Maintaining Macau Gaming Revenue Forecasts as We Reduce Table Allocations for MGM China and SJM

If You Build It, They Will Come: Macau Will Rise Again, but Amid Near-Term Growing Pains

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

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Thematic (Sector/Industry)

China Consumer discretionary / Thematic (Sector/Industry)

The 7.4% year-over-year gross gaming revenue increase in September is stronger than consensus estimates. The improvement is driven by a low base for VIP revenue (Dore theft incident in September 2015) and three new casinos stimulating demand. The increase appears to be broad-based across the VIP and mass segments, based on our conversations with industry participants. Without an official breakdown between VIP and mass revenue, we estimate that both mass and VIP revenue increased by at least mid-single-digit rates on a year-over-year basis. We have turned slightly more positive on the outlook for the junket VIP business, following our checks indicating continuous improvement in liquidity. However, we maintain our VIP revenue forecast of negative 16% this year, as it remains to be seen whether the VIP revenue improvement is sustainable.We maintain our fair value estimates for our Macau gaming coverage, with an unchanged three-year horizon. Our Macau gaming coverage is now fairly valued, with the exception of <a href="https://www.smartkarma.com/entities/472" target="_blank" data-smartkarma-citation="entities:472:1">MGM China Holdings Ltd (2282 HK)</a> and <a href="https://www.smartkarma.com/entities/606" target="_blank" data-smartkarma-citation="entities:606:1">Wynn Resorts Ltd (WYNN US)</a>. Our best ideas MGM China and Wynn Resorts have price/fair value estimate ratios of 0.84 times and 0.80 times, respectively, and fair value estimates of HKD 16.00 per share and $122 per share. <a href="https://www.smartkarma.com/entities/806" target="_blank" data-smartkarma-citation="entities:806:1">Galaxy Entertainment Group Limited (27 HK)</a> has the next lowest price/fair value estimate of 0.88 times and a fair value estimate of HKD 33.00 per share.Analyst: Chelsey Tam

The 7.4% year-over-year gross gaming revenue increase in September is stronger than consensus estimates. The improvement is driven by a low base for VIP revenue (Dore theft incident in September 2015) and three new casinos stimulating demand. The increase appears to be broad-based across the VIP and mass segments, based on our conversations with industry participants. Without an official breakdown between VIP and mass revenue, we estimate that both mass and VIP revenue increased by at least mid-single-digit rates on a year-over-year basis. We have turned slightly more positive on the outlook for the junket VIP business, following our checks indicating continuous improvement in liquidity. However, we maintain our VIP revenue forecast of negative 16% this year, as it remains to be seen whether the VIP revenue improvement is sustainable.We maintain our fair value estimates for our Macau gaming coverage, with an unchanged three-year horizon. Our Macau gaming coverage is now fairly valued, with the exception of MGM China Holdings Ltd (2282 HK) and Wynn Resorts Ltd (WYNN US). Our best ideas MGM China and Wynn Resorts have price/fair value estimate ratios of 0.84 times and 0.80 times, respectively, and fair value estimates of HKD 16.00 per share and $122 per share. Galaxy Entertainment Group Limited (27 HK) has the next lowest price/fair value estimate of 0.88 times and a fair value estimate of HKD 33.00 per share.Analyst: Chelsey Tam

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Gaming Revenue Returned to Growth in September and August; More Optimism in the Junket VIP Business