Reality check: operators’ execution and track records

See important disclosures, including any required research certifications, beginning on page 23 Macau Consumer Discretionary What's new: In this report, we analyse the incremental capacity growth arising from past casino openings, alongside GGR growth, as well as the historical intra-operator market-share swings in GGR. What's the impact: what has history taught us? Increasing gaming capacity was no longer yielding disproportionate GGR growth by the time Sands Cotai Central opened in April 2012. Hence, contrary to the market’s expectations, the industry did not technically “enter” a downcycle in 2H14. Rather, it simply continued on a growth trajectory that began in 2012. We have also studied the market-share swings among operators resulting from the new property openings since Wynn Encore in 2010. Despite Macau’s smaller operating base, lower competition, and bigger magnitude of capacity growth in the past, casino operators/properties have not been successful in growing the market and gaining meaningful incremental GGR market share in a sustainable manner. We question the market’s expectations for new openings this year. As we see it, the street expects the back-to-back openings of Wynn Palace and the Parisian to expand Macau’s gaming market meaningfully, with market share seen shifting in favour of these operators. But this expectation seems unrealistic to us, given the operators’ historical track records, which we examine in detail in this report. On the flip side, the market also appears to have excessively discounted the ability of operators without new openings to defend their respective market shares, particularly in Cotai (ie, Galaxy and Melco Crown). What we recommend: Macau is clearly operating in an environment of increasing costs and mounting competition amid a challenging macro environment (we forecast GGR to fall by 10% YoY in 2016, the lowest estimate on the street and still higher than the 11% decline for January-July 2016). Against this backdrop, we view the street’s forecasts for incremental profitability due to new property openings this year to be far too optimistic. Hence, we remain Negative on the sector, within which Wynn Macau (1128 HK, HKD12.44) stands as our key Sell (5) call with an unchanged 12-month TP of HKD9.50. Post its recent rally (+28% since early July, vs. +8% for the HSI), we also downgrade Sands China (1928 HK, HKD31.80) to Sell (5) from Underperform (4); our 12-month target price of HKD26.30 stands. How we differ: We are among the few brokers to scrutinise the casino operators’ track records and look at past new property openings with a view to assessing prospects for the back-to-back openings scheduled this year. Our Macau gaming GGR growth over 2015-18E remains below consensus, which appears to be pricing in a “build it and they will come” scenario. 17 August 2016 Macau Gaming Sector Reality check: operators’ execution and track records  In this report, we examine the incremental new capacities introduced since 2010 and the resulting GGR growth and market-share shifts...  ...and conclude that the market is overestimating the potential GGR growth resulting from planned new property openings this year  Operators with new openings this year look to have the most scope for disappointment; Sands China joins Wynn Macau on our Sell (5) list Key stock calls Source: Daiwa forecasts Jamie Soo(852) 2773 8529jamie.soo@hk.daiwacm.comAdrian Chan, CFA(852) 2848 4427adrian.chan@hk.daiwacm.comNewPrev.Wynn Macau (1128 HK)RatingSellSellTarget9.509.50Downsideq23.6%Sands China (1928 HK)RatingSellUnderperformTarget26.3026.30Downsideq17.3% 2 Macau Gaming Sector: 17 August 2016 Sector stocks: key indicators Source: Bloomberg, Daiwa forecasts Macau Gaming: monthly gaming revenue ADR (record low against new property openings) Source: DICJ, Company, Daiwa Wynn Macau: historical market-share movements Source: Company, DICJ, Daiwa ShareCompany NameStock codePriceNewPrev.NewPrev.% chgNewPrev.% chgNewPrev.% chgGalaxy Entertainment Group27 HK27.45HoldHold27.4027.400.0%1.1821.1820.0%1.2161.2160.0%Melco Crown EntertainmentMPEL US15.35HoldHold14.5014.500.0%0.5420.5420.0%0.9280.9280.0%MGM China Holdings2282 HK11.74UnderperformUnderperform9.819.810.0%0.5360.5360.0%0.1310.1310.0%Sands China1928 HK31.80SellUnderperform26.3026.300.0%0.1330.133(0.1%)0.1320.135(1.7%)SJM Holdings880 HK5.25HoldHold5.105.100.0%0.3120.3120.0%0.2180.2180.0%Wynn Macau1128 HK12.44SellSell9.509.500.0%0.1310.1310.0%0.0530.0530.0%RatingTarget price (local curr.)FY1EPS (local curr.)FY2778 793 829 751 698 639 579 571 548 529 833 656 647 5006007008009001,0001,1001,2001,3001,4001,500(MOPm/day)GM2 opensStudioCity opensSuccessivere-testing of 3-to-5 year record lows(MOPm/day)SCC opens6-monthrecord lowLower than when SCC opened16%17%14%16%15%12%11%10%10%~9%8%9%10%11%12%13%14%15%16%17%18%1Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q104Q101Q112Q113Q1