More accommodative regulation;upgrade Sands China to OW

Equity Research15 July 2015 Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 47. Macau Gaming More accommodative regulation; upgrade Sands China to OW Given the easing comps and accommodative regulatory environment, the sequential decline in gaming revenue y/y should narrow for the rest of the year. The recent easing of transit visa restrictions may indicate that the government is becoming less restrictive on gaming. If there are no more gaming-restrictive policies in Macau other than the smoking ban, we believe this will help the mass market rebound. In addition, 2H15 benefits from a lower base comparison and 2H is seasonally stronger. We lower our 2015/16/17 industry EBITDA estimates by 4%/2%/1%, respectively, due to June trends. Valuations for the sector as a whole are not particularly cheap at 16.2x/17.0x 2015/16E EV/EBITDA, but we recommend accumulating our OW-rated stocks. We upgrade Sands China to OW (from EW); it is our preferred stock due to its attractive dividend of 6%, and we believe its earnings will be resilient. We like Galaxy (OW) due to its undemanding valuation at 13x 2016E EV/EBITDA, but we see execution risk on its Phase 2 ramp-up. Restrictive policies unlikely; worst appears to be over: The recent easing of transit visa restrictions, and the government’s indication that operators might be able to keep smoking lounges could be signs the government is becoming less restrictive on gaming. Since Macau’s revenue collapse was mostly due to regulatory and political factors, an accommodative environment should allow mass revenues to grow again. Also, given the easing comps, we expect the sequential decline in gaming revenue y/y to narrow for the rest of the year. Growth forecasts: We now look for a 32% gross gaming revenue (GGR) decline in 2015 (26% decline previously), 3% GGR growth in 2016E (2% growth previously), before stronger 10% growth in 2017E. We believe a resumption in growth in 2016 will mainly be driven by increased mass revenues, offsetting the 7% decline in VIP revenues caused by the smoking ban. We look for 2015/16/17E EBITDA growth of -36%/+5%/+10%. Upgrade Sands China to OW, now our preferred stock: Macau stocks under coverage have corrected -20% on average YTD (vs HSI +7%), and valuations for the sector are still at 16.2x/17.0x 2015/16E EV/EBITDA. However, we recommend accumulating our OW names. We upgrade Sands China to Overweight (from EW) for two reasons: 1) Sands China has high mass exposure that should make earnings resilient, and it should see limited risk from the VIP smoking ban; and 2) with industry revenue deterioration likely over, we have increased confidence in Sands’ attractive 6% dividend yield. We also like Galaxy (remain OW) due to its undemanding valuation at 13x 2016E EV/EBITDA. Estimate and PT revisions: We lower our 2015/16/17E EBITDA estimates 4%/2%/1% and we revise our PTs by a range of -15% to +15% as we change estimates and roll over our SOTP valuation to 10-16x 2016E EBITDA (from 8-15x 2015E). 2Q15 preview: We look for 2Q15 industry EBITDA to be down 14% q/q and 42% y/y. INDUSTRY UPDATE Asia ex-Japan Gaming & Leisure POSITIVE Unchanged For a full list of our ratings, price target and earnings changes in this report, please see table on page 2. Asia Ex-Japan Gaming & Leisure Phoebe Tse +852 2903 4285 phoebe.tse@barclays.com Barclays Bank, Hong Kong Vineet Sharma, CFA +852 2903 4609 v.sharma@barclays.com Barclays Bank, Hong Kong Elaine Zhang +852 2903 4014 elaine.y.zhang@barclays.com Barclays Bank, Hong Kong Barclays | Macau Gaming 15 July 2015 2 Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold) Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E) OldNew13-Jul-15 Old New %Chg Old New %Chg Old New%Chg Asia ex-Japan Gaming & Leisure PosPos Galaxy (27 HK / 0027.HK) OW OW 35.45 44.6040.80-9 1.841.55 -16 2.201.99-10 Melco Crown Entertainment (MPEL) EWEW 21.91 21.9020.60-6 0.530.49 -8 0.500.39-22 MGM China (2282 HK / 2282.HK) EWEW 17.30 15.6016.606 0.790.84 6 0.550.585 Sands China Ltd. (1928 HK / 1928.HK) EWOW 30.95 32.8037.