Macau: 2018 Outlook - Mass accelerating; Upgrade Sands to Buy

15 January 2018Hotels / Leisure / GamingMacauConsumerHotels / Leisure / GamingIndustry UpdateAsiaChinaHong KongIndustryMacauDate15 January 2018Deutsche BankMarkets ResearchMacau: 2018 Outlook - Massaccelerating; Upgrade Sands to BuyBuy mass share gainers & margin enhancers: Wynn, MGM China & SandsIn 2017, VIP GGR sharply outgrew mass GGR (c.24% yoy vs 13% yoy). For 2018,we think segment growth will converge - VIP growth decelerating to 20% yoywhile mass growth accelerating to 15% yoy. Mass growth and margin expansionwill thus become more important drivers. For 2018, we like mass share gainers(Wynn Macau, MGM China, and Sands) and margin enhancers ( Wynn Macau& Sands). Keep Wynn Macau (Buy) as Top Pick as a special div in March willlikely re-rate the stock. Recommend buying MGM China (Buy) on dips, esp if Cotaiopening on Jan 29th disappoints. Upgrade Sands from Hold to Buy as the keybeneficiary of Macau's mass growth re-acceleration. Lift Sands TP to HK$48.Mass growth accelerating - Accelerating visitor growth with higher min betsIn recent weeks, Macau's visitation growth accelerated from 4.2% yoy in 9M17to 8.6% yoy in Oct-Nov 2017, driven mainly by higher visitations from Mid-WestChina, such as Hunan & Hubei provinces. We believe higher property prices inTier 3 cities have lifted consumer discretionary spending in travel, including tripsto Macau. Our proprietary table count also points to rising average minimum betsin Macau's Big 10 casinos (Fig 13). With the HK-Zhuhai-Macau Bridge operationalby May/June 2018, we forecast that visitation growth will accelerate to 10% yoyafter the bridge opening (Fig 26).VIP growth decelerating - A hiccup or a cyclical turn?Since mid-Dec, VIP yoy growth had sharply slowed to single-digit on the backof tight year-end liquidity and a disruption of a Zhuhai underground bankingnetwork. We believe this had particularly slowed the growth of Macau's largestjunket, and therefore Galaxy who relies more heavily on this junket. For now,we think it's too early to conclude if this VIP slowdown is just a seasonal blipor a cyclical turn. We maintain our forecast that VIP GGR will grow 20% in2018, given the mid-sized junkets have planned to add 12-15 VIP rooms in thenext few months. As such, additional junket capital should keep the VIP growthdeceleration relatively mild in 2018.Top pick Wynn Macau; key risksMacau stocks are trading at 14.0x DBe 12m fwd EV/EBITDA, slightly below +1 stddeviation (14.3x). We find the current valuation reasonable as stocks could tradeup to 16x EV/EBITDA in an upcycle. We raise 2017/18 company EBITDA ests by1-7% (Fig 48). Key risks include a sharp VIP slowdown and policy changes.Karen TangResearch Analyst+852-2203 6141Key ChangesCompanyTarget PriceRating1928.HK42.00 to 48.00Hold to BuySource: Deutsche BankTop picksWynn Macau (1128.HK),HKD23.45BuySource: Deutsche BankCompanies featuredGalaxy (0027.HK),HKD60.15Buy2016A2017E2018EP/E (x)18.725.921.1EV/EBITDA (x)10.116.714.0Price/book (x)3.14.74.0MGM China (2282.HK),HKD22.60Buy2016A2017E2018EP/E (x)14.831.129.4EV/EBITDA (x)13.123.816.2Price/book (x)8.510.28.4Sands China (1928.HK),HKD41.70Buy2016A2017E2018EP/E (x)23.026.120.7EV/EBITDA (x)15.317.915.3Price/book (x)7.09.59.5Wynn Macau (1128.HK),HKD23.45Buy2016A2017E2018EP/E (x)24.029.718.3EV/EBITDA (x)17.317.913.2Price/book (x)26.140.920.5SJM (0880.HK),HKD7.35Hold2016A2017E2018EP/E (x)13.120.419.3EV/EBITDA (x)5.314.915.1Price/book (x)1.41.71.6Source: Deutsche BankDeutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.Distributed on: 14/01/2018 20:27:15 GMT7T2se3r0Ot6kwoPa 15 January 2018Hotels / Leisure / GamingMacauTable Of Contents2017 review - Year of VIP resurgence................................ 4VIP GGR sharply outgrew mass GGR................................................................ 4So, VIP stocks significantly outperformed mass stocks.................................... 44Q17 results preview - Sands & Wynn may surprise on mass & margin...........52018 outlook - Mass growth accelerating..........................8We expect GGR to grow 17% in 2018, slightly higher than consensus.............8More bullish than Street on Wynn Macau and Sands China.............................9Table supply to remain tight............................................................................ 10Mass growth accelerating................................................ 12DB Proprietary Table Count: Rising minimum bets..........................................12Leading to higher mass table yield..................................................................12Visitation growth likel