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Macau Gaming Report Platinum Broking July 2019 IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT Macau Gaming Report July 2019 Executive Summary Section Macau Gaming Industry Overview 1.1 Recovery in Gross Gaming Revenue 1.1 Steady Growth in Tourist Arrivals 1.2 Fundamental Shift to Mass Market Section Macau Gaming Industry Outlook 2.1 Upcoming Developments on the Cotai Strip 2.2 Tourist Arrivals Are Expected to Grow as More Licenses Are Given for the HKZM Bridge 2.3 Greater Visibility Into the Future of Casino Concessions Section Trip Commentary 3.1 Positive Outlook for Growth in Macau’s Island Section Valuation 10 4.1 Outperformers 10 4.2 Contender 10 4.3 Neutral 10 Section Company Notes 12 5.1 Sands China (1928.HK) 12 5.2 Galaxy Entertainment Group (27.HK) 16 Section Appendix: Platinum Research Pictures Platinum Broking 20 Macau Gaming Report July 2019 Executive Summary Reasons Why Macau’s Gaming Industry Continues To Be An Attractive Investment: Macau’s gross gaming revenues are recovering as a function of: - Growing disposable income of the Chinese population - Improvments in connectivity and mobility withinin and to Macau - Construction & refurbishment of casino resorts - Investments in non-gaming activities to attract non-gaming foot traffic Statistics shows less than 2% (24.9m in 2018) of Chinese nationals visit Macau every year whilst growing at 12% YoY Q1 2019 showed a record 10.4m visitors, up 21.2% YoY This implies ample room for growth in the coming years Comparatively, roughly 80% of Las Vegas visitors are domestic – or about 10% of the total US population Recent capital expenditure in hotel & casino refurbishments indicates managements’ confidence in their future operations This raises the likelyhood of concession’s renewal by the local government as it demonstrates the commitment of casino operators in making Macau an attractive tourist destination Platinum Stock Recommendations: Platinum Broking Key is to prioritize players who focus on the mass-market segment as it is the right strategic call for future growth Sands China (1928.HK) - Solid 12% YoY revenue growth and market share of 23.1% - Casino refurbishments in the pipeline will improve brand image and tourist attraction - Strong cross-selling opportunities through non-gamig offerings will increase revenue streams and lower customer acquisiton costs - Substantial capacity (hotel room, floor space and tables) - Well-positioned on the faster growing in terms of gaming revenue, Cotai Strip Galaxy Entertainment Group (27.HK) - Solid 14% YoY revenue growth and market share of 21.6% - Stragetic focus on Chinese tourists will drive revenues in what is the largest and fastest growing segment - Strong demand has led to hotel capacity expansion plans that will drive top line growth Macau Gaming Report July 2019 Section Macau Gaming Industry Overview 1.1 Recovery in Gross Gaming Revenue In 2018, gaming accounted for 83% of Macau’s fiscal revenues, generating gross gaming revenues (GGR) of MOP302.8 billion (US$37.5 billion), growing 18.4% YoY vs 14.6% YoY in 2017 In comparison, Las Vegas’ gaming industry generated US$7.2 billion in 2018, growing 3.0% YoY Las Vegas GGR has roughly remained flat in the past five years With GGR five times that of Las Vegas, Macau has become the worlds gaming capital Macau’s GGR has grown rapidly since 2008, with the exception of the Chinese government’s anti-corrpution campaign that took place between 2014 and 2016 where we saw a temporary halt in growth As a result, VIP GGR saw a 45% contraction that dragged total GGR down 37% for the period, although it has been consistently grown since then Exhibit 1: Macau Total GGR and Segmentation 400 352 350 303 304 300 (MOP Billions) VIP has traditionally dominated (20082014), yet we expect the Mass market to be the key growth driver (2015-Present) 223 250 188 200 150 109 100 50 - 2008 2010 2012 VIP 2014 Mass + Slots 2016 2018 Total Source: DSEC GGR Statistics 1.2 Steady Growth in Tourist Arrivals 24.9m Chinese tourists visited Macau in 2018, an increase of 12% YoY which accounted for 71% of total visitors for the year This figure represents less than 2% of China’s total population, demonstrating clear underpenetration and growth potential On the other hand, China and Hong Kong alone accounted for 89% of tourist arrivals in 2018 (Exhibit 2) It is for such reason we find the affairs occurring in the Chinese economy to be of upmost relevance in what may influence Macau’s gaming prospects Platinum Broking Macau Gaming Report July 2019 Exhibit 2: Macau Tourist Arrivals Segmentation 40,000 10yr CAGR 4% 35,000 30,000 (000's) 25,000 20,000 15,000 19% 31% 27% 25% 58% 60% 64%% 2011 2012 2013 12% 12% 13% 18% 19% 20% 21% 21% 67% 66% 66% 68% 2014 2015 2016 2017 23% 30% 31% 10,000 5,000 15% 17% 19% 13% 15% 12% 13% 51% 51% 53% 2008 2009 2010 71% China Hong Kong 2018 ROW Note: ROW refer to rest of the world Source: DSEC GGR Statistics 1.3 Fundamental Shift Towards Mass Market Several macroeconomic factors lead the industry’s momentum among which are Chinese GDP per capita (10yr CAGR of 11%) and M2 money supply (10yr CAGR of 15%) that indicate growth in disposable income and spending Both factors are strongly correlated to Macau’s growing mass segment and play a key role in the industry’s growth These fundamentals support our positive outlook on the industry and demonstrate the large room for growth that still exists in Macau’s mass segment (Exhibit 3) In addition, Exhibit shows how the balance between VIP and mass GGR has been shifting towards the latter Our view is that this spread will continue to widen in favour of the mass segment due to the stronger momentum led by the macro economic outlook and Chinese tourism themes that benefit the supply constrainted territory Exhibit 3: Mass Segment Growth In Line With Chinese Economic Growth (Rebased) 450% Macau’s mass segment GGR growth is highly correlated with the fundamental growth in the Chinese economy 400% 350% 300% 250% 200% 150% 100% 2008 2009 2010 China GDP/Capita 2011 2012 2013 2014 China M2 Supply 2015 2016 2017 2018 Macau MASS GGR Source: IMF & DICJ Data Platinum Broking Macau Gaming Report July 2019 Section Macau Gaming Industry Outlook 2.1 Upcoming Developments on the Cotai Strip As of May 2019, five projects are under construction on Macau’s Cotai Strip These are SJM’s Grand Lisboa Palace, Galaxy’s Phases & 4, Melco’s Studio City Phase 2, Wynn Palace’s Phase 2, and Macau’s Light Rapid Transit system (MLRT) In-line with the Island’s visitor growth prospects, these projects aim to increase capacity and facilititate mobility around the city We have thus observed that even on the eve of their concession expiry, casino operators are making substantial capex investments in efforts to gain negotiating leverage vis a vis regulators Exhibit 4: Resorts Projects On The Strip Operator Property Year Tables Rooms Wynn Macau Galaxy Ent Galaxy Ent Melco Resorts Sands China SJM Wynn Palace Phase Galaxy Macau Phase Galaxy Macau Phase Studio City Phase T he Londoner Grand Lisboa Palace T BD 2020 2022 2021 2021 2020 N/A 150 250 N/A 415 300 1,371 1,500 3,000 940 1,260 2,000 Cost (US$ M) T BD 2,091 4,179 T BD 2,200 4,647 Source: Company Data Exhibit 5: Complete Layout of MLRT Project Phase will be operational by late 2019 The LRT Taipa line, connecting the Peninsula with Macau’s Island spans 11 stations and entered the phase of equipment installation in October 2017 It is expected to begin operations by late 2019 Source: Macau GIT Bureau, Platinum Research Platinum Broking Macau Gaming Report July 2019 2.2 Tourist Arrivals are Expected to Grow as More Licenses are Granted for the HKZM Bridge The Hong Kong-Zhuhai-Macau Bridge opened in October 2018 as a project that would render the region of Macau more accessible for its two most important visitor streams; China and Hong Kong The existing quota on licenses has aimed to control incoming traffic into Macau, yet we expect it to increase gradually as appropriate operational systems are set up by the regions’ governments (border control and security) As a result, the government of Macau estimates a 10% increase in tourist arrivals, bringing total estimates close to 40M tourist for 2019 Exhibit 6: HKZM Bridge Layout The bridge facilitates the inflow of tourism in a fast and inexpensive manner Construction started: 2009 Total Length: 55km Cost estimates according to HK government departments Main bridge, 2010 est.: US$ 5.76bn 2017 est overrun: US$ 1.5bn HK link road: US$ 3.2bn HK boundary facilities: US$ 4.6bn Full official total not disclosed Source: Hong Kong Highways Department, Hong Kong Transport & Housing Bureau 2.3 Greater Visibility Into the Future of Casino Concessions All six of Macau’s casino operators will have their 20 year licenses expire by 2022 Meanwhile, Macau will hold re-elections for its Chief Executive who will take office in December 2019 The decision to renew concessions will be left in hands of the CE Although it is unclear what the government will with its current leverage over operators, we shall mention the following speculative concerns: Decision to renew current concessions and grant additional ones in favour of competition and higher tax collection Decision to renew current concessions with a renewal fee and tax rate increase (currently at 39% vs 22% in Singapore and 25% in Philippines for mass GGR) In spite of this, we believe the outlook is positive given recent contributions made by resort owners that signal good terms with regulators All six concession holders will have either built new resorts or remodelled existing ones before 2020, demonstrating: Long-term commitment to improving the quality of their assets and the aesthetics of Macau Any previous discussions with government officials have given operators the confidence to increase capex investments with certainty of concessions’ renewal Platinum Broking Macau Gaming Report July 2019 Our view is that government officials have little interest in disrupting the beneficial growth of the industry and the recent investments in non-gaming facilities demonstrate the extent to which casino operators comply with the government’s intention to keep Macau attractive to business operators and visitors Exhibit 7: Diagram of Current Casino Concessions and Sub-Concessions Concession Sub-Concession Source: Company Data, Platinum Research Section Trip Commentary 3.1 Positive Outlook for Growth On The Strip Platinum Research visited Macau in early January and late March to better understand the progress made since the last visit The team identified three relevant insights The team noted a surprising amount of construction works being undertaken all around the Cotai Strip This inspires confidence in the future attractiveness of the area as there are many more developments in the pipeline both in property and transportation Exhibit 8.1: New Plaza Hotel Suites & MLRT UCTM station Source: Platinum Research Platinum Broking Macau Gaming Report July 2019 Little traffic on the streets but good traffic indoors Every casino visited was at least 60% full that Tuesday and traffic in retail spaces was high in certain venues like The Venetian, The Parisian and Galaxy Macau Exhibit 8.2: Emptiness on Cotai Strip’s Sidewalk and High Concentration Inside Casinos Source: Platinum Research Consumer confidence is exhibited through high-levels of spending Baccarat tables had the highest traffic in all casinos with mininum bets ranging from MOP200 to MOP2,000 We saw the most traffic around tables with minimum bets of MOP1,000 and gamers had around MOP2,000MOP5,000 worth of chips on the table The DSEC estimates the average Chinese visitor spending to be MOP2,300 (+5% YoY), a figure that will continue to increase in line with the growth of disposable income in China Platinum Broking Macau Gaming Report July 2019 Exhibit 8.3: Evaluation of Casino Operators Operator Hotels Visited Comments Sands China The Venetian, The Plaza, The Parisian Galaxy Galaxy Macau - Venetian: Mass (ranked 1st by number of visitors) - Parisian: Premium Mass - Plaza: VIP - Minimum bets range MOP200- MOP2,000 - Casinos & Retail spaces had the highest foot traffic in Cotai - Minimum bets at MOP1,000 - Design matched Chinese luxury aesthetics (Gold & White) - Retail and restaurants target Premium Mass - Casino was the 2nd most crowded - City of Dreams: Premium Mass - Morpheus: VIP - Overall appearance was that of a high end mall - Casino traffic was low - Minimalist design resulted in a higher appreciation of retail and casino space compared to C.o.D or Morpheus - Target segment lies between Premium Mass and VIP - Casino traffic was reasonable and the highest amongst the Premium Mass resorts (COD, The Parisian) Melco Resorts City of Dreams, Morpheus MGM China MGM Cotai Wynn Macau Wynn Palace SJM - Las Vegas style with flashy red carpets and flamboyant ornaments - VIP resort with clear signs for VIP visitors in its main entrance - Retail space targeted the VIP market - Minimum bets at MOP2,000 - VIP room: minimum bets are MOP10,000 - Foot traffic was average Grand Lisboa Palace -Currently under construction - Faỗade near completion - Furthest away from the Cotai Strip - Architecture resembles 18th century European royal residences Source: Platinum Researc Platinum Broking Macau Gaming Report July 2019 Section Valuation Correlation coefficients for the period after March 2018 for Macau’s six gaming operators are in the range of 0.61-0.87, reflecting symmentry in movements despite targeting different segments We can therefore assume operators’ stock performance is mostly guided by sector performance and to a lesser degree individual results 4.1 Outperformers: Sands China (1928.HK) & Galaxy Entertainment Group (27.HK) - - Focus on Mass: High margins and best growth prospects and scalability Largest market share: Capitalise on a growing market both in visitors (9% growth YoY in 2018) and expenditure (2018 Chinese visitor spending grew 12% YoY) Strong competitive advantages: Chinese aesthetics and International thematics High qualiy of assets: Portfolios are centered around new Cotai properties Favourable diversification: Recent investments in non-gaming will lead to cross-selling revenue streams Highest Capacity: Ability to receive visitors due to their substantial market share of hotel rooms (Sands: ~12,600; Galaxy: ~4,100; Industry total ~36,500) 4.2 Contender: SJM (880.HK) - - Drivers: Focus on Mass Segment Good segment to target given growth prospects Change in Management Newly elected chairwoman, Daisy Ho Chiu Fung, is set to restructure the casino legend after an alliance led by Pansy Ho and the Henry Fok Foundation took control over the underperforming company Despite a reduced market share in 2018 (14.9% vs 21.6% for Galaxy), we await a near-term turnaround once the organization gains some momenum, expected to appear around 2Q19 Mitigants: Insufficient catalysts Grand Lisboa Palace will be a catalyst to SJM’s near future growth but not enough to compensate underperforming assets on the Peninsula 4.3 Neutral: MGM China (MLCO.NASDAQ) Platinum Broking (2282.HK), Wynn Macau (1128.HK), Melco Resorts - Given their reliance on VIP GGR and the slowdown in this segment, we not believe these companies will outperform their peers - Our preference leans towards MGM China due to the high foot traffic observed and quality resorts on both sides of the territory - Wynn Macau continues to remain a preferred location for VIPs – when VIP data improves in Macau, the operator will be a major beneficiary 10 Macau Gaming Report July 2019 Exhibit 9: Relative Valuation Table Source: Company Data, Bloomberg, Platinum Research Platinum Broking 11 Macau Gaming Report July 2019 Recommendation: BUY TP: HK$45.00 (+15.7%) Sands China (1928.HK) 08 July 2019 SECTOR: Gaming EARNINGS (reported in USDm) For the fiscal year ended Turnover Operating Profit Net Profit EPS (HK$) % Change DPS (HK$) Dividend yield (%) 2016 6,653 1,351 1,224 1.18 (16.1%) 1.99 5.0% HSI: 28,331.69 2017 7,586 1,784 1,603 1.57 33.1% 1.98 5.0% INTERIM RESULTS (reported in USDm) Period Turnover Adjusted EBITDA Net Profit EPS (HK$) 2018 8,665 2,150 1,875 2.00 27.4% 1.99 5.0% 2019E 9,116 2,431 2,163 2.13 6.5% 1.99 5.0% 2020E 9,671 2,649 2,375 2.28 7.0% 1.99 5.0% 1H17 3,635 1,227 678 0.66 1H18 4,265 1,539 979 0.95 % change 17.3% 25.4% 44.4% 43.9% PRICE: HK$38.90 KEY DATA Issued Capital (m Shrs) M arket Cap (HK$m) Avg 6M Turnover (HK$m) 52 Week High/Low (HK$) Net Gearing (%) Book Value per Share (HK$) Free Float (%) M ajor Shareholder(s) 8,086.7 320,233 526.5 44.7 / 29.85 65.46 4.26 29.90% LVS Sands (70.10%) Source: Company Data, Bloomberg, Platinum Estimate SECTION FY18 RESULTS BRIEFING 1.1 Double Digit Revenue Growth Demonstrates The Popularity Of Thematic Resorts - Double digit growth with net revenue growing 12% YoY (HK$67.9bn) and Adjusted EBITDA up 18% YoY (HK$24.1bn) - Premium mass GGR grew 10% YoY, contributing to EBITDA margin growth, up 150bps to 33.6% - Chip drop rolling volume rose 16% YoY (HK$80.4bn) with win rates growing 29bps to 3.28%, capitalizing on the better luck for 2018 1.2 Start Of “The Londoner Macau” Renovation - Sands Cotai Central began its 2-year renovation post 2019’s CNY to create the new “Londoner Macau” resort (HK$2.2b Investment) - The 1,224 room Holiday Inn will be the first to close, minimizing impact on revenue as it generates the lowest ADR out of all hotels - Four Seasons and St Regis apart-hotels will be converted into 660 luxury hotel suites with higher EBITDA contribution - New MICE, retail and entertainment offerings will widen revenue streams whilst complying with the government’s push for a growing non-gaming segment Platinum Broking 12 Macau Gaming Report SECTION July 2019 COMPANY BACKGROUND 2.1 Sands China Is The Largest Owner And Operator Of Integrated Resorts In Macau, Measured By Adjusted EBITDA It is a subsidiary of Las Vegas Sands (NYSE: LVS) and is listed on the Hong Kong Stock Exchange It owns resorts in Macau amongst which its largest, The Venetian Macau, holds one of the six concessions granted by Macau’s Government to operate casinos The Adelson Family holds an indirect interest (38%) through Las Vegas Sands which owns 70% of its Chinese subsidiary as of 2018 Its portfolio of resorts in Macau is comprised of 12,605 Hotel rooms & suites, 1,660 table games, 5,293 slot machines, 140 restaurants, 1.6m sq ft of MICE space and 2m sq ft of leased retail space Furthermore, it hosts a wide range of entertainment activities in its thematic resorts: The Venetian Macau, Sands Cotai Central, The Parisian Macau, The Plaza Macau and Sands Macau Exhibit 10: Sands China Corporate Structure Source: Company Data, Platinum Research SECTION BUSINESS OUTLOOK 3.1 Sands China Will Maintain A Competitive Advantage Through Its Thematic Offerings Sands China’s focus on thematic resorts has been beneficial in attracting visitors, soon becoming a must see attraction in Macau With the addition of The Londoner Macau in 2020, the company will hold the largest portfolio of resorts on the Cotai Strip In our view, Sands China will hold the most valuable set of properties, all renovated in the last years and whose distinctive qualities provide unique attractions for visitors that will drive long term revenue growth Platinum Broking 13 Macau Gaming Report July 2019 3.2 Its Effective Strategy Is Rooted In Its Understanding Of Customer Segments Sands China’s recent capital expenditure is rooted in its view of an upcoming boost in Macau’s visitation figures In comparison to Las Vegas (42.1M Visitors), Macau Mass tables’ gross hosted 17% less visitors in 2018 (35.2M visitors) whilst being located in one of the margins are 4x most populated areas in the world For this reason, management has focused on those of VIP tables targeting mass customers with 12,600 rooms and casino facilities suited for them As a result, we believe Sands China will benefit from substantial top line growth as it is the best positioned to capitalize on the incremental visitation to Macau 3.3 Long Term Cross-Selling Opportunities Will Lead To Margin Expansion Sands China succeeds in attracting additional visitors through its diversified offerings It has become the largest MICE provider in Macau with 1.7m sq ft ready to host business events across its largest hotels We see the potential for these events to generate complementary revenues from their stay in Sands’ resorts Eventually, the potential of MICE lies in the ability to cross sell other products, something Sands has demonstrated to well for years SECTION VALUATION TP: HK$45.00 (15.7%) BUY 4.1 Our target price of HK$45.00 represents a 15.7% upside from current share price, and therefore we recommend buying Sands China also distributes an attractive dividend yield of 5.1% 4.2 Shares currently trade at 13.4x 2019E EV/EBITDA, lower than the comparable average of 14.7x EV/EBITDA which signals a good entry point We see opportunity in the sector weakness as We prefer Sands China has mass gaming figures have shown good resilience due to structural developments and beating estimates in 2019 and 2018, while VIP shows contraction Structural drivers that contributed to this are HKZM bridge, high-speed rail, rising middle-class and improving mass demand 4.3 We have identified considerable upside potential in the form of growing EPS derived from an increase in capacity to host high-margin mass customers We also believe their thematic strategy is a key competitive advantage to sustain current growth rates and reach mid-2018 valuation levels Exhibit 11: Peer Group Multiples Ticker FY18 Total Assets (HK$m) Mkt cap (HK$m) EV (HK$m) Closing price (HK$) 1928 HK 94,149 321,850 344,384 39.80 44.7 / 29.85 13.74 527.5 13.64 13.40 4.97 5.08 27 HK 87,384 240,860 235,144 55.60 64.44 / 39.96 13.26 703.3 14.85 14.00 0.91 1.27 Wynn Macau 1128 HK 46,082 97,911 121,462 18.84 24.83 / 14.84 12.53 233.7 10.77 11.76 3.28 6.01 Melco Resorts MLCO US 69,315 85,692 112,545 183.49 210.58 / 119.7 2.55 449.0 12.54 9.71 2.25 2.71 MGM China 2282 HK 35,133 53,656 68,537 14.12 18.28 / 10.78 6.20 92.0 18.08 11.72 0.55 1.90 SJM 880 HK 56,399 53,299 50,474 9.41 10.74 / 6.15 16.92 149.2 10.14 12.70 3.62 2.91 Simple avg 13.34 12.21 2.44 3.38 Mkt cap wtd avg 13.60 12.86 2.74 3.66 Name Sands China Galaxy Entertainment Group 52-week High/Low (HK$) 6M 6M Cur FY19E FY18 FY19E Volume Turnover EV/EBITDA EV/EBITDA Yield (%) Yield (%) (m shrs) (HK$m) (x) (x) Source: Company Data, Bloomberg, Platinum Estimates Platinum Broking 15 Macau Gaming Report Exhibit 12.1: Two-Year Share Price Performance July 2019 There still is plenty of room for growth in valuations post its 2H18 recovery Source: Bloomberg, Platinum Research Exhibit 12.2: Ten-Year Share Price Performance Chinese Government anti-corruption campaign Source: Bloomberg, Platinum Research Platinum Broking 15 Macau Gaming Report July 2019 Recommendation: BUY TP: HK$65.00 (+18.3%) Galaxy Entertainment Group Ltd (HK: 27) SECTOR: Gaming EARNINGS (reported in HK$m) For the fiscal year ended Turnover Operating Profit Net Profit EPS (HK$) % Change DPS (HK$) Dividend yield (%) 2016 52,826 6,134 6,283 1.47 50.6% 0.33 0.6% HSI: 28,331.69 2017 48,640 9,755 10,504 2.45 66.4% 0.59 1.2% INTERIM RESULTS (reported in HK$m) Period Turnover Adjusted EBITDA Net Profit EPS (HK$) 2018 55,211 12,329 13,507 3.13 27.6% 0.91 1.8% 2019E 68,465 13,121 13,956 3.22 2.9% 1.27 2.5% 2020E 73,928 14,213 15,443 3.54 10.0% 1.67 3.3% 1H17 22,536 6,466 4,631 1.08 1H18 28,058 8,645 7,206 1.67 % change 24.5% 33.7% 55.6% 54.6% 08 July 2019 PRICE: HK$54.95 KEY DATA Issued Capital (m Shrs) M arket Cap (HK$m) Avg 6M Turnover (HK$m) 52 Week High/Low (HK$) Net Gearing (%) Book Value per Share (HK$) Free Float (%) M ajor Shareholder(s) 4,332.0 220,933 701.2 64.44 / 39.96 (9.97) 14.40 46.10% Lui Family (53.90%) Source: Company Data, Bloomberg, Platinum Estimate SECTION FY18 RESULTS BRIEFING 1.1 Full Year Results Show Strength In Its Share Of A Growing Mass Market (+11% YoY) - Solid top-line results with net revenue up 14% YoY (HK$55.2bn) and adjusted EBITDA up 19% YoY (HK$16.9bn) - Mass GGR up 14% YoY (HK$27.5bn) and VIP GGR up 18% YoY (HK$37.3bn), demonstrating the popularity of GEG’s offerings despite macroeconomic uncertainties 1.2 Galaxy Macau Continues To Deliver In Both Gaming And Non-Gaming - Gaming revenues netted HK$34.9bn (15% YoY) and net non-gaming revenues also increased to HK$4.5bn (8% YoY) - Hotel occupancy nearly reached 100% for the whole year - Adjusted EBITDA margin grew 1% point indicating an improvement in the management’s cost structure - Galaxy Macau contnues to lead the group’s revenues contributing to 74% of the total revenues 1.3 International Expansion In The Pipeline - Exploration of investment opportunities in Japan after newly passed bill - cities are being studied together with its partner “MonteCarlo SBM” - GEG shows Balance Sheet strength with HK$14.5bn cash and HK$14bn FCF that act as a solid source of funding for its investments outside Macau Platinum Broking 16 Macau Gaming Report SECTION July 2019 COMPANY BACKGROUND 2.1 Galaxy Entertainment Group (GEG) Is One Of The World’s Leading Resorts, Hospitality And Gaming Companies Galaxy was established in 1988, and listed on the Hong Kong Stock Exchange since October 7, 1991 It was granted the right to operate its casino resorts in late 2002 and is one of the original concessionairies in Macau The Lui Family holds a controlling stake of 44% as of mid-2018 GEG operates flagship destinations in Macau; in the island and in the Peninsula These are Galaxy Macau, Broadway Macau and Star World Macau GEG is preparing their next chapter of developments in Cotai, doubling their current footprint to 200 and making it one of the largest and most diverse destinations for hospitality in the world Although its operations remain in Macau, GEG has begun its plans to expand internationally, starting with Japan Exhibit 13: Galaxy Entertainment Group Corporate Structure Source: Company Data, Platinum Research SECTION BUSINESS OUTLOOK 3.1 GEG Is Positioned For Growth Within The Mass Segment Mainland China has signifcant demand for leisure, tourism and travel as disposable income grows and the middle class surges Seen as GEG derives approximately 41% of its GGR from the mass Platinum Broking 17 Macau Gaming Report July 2019 segment, we see the aforementioned macro trend as a catalyst for future revenue streams in both Galaxy Macau & StarWorld Furthermore, their growing focus on nongaming activities will result in a larger array of entretainment features that would attract this class of gamers to stay in their hotels, consequently driving their top line over the next 2-3 years We also appreciate the hotels’ design oriented towards Chinese customers’ tastes with shades of gold and white that give it a majestic appearance 3.2 No Clear Headwinds From Regulators Given Good Track Record GEG has maintained good relations with the local government through their interventions in the media and their passive comments about regulators, as opposed to Wynn Macau’s management We believe their actions are in line with regulators’ expectations, see through their improvements in non gaming facilites Not only does this diversification help GEG’s operational sustainability but it demonstrates its compliance with authorities at a point when casino concessions are expect to undergo a renewal process With respect to its competitors, GEG looks well positionned to leverage both its good behaviour and contribution to the comunity during the negotiations in 2022 Regardless of the uncertainty, we believe there are no considerable risks to GEG’s future in Macau, thus allowing it to continue capitalizing on the prosperous premium mass segment SECTION VALUATION TP: HK$65.00 (18.3%) BUY 4.1 Our target price of HK$65.00 represents a 18.3% upside from current share price, and therefore we recommend to buy 4.2 Shares currently trade at 14.85x 2018A EV/EBITDA and 14.0x 2019E EV/EBITDA Although the 7-yr average is 14.1x 1yr forward EV/EBITDA, we see opportunity in the mass structural story for Galaxy 4.3 Galaxy’s management has stated its plans to capitalize on the strong demand in the form of cross selling, shown in its 100% hotel occupancy rate for 2018 We believe Galaxy Macau will be a key driver of EBITDA growth as it attracts a growing premium-mass segment Galaxy is uniquely positioned with substantial real estate assets under development on the Cotai Strip (Phases & 4) which will attract substantial foot traffic from MICE events Exhibit 14: Peer Group Multiples Ticker FY18 Total Assets (HK$m) Mkt cap (HK$m) EV (HK$m) Closing price (HK$) 1928 HK 94,149 321,850 344,384 39.80 44.7 / 29.85 13.74 527.5 13.64 13.40 4.97 5.08 27 HK 87,384 240,860 235,144 55.60 64.44 / 39.96 13.26 703.3 14.85 14.00 0.91 1.27 Wynn Macau 1128 HK 46,082 97,911 121,462 18.84 24.83 / 14.84 12.53 233.7 10.77 11.76 3.28 6.01 Melco Resorts MLCO US 69,315 85,692 112,545 183.49 210.58 / 119.7 2.55 449.0 12.54 9.71 2.25 2.71 MGM China 2282 HK 35,133 53,656 68,537 14.12 18.28 / 10.78 6.20 92.0 18.08 11.72 0.55 1.90 SJM 880 HK 56,399 53,299 50,474 9.41 10.74 / 6.15 16.92 149.2 10.14 12.70 3.62 2.91 Simple avg 13.34 12.21 2.44 3.38 Mkt cap wtd avg 13.60 12.86 2.74 3.66 Name Sands China Galaxy Entertainment Group 52-week High/Low (HK$) 6M 6M Cur FY19E FY18 FY19E Volume Turnover EV/EBITDA EV/EBITDA Yield (%) Yield (%) (m shrs) (HK$m) (x) (x) Source: Company Data, Bloomberg, Platinum Estimate Platinum Broking 19 Macau Gaming Report July 2019 Exhibit 15.1: Two-Year Share Price Performance We are witnessing a strong recovery in fundamentals and momentum by Galaxy Entertainment Source: Bloomberg, Platinum Research Exhibit 15.2: Ten-Year Share Price Performance Chinese Government anti-corruption campaign Source: Bloomberg, Platinum Research Platinum Broking 19 Macau Gaming Report SECTION July 2019 Appendix: Platinum Research Pictures 6.1 Sands China: The Venetian, The Plaza, The Parisian 6.2 SJM Holdings: Grand Lisboa Palace Platinum Broking 20 Macau Gaming Report July 2019 6.3 Galaxy Entertainment Group: Galaxy Macau 6.4 Melco Resorts: City of Dreams, Morpheus Platinum Broking 21 Macau Gaming Report July 2019 6.5 MGM China: MGM Cotai 6.6 Wynn Macau: Wynn Palace Platinum Broking 22 Macau Gaming Report July 2019 DISCLOSURE OF INTERESTS Terms not expressly defined have the meanings given to them in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission Analyst Compensation: No part of the compensation of the analyst(s) who prepared this document was, is or will be directly or indirectly related to the analysis, comments or recommendations stated in this document The compensation of such analyst(s) is not directly linked to any specific investment banking transaction of Platinum (which collectively refers to Access Investment Management (H.K.) Limited, Platinum Broking Company Limited and Platinum Securities Company Limited) Analyst Relationships: The analyst(s) who prepared this document and the associates of such analyst(s) not serve as an officer of an issuer or new listing applicant reviewed by such analyst(s) Analyst Financial Interests: The analyst(s) who prepared this document and the associates of such analyst(s) not have any financial interests in relation to an issuer or new listing applicant reviewed by such analyst(s) Market Making: Platinum does not make a market in the securities of any issuer reviewed in this document and will not make a market in the securities of any new listing applicant reviewed in this document Firm Financial Interests: On the date of publication of this document, Platinum does not have financial interests in relation to: (i) any issuer reviewed in this document in an amount equal to or more than 1% of the market capitalisation of such issuer; or (ii) any new listing applicant reviewed in this document in an amount equal to or more than 1% of the new listing applicant’s issued share capital, or issued units, as applicable Investment Banking Relationship: Platinum does not have an investment banking relationship with any issuer or listing applicant reviewed in this document Relevant Relationships: On the date of publication of this document, no individual employed by or associated with Platinum serves as an officer of an issuer or new listing applicant reviewed in this document General Disclaimer This document is prepared, produced and published by Platinum Broking Company Limited Platinum Broking Company Limited is a licensed corporation registered with the Hong Kong Securities and Futures Commission This document is for distribution in Hong Kong and in other jurisdictions only to the extent permissible by applicable law This document is intended for information purposes only, and may be subject to change without further notice This document is not an offer or a solicitation of an offer to buy or sell any securities or financial instruments in any country or jurisdiction This document is not to be relied upon by any person in making any investment decision or otherwise dealing in the securities mentioned, as it does not take into account the specific investment objectives, financial situation or needs of any person Investors should consider whether the analysis and recommendations in this document are suitable for their particular circumstances and, if appropriate, seek independent professional advice While we have endeavoured to ensure the information in this document is true and up-todate at the time of publication, we cannot guarantee its accuracy, timeliness and completeness The price and value of the securities referred to in this document may fluctuate Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur Opinions expressed in this document are subject to change without notice Neither Platinum Broking Company Limited, nor any of its holding or affiliated companies, nor any of its or their directors or employees (collectively, the “Platinum Group”), represent or warrant the accuracy, timeliness or completeness of the information in this document, and will not accept any responsibility or liability for any use of or reliance upon any of the contents of this document The Platinum Group is under no obligation to update the information in this document The use of any information herein is at the sole discretion and risk of investors This document has not been reviewed or authorised by any regulatory authority in Hong Kong or elsewhere Any opinions expressed in this document may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of the Platinum Group The Platinum Group may from time to time have positions in, and may effect transactions in, securities mentioned in this document This document is produced and published by Platinum Broking Company Limited Hong Kong Office: 21/F LHT Tower, 31 Queen’s Road Central, Hong Kong Telephone: 852-2841-7000 Fax: 852-2522-3500 Website: www.Platinum-Asia.com/ and http://www.accessfunds.com/ © 2019 Platinum Broking Company Limited All rights reserved This publication may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Platinum Broking Company Limited Platinum Broking 23
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