Downgrading FVEs of Macau Gaming Coverage; China Economy and Policies Extend Near-Term Uncertainty

Leading Independent Investment Research, Morningstar, Inc.

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Equity Bottom-Up

As one of six casino licence holders in Macau, <a href="https://www.smartkarma.com/entities/805" target="_blank" data-smartkarma-citation="entities:805:1">SJM Holdings Ltd (880 HK)</a>s benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply of 8,000 hotel rooms by major casino operators in 2015 and 2016 versus a total of 32,249 hotel rooms in Macau in 2015, has increased higher-spending overnight visitors and revitalize appeal for Macau. We expect another 4,280 rooms by major casino operators in 2017 and 2018 to continue to increase the quality of tourists. With the completion of the Hong Kong-Zhuhai-Macau bridge and light railway transit at the end of this decade, Macau's carrying capacity for tourists will increase. In addition, the neighbouring Hengqin Island, 3 times the size of Macau, is under rapid development to complement Macau's growth.SJM has lost Macau gaming market share, going from 32.1% in the first quarter of 2011 to 18.5% in the third quarter of 2016. We expect market share losses to continue until the opening of SJM's new casino complex in Cotai, Lisboa Palace, in early 2018. Currently, SJM's casinos and satellite casinos are all located in the Macau Peninsula. Being the last major casino project to open in Cotai, SJM could face more difficulties in hiring dealers, who are required to be locals by the government. Given our table grant forecast of 150 and the relocation of 200 tables to Lisboa Palace in 2018, we expect Lisboa Palace to regain market share for the group. The new resort includes three hotels with 2,000 rooms, more than 4 times the current room count at Grand Lisboa, giving SJM more complimentary rooms for premium mass customers, who are 4 times more profitable.Our fair value estimate is HKD 6.60 per share, implying forward enterprise value/adjusted EBITDA of 6.4 times.Analyst: Chelsea Tam

As one of six casino licence holders in Macau, SJM Holdings Ltd (880 HK)s benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply of 8,000 hotel rooms by major casino operators in 2015 and 2016 versus a total of 32,249 hotel rooms in Macau in 2015, has increased higher-spending overnight visitors and revitalize appeal for Macau. We expect another 4,280 rooms by major casino operators in 2017 and 2018 to continue to increase the quality of tourists. With the completion of the Hong Kong-Zhuhai-Macau bridge and light railway transit at the end of this decade, Macau's carrying capacity for tourists will increase. In addition, the neighbouring Hengqin Island, 3 times the size of Macau, is under rapid development to complement Macau's growth.SJM has lost Macau gaming market share, going from 32.1% in the first quarter of 2011 to 18.5% in the third quarter of 2016. We expect market share losses to continue until the opening of SJM's new casino complex in Cotai, Lisboa Palace, in early 2018. Currently, SJM's casinos and satellite casinos are all located in the Macau Peninsula. Being the last major casino project to open in Cotai, SJM could face more difficulties in hiring dealers, who are required to be locals by the government. Given our table grant forecast of 150 and the relocation of 200 tables to Lisboa Palace in 2018, we expect Lisboa Palace to regain market share for the group. The new resort includes three hotels with 2,000 rooms, more than 4 times the current room count at Grand Lisboa, giving SJM more complimentary rooms for premium mass customers, who are 4 times more profitable.Our fair value estimate is HKD 6.60 per share, implying forward enterprise value/adjusted EBITDA of 6.4 times.Analyst: Chelsea Tam

SJM Holdings Is the Last Casino Licence Holder to Benefit from a Presence in Cotai