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2011 Retail sales at Harbour City and Time Square are calculated by assuming 25% retail sales growth,
which is in line with the overall market. Assume 50-60% of the GFA is leasable area; NAV of Harbour
City and Time Square are based on property team estimate; Source: CLSA Asia-Pacific Markets; Wharf
2010 annual report
VIP and other elements
VIP gaming is perceived as the black box of the Macau gaming market, with
the junkets assuming a key role in the gaming operations. The key reason for
the existence of the VIP gaming market is because of the currency
restrictions that the Chinese Central government imposes, limiting currency
movement into and out of the country. With such restrictions, most VIP
players have to rely on junket credit to fund their gaming expenditure. China
also lacks a robust credit database, which prohibits casinos to directly extend
credit to players and thus creates opportunities for the junkets.
Some perceive Macau as a sin city and a place for corrupt government
officials to launder money. But in fact, over the past decade, we have not had
any gaming company prosecuted for any crimes or violating the anti-money
laundering control procedures. In fact, some of the worlds most prestigious
financial institutions have been charged with greater and more frequent
financial crimes than the global gaming companies.
Over the past 10 years, the number of criminal offences in Macau has
remained low. In 2011, 12,500 crimes were recorded, representing a crime
rate of only 2.5%.
Figure 10
Macau: No. of crimes cases
Source: CLSA Asia-Pacific Markets
500
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(No.)
12,500 crimes recorded in
2011, representing a
crime rate of 2.5%
VIP market existed due to
Chinese governments
policy to restrict capital
flow in and out of the
country
Sands retail assets vs
top-tier shopping
malls in Hong Kong
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
15 November 2012 aaron.fischer@clsa.com 9
Comparing Macaus crime rate with that of the major cities in the USA, Macau
at 2.5%, is extremely low. Indeed, it is the lowest among all major US cities
and is significantly lower than the 4% in Las Vegas.
Figure 11
Crime rates
Source: CLSA Asia-Pacific Markets, FBI, HK Police
2. Is there an economic moat protecting the business?
. . . [the] most important thing to me is figuring out how big a moat there
is around the business. What I love, of course, is a big castle and a big
moat with piranhas and crocodiles.
Warren Buffett
Macau gaming operators are protected by a strong moat, with only six
gaming licences issued there. We understand that the government has no
intention of issuing additional permits which creates a very favorable industry
environment for incumbents by installing a strong entry barrier. The fact that
only six gaming licences have been issued. Governments determination to
tame table supply growth and to slow the pace of new project approval are
also key factors in driving gaming companies strong earnings and cashflows.
Further, Macau casino operators do not face much external competition over
the next decade, Macau and Singapore will remain the only two major gaming
destinations in the region, serving billions of Asian gamers. Japan could be
the next meaningful market but will most likely serve the local population
(see our Asias wonderland report). Meanwhile, it is unlikely that the Chinese
government will legalise gaming anywhere within the country, including island
destinations such as Hainan. While Hong Kong would be an enormous market,
we believe the probability of casinos being licensed there is less than 1%.
0 1 2 3 4 5 6 7 8
Hong Kong
Macau
New York
San Diego
Los Angeles
Las Vegas
Phoenix
Philadelphia
Chicago
Dallas
Houston
San Antonio
(%)
. . . and limited external
competition
Crime rate is low in Macau
Limited internal
competition . . .
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
10 aaron.fischer@clsa.com 15 November 2012
Figure 12
Macau gaming: Porters five-forces analysis
Source: CLSA Asia-Pacific Markets
3. Is management candid with shareholders?
With a long-term investment horizon, Buffett favours companies that are
candid with shareholders. In Macaus gaming industry, analysts and investors
generally enjoy excellent access to CEOs and other senior management over
a period of time. Companies tend to host regular conference calls, attend
investor conferences, host property tours and have strong investor-relations
teams. Being Hong-Kong based, one of our few complaints is that Las Vegas
Sands and Wynn host their conference calls at 4:30am Hong Kong time,
which makes for a long day!
Since we started to cover Macau companies in 2005, the Macau gaming
names have been fairly candid with analysts and shareholders. Companies
update investors on their recent operational performance on a quarterly
basis. Hong Kong-listed companies are obliged only to semi-annual reporting,
but they still voluntarily report quarterly numbers. Quarterly earnings contain
detailed analysis on the financial performance broken down into individual
casino properties and by different business segments. Financial disclosure is
world class in Macau, especially compared to some other Asian gaming
companies such as Genting Singapore, which is weak on disclosure.
Industry competition - Medium
There are competition among the six
casino operators and those which fail
to bring new products to the market
will be prone to market-share loss.
Threat of new entrants - Low
Very unlikely to have another company
entering the Macau gaming sector.
Bargaining power of suppliers
- Medium
Suppliers of gaming tables /
machines do not have strong
bargaining power, but labour is
currently in shortage and employee s
have strong bargaining power.
Bargaining power of customers
- Low
Macau is the only gaming city in China.
Supply shortage endows casino
operator with strong bargaining power.
Threat of substitutes - Low
Online gaming could potentially be
a substitute to casino gaming, but
online gaming is still illegal in most
parts of Asia.
Since covering Macau
companies in 2005, we
believe they have been
honest with analysts and
shareholders
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
15 November 2012 aaron.fischer@clsa.com 11
Figure 13
Key operational and financial metrics included in quarterly release
Revenue (broken down by individual casino property)
Ebitda (broken down by individual casino property)
Operating profit
Net profit
Rolling chip volume (broken down by individual casino property)
Rolling chip win rate (broken down by individual casino property)
Non-rolling chip volume (broken down by individual casino property)
Non-rolling chip win rate (broken down by individual casino property)
Slot handle (broken down by individual casino property)
Slot hold rate (broken down by individual casino property)
Number of tables in operation (broken down by individual casino property)
Number of slots in operation (broken down by individual casino property)
Hotel occupancy (broken down by individual hotel)
Hotel room rate (broken down by individual hotel)
Revenue per available room (broken down by individual hotel)
Source: CLSA Asia-Pacific Markets
4. Does the business have long track record of earnings growth?
Buffett prefers companies with a long track record of delivering earnings
growth. The Macau casino operators do not score well in this area, as most
only have five years of operating history. US operators, such as Wynn Resorts
and Las Vegas Sands, have a longer operating track record, but their
earnings, historically, has been volatile due to high gearing levels during the
financial crisis. This is unlikely to be repeated in the Macau gaming sector,
with many companies in a net-cash position.
We expect Macau to deliver more consistent earnings growth as VIP gaming
revenue moderates on a high base. With a slowing VIP segment, we are also
seeing increased earnings exposure to the more robust mass-market
segment, which will help lower gaming companies earnings volatility.
Figure 14
Macau gaming revenue/Ebitda growth
Source: CLSA Asia-Pacific Markets
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(20)
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VIP revenue Mass gaming revneue Industry Ebitda (%)
Forecast Actual
Mass-gaming revenue
growth has been
consistently at 30-40%
over past three years
A list of key operational
metrics that are disclosed
quarterly
Macau casinos do not
score well on long track
record of earnings growth
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
12 aaron.fischer@clsa.com 15 November 2012
5. Does the business have a consistent operating history?
Buffett dislikes companies that expand beyond their comfort zone and favours
those with a consistent operating history. We note that the Macau gaming
operators have, over past years, been very focused on their expertise, which
is to develop gaming properties in Macau or in Asia. This is not true for others
such as the Genting Group in Malaysia, which have been very aggressive in
other industries and other markets.
6. High owner earnings and lack of need to reinvest
Buffett places significant emphasis on cashflow-generating capability and
regards it as the best metric to evaluate the quality of the company. He
favours firms that generate high owner earnings, also known as free
cashflow. We share the same view and have been bullish on Macau gaming
because of its strong free cashflow-generating capability. We were the first
broker to discuss this theme in our Raining cash report in September 2011.
We expect the sector to deliver US$3-4bn of free cashflow in 2012-14,
representing 4-5% FCF yield.
Figure 15
Macau gaming: Free cashflow
Source: CLSA Asia-Pacific Markets
Buffett places huge emphasis on cash earnings generated by companies and
gives preference to those where minimal capex is required to maintain
competency. The Macau government has been very helpful by implementing a
table cap of 5,500 tables to March 2013 and allowing about 3-5% growth
thereafter with around 2,000 additional tables by the end of 2022.
Figure 16
Macau gaming tables
Source: CLSA Asia-Pacific Markets
(6)
(4)
(2)
0
2
4
6
(4,000)
(3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
2008 2009 2010 2011 12CL 13CL 14CL
Free cashflow
FCF yield (RHS)
(US$m) (%)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12CL 13CL 2022
Galaxy Macau Phase II
Macau Studio City
The Parisian
SJM Cotai, MGM Cotai,
Wynn Cotai
(No.)
Maintenance capex
requirement is minimal
Some 2000 additional
gaming tables
by end of 2022
Forecast fee cashflow
generation of US$3-4bn
in 2012-14
The Macau gaming
operators have, over the
past years, been very
focused on their expertise
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
15 November 2012 aaron.fischer@clsa.com 13
Comparing the Macau gaming sector with other sectors in Asia, the capex-to-
sales ratio is very low, allowing most of the earnings to flow back to company
shareholders.
Figure 17
Asia capex as share of sales, 2009-11 average
Source: CLSA Asia-Pacific Markets
Over the past five years, casino operators have invested US$24bn in the Las
Vegas gaming market, whose revenue is likely to reach US$6bn in 2012 and
remain flat for some time. In Macau, the casino operators have invested
US$18bn in the past five years, with expected gaming revenue of US$39bn in
2012. In other words, Las Vegas has invested 4x the size of the gaming
market versus Macau which has invested only 0.5x the revenue level.
For casino properties that have been completed, maintenance caper required
is also minimal. Not until recently have we seen a slight uptick in
maintenance capes with high capacity utilisation and slightly intensifying
competition. But relative to the Ebitda generated by the casino property,
maintenance capex required is still minimal.
Figure 18
Investments in gaming sectors
Source: DICJ, company data
0 20 40 60 80 100
Luxury
Autos
Internet
Macau gaming
Capital goods
Consumer
Technology
Healthcare
Media
Conglomerates
Materials
Hotels & leisure
Telecoms
Property
Petro/chems
Transport
Infrastructure
Power
(%)
24
18
6
39
0
5
10
15
20
25
30
35
40
Las Vegas Macau
Investment over past five years
Gaming revenue (12CL)
(US$bn)
0.5x
4x
Only US$18bn investment
has been made in Macau
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
14 aaron.fischer@clsa.com 15 November 2012
Looking forward to the next round of projects, the capex requirement will not
be too onerous. Macaus gaming companies plan to spend US$2.0-3.5bn on
their next Cotai projects, which looks like a huge figure on the surface. But
the capex spend will span three to four years, implying that the average
annual capex on a new project is around US$0.5-1.0bn. Companies also
normally fund 50-75% of the Cotai expansion by debt financing, which
implies the actual cashflow strain to the company would be even less.
Figure 19
Cotai capex
(US$m) Total capex Avg annual
capex
Avg annual
equity
investment
Adj Ebitda
(2013)
Annual equity
investt as % of
13CL Ebitda
The Parisian (Sands Site 3) 3,000 750 300 2,471 12
Wynn Cotai 3,500 875 350 1,072 33
MGM Cotai 2,500 625 250 673 37
Macau Studio City 2,000 500 200 943 21
SJM Cotai 2,000 500 200 1,064 19
Galaxy Macau Phase II 2,000 500 200 1,355 15
Note: Assume the Cotai projects to take 4 years to build and also to assume 60% of the Cotai capex is to be funded by debt and 40% by equity;
Source: CLSA Asia-Pacific Markets
7. Rational with managing capital
Buffett praises companies which return excess cash to investors. Macau
gaming operators score well in this aspect as they return cash generously to
investors by means of dividends. In 2011, SJM, MGM China, Wynn Macau and
Sands China maintained a dividend payout ratio of 80-100%, representing
US$3bn of dividends returned to shareholders.
Figure 20
Dividend-payout ratio
(%) 2009 2010 2011 12CL 13CL 14CL
MGM Resorts 0 0 0 0 0 0
Las Vegas Sands 0 0 0 52 47 54
Wynn Resorts 2,353 658 133 188 133 114
Sands China 0 0 107 100 80 80
Wynn Macau 0 89 106 80 80 80
Melco Crown 0 0 0 0 0 0
Galaxy 0 0 0 0 0 0
SJM 42 54 76 80 80 80
MGM China 0 0 95 80 80 80
Source: CLSA Asia-Pacific Markets
The strong dividend payout by gaming companies has been underpinned by
three key factors.
First, the limited supply and strong demand for gaming has shaped a
favorable industry dynamics for casino operators, allowing them to face
minimal internal and external competition and to readily convert revenue
growth into profit growth.
Second, capex requirement of the gaming companies has been low, which
allowed earnings to be converted into free cashflows.
Lastly, senior management of the gaming companies has a very strong
appetite for dividends, which allowed free cashflows to be distributed to
shareholders as dividends.
Strong dividend payout
underpinned by three
key factors
Macau casinos plan to
spend US$2.0-3.5bn in
the next round of
Cotai projects
Macau gaming operators
generously return cash to
investors by means of
dividends
Gearing level was much
higher in 2007-08
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
15 November 2012 aaron.fischer@clsa.com 15
Figure 21
Dividend flow
Source: CLSA Asia-Pacific Markets
While Sheldon Adelson and Steve Wynn have had disagreements in the past,
they seem to agree on one thing - to pay high dividends - which they have
made clear in recent 3Q12 earnings conference calls.
We believe that companies should make money for their shareholders.
That's the reason we exist. And to create safe, steady, secure jobs for the
people that make the enterprise breathe: our staff. As long as we keep our
staff healthy and safe we'd like to give the shareholders of this company
the maximum benefit possible from the company's operations. And I say
that because so many of us on the board are shareholders, including key
members of management have most of their net worth invested in the
company's stock. So we think like shareholders.
Steve Wynn
I'm focused on delivering growth and maximising shareholder value. I
think our company assumes these goals in four key areas: one, organic
growth in existing properties; two, development growth that's within our
reach today; three, development of integrated reserve locations new to
Las Vegas Sands; and four, return of capital to shareholders through
growing annual dividends. It gives me great pleasure to announce that our
Board of Directors has approved an increase of our recurring quarterly
dividend in 2013 by 40% to US$0.35 per share per quarter or US$1.40 per
year. Let me add that we have every intention of increasing the dividend in
the years ahead as our business and cash flows continue to grow. I can
only say one thing about that, Go Dividend.
Sheldon Adelson
Favourable industry
dynamics allowing
companies to convert revenue
growth into profit growth
Low capex requirement
allowing companies to convert
profits into free cashflow
Management's strong
appetite for dividends allows
free cashflows to be converted
into dividend payments
Revenue
Net profit
Free cashflow
Dividends
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
16 aaron.fischer@clsa.com 15 November 2012
8. Generates high return on equity
As a value investor, Buffett likes companies that generate high ROE. The
Macau gaming sector scores well on this front, with its low capex requirement
allowing high ROE. In 2012, we expect the Macau gaming sector to generate
33% ROE, which is the highest among all the sectors in Asia.
Figure 22
Asia: Return on equity, 2012
Source: CLSA Asia-Pacific Markets
The high return on equity of the Macau gaming sector has been underpinned
by the respectable investment return generated by Macau casinos. In 2012,
we expect these casinos to generate an investment return of 30-130%.
Figure 23
Casinos: ROIC, 2012
Note: Casinos in Macau are highlighted in yellow, while casinos in Singapore and Las Vegas are
highlighted in Blue; Source: CLSA Asia-Pacific Markets
0 5 10 15 20 25 30 35
Power
Property
Transport
Infrastructure
Media
Insurance
Conglomerates
Capital goods
Materials
Petro/Chems
Telecoms
Financial services
Consumer
Technology
Hotels & Leisure
Healthcare
Autos
Internet
Macau Gaming
(%)
0 20 40 60 80 100 120 140 160
Wynn Las Vegas
Resorts World Sentosa
Venetian Las Vegas (including Palazzo)
Mariana Bay Sands
Altira
Four Seasons
City of Dreams
Galaxy Macau
Venetian Macau
MGM Macau
Wynn Macau
Grand Lisboa
Starworld
Sands Macao
(%)
Sands Macao and
Starworld generate
over 100% ROIC
Casinos in Macau
generated 30-130%
ROIC in 2012
In 2012, we expect Macau
to generate 33% ROE,
which is the highest
among all Asian sectors
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
15 November 2012 aaron.fischer@clsa.com 17
9. Avoids excess debt
Buffett prefers a prudent management style and would favour companies that
avoid excess debt. The Macau gaming sector is highly rich in cash. By 2012,
we expect the sector to have a net debt/(cash) as a share of equity ratio of
1%, with three out of the six Macau gaming operators in a net-cash position.
Figure 24
Asia: Net debt/(cash) as a share of equity, 12CL
Source: CLSA Asia-Pacific Markets
However, the situation only changed recently with some concerns of
bankruptcy particularly at the US parent company level only a few years ago.
Las Vegas Sands was badly hit during the financial crisis. In 2008-09, the
company had just opened the Venetian Macao and Four Seasons Macao,
while Sands Cotai Central and Marina Bay Sands still remain under
construction. The earnings base of the company was much smaller then,
while net gearing was sky high at 300% in 2007 as project loans were yet
to be repaid. With the low income base and the high interest cost, LVS
recorded two consecutive years of net losses in 2008-09. The share price of
Las Vegas Sands was down 97% from the peak and there were worries
about the company going bankrupt.
10. Current valuation offers margin of safety
Buffett also stresses the importance of a margin of safety, which is the
discount to fair value that the stock is currently offering. We understand the
importance of having a margin of safety and we do not rate a stock a BUY
unless we see more than 20% upside to our fair-value estimate of the stock.
You leave yourself an enormous margin of safety. You build a bridge that
30,000-pound trucks can go across and then you drive 10,000-pound
trucks across it. That is the way I like to go across bridges.
Warren Buffett
(40) (20) 0 20 40 60 80 100
Internet
Technology
Macau Gaming
Healthcare
Insurance
Hotels & Leisure
Media
Capital goods
Consumer
Property
Autos
Telecoms
Petro/Chems
Materials
Conglomerates
Transport
Infrastructure
Power
(62.9)
(%)
102.8
The Macau gaming sector
is highly rich in cash
LVS share price was
down 97% during the
financial crisis
Margin of safety is
the discount to fair value
that the stock is
currently offering
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
18 aaron.fischer@clsa.com 15 November 2012
Warren Buffett defines fair value as the discounted value of the cash that can
be taken out of a business during its remaining life. That is different from our
sum-of-the-parts valuation methodology, in which we value the existing
operations on EV/Ebitda and add an additional option value for the upcoming
Cotai project. Historically, EV/Ebitda is used because the gaming companies
incur a large amount of pre-opening cost, noncash cost (depreciation and
amortisation) and interest cost which resulted in a low net profit figure. That
is no longer true, with most of the casino properties fully ramped up and
companies generating strong net profits.
We value the Macau gaming companies based on 10-15x EV/Ebitda. We give
preference to stocks that have: short-term earnings growth; higher exposure
to more defensive mass-market and non-gaming segments; a Cotai or other
growth story; and pay dividends. We score the six Macau operators on these
metrics, with Sands China earning 14 ticks, Wynn Macau 11 and SJM 11.
Figure 25
Macau gaming: Stock selection scorecard
Earnings
growth
Mass-market
exposure
Additional
projects
Dividend Ticks Target
multiple
(x)
Sands China 14 15
Wynn Macau 11 13
SJM 11 11
MGM China 11 11
Galaxy - 8 11
Melco Crown - 8 10
Source: CLSA Asia-Pacific Markets
Even if we were to abide to free cashflows and dividends that Warren Buffett
pays most focus to, Macau is still undervalued with their expected free
cashflow yield at 4-5% in 2012-13 (versus Asia consumer of 2-3%) and
dividend yield at 4-5% (versus Asia consumer of 3%).
Figure 26
Valuation comparison
PE (x) FCF yield (%) Dividend yield (%)
2012 2013 2012 2013 2012 2013
Macau Gaming 19.4 16.3 4.8 4.1 4.3 4.9
China Consumer 25.7 19.9 0.7 3.0 1.8 2.1
Asia Consumer 19.2 16.9 1.8 3.3 2.9 3.3
Source: CLSA Asia-Pacific Markets
If we were to apply a discounted cashflow (DCF) valuation to the Macau
gaming companies, we still see them as attractively valued. We apply
conservative cashflow growth estimate of 5% pa to forecast the free-cashflow
generation of the existing properties operated by the gaming companies. We
also apply a 10% WACC and a terminal growth rate of 2% to derive the fair
value of the existing casino properties.
Trading at discount to the
consumer sector
Stock selection score card
We value Macau gaming
companies on EV/Ebitda
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 1: Macaus winning scorecard Macau gaming
15 November 2012 aaron.fischer@clsa.com 19
Figure 27
DCF valuation for existing properties
Wynn
Macau
SJM MGM
China
Galaxy Melco
Crown
Sands
China
Estimated cashflow growth (2014-2023) (%) 5 5 5 5 5 5
Estimated maintenance capex growth (2014-2023) (%) 5 5 5 5 5 5
WACC (%) 10 10 10 10 10 10
Terminal growth rate (%) 2 2 2 2 2 2
DCF fair value for existing operations 26.0 26.9 19.6 39.1 24.4 36.9
Current share price 22.7 17.2 13.7 27.4 15.0 30.5
% discount/(premium) to fair value for existing operations 15 57 43 43 63 21
Source: CLSA Asia-Pacific Markets
At current share prices, the Macau gaming operators are still trading at a 15-
63% discount to the fair value of their existing properties, not to mention that
there is still upside potential to the companys fair value as the upcoming
Cotai project start operation. We believe the valuations of the Macau gaming
companies are still attractive at current levels and offer investors a
reasonable margin of safety.
Figure 28
Macau gaming: % discount/(premium) to fair value for existing properties
Source: CLSA Asia-Pacific Markets
0 10 20 30 40 50 60 70
Wynn Macau
Sands China
MGM China
Galaxy
SJM
Melco Crown
(%)
Trading at 15-63%
discount to fair value of
existing operations
All six companies
offer reasonable
margin of safety
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
20 aaron.fischer@clsa.com 15 November 2012
Top performers
We analyse nine Macau-related gaming companies under our coverage to see
how they fare according to Buffetts investment criteria. Most score well on
the criteria but the better performers are those with heavier exposure to
mass market and non-gaming, lower capex requirements and pay high
dividends. Wynn Macau, MGM China and SJM score well. A lack of dividends
hurts Melco Crown and Galaxy, but they also have better growth potential.
Figure 29
Our Buffett-style scorecard
Sands
China
Wynn
Macau
Galaxy SJM MGM
China
Melco
Crown
LVS Wynn
Resorts
MGM
Resorts
1 Simple and understandable business 8.0 7.0 6.0 7.0 7.0 7.5 8.0 7.0 8.0
2 Has an economic moat protecting the business 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 6.0
3 Candid with shareholders 8.0 8.0 7.0 7.0 8.0 8.0 8.0 8.0 8.0
4 Long track record of delivering earnings growth 6.0 6.0 5.0 6.0 5.0 5.0 5.0 5.0 4.0
5 Consistent operating history 9.0 9.0 9.0 9.0 9.0 8.0 6.0 6.0 6.0
6 Generates high owner earnings; lack of need to reinvest 9.0 8.0 8.0 9.0 9.0 8.0 8.0 8.0 9.0
7 Rational with managing capital 9.0 9.0 8.0 9.0 9.0 8.0 8.0 9.0 7.0
8 Generates high return on equity 8.0 9.0 8.0 8.0 8.0 6.0 7.0 9.0 4.0
9 Avoids excess debt 8.0 9.0 8.0 9.0 9.0 8.0 6.0 6.0 5.0
10 Current valuation offers margin of safety 8.0 8.0 8.0 9.0 9.0 9.0 9.0 7.0 9.0
Average score 8.5 8.5 7.5 8.5 8.5 7.5 7.5 7.5 6.5
Source: CLSA Asia-Pacific Markets
1. Simple and understandable business
When ranking the companies under the simplicity of the business model, we
assess according to the earnings contribution from mass market and non-gaming
(simple) versus VIP (less transparent). As the VIP segment is primarily specific to
Macau, thus the US-listed companies with exposure in the USA, Singapore and
others markets have the lowest exposure to VIP. This is especially true for MGM
Resorts, which has a significant business in Las Vegas, and Las Vegas Sands,
which generates close to half its Ebitda from Singapore and some from Vegas
and Bethlehem. Among the Hong-Kong listed names, Sands China has the lowest
exposure to VIP gaming while Galaxy has the highest.
Figure 30
Ebitda breakdown by segment (2012)
Source: CLSA Asia-Pacific Markets
Top scorers: MGM Resorts, Las Vegas Sands and Sands China
54
62 63
46
56 57
54
44
41
33 18
14
21
10
3
3
13
8
13
20
23
33 34
41
43 44
51
0
10
20
30
40
50
60
70
80
90
100
MGM
Resorts
Las
Vegas
Sands
Sands
China
Wynn
Resorts
Melco
Crown
MGM
China
SJM Wynn
Macau
Galaxy
Mass Non-gaming VIP (%)
Of all the gaming
companies, SJM and
MGM China are the
highest scorers
MGM Resorts, LVS and
Sands China have the
highest exposure to mass
gaming and non-gaming
Macau gaming should be
a simple-enough business
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
15 November 2012 aaron.fischer@clsa.com 21
2. Economic moats protecting the business
To Buffett, the most important thing is to figure out how big a moat there is
around the business. The Macau gaming operators are protected by a strong
moat, as there are only six gaming licences issued in Macau. The table cap
implemented by the government also limits table supply growth and keeps
industry competition at bay.
As was detailed in The moat report, the definition of an economic moat is
simple: having a durable competitive advantage which over time will lead to
return ratios that can remain above cost of capital. The return ratios we focus
on are ROE and ROIC. Businesses with ROE and/or ROIC above their relevant
cost of capital are creating positive EVA
Companies are fairly
proactive with meeting
with analysts and
investors
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
22 aaron.fischer@clsa.com 15 November 2012
The gaming companies all offer in-depth financial disclosure, but if one
were to differentiate among the industry group, Las Vegas Sands, Sands
China, Wynn Macau and Wynn Resorts offer the most detailed financial
breakdown in their quarterly release, while SJM is weaker side in terms of
disclosure of financials.
Top scorers: Las Vegas Sands, Sands China, Wynn Macau and Wynn Resorts
4. Long track record of earnings growth
Macau has liberalised its gaming market in 2002, while Singapore issued the
countrys first gaming concession in 2006. Most of the regions flagship
casinos were not opened until 2007. Before the opening, the earnings base of
the gaming companies was much smaller and could be loss making, given the
high interest cost, non-cash cost (like depreciation), pre-opening cost that
need to be incurred before the full ramp up of the casino resort.
Figure 32
Casinos opening date
Casino Opening year
Sands Macao 2004
Wynn Macau 2006
Starworld 2006
Grand Lisboa 2007
MGM Macau 2007
Altira 2007
Venetian 2007
Four Seasons 2008
Ponte 16 2008
City of Dreams 2009
LArc 2009
Oceanus 2009
Wynn Encore 2010
Resorts World Sentosa 2010
Marina Bay Sands 2010
Galaxy Macau 2011
Sands Cotai Central 2012
Source: CLSA Asia-Pacific Markets
To identify gaming companies with the longest track record of earnings
growth, we look at Ebitda generated by the casinos over the past 12 years.
On an Ebitda basis, Las Vegas Sands stood out as the company with the
longest track record of earnings growth, with its consecutive growth trend
since 2002. Sands China has also been consistently expanding its Ebitda since
2006, when the company financials become publicly available.
Figure 33
Casino Ebitda
Company Code Ebitda (US$m) Years of
consecutive
earnings growth
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12CL
MGM Resorts MGM US 1,133 1,167 1,117 1,340 1,943 2,384 2,440 1,882 1,107 930 1,557 1,838 2
Las Vegas Sands LVS US 171 156 261 462 665 831 875 1,062 1,086 2,229 3,532 4,044 10
Wynn Resorts WYNN US na na na na 211 391 779 737 746 1,162 1,635 1,547 3
Sands China 1928 HK na na na na na 457 512 671 798 1,189 1,548 1,880 6
Wynn Macau 1128 HK na na na na na 44 316 405 418 758 1,017 991 5
Melco Crown MPEL US na na na na na na (37) 157 56 430 810 877 3
Galaxy 27 HK na na na na na na 188 70 150 288 625 1,264 4
SJM 880 HK na na na na na na 271 204 293 624 853 965 4
MGM China 2282 HK na na na na na na - 111 149 361 611 657 4
Source: CLSA Asia-Pacific Markets, company data
On Ebitda basis, Sands
China and LVS has the
longest track record of
earnings growth
The Singapore casinos
were only opened in 2010
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
15 November 2012 aaron.fischer@clsa.com 23
In addition to the low earnings base, the gaming companies net gearing was
also much higher, as they rely on project loan or bank credit facilities to fund
construction of the casino. Net gearing of the gaming companies declined rapidly
post opening, with Las Vegas Sands net gearing falling form 297% in 2007 to an
estimated of 53% in 2012, while Wynn Macau, SJM and MGM China has moved
from a net debt position in 2008 to net cash position in 2012.
Figure 34
Net debt to equity ratio
(%) 2006 2007 2008 2009 2010 2011 12CL
MGM Resorts 342 190 351 326 413 126 132
Las Vegas Sands 177 297 157 83 84 65 53
Wynn Resorts 105 127 218 64 103 120 na
Sands China 130 239 258 52 48 17 29
Wynn Macau (27) (21) 736 74 26 (11) (22)
Melco Crown na (9) 30 63 55 37 11
Galaxy na (9) 9 28 53 39 6
SJM na (16) 13 (1) (34) (61) (52)
MGM China na na 1,199 1,888 268 (30) (32)
Source: CLSA Asia-Pacific Markets
The earnings track record of the gaming companies is weaker on net profit
basis. Gaming companies gearing level has historically been quite high with
many of the major integrated resorts under construction including projects in
Macau, Singapore (eg Marina Bay Sands), and Las Vegas (eg MGMs
CityCentre). Most of the gaming companies have a much lower earnings base,
with net profit significantly impacted by the high pre-opening and interest
cost. Sands China has the longest track record of earnings growth with its net
profit on consecutive growth for five years. Wynn Macau and SJM came in
second by growing their net profit continuously for four years in a row.
Figure 35
Casino net profit
Company Code Net profit (US$m) Years of
consecutive
earnings growth
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12CL
MGM Resorts MGM US 170 292 244 412 443 648 1,584 (855) (1,292) (1,437) 3,115 (536) na
Las Vegas Sands LVS US 8 (12) 67 495 284 442 117 (189) (540) 407 1,270 1,779 2
Wynn Resorts WYNN US na na na na (91) 629 196 210 21 160 613 528 2
Sands China 1928 HK na na na na na 376 196 174 216 678 1,119 1,219 4
Wynn Macau 1128 HK na na na na na 758 178 265 267 571 760 829 5
Melco Crown MPEL US na na na na na na (178) (2) (308) (11) 292 395 1
Galaxy 27 HK na na na na na na (60) (1,470) 68 233 388 940 3
SJM 880 HK na na na na na na 198 103 139 459 685 833 4
MGM China 2282 HK na na na na na na na (38) (22) 202 423 541 2
Source: CLSA Asia-Pacific Markets, company data
Top scorers: Wynn Macau, Sands China and SJM
5. Consistent operating history
We assess each company one by one. Sheldon Adelson (Chairman and CEO of
Las Vegas Sands) founded the company in 1988 after having successfully
founded the computer trade show, Comdex, in 1979. Sheldon opened his first
casino resort - Venetian Las Vegas in 1999, which turned out to be a huge
success. Sheldon then brought his vision to Macau, where he was awarded a
casino concession in 2002. He soon understood the enormous potential for
gaming in Asia when the Sands Macao yielded over 100% investment return
in its first year of operations in 2004. Sheldon then took on ambitious
development plans in Asia by constructing Venetian, Four Seasons and Sands
Sands China, Wynn Macau
and SJM have the longest
track record of net
profit growth
Las Vegas Sands opened
its first casino in LV in
1999 and moved into
Asia in 2004
Gearing level was much
higher in 2007-08
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
24 aaron.fischer@clsa.com 15 November 2012
Cotai Central on the Cotai Strip and also to develop Marina Bay Sands in
Singapore. The financial crisis has impacted the development timeline of
these projects, but they were all eventually opened in 2007-12 and have all
turned out to be huge success, yielding investment returns in excess of 20%.
Steve Wynn, founder of Wynn Resorts, designed and built some of the most
famous properties in Las Vegas including The Mirage, Bellagio, Treasure
Island, and Golden Nugget. When Steves control of Mirage Resorts was
wrestled away by MGM, Steve immediately started his next venture, Wynn
Resorts, by buying Desert Inn on the Las Vegas Strip and constructed Wynn
Las Vegas (US$2.7bn), the most expensive casino ever built up until the
construction of MGMs CityCenter (US$9bn). Given Steves strong track record
in the US, the Macau government offered Steve Wynn a concession in Macau
and Steve Wynn opened the Wynn Macau in 2006. After the split between Las
Vegas Sands and Galaxy that resulted in the creation of a sub-concession,
Steve Wynn sold his sub-concession to Melco for US$900m.
MGM was first founded by Kirk Kerkorian in the 1960s as a casino owner and
operator. Through a series of mergers and acquisitions (Mirage Resorts in
2000 and Mandalay in 2004), the company controlled roughly one-quarter of
gaming revenues on the Las Vegas Strip and owned operations across the US
including Mississippi, Atlantic City (50% of Borgata), and Michigan. In 2005,
in partnership with Pansy Ho (daughter of Stanley Ho, Chairman of SJM),
MGM bought the sub-concession from SJM for US$200m to begin construction
of MGM Grand Macau which opened in 2007.
When in 2002, Caesars missed the bid for a concession in Macau, the company
was offered another chance to buy a stake into Macau. In 2005, Caesars
Entertainment was the largest gaming company in the world (US$10bn in
revenues and nearly 50 casino properties) at the time when Wynn offered to sell
Caesars its sub-concession for US$900m (the only remaining sub-concession
after MGM and Pansy bought SJMs sub-concession for US$200m). However,
Caesars felt the US$900m price tag was too high and ultimately allowed Melco to
acquire the sub-concession. Quickly realizing its mistake, the company reportedly
spent US$580m to acquire a golf course on Macaus Cotai Strip in hopes of
obtaining a casino license later on. However, the company announced in October
2012 that the Macau government has said they will not be issuing any new
licenses to US companies, formally ending Caesars bid in Macau.
Unlike the parentco, we expect the Macau subsidiary of the US gaming
companies to have a very consistent business operations, as they are
bounded by their mandate to focus only on the Greater China region, while
the parent company (ie, Las Vegas Sands, Wynn Resorts and MGM Resorts)
will be the investment vehicle to carry out overseas expansion. With Hong
Kong and China highly unlikely to legalize gaming, the country that the Macau
gaming companies could possibly expand into would be Taiwan.
For the local Macau gaming operators (like SJM, Galaxy and Melco crown),
they are not bounded by a business mandate and can expand overseas if any
attractive investment opportunities prevail. In fact, Melco Crown has recently
announced its plans to expand into the Philippines to develop Belle Grande
Manila jointly with Belle Corp. But for SJM and Galaxy, we believe the chance
of them winning a gaming concession in overseas location is low and
therefore is more likely to be focusing on Macau in the future.
Steve Wynn, the designer
of one of the best casinos
in the world, opened its
first Asian casino in 2006
MGM, with the long
heritage in Las Vegas,
opened MGM Macau
in 2007
Caesars missed the boat
Macau subsidiary should
have very consistent
business operations
SJM and Galaxy are
unlikely to divest
out of Macau . . .
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
15 November 2012 aaron.fischer@clsa.com 25
Figure 36
Asia/USA gaming: Business operations by location
Sands
China
Wynn
Macau
Galaxy SJM MGM
China
Melco
Crown
LVS Wynn
Resorts
MGM
Resorts
Macau
HK/China
Taiwan O O O O
Singapore
Philippines
Other Asia
United States
Americas (ex-USA)
Europe
Note: Tick mark represents markets which the company is already operating in or is highly likely to be operating in, circle mark represents market
which the company could potentially expand into, while cross mark represents markets which the company is highly unlikely to expand into;
Source: CLSA Asia-Pacific Markets
Consistency is not true for some other gaming operators such as the Genting
Group in Malaysia. Genting received the first and only gaming license in
Malaysia in 1969 and opened the Genting highlands in 1971. The company
moved out of its core business in 1977 by entering the Plantations division. In
1990, management turned their focus back to the gaming business by
expanding the Genting Highlands. In 1993, Genting ventured into another
new business by launching the Star Cruises.
In the 1990s, Genting moved into the paper manufacturing and oil and gas
extraction business. The company also expanded into the power industry by
acquiring power plants in India. In 2005, Genting expanded into the UK by
acquiring the Maxim Casino Club. In 2010, Genting turned its focus back to
Asean by opening Resorts World Sentosa before opening Resorts World New
York in 2011.
Figure 37
Corporate history of Genting Bhd
1969 Begin construction of Genting Highland
1971 Genting Highland opens
1977 Company launches Plantation division
1990 Three new hotels and theme parks added to Genting Highland
1993 Company launches Star Cruise
1994 Company diversifies with purchase of Sanyen Paper Mill complex
1996 Purchased 45% stake in British Gas Muturi PSC in Irian Jaya, Indonesia
1998 Launch of corrugated packaging plant
2000 Stake in Muturi PSC sold to British Petroleum
2003 Acquired equity interest in power plant in India
2005 Expanded into UK by acquiring Maxims Casino Club
2010 Opened Resorts World Sentosa
2011 Opened Resorts World New York
Source: CLSA Asia-Pacific Markets
Top scorers: Sands China, Wynn Macau and MGM China
. . . not really the case for
Genting Bhd
Gentings history
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
26 aaron.fischer@clsa.com 15 November 2012
6. Generate high owner earnings and lack of need to renivest
All nine Macau gaming companies are cashflow positive and we expect them
to generate average free cashflow of US$330-1,716m per annum in 2012-13.
Las Vegas Sands is the strongest cashflow generator with expected free-
cashflow generation of US$1,716m pa in 2012-13. We expect SJM to come in
second and to generate an average free cashflow of US$1bn in 2012-13. SJM
generates the highest free-cashflow yield of 9% followed by 7% from MGM
China and MGM Resorts.
Figure 38 Figure 39
Free cashflow - 2012-13CL avg Free-cashflow yield - 2012-13CL avg
Source: CLSA Asia-Pacific Markets
Top scorers: SJM, MGM China, MGM Resorts
Lack of need to actively reinvest
As mentioned above, the Macau government has implemented strict controls
on expansion so all six gaming companies only have one or two more casino
properties left to build in the enclave. Melco Crown is the only Macau
concession holder investing outside the market with one investment thus far
in the Philippines.
Gaming companies generally do not need to actively reinvest as the
maintenance capex required by a casino property is quite minimal, compared
to the huge operational in-cashflow. Maintenance capex should continue to be
relatively low, although may increase slightly as companies improve premium
mass gaming space.
US gaming operators continue to look for opportunities in other markets such
as Spain and Japan, but globally governments have been slow to issue casino
licenses, despite the potential need for increased tax revenues, job creation
and tourism following the global financial crisis.
Figure 40
List of potential Cotai projects
Company Potential Cotai expansion Estimated capex (US$bn)
Sands China Sands Site 3 3.0
Wynn Macau Wynn Cotai 3.5
Galaxy Galaxy Macau Phase II 2.0
Melco Crown Macau Studio City 1.9
SJM SJM Cotai 2.0
MGM China MGM Cotai 2.5
Source: CLSA Asia-Pacific Markets
0 500 1,000 1,500 2,000
MGM Resorts
Melco Crown
MGM China
Wynn Macau
Wynn Resorts
Galaxy
Sands China
SJM
Las Vegas Sands
(US$m)
0 2 4 6 8 10
Sands China
Wynn Macau
Las Vegas Sands
Galaxy
Wynn Resorts
Melco Crown
MGM Resorts
MGM China
SJM
(%)
Strong free-cashflow
generation
Strong free cashflow
generation
The Macau gaming
companies only have one
more casino left to build
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
15 November 2012 aaron.fischer@clsa.com 27
Las Vegas Sands and Sands China stood out as the companies with the
highest expected capex spend in 2012-13 as they are still constructing the
Sands Cotai Central. We estimate LVS and Sands China to incur an average of
US$1.3bn and US$1.1bn capex in 2012-13. SJM and MGM China will be the
companies with the lowest expected capex, as they have only recently
received the Cotai approval and are likely to be just spending mostly on
maintenance capex in 2012-13. On capex to OCF ratio, Melco Crown also
stands out as a big capex spender as we forecast the company to spend on
the construction of Belle Grande Manila and also Macau Studio City.
Figure 41 Figure 42
Capex, 2012-13 avg Capex as % of operating cashflow, 2012-13 avg
Source: CLSA Asia-Pacific Markets
Top scorers: SJM, MGM China, MGM Resorts
7. Rational with managing capital
As detailed in our Still raining cash report, casino operators generate high
free cashflow, with reasonable revenue growth, limited cost pressure, low
working capital and capex requirements. From 2009, most casino operators
have turned FCF positive and in 2011, Las Vegas Sands, Wynn Resorts and
Wynn Macau generated FCF in excess of US$1bn.
Figure 43
Free cashflow
(US$m) 2006 2007 2008 2009 2010 2011 12CL 13CL
MGM Resorts (551) (1,923) (43) 465 297 212 340 (284)
Las Vegas Sands (2,122) (3,433) (3,664) (1,454) (154) 1,154 923 1,993
Wynn Resorts (403) (348) (810) 53 773 1,332 840 393
Sands China (679) (1,443) (1,717) 318 1,016 709 618 1,064
Wynn Macau (328) 19 204 283 756 1,095 755 466
Melco Crown na (517) (1,136) (1,070) 109 933 894 15
Galaxy na (57) (307) (99) (51) (147) 577 805
SJM na (413) (199) 347 957 976 1,031 995
MGM China na na (55) 99 400 667 580 386
Source: CLSA Asia-Pacific Markets
0 500 1,000 1,500
MGM China
SJM
MGM Resorts
Wynn Macau
Melco Crown
Galaxy
Wynn Resorts
Sands China
Las Vegas Sands
(US$m)
0 10 20 30 40 50 60 70
SJM
MGM Resorts
MGM China
Las Vegas Sands
Wynn Resorts
Wynn Macau
Galaxy
Melco Crown
Sands China
(%)
Maintenance capex
requirement is minimal
In 2011, LVS, Wynn
Resorts and Wynn Macau
generated free cashflow
in excess of US$1bn . . .
Casino operators are very
strong in free-cashflow
generation
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
28 aaron.fischer@clsa.com 15 November 2012
Figure 44
Free cashflow yield
(%) 2006 2007 2008 2009 2010 2011 12CL 13CL
MGM Resorts (11.2) (38.9) (0.9) 9.4 6.0 4.3 6.9 (5.8)
Las Vegas Sands (5.8) (9.4) (10.0) (4.0) (0.4) 3.2 2.5 5.6
Wynn Resorts (3.6) (3.1) (7.2) 0.5 6.9 11.9 7.5 3.6
Sands China (2.1) (4.5) (5.3) 1.0 3.1 2.2 1.9 3.4
Wynn Macau (2.1) 0.1 1.3 1.8 4.9 7.1 4.9 3.1
Melco Crown na (6.3) (13.9) (13.1) 1.3 11.4 10.9 0.2
Galaxy na (0.4) (2.0) (0.6) (0.3) (0.9) 3.7 5.4
SJM na (3.3) (1.6) 2.7 7.6 7.7 8.1 7.7
MGM China na na (0.8) 1.5 5.9 9.8 8.5 5.8
Source: CLSA Asia-Pacific Markets
With the strong free-cashflow generation and rising cash balance, we praise
companies that actively return excess cash to shareholders in the form of
dividends. SJM, Wynn Resorts and MGM China have been most generous in
returning cash to investors, and we expect them to deliver 6-7% average
dividend yield in 2012-13. Galaxy and Melco Crown do not pay dividends, but
that is a result of them having a better growth prospects, and we are not
disappointed by the lack of dividend in the next 12 months.
Figure 45
Dividend
(US$m) 2006 2007 2008 2009 2010 2011 12CL 13CL
MGM Resorts 0 0 0 0 0 0 0 0
Las Vegas Sands 0 0 0 0 0 0 823 1,154
Wynn Resorts 593 0 0 395 840 642 939 810
Sands China 0 0 0 0 0 1,207 1,188 1,512
Wynn Macau 0 0 0 0 509 803 663 690
Melco Crown na 0 0 0 0 0 0 0
Galaxy na 0 0 0 0 0 0 0
SJM na 0 5 65 250 520 671 737
MGM China na na 0 0 0 400 361 406
Figure 46
Dividend yield
(%) 2006 2007 2008 2009 2010 2011 12CL 13CL
MGM Resorts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Las Vegas Sands 0.0 0.0 0.0 0.0 0.0 0.0 2.3 3.2
Wynn Resorts 5.3 0.0 0.0 3.5 7.5 5.7 8.4 7.4
Sands China 0.0 0.0 0.0 0.0 0.0 3.7 3.7 4.9
Wynn Macau 0.0 0.0 0.0 0.0 3.3 5.2 4.3 4.6
Melco Crown na 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Galaxy na 0.0 0.0 0.0 0.0 0.0 0.0 0.0
SJM na 0.0 0.0 0.5 2.0 4.1 5.3 5.7
MGM China na na 0.0 0.0 0.0 5.9 5.3 6.1
Source: CLSA Asia-Pacific Markets
Top scorers: Wynn Resorts, SJM and MGM China
8. Generates high return on equity
Return on equity (ROE) is one of the better financial metrics to assess a
companys ability to create value for shareholders. The key differentiator is
whether the company was a buyer or seller of the gaming concessions. While
this occurred back in 2002, we still find the situation unusual. The brief
. . . representing FCF
yield of 3-11%
Expect Sands China to
distribute US$1.2bn of
dividend in 2012
In 2012, we expect Macau
to generate 33% ROE -
the highest among all
Asian sectors
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
15 November 2012 aaron.fischer@clsa.com 29
background is that the government issued three gaming concessions at zero
cost to SJM, Wynn and a joint venture between Las Vegas Sands and Galaxy.
Soon after, there was some disagreement between Las Vegas Sands and
Galaxy so the government allowed this concession to be effectively split into
two. The government then allowed SJM and Wynn to sell a subconcession to
another party - SJM selling to MGM for US$200m and Wynn selling to Melco
Crown for US$900m.
As a result, Wynn Macau stands out as the company with the highest ROE of
137% in 2012. Wynn Macaus high ROE is in also due to the highly successful
Wynn Macau casino, which we estimate to generate an ROIC of 65% in
2012. Melco Crown generates the lowest ROE. That is also partly due to the
high capex for City of Dreams of US$2.7bn (vs. Venetian Macao of US$2.4bn,
Galaxy Macau of US$2.0bn and Wynn Macau of US$1.8bn).
Return on equity of Sands China is relatively low among the peer group as
the company asset base is largely composed of Cotai projects, which contains
more non-gaming elements that yield low invest return. Another key reason
to the low ROE is because the assets of Sands Cotai Central has already been
recorded in the companys balance sheet, while the earnings from the casino
is not reflected in the companys 2012 net profit as the property is still yet to
ramp up.
Figure 47
Return on equity, 2012
Source: CLSA Asia-Pacific Markets
Macau subsidiaries also tend to generate higher return on equity (versus the
US parentco) as the investment return generated by a Macau casino is much
higher than those in Las Vegas and in Singapore. Construction cost of an
integrated resort in Las Vegas and Macau are quite similar, but property
Ebitda is much higher in Macau due to a bigger gaming market size. Property
Ebitda in Singapore are high, helped by the low gaming tax, but construction
cost is also much higher with the two Singapore IRs costing US$5.5-6.5bn
each, while Macau casinos generally only cost US$2-3bn. The lower
investment return from the Singapore and Las Vegas Sands is the key reason
why the ROE of the Macau subsidiary is significantly higher than that of the
parent company.
(20) 0 20 40 60 80 100 120 140
MGM Resorts
Melco Crown
Las Vegas Sands
Sands China
SJM
Galaxy
Wynn Resorts
MGM China
Wynn Macau
(%)
Wynn Macau generate
the highest ROE
Investment return
generated by a Macau
casino is much higher
Wynn Macau stands out
as the company with the
highest ROE of 137%
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
30 aaron.fischer@clsa.com 15 November 2012
Figure 48
Casinos: ROIC, 2012
Note: Casinos in Macau are highlighted in yellow, while casinos in Singapore and Las Vegas are
highlighted in Blue; Source: CLSA Asia-Pacific Markets
Figure 49
Casinos: Property cost and Ebitda, 2012
Cost (US$m) Ebitda (US$m) ROIC (%)
Wynn Las Vegas 2,700 365 14
Resorts World Sentosa 5,500 1,183 22
Venetian Las Vegas 1,530 355 23
Mariana Bay Sands 6,500 1,645 25
Altira 580 150 26
Four Seasons 974 266 27
City of Dreams 2,700 769 28
Galaxy Macau 1,987 716 36
Venetian Macau 2,400 1,099 46
MGM Macau 1,200 723 60
Wynn Macau 1,800 1,178 65
Grand Lisboa 625 604 97
Starworld 411 436 106
Sands Macao 265 357 135
Source: CLSA Asia-Pacific Markets
Top scorers: Wynn Macau, MGM China, Wynn Resorts
9. Avoids excess debt
Generally, gearing at the parent level is higher, with MGM Resorts and Las
Vegas Sands being more highly levered than their Macau subsidiaries. Wynn
Resorts net gearing is less comparable to that of other gaming companies as
Wynn has issued a 10-year bond to redeem the 20% stakes owned by Kazuo
Okada, which moved the companys net asset balance to negative territory.
SJM and MGM China are the companies with the lowest gearing, with net cash
accounting for 25-52% of shareholder equity.
0 20 40 60 80 100 120 140 160
Wynn Las Vegas
Resorts World Sentosa
Venetian Las Vegas (including Palazzo)
Mariana Bay Sands
Altira
Four Seasons
City of Dreams
Galaxy Macau
Venetian Macau
MGM Macau
Wynn Macau
Grand Lisboa
Starworld
Sands Macao
(%)
The Macau gaming sector
is highly rich in cash
Sands Macao and
Starworld generates
over 100% ROIC
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 2: Top performers Macau gaming
15 November 2012 aaron.fischer@clsa.com 31
Figure 50
Net debt to equity (2012)
Source: CLSA Asia-Pacific Markets
Top scorers: SJM, MGM China, Wynn Macau
10. Current valuation offers margin of safety
Buffett also stresses the importance of a margin of safety, which is the
discount to fair value that the stock is currently offering. We derive the fair
value of the Macau operators by using 10-15x 2013 EV/Ebitda to our earnings
estimate. Based on our fair-value estimates, the sector is now trading at 73-
88% of its fair value, offering 12-27% margin of safety, which should be wide
enough for investors to maintain positive on the sector. Among the nine
gaming companies, MGM China, MGM Resorts and SJM are the companies
offering the widest margin of safety of 26-27%.
Figure 51
Margin of safety
Source: CLSA Asia-Pacific Markets
Top scorers: MGM China, MGM Resorts, SJM and Melco Crown
(100) (50) 0 50 100 150
SJM
MGM China
Wynn Macau
Galaxy
Melco Crown
Sands China
Las Vegas Sands
MGM Resorts
Wynn Resorts
(%)
na
0 5 10 15 20 25 30
Wynn Resorts
Sands China
Wynn Macau
Galaxy
Las Vegas Sands
Melco Crown
SJM
MGM Resorts
MGM China
(%)
Macau offers a wide
margin of safety
SJM, MGM China and
Wynn Macau are expected
to be net cash in 2012
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 3: Annualised average return of 20% to 2016 Macau gaming
32 aaron.fischer@clsa.com 15 November 2012
Annualised average return of 20% to 2016
We value Macau stocks on sum of the parts - like the street - applying an
EV/Ebitda multiple to earnings from existing operations and adding a DCF-
derived fair value for future projects. However, we believe the industry
should now be valued based on dividend yields and we are slowly seeing
some growth investors leaving the sector, with yield seekers taking their
place. It takes time for the market to view the sector in a different light
but it will occur once investors fully believe in the sustainability of the
dividends - we are not there yet. Using this alternative methodology, we
value the stocks on yield which results in an average four-year annualised
return of 12-23% from now until 2016.
Highest yield in Asia
We believe the sector is currently undervalued, offering free-cashflow yields
of 4-5% (versus Asia consumers 2-3%) and dividend yields of 4-5% (versus
Asia consumers 3%).
Figure 52
Valuation comparison
PE (x) FCF yield (%) Dividend yield (%)
2012 2013 2012 2013 2012 2013
Macau gaming 19.4 16.3 4.8 4.1 4.3 4.9
China consumer 25.7 19.9 0.7 3.0 1.8 2.1
Asia consumer 19.2 16.9 1.8 3.3 2.9 3.3
Source: CLSA Asia-Pacific Markets
Supported by strong free-cashflow generation, we expect the Macau gaming
companies to deliver a 2013 dividend yield of 5%, the highest among all
sectors in Asia and significantly better than the market average of 3%.
Figure 53
Asia: Dividend yield by sector (13CL)
Source: CLSA Asia-Pacific Markets
0 1 2 3 4 5 6
Internet
Healthcare
Autos
Technology
Insurance
Conglomerates
Capital goods
Petro/Chems
Consumer
Power
Materials
Hotels & Leisure
Property
Infrastructure
Transport
Media
Financial services
Telecoms
Macau gaming
(%)
Macau gaming offers best
dividend yields
Trading at discount to the
consumer sector
Macau: Increasingly
a yield sector
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 3: Annualised average return of 20% to 2016 Macau gaming
15 November 2012 aaron.fischer@clsa.com 33
Gradual pricing in of Cotai
In addition to the attractive dividend yield, the Macau gaming operators also
benefit from the gradual pricing in of the Cotai projects. Wynn Cotai, Galaxy
Macau Phase 2, and Macau Studio City have already commenced
construction, while the others are still pending the construction permit to
start. With most of the casino properties running at high capacity utilisation,
we expect the upcoming Cotai projects to drive substantial earnings growth.
We estimate the Cotai projects account for 6-24% of the fair value, despite
assuming low return on investment (ROIC) of 14-19% (compared to 27-46%
ROIC for existing Cotai properties) to factor in potential risk of delay.
Figure 54
Cotai: Value computation assumptions
Wynn SJM MGM Melco Galaxy Sands
Project capex (US$m) 3,500 2,000 2,500 2,000 2,000 3,000
WACC (%) 12.0 12.0 12.0 12.0 12.0 12.0
Terminal growth rate (%) 2.0 2.0 2.0 2.0 2.0 2.0
Project ROIC (%) 19.0 17.0 14.0 17.0 17.0 15.0
Maintenance capex as % of project capex 6.0 5.0 5.0 5.0 5.0 5.0
Project stakes owned (%) 100 100 100 60 100 100
Cotai value as % of target price 24.0 12.9 17.0 12.4 12.1 6.5
Figure 55
Cotai casinos ROIC (12CL)
Source: CLSA Asia-Pacific Markets
Alternative valuation: Yield to completion
With macro uncertainty, we expect investors to increasingly appreciate the
dividend-generation capability of the Macau gaming operators. Our
microstrategy team highlights in its recent Dividend wave 2012 report that
there has been consistent weekly inflow into dividend-focused equity fund
since 2011, adding up to an impressive US$70bn inflow from 2011 to 2012
YTD. The strong inflow into dividend funds could also mean that investors are
starting to value the sector based on dividend yields instead of growth.
27
28
36
46
0 10 20 30 40 50
Four Seasons
City of Dreams
Galaxy Macau
Venetian Macao
(%)
DCF model
Dividends and also
gradual pricing in of Cotai
Existing Cotai properties
generate 27-46% ROIC
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 3: Annualised average return of 20% to 2016 Macau gaming
34 aaron.fischer@clsa.com 15 November 2012
Figure 56
Global dividend equity funds - Monthly flows, 2011-YTD12
Source: EPFR global, CLSA Asia-Pacific Markets
To combine the strong dividends yields and the potential capital gain from the
upcoming Cotai projects, we look at yield to completion, which shows the
average total return (dividends + capital return) that the Macau gaming
companies can offer between 2013 and 2016, before the opening of the next
Cotai property.
We calculate our 2016 target price by applying 10-15x EV/Ebitda to our 2016
Ebitda estimate. The 2016 Ebitda is composed of two components, Ebitda
from existing operations and Ebitda from the new Cotai projects. We calculate
the 2016 Ebitda on existing operations by applying 5% p.a. growth to our
2014 estimate. While for the Cotai projects, to simplify, we assume all of the
six companies to open in 2016 and to generate US$340-665m Ebitda
(calculated based on US$2.0-3.5bn construction capex and return on
investment of 14-19%).
Figure 57
Macau gaming: 2016 target price
Sands
China
Wynn
Macau
MGM
China
Melco
Crown
SJM Galaxy
2014 adj. Ebitda (US$m) - Existing operations 2,833 1,178 726 1,016 1,174 1,485
2016 adj. Ebitda (US$m) - Existing operations 3,123 1,299 800 1,120 1,295 1,637
Cotai capex (US$m) 3,000 3,500 2,500 2,000 2,000 2,000
Cotai ROIC (%) 15 19 14 17 17 17
2016 Cotai Ebitda (US$m) 450 665 350 340 340 340
2016 Total Ebitda (US$m) 3,573 1,964 1,150 1,460 1,635 1,977
EV/Ebitda multiple 15 13 11 10 11 11
Enteprise value (US$m) 53,592 25,528 12,652 14,604 17,982 21,747
Net debt (US$m) 2,328 813 5 15 (2,695) (1,577)
Equity value (US$m) 51,265 24,715 12,646 14,589 20,677 23,325
No. of shares 8,050 5,188 3,800 552 5,523 4,180
Target price (LC$) 49.4 36.9 25.8 26.4 29.0 43.2
Note: Assume 5% Ebitda growth on existing operations in 2015-16 for the six gaming companies; Source: CLSA Asia-Pacific Markets
Our 2016 target price implies an annualised capital return of 12-17% over
the next four years. The 12-17% capital return, combined with the
forecasted 5-6% dividend yield implies that the Macau gaming firms are set
to offer investors an average four-year annualised return of 12-23% from
now until 2016.
(1,000)
(500)
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(US$m)
Global dividend funds witnessed inflows in
91 weeks out of 96 since 2011
US$70bn inflow from
2011 to 2012YTD
Use yield to completion
as an alternative
valuation method
Apply 10-15x multiple to
2016 Ebitda to derive our
2016 price target
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 3: Annualised average return of 20% to 2016 Macau gaming
15 November 2012 aaron.fischer@clsa.com 35
Figure 58
Macau gaming: Yield to completion
Company Price
(lcy)
Target
(lcy)
Dividend yield
(%)
Annualised
capital return (%)
Annualised
dividend return (%)
Annualised
total return (%)
2016 13CL 14CL 15CL 16CL 13-16CL 13-16CL 13-16CL
Galaxy 27.4 43.2 0.0 0.0 0.0 0.0 12.1 0.0 12.1
Melco Crown 15.0 26.4 0.0 0.0 0.0 0.0 15.2 0.0 15.2
MGM China 13.7 25.8 5.8 6.3 6.3 6.3 17.1 6.2 23.3
Sands China 30.5 49.4 4.7 5.7 5.7 5.7 12.8 5.4 18.2
SJM 17.2 29.0 5.9 6.6 6.6 6.6 14.0 6.4 20.4
Wynn Macau 22.7 36.9 4.6 5.0 5.0 5.0 13.0 4.9 17.9
Source: CLSA Asia-Pacific Markets
Still raining cash; Maintain BUY
As detailed in our Still raining cash report, we favour the sector for its strong
free cashflow generation, high dividend yield and gradual pricing in of Cotai.
We believe the Macau gaming sector is the best way to gain exposure to the
rising Chinese middle class. Despite the strong share-price performance in
the past few months, we still like the sector and have nine BUYs in our global
gaming coverage.
Figure 59
Global gaming: Three-month share-price performance
Source: CLSA Asia-Pacific Markets
We recently lifted Galaxys target EV/Ebitda multiple from 10x to 11x and
upgraded the stock from Outperform to BUY on the companys strong
performance in further improving Galaxy Macau. We highlight Melco Crown,
SJM, Wynn Macau and Las Vegas Sands as our top sector picks.
Figure 60
Valuations
Company Code Ctry Price
(lcy)
Target
(lcy)
Upside
(%)
Rec Mkt cap
(US$m)
PE
(x)
EV/Ebitda
(x)
Cashflow
yield (%)
Div yield
(%)
2012 2013 2012 2013 2012 2013 2012 2013
Galaxy 27 HK HK 27.4 33.0 20.7 BUY 14,812 15.7 14.6 11.9 10.6 3.9 5.4 - -
Las Vegas Sands LVS US USA 42.8 58.0 35.5 BUY 36,571 22.2 14.4 11.1 9.3 0.3 0.7 3.3 4.2
Melco Crown MPEL US US 14.2 19.4 36.7 BUY 8,080 18.9 15.8 9.5 8.7 10.8 0.2 - -
MGM China 2282 HK HK 13.7 18.8 37.2 BUY 6,716 12.3 13.7 9.8 9.6 8.4 5.6 5.4 5.8
MGM Resorts MGM US USA 9.8 14.0 42.9 BUY 4,782 nm nm 11.1 10.3 0.4 (0.7) - -
Sands China 1928 HK HK 30.5 35.3 15.7 BUY 31,686 26.6 16.8 18.0 13.8 1.8 3.3 3.7 4.7
SJM 880 HK HK 17.2 23.2 34.9 BUY 12,309 14.8 13.5 11.5 10.2 8.1 7.8 5.4 5.9
Wynn Macau 1128 HK HK 22.7 27.1 19.6 BUY 15,159 18.3 17.6 15.1 12.5 4.9 3.0 4.4 4.6
Wynn Resorts WYNN US USA 109.3 127.0 16.2 BUY 10,982 22.1 18.2 10.7 10.2 1.0 0.5 8.7 7.3
Source: CLSA Asia-Pacific Markets
(5) 0 5 10 15 20 25 30 35 40
MGM Resorts
Wynn Resorts
Las Vegas Sands
MGM China
SJM
Sands China
Wynn Macau
Melco Crown
Galaxy
(%)
We recently upgraded
Galaxy from Outperform
to BUY
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 4: Best way to play Chinese consumption Macau gaming
36 aaron.fischer@clsa.com 15 November 2012
Best way to play Chinese consumption
Our recent Still raining cash report highlighted the Macau gaming sector as
the best way to gain exposure to the rising Chinese middle class due to the
industrys ability to convert consumer spending into a companys free
cashflow and dividends. In 2011, Macau gaming companies converted
US$35bn of casino revenue into US$4.2bn of free cashflow (11.9% of
revenue) and US$3.0bn of dividends (8.4%). The conversion ratio of Macau
gaming firms has been significantly higher than that of other consumer
companies, which were able to convert less than 1% of industry revenue.
We carried out our analysis by collating industry revenue from
Euromonitor estimates and various industry sources. Next, we aggregate
the revenue, net profit, free cashflow and dividend of the various listed
consumer companies to calculate their key financial metrics. By comparing
the listed-company financials with industry revenue, we can determine
how much of mainland Chinese consumer spending has been converted
into free cashflow and dividends.
Figure 61
China consumer/gaming: Listco revenue and dividend (2011)
Source: CLSA Asia-Pacific Markets
Figure 62
China consumer/gaming: Key financials, 2011
Sector Industry
revenue
(US$bn)
Listco
revenue
(US$bn)
Listco
net profit
(US$bn)
Listco
FCF
(US$bn)
Listco
dividend
(US$bn)
As % of industry revenue
Listco
revenue
Listco
net profit
Listco
FCF
Listco
dividend
Macau gaming 35.0 35.0 3.7 4.2 3.0 100.0 10.5 11.9 8.4
Department stores 35.1 2.1 0.6 0.3 0.2 5.9 1.7 0.8 0.6
Jewellery 39.9 13.2 1.3 (1.0) 0.2 33.1 3.3 (2.5) 0.5
Daily use goods 42.7 3.5 0.5 0.1 0.3 8.2 1.1 0.3 0.6
Apparel (incl sportswear) 128.4 6.5 1.0 0.3 0.4 8.7 1.2 0.4 0.5
Food, beverage and tobacco 159.5 27.7 1.8 (0.8) 0.7 17.4 1.1 (0.5) 0.5
Autos 321.3 96.3 6.5 2.4 1.1 30.0 2.0 0.8 0.3
Supermarket 543.9 14.8 0.3 0.1 0.2 2.7 0.1 - -
Note: Industry revenue of department stores is based on gross department store sales from Euromonitor multiplied by average concession rate of
listed department store operators (26.4%); industry supermarket revenue is based on Euromonitor estimates; while industry revenue of daily use
goods, apparel, food, beverages and tobacco and autos are based on China retail sales figure prepared by the National Bureau of Statistics of
China; Industry revenue of jewellery is an aggregate of jewellery retail sales in Hong Kong and Mainland China; Source: CLSA Asia-Pacific Markets,
CEIC, Euromonitor, company data
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Revenue Dividend (RHS) (US$bn) (US$bn)
The research thesis
Macau casinos distributed
US$3bn in dividends
in 2011
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 4: Best way to play Chinese consumption Macau gaming
15 November 2012 aaron.fischer@clsa.com 37
Key drivers of better dividends for Macau versus peers include:
Shifting budgets in favour of discretionary spending
Less-competitive industry landscape - externally (very few jurisdictions
have legalised gaming) and internally (only six licensed operators)
High earnings visibility
Strong cashflow conversion due to lower capex requirement
Appetite to pay dividends (especially US companies)
Macau gaming. The Macau gaming companies offer good exposure to
mainland Chinese spending as the six licensed casino operators account for
100% of the market. The low capex requirement enables them to generate
strong free cashflow. The companies also have a strong appetite to pay
dividends, with Sands China, Wynn Macau, SJM and MGM China estimated to
deliver 80% dividend payouts.
Jewellery. Investors enjoys good exposure to the jewellery sector from the
listed watch and jewellery retailers (including Chow Tai Fook, Luk Fook,
Emperor Watch & Jewellery, Oriental Watch, Hengdeli and Chow Sang Sang),
as they in aggregate account for 33% of total industry retail sales. However,
they have failed to generate positive free cashflow, as the companies have
been aggressively expanding store network with most of the operating profits
reinvested back into the business for inventory purchases and new store
openings. The weak free-cashflow generation has therefore limited their
capacity to distribute dividends, with 2011 payouts at 30-40%.
Daily use goods. Listed daily use goods manufacturers (like Hengan, Vinda,
Shanghai Jahwa and Magic) tend to enjoy high market share in their
respective product segments. But there are various daily use goods
manufacturers like Guangzhou Liby (largest player in dishwashing products,
laundry care and home care in China according to Euromonitor) which are not
listed. Free cashflow generation of daily use goods companies is not very high
as most are spending sizeable capex to expand their production capacity. This
resulted in a lower dividend payout of 30-60% in 2011.
Apparel. Listed apparel companies (including Belle Intl, Trinity, Li Lang,
Daphne, Evergreen Intl and the various sportswear manufacturers) are
aggressively pursuing growth by expanding their store networks. Capex
requirements are not as high as the daily use goods or food and beverages
companies as a large portion of the point-of-sales are third-party operated.
Free cashflow generation of the apparel companies are generally strong
(except sportswear manufacturers which have been building up inventory and
accounts receivables as a result of wholesale channel stuffing). In 2011, the
limited capex requirement enabled the apparel firms to maintain high
dividend payouts of 30-80%.
Food, beverages and tobacco (FBT). Listed food and beverages
manufacturers (including Tingyi, Want Want, Tsingtao, Uni-President, Mengniu
Dairy, China Foods, Dynasty Wine, Changyu Wine and China Huiyuan Juice)
offer strong exposure to mainland Chineses FBT spending with their dominant
industry position. They are still trying to pursue growth by taking over small
players or construct new production facilities, which imply higher capex
investment and lower free cashflow generation. The sizeable expansionary
capex resulted in a lower dividend payout of 20-60% in 2011.
Most operating profits
reinvested into the
business for inventory
and store openings
Capex spent on expanding
production capacity
Apparel (ex-sportswear)
are strong in cashflow
generation
Acquisitions and
production capacity
expansion led to high
capex spending
Macau can convert rising
revenue into free
cashflow and dividends
Minimal capex
requirement allows high
dividend payout
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 4: Best way to play Chinese consumption Macau gaming
38 aaron.fischer@clsa.com 15 November 2012
Autos. Investors can gain high exposure to mainland Chinese automobiles
spending from listed manufacturers (including Shanghai Auto, Dongfeng,
Great Wall Motor, Brilliance Auto, GAC and Geely), with these companies
accounting for 30% of total industry retail sales. Profit margin of auto
manufacturers is much lower than consumables companies due to the high
overhead, raw materials and distribution cost. Capex intensity of the
automakers is also high to maintain the production facility and expand
capacity to drive earnings growth. The weak free-cashflow generation has
limited capacity to distribute dividend, with the companies maintaining a
dividend payout of 10-30% in 2011.
Department stores. The listed department stores (like Golden Eagle,
Parkson Retail Group, Intime and New World Department Store) do not offer
strong exposure to the Chinese department-store industry, as their aggregate
market share is rather low. Department-store operators generate wide profit
margins but companies are also aggressively expanding their store network
to tap onto the consumption growth in inland China. In 2011, the
department-store operators maintained a dividend payout of 30-50%.
Supermarkets. Listed supermarket operators, like Sun Art and Lianhua
Supermarket, offer investors minimal exposure to mainland Chineses
supermarket spending, as there are still a large number of non-modern
grocery retailers in the country. Supermarket operations carry thin margins.
Capex requirement is also high as expanding store network is the key to
future earnings growth. With sizeable expansionary capex, the supermarket
operators maintained a dividend payout of 30-50% in 2011.
Varying returns despite structural tailwind
Most investors are well aware of the rising consumer spending in China
underpinned by disposable income growth and low penetration in many
consumer-product categories. The growing consumer spending is a structural
tailwind for most of the consumer sub-segments, but over the past years, it
has not benefitted all of them equally in terms of share-price return. Out of
them all, Macau gaming companies were the biggest beneficiaries in terms of
share-price performance as the market rewards the high cashflow generation.
Figure 63
China consumer companies: Share-price performance by subsegments
Source: CLSA Asia-Pacific Markets
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e
p
1
1
N
o
v
1
1
J
a
n
1
2
M
a
r
1
2
M
a
y
1
2
J
u
l
1
2
Dept store Supermarket
FBT Daily use goods
Apparel Sportswear
Jewellery Autos
Macau gaming
(Rebased to 100)
Low dividend payouts due
to thin margin and high
capex requirement
Aggressive store
expansion plan results in
high capex spending
Sourcing growth by
rolling out new
supermarkets
Macau casinos are the
biggest beneficiaries
(in terms of share-price
performance)
Macau delivered +620%
share-price return
since 2009
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Section 4: Best way to play Chinese consumption Macau gaming
15 November 2012 aaron.fischer@clsa.com 39
Overlaying share-price performance with net-profit growth highlights that the
laggards have underperformed due to their weak capability in converting the
robust spending by Chinese into earnings growth. From 2009 to 2012 YTD,
Macau gaming companies grew their earnings by 1,148%, underpinning
strong share-price growth of 620%.
Figure 64
China consumer: Share-price changes, 2009-12 to date
Source: Bloomberg, CLSA Asia-Pacific Markets
Please refer to our Still raining cash report for more details
(100) 0 100 200 300 400 500 600 700
Sportswear
Department store
Food, beverages & tobacco
Supermarket
Daily use goods
Apparel
Jewellery
Autos
Macau gaming
Net profit growth (2009-12)
Share-price performance
(%)
1,148
Strong profit growth
underpins share-price
performance
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Macau gaming
40 aaron.fischer@clsa.com 15 November 2012
Notes
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Macau gaming
15 November 2012 aaron.fischer@clsa.com 41
Company profiles
Galaxy .............................................................................................. 43
Las Vegas Sands ............................................................................. 47
Melco Crown ..................................................................................... 51
MGM China ....................................................................................... 55
MGM Resorts ................................................................................... 59
Sands China ..................................................................................... 63
SJM .................................................................................................. 67
Wynn Macau ..................................................................................... 71
Wynn Resorts ................................................................................. 75
Covered by Credit Agricole Securities (USA) Inc.
All prices quoted herein are as at close of business 8 November 2012, unless otherwise stated
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Macau gaming
42 aaron.fischer@clsa.com 15 November 2012
Notes
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Galaxy
HK$27.35 - BUY
Financials
Year to 31 December 10A 11A 12CL 13CL 14CL
Revenue (HK$m) 19,262 41,186 56,137 58,434 62,409
Net profit (HK$m) 1,806 3,004 7,286 7,806 8,797
EPS (HK) 45.3 71.9 174.3 186.8 210.5
CL/consensus (23) (EPS%) - - 101 96 93
EPS growth (% YoY) 237.1 58.5 142.5 7.1 12.7
PE (x) 60.3 38.1 15.7 14.6 13.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
FCF yield (%) (0.4) (1.0) 3.9 5.5 6.0
PB (x) 11.8 8.0 5.3 3.9 3.0
ROE (%) 20.2 25.0 40.3 30.7 26.1
Net debt/equity (%) 52.8 38.7 5.6 (14.3) (26.9)
Source: CLSA Asia-Pacific Markets
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com
Aaron Fischer, CFA
aaron.fischer@clsa.com
(852) 26008256
Richard Huang
(852) 26008455
Mariana Kou, CFA
(852) 26008190
15 November 2012
Hong Kong
Hotels & Leisure
Reuters 0027.HK
Bloomberg 27 HK
Priced on 8 November 2012
HK HSI @ 21,566.9
12M hi/lo HK$29.45/13.20
12M price target HK$33.00
% potential +21%
Shares in issue 4,179.7m
Free float (est.) 31.3%
Market cap US$14,812m
3M average daily volume
HK$554.0m (US$71.5m)
Major shareholders
City Lion 31.8%
Stock performance (%)
1M 3M 12M
Absolute 8.7 36.9 65.4
Relative 5.0 27.4 50.9
Source: Bloomberg
www.clsa.com
50
100
150
200
250
300
350
400
450
5
10
15
20
25
30
35
Nov 10 Jul 11 Mar 12 Nov 12
Galaxy (LHS)
Rel to HSI
(HK$) (%)
Awaiting next phase
The addition of Galaxy Macau in May 2011 drove a strong 117% Ebitda
gain in 2011 and will help it to another 102% hike in 2012. The property
should continue to boost earnings, but given the high 2012 base we see
less scope for further improvement: we expect Ebitda growth to slow to
7% in 2013 pending the opening of Galaxy Macau Phase 2. We recently
lifted our target EV/Ebitda multiple to 11x and upgraded the stock from
Outperform to BUY. Our new HK$33.0 target implies 21% upside.
Investment thesis
The strong market-share expansion after the addition of Galaxy Macau was
the key driver of Galaxys 117% Ebitda jump in 2011 and will help it to a
102% Ebitda increase in 2012. This is likely to slow in 2013, as there is less
scope for further improvement in performance at the property. In the longer
term, the company is likely to resume rapid earnings growth with the opening
of Galaxy Macau Phase 2 in mid-2015.
Catalysts
The companys continued efforts to ramp up Galaxy Macau and to improve
operational efficiencies should be the key earnings drivers. In the longer
term, the markets gradual pricing in of Galaxy Macau Phase 2 will be an
additional share-price catalyst.
Growth estimate
We expect Galaxys revenue to increase 36% in 2012 (to HK$56bn) and 4%
in 2013 (to HK$58bn). The strong topline gains should translate into a
significant 102% jump in Ebitda in 2012 (to HK$9.8bn) and a further 7% rise
(to HK$10.5bn) in 2013. In 3Q12, the property Ebitda of Galaxy Macau came
in at US$227m, which is largely in line with City of Dreams US$204m, Wynn
Macaus US$292m and Venetian Macaos US$299m. This suggests less room
for the property to ramp up further.
Valuation
We recently raised our target multiple from 10x to 11x to reflect Galaxys
growing mass-market exposure and improved visibility on its Cotai
development. We value the stock using an 11x 13CL EV/Ebitda for existing
operations and HK$4.00 per share for Galaxy Macau Phase 2. Our HK$33.0
target (previously HK$30.5) implies an 18x 13CL PE, which we believe is fair
given that it is still at a discount to our 20-25x target PEs for other Chinese
consumer-discretionary names.
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Galaxy - BUY Macau gaming
44 aaron.fischer@clsa.com 15 November 2012
Dividend yield Return on equity
Free cashflow Capex as % of operating cashflow
Net debt/(cash) as a % of equity
Source: CLSA Asia-Pacific Markets
0
1
2
3
4
5
6
2010 2011 12CL 13CL 14CL
Galaxy Industry average (%)
na na na na na
(20)
(10)
0
10
20
30
40
50
2008 2009 2010 2011 12CL 13CL 14CL
Galaxy Industry average (%)
(88)
(3)
(2)
(1)
0
1
2
3
4
5
6
7
(400)
(200)
0
200
400
600
800
1,000
2008 2009 2010 2011 12CL 13CL 14CL
Free cashflow
FCF yield (RHS)
(US$m) (%)
0
30
60
90
120
150
2009 2010 2011 12CL 13CL 14CL
Galaxy Industry average (%)
(40)
(20)
0
20
40
60
80
100
2008 2009 2010 2011 12CL 13CL 14CL
Galaxy Industry average (%)
We expect Galaxy to turn
net cash in 2013
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
Galaxy - BUY Macau gaming
15 November 2012 aaron.fischer@clsa.com 45
Summary financials
Year to 31 December 10A 11A 12CL 13CL 14CL
Summary P&L forecast (HK$m)
Revenue 19,262 41,186 56,137 58,434 62,409
Op Ebitda 2,231 4,848 9,794 10,498 11,507
Op Ebit 1,720 3,600 7,983 8,686 9,696
Interest income 25 62 108 108 108
Interest expense (59) (400) (616) (780) (760)
Other items 180 (201) (19) 101 101
Profit before tax 1,866 3,061 7,456 8,115 9,145
Taxation (45) (32) (51) (81) (91)
Minorities/Pref divs (16) (26) (119) (228) (256)
Net profit 1,806 3,004 7,286 7,806 8,797
Summary cashflow forecast (HK$m)
Operating profit 1,720 3,600 7,983 8,686 9,696
Operating adjustments - - - - -
Depreciation/amortisation 511 1,248 1,811 1,811 1,811
Working capital changes - - - - -
Net interest/taxes/other (125) (984) (2,069) (9) 351
Net operating cashflow 2,106 3,864 7,725 10,488 11,859
Capital expenditure (2,500) (5,000) (3,250) (4,250) (5,000)
Free cashflow (394) (1,136) 4,475 6,238 6,859
Acq/inv/disposals - - - - -
Int, invt & associate div (2,247) (1,503) 108 108 108
Net investing cashflow (4,747) (6,503) (3,142) (4,142) (4,892)
Increase in loans 7,004 2,246 3,929 (3,162) 4,374
Dividends (9) 0 0 0 0
Net equity raised/other (3,503) 2,032 (164) (780) (760)
Net financing cashflow 3,492 4,278 3,764 (3,942) 3,614
Incr/(decr) in net cash 851 1,639 8,348 2,404 10,581
Exch rate movements 2 4 0 0 0
Opening cash 3,516 4,369 6,013 14,361 16,765
Closing cash 4,370 6,013 14,361 16,765 27,346
Summary balance sheet forecast (HK$m)
Cash & equivalents 4,369 6,013 14,361 16,765 27,346
Debtors 363 595 686 737 787
Inventories 87 138 84 82 87
Other current assets 716 2,537 2,567 2,646 2,725
Fixed assets 12,471 17,469 18,631 21,070 24,259
Intangible assets - - - - -
Other term assets 7,179 9,012 8,935 8,935 8,935
Total assets 25,186 35,764 45,263 50,234 64,138
Short-term debt 2,283 1,142 2,036 1,126 -
Creditors 5,244 8,829 6,859 6,958 7,434
Other current liabs 481 22 38 38 38
Long-term debt/CBs 7,144 10,531 13,565 11,313 16,813
Provisions/other LT liabs 460 597 631 631 631
Minorities/other equity 378 421 557 784 1,041
Shareholder funds 9,197 14,222 21,578 29,384 38,181
Total liabs & equity 25,186 35,764 45,263 50,234 64,138
Ratio analysis
Revenue growth (% YoY) 57.5 113.8 36.3 4.1 6.8
Ebitda growth (% YoY) 92.2 117.3 102.0 7.2 9.6
Ebitda margin (%) 11.6 11.8 17.4 18.0 18.4
Net profit margin (%) 9.4 7.3 13.0 13.4 14.1
Dividend payout (%) 0.0 0.0 0.0 0.0 0.0
Effective tax rate (%) 2.4 1.0 0.7 1.0 1.0
Ebitda/net int exp (x) 66.2 14.4 19.3 15.6 17.7
Net debt/equity (%) 52.8 38.7 5.6 (14.3) (26.9)
ROE (%) 20.2 25.0 40.3 30.7 26.1
ROIC (%) 12.7 19.8 35.3 34.1 34.4
EVA
is a registered trademark of Stern, Stewart & Co. "CL" in charts and tables stands for CAS estimates
unless otherwise noted in the source.
Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk
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2012 CLSA Asia-Pacific Markets ("CLSA").
Key to CLSA/Credit Agricole Securities investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater
absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be
less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to
provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the
12-month forecast return (including dividends) for the local market where the stock is traded. 16/10/2012
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Prepared for EV: Jolin.Majmin@gemstarcapital.co.uk