76.6) 48.4 1.4 113.8 33.9 12.0 8.1 3.9Core EPS (fully-diluted) (YoY) (76.6) 48.4 0.6 107.7 33.9 12.0 8.1 3.9Gross-profit margin 53.3 52.4 52.1 51.8 51.3 52.0 51.9 52.0EBITDA margin 22.6 21.3 23.0 26.2 27.0 27.1 27.1 27.3Operating-profit margin 13.2 15.8 17.2 20.9 20.3 23.7 23.9 24.3ROAE 21.9 52.9 91.8 109.6 142.2 156.5 114.8 69.9ROAA 10.8 16.5 15.5 29.5 37.3 39.2 36.8 27.8ROCE 14.2 23.6 23.6 44.7 66.2 82.9 69.4 43.5ROIC 29.7 40.0 37.8 77.6 133.0 197.2 141.5 78.9Net debt to equity n.a. 736.1 73.9 26.3 n.a. n.a. n.a. n.a.Effective tax rate 1.2 n.a. 0.3 1.0 n.a. 0.1 0.2 0.3Accounts receivable (days) 8.4 6.8 6.9 6.6 7.6 9.3 9.0 9.2Current ratio (x) 2.6 1.4 1.7 1.0 0.7 0.6 0.8 1.0Net interest cover (x) 38.1 10.3 7.7 18.5 28.4 35.9 43.9 24.3Net dividend payout 0.0 393.2 47.4 89.2 105.1 93.9 50.0 30.0



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Light at the end of a very long tunnel

We believe Wynn’s EV/EBITDA premium will narrow, given the company’s difficulty in retaining gaming-revenue market share and the few options it has to enhance overall profitability.

Not as good as before

Wynn has demonstrated excellent execution and premium brand equity, in our view. The company’s anchor property, which opened to the public in September 2006 on the Macau Peninsula, saw rapid market-share gains in gaming revenue and tremendous property EBITDA margin expansion over 2007-11. We believe this justified the stock’s EV/EBITDA premium over the sector average in the past few years. Wynn Macau: gaming revenue market share and property

EBITDA margin


However, the new gaming table capacity added in Cotai, which has lured gamers away from the Macau Peninsula, has adversely affected Wynn’s gaming-revenue market share. The company’s gaming-revenue market share fell from 14% for 1Q11 to 12% for 2Q12. Under the current market conditions, we believe Wynn is no longer in the best position to gain market share, in either gaming revenue or EBTIDA, given the following:

• Wynn currently has no presence in Cotai and cannot benefit from the shift in gamer traffic from the Macau Peninsula to Cotai over the near term.

• The marginal benefits from the redesignation of tables, as the average EBITDA per table variance between VIP and mass-market tables has already been optimized.

• Maintaining profitability is part of Wynn’s core management philosophy, such that the company is unlikely to lift its commissions or rebates to junkets or players aggressively in order to retain market share.

Quite close to the ceiling

Recalling our investment thesis on table optimisation in the sector part of this report, we believe that when productivity per table between VIP and mass-market players reaches a certain level, table optimisation becomes crucial in maximising property profitability. Unfortunately, our analysis reveals that Wynn’s current table mix is at an optimal level, as the property’s average win per VIP table to mass-market table ratio is 3x, and thus we see little room for improvement here. In other words, unlike Galaxy, Sands and Melco, it will be difficult for Wynn to enhance its EBITDA margin through table redesignation over the near term, in our view.

Average win per VIP table to mass table ratio Operator Property 2009 2010 2011 1H12 Sands Venetian Macao 3.1 3.1 3.1 3.1



Galaxy Macau 13.8 6.6 MGM MGM Macau 5.0 4.6 5.1 3.7 Source: Company, Daiwa estimates

Profitability is Wynn’s core philosophy

Wynn has been very strict about commission payouts and has the highest direct-VIP business in Macau. We understand that maintaining profitability is one of the core philosophies of Wynn’s management, thus we believe it is unlikely that the company would raise commissions or rebates significantly to junkets or VIP players to retain market share. Having said that, we expect the company’s gaming-revenue market share to decline over the next few years.

20%

25%

30%

35%

0%2%4%6%8%

10%12%14%16%18%

2006 2007 2008 2009 2010 2011

Gaming revenue market share Property EBITDA margin


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While the company may be able to maintain its EBITDA margin, we believe it will not be able to prevent a decline in EBITDA market share since the peers are expanding their EBITDA margin, based on our forecasts. We therefore forecast Wynn’s contribution to the industry’s incremental EBITDA to decline from 21% in 2010 to 6% in 2013. Wynn: gaming revenue market share


Wynn: contribution to industry’s incremental EBITDA


Wynn Cotai due to open ahead of the Lunar New Year in 2016

Wynn obtained land-concession contract approval from the Macau authorities for its Cotai project (Wynn Cotai), ahead of its competitors, MGM and SJM. The company plans to set up an integrated resort with 2,000 hotel rooms, featuring a casino with 500 tables and 1,000 slots. According to the latest update from management during the 3Q12 results conference call, it aims to start piling by November 2013, with the property opening by the Lunar New Year in 2016. The total capex for Wynn Cotai is about USD3.5-4.0bn. We believe this will be well-covered by the company’s existing credit facility and cash on hand. In our opinion, it is too early to include Wynn’s Cotai intrinsic value into our valuation, even though the property is likely to become Wynn’s next revenue growth engine.

Not the best dividend play

Wynn Resorts, Wynn’s parent company listed in the US, just announced a USD8 dividend per share (USD6 special dividend and USD2 regular dividend) for 9M12, and will increase its quarterly regular dividend payout from USD0.5 per share to USD1.0 per share. Wynn Resorts’ total payout for 2012 would accordingly be around USD800m. The dividend Wynn pays to Wynn Resorts represents the major source of Wynn Resorts’ funding in paying dividends. Referring to the case in 2011, the special dividend paid from Wynn to Wynn Resorts accounted for around 85% of Wynn Resorts’ dividend payout over 2011. We expect Wynn’s dividend to increase to HKD1.2 per share, which would account for 75% of Wynn Resorts’ dividend payout for 2012, implying a 5% dividend yield in 2012. However, we believe this high dividend payout will only have a short-term positive impact and will not be warranted going forward due to:

• Despite the lift in quarterly regular dividend, the Bloomberg consensus dividend per share for Wynn Resorts for 2013E is only USD4.0, which is lower than the 2012’s USD9.5.

• We expect Wynn’s free cash flow to decline substantially once the capex for the Cotai project starts to kick in. Based on our forecasts, the company will spend USD600m for its Cotai project in 2013, with its free cash flow yield dropping from 5.9% in 2012 to 3.2% in 2013.

Instead, we prefer SJM as a better dividend play, given SJM’s strong balance sheet and reliable dividend yield.

Macau gaming sector: free cash flow and dividend yield Free cash flow yield % Dividend yield % 2012E 2013E 2012E 2013E Galaxy 5.0 6.0 n.a. n.a. Melco 3.6 0.2 n.a. n.a. MGM 9.2 3.4 5.8 3.5 Sands 2.4 5.5 3.9 4.4 SJM 6.3 6.0 5.5 6.0 Wynn 5.7 3.1 5.1 3.0 Average 5.4 4.0 5.1 4.2 Source: Company, Daiwa forecasts

8%

10%

12%

14%

16%

18%

2009 2010 2011 2012E 2013E

overall VIP Mass-market

21%

15%

-3%

6%

(5%)

0%

5%

10%

15%

20%

25%

2010 2011 2012E 2013E


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Daiwa forecasts

Our forecasts are driven by underlying assumptions in the following areas.

• Average rolling chip volume/ non-rolling drop per table per day.

• Implied normalised ROI per property.

• The VIP and mass-gaming revenue mix.

• Cross-checking with market-share movements per property.

The revenue-growth rate we forecast for 2013, of 7% YoY, is lower than the industry average, due to our expectation of continued market-share losses to its peers’ Cotai properties. Wynn: revenue


We forecast Wynn’s EBITDA to rise by 7% YoY for 2013, in line with the revenue growth we expect over the period. We believe the company’s gaming-revenue mix will be relatively stable over the next year. With very little room for Wynn to raise average productivity per table through a table-redesignation strategy, we believe it will be difficult for the company to enhance its EBITDA margin going forward.

Wynn: EBITDA and EBITDA margin


Valuation

The stock has been trading at an average EV/EBITDA premium of 22% to the sector average since 2010. The premium started to narrow this year, which we believe reflects rising concerns about Wynn’s market share in the future. While in our opinion the stock still deserves to trade at a premium given its proven track record, we believe a lower premium than that of the past few years is now justified, given that market-share pressure is likely to persist in terms of both gaming revenue and EBITDA. Meanwhile, we expect the premium to narrow further going forward. We assign a 12.0x target EV/EBITDA multiple to Wynn. We initiate coverage of the stock with an Underperform (4) rating and six-month target price of HKD19.30. Risks The upside catalysts include a significant recovery in market share and a better-than-expected special dividend.

Wynn: EV/EBITDA-based valuation (HKDm) 2013E EBITDA 8,336 Target EV/EBITDA multiple (x) 12.0x Enterprise value 100,028 Gross cash 6,019 Total debt 5,500 Net cash / (debt) 519 Equity value 100,548 Number of shares (m) 5,188 Target price (HKD) 19.30 Source: Daiwa forecasts

14.1

22.4

29.5 28.8 30.7

(10%)

0%

10%

20%

30%

40%

50%

60%

70%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


(HKDbn)

23.0%

26.2%27.0% 27.1% 27.1%

20%

22%

24%

26%

28%

0.0

3.0

6.0

9.0


(HKDbn)


- 94 -

Wynn: 12-month forward EV/EBITDA multiple Wynn: EV/EBITDA multiple premium to sector

Source: Bloomberg, Companies, Daiwa forecasts Source: Bloomberg, Companies, Daiwa forecasts



growth YoY (%) PER Div. yield (%) FCF yield (%) Company code (local cur.) (USDbn) Rating 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E Macau Galaxy 27 HK 28.80 15.6 Buy 12.3 9.8 67.2 18.3 16.6 13.6 n.a. n.a. 5.0 6.0 Melco MPEL US 14.90 8.2 Outperform 10.6 9.3 8.7 13.8 20.6 17.5 n.a. n.a. 3.6 0.2 MGM 2282 HK 14.14 6.9 Hold 9.7 9.2 6.5 8.7 11.7 11.8 5.8 3.5 9.2 3.4 Sands 1928 HK 31.60 4.2 Outperform 18.5 13.7 17.5 32.9 30.4 18.3 3.9 4.4 2.4 5.5 SJM 880 HK 17.92 12.8 Hold 10.8 9.9 7.6 8.0 15.5 14.3 5.5 6.0 6.3 6.0 Wynn Macau 1128 HK 23.35 15.5 Underperform 15.3 14.4 (1.6) 6.5 18.3 16.9 5.1 3.0 5.7 3.1 Macau - simple average 12.9 11.1 17.6 14.7 18.9 15.4 5.1 4.2 5.4 4.0 US Las Vegas Sands LVS US 44.39 36.5 NR 12.2 10.2 8.4 16.5 19.9 16.6 2.5 2.8 3.1 6.5 Wynn Resorts WYNN US 111.52 11.2 NR 9.9 9.2 0.1 7.3 20.6 18.4 8.4 3.6 10.4 7.6 MGM Resorts MGM US 10.10 4.9 NR 10.5 9.5 (11.0) 7.9 n.a. n.a. 0.0 0.0 8.6 4.6 US - simple average 10.9 9.6 (0.8) 10.5 20.2 17.5 3.6 2.1 7.4 6.2 Source: Bloomberg forecasts for non-rated stocks, Daiwa forecasts for rated stocks

Note: prices as of close on 5 November 2012

6

8

10

12

14

16

18

20

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

(x)avg: 11.5x sd+1: 13.7xsd-1: 9.3x

0%

10%

20%

30%

40%

50%

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-1

2

avg: 23%


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Wynn Macau: property model (USDm) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12E 2012E 2013E Days in operation 90 91 92 92 365 91 91 92 92 366 365 Rolling chip volume 29,300 32,700 31,400 29,700 122,868 33,500 30,300 27,600 29,197 120,597 126,280 YoY change 45.0% 50.7% 44.7% 7.2% 35.2% 14.3% -7.3% -12.1% -1.7% -1.8% 4.7% Sequential change 5.8% 11.6% -4.0% -5.4% 12.8% -9.6% -8.9% 5.8% win rate 2.69% 2.89% 2.95% 3.18% 2.93% 2.59% 2.79% 3.08% 2.85% 2.82% 2.85% VIP gross revenue 788 945 926 944 3,597 868 845 850 832 3,395 3,599 YoY change 44.5% 35.2% 48.2% 8.2% 31.7% 10.1% -10.5% -8.2% -11.9% -5.6% 6.0% Sequential change -9.7% 19.9% -2.0% 2.0% -8.1% -2.6% 0.6% -2.1% Number of VIP tables 263 265 286 295 295 289 290 286 290 290 290 Average rolling chip per VIP table per day (USDm) 1.24 1.36 1.19 1.09 1.14 1.27 1.15 1.05 1.09 1.14 1.19 YoY change 35.7% 35.9% 17.9% -11.7% 9.0% 2.9% -15.3% -12.1% 0.0% -0.4% 5.0% Sequential change -0.1% 9.5% -12.0% -8.3% 16.4% -9.9% -8.6% 4.3% Average win per VIP table per day (USD) 33,298 39,188 35,204 34,800 33,405 32,992 32,034 32,308 31,188 31,988 34,001 YoY change 35.2% 22.0% 20.8% -10.8% 6.2% -0.9% -18.3% -8.2% -10.4% -4.2% 6.3% Sequential change -14.7% 17.7% -10.2% -1.2% -5.2% -2.9% 0.9% -3.5% Non-rolling chip drop 683 690 704 692 2,764 707 672 686 745 2,811 3,223 YoY change 29.2% 25.9% 16.4% 4.4% 18.4% 3.6% -2.7% -2.6% 7.7% 1.7% 14.7% Sequential change 2.9% 1.1% 2.0% -1.7% 2.2% -5.0% 2.1% 8.6% win rate 27.9% 27.8% 26.0% 27.7% 28.4% 30.3% 29.8% 30.8% 30.0% 30.2% 29.0% Mass table gross revenue 190 192 183 192 786 214 200 211 224 849 935 YoY change 62.4% 52.9% 31.6% 26.8% 42.9% 12.6% 4.3% 15.4% 16.6% 8.0% 10.0% Sequential change 25.9% 0.8% -4.6% 4.7% 11.8% -6.6% 5.6% 5.8% Number of mass tables 225 217 212 198 195 201 203 196 203 203 203 Average non-rolling chip drop per mass table per day (USD) 33,704 34,957 36,111 38,005 38,834 38,675 36,367 38,049 39,905 37,828 43,503 YoY change 20.6% 30.0% 19.1% 18.6% 36.6% 14.7% 4.0% 5.4% 5.0% -2.6% 15.0% Sequential change 5.2% 3.7% 3.3% 5.2% 1.8% -6.0% 4.6% 4.9% Average win per mass table per day (USD) 9,403 9,718 9,389 10,527 11,046 11,718 10,837 11,719 11,972 11,433 12,616 YoY change 51.6% 57.8% 34.7% 44.1% 64.9% 24.6% 11.5% 24.8% 13.7% 3.5% 10.3% Sequential change 28.7% 3.3% -3.4% 12.1% 11.3% -7.5% 8.1% 2.2% Table gaming gross revenue 979 1,137 1,109 1,136 4,383 1,082 1,046 1,061 1,056 4,245 4,534 YoY change 47.7% 37.9% 45.2% 11.0% 33.6% 10.6% -8.0% -4.3% -7.1% -3.2% 6.8% Number of tables 488 482 498 493 481 490 493 482 493 493 493 Average win per table per day (USD) 22,281 25,921 24,215 25,051 24,982 24,265 23,306 23,936 23,276 23,524 25,195 Slot handle 1,500 1,500 1,100 1,300 5,390 1,500 1,200 984 1,040 4,724 5,102 slot hold rate 4.9% 5.1% 5.5% 4.9% 28.6% 4.9% 5.4% 5.2% 5.0% -12.4% 8.0% Slot machine gross revenue 73 76 60 64 277 73 64 51 52 240 255 YoY change 47.6% 52.8% 8.0% 12.9% 27.1% -0.2% -15.2% -15.8% -18.9% -13.1% 6.1% Number of slot machines 1,015 1,053 943 930 999 924 939 891 900 950 950 Average win per slot per day (USD) 803 791 696 749 758 871 752 620 628 691 736 Gross gaming revenue 1,052 1,213 1,170 1,200 4,676 1,155 1,110 1,112 1,108 4,503 4,808 Commission and discounts (240) (289) (277) (264) (1,117) (264) (255) (255) (250) (1,023) (1,098)


Net gaming revenue 812 924 893 936 3,558 892 855 857 858 3,480 3,710 Non-gaming revenue 54 53 58 59 223 59 53 53 52 217 229 Property revenue 866 977 951 996 3,782 951 908 910 910 3,697 3,939 YoY change 46.6% 36.7% 41.7% 9.1% 31.5% 9.8% -7.1% -4.3% -8.6% -2.2% 6.6% Sequential change -5.1% 12.8% -2.6% 4.6% -4.5% -4.5% 0.3% -0.1% Property EBITDA 273 314 296 313 1,196 290 302 292 282 1,166 1,233 YoY change 50.2% 45.4% 49.5% 5.5% 34.0% 6.2% -3.9% -1.3% -9.9% -2.5% 5.7% Sequential change -8.1% 15.2% -5.8% 5.8% -7.4% 4.3% -3.3% -3.5% Property EBITDA margin (IFRS) 24.7% 24.8% 24.1% 24.9% 26.0% 23.9% 26.0% 25.1% 24.3% 25.9% 25.6% Property EBITDA margin (US GAAP) 31.5% 32.2% 31.1% 31.5% 31.6% 30.5% 33.3% 32.1% 31.0% 31.5% 31.3% Property ROI 15.6% 18.0% 16.9% 17.9% 68.4% 16.6% 17.3% 16.7% 16.1% 66.6% 70.5% Normalized ROI 18.3% 17.2% 15.1% 12.3% 66.7% 21.5% 18.3% 13.1% 16.1% 67.4% 70.5% Source: Company, Daiwa forecasts


- 96 -

Appendix

Wynn: key management members Name Age Position Experience Stephen A. Wynn 70 Chairman, executive director, CEO and president Mr. Wynn has over 40 years of experience in the gaming casino industry. In 2011, Barron’s

ranked him as one of the world’s 30 best CEOs. Linda Chen 45 Executive director and COO Ms. Chen is responsible for marketing and strategic development. Ian Michael Coughlan 52 Executive director Mr. Coughlan is responsible for the entire operation and development. Source: Company

Wynn: shareholding structure

Source: Company

Wynn Macau

Source: Company

Wynn Resorts

Wynn Macau

Public

72.3% 27.7%


- 97 -

Daiwa’s Asia Pacific Research Directory

HONG KONG Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Head of Product Management

Pranab Kumar SARMAH (852) 2848 4441 [email protected] Regional Head of Research Promotion

Mingchun SUN (852) 2773 8751 [email protected] Head of China Research; Chief Economist (Regional)

Dave DAI (852) 2848 4068 [email protected] Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Chi SUN (852) 2848 4427 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong)

Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking/Diversified Financials (Taiwan)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China)

Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)

Bing ZHOU (852) 2773 8782 [email protected] Consumer/Retail (Hong Kong, China)

Hongxia ZHU (852) 2848 4460 [email protected] Consumer, Pharmaceuticals and Healthcare (China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

John CHOI (852) 2773 8730 [email protected] Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional); Internet (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES Rommel RODRIGO (63) 2 813 7344

ext 302 [email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

Danielo PICACHE (63) 2 813 7344 ext 293

[email protected]

Property; Banking; Transportation – Port

SOUTH KOREA Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy; Banking/Finance

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Anderson CHA (82) 2 787 9185 [email protected] Banking/Finance

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

Shannen PARK (82) 2 787 9184 [email protected] Custom Products Group

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)

Birdy LU (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (PC Hardware)

Chris LIN (886) 2 8758 6251 [email protected] IT/Technology Hardware (Panels)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

Srikanth VADLAMANI (65) 6499 6570 [email protected] Banking (ASEAN)

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)


- 98 -

Daiwa’s Offices

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- 99 -

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India

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Taiwan

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Philippines

This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.

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United Kingdom

This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.


This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany

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Bahrain

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This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States

This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association

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