Macau:Concession bidding process -more clarity by mid-2018
Policy Address hints at more clarity on concession bidding process by mid-2018.
GGR in 2H is usually 10% higher than in 1H。
Macau's Chief Executive has delivered the 2018 Policy Address. As in previousyears, he urged gaming operators to diversify and to support local SMEs. But thisyear, he also highlighted the need to review the legislative framework regardingthe gaming concession bidding process. After speaking to legislative experts,we believe it will take Macau's Legislative Assembly 12-24 months to debate,vote and pass the new laws governing the next gaming concessions. If thisdrags beyond SJM/MGM's concession expiry in March 2020, then Macau's nextChief Executive, to be elected in Dec 2019, may extend the current concessions,providing time for the legislative process to finish. Click Fig 1 to see the timelineof the previous gaming concession legislative process in 2000-02.
QTD, Macau stocks have underperformed MSCI HK by 10ppt as 2Q results mostlymissed expectations. Of the 5companies reported, only Wynn delivered both GGR& EBITDA qoq growth. On 30Aug, we think Galaxy will be the next one to deliverboth GGR & EBITDA qoq growth. Recently, local checks told us that more smalljunkets are expanding footprints (Fig 4). e.g. Galaxy Macau just opened a VIP roomfor David junket in August. Historically, 2H is the high season with GGR typically10% above that in 1H. But consensus seems to be too conservative, forecasting2H17EBITDA to be merely 1% above 1H17. We think Wynn and Galaxy have thestrongest consensus upgrade potential (Fig 20). Our 2H17F EBITDA for Wynn &Galaxy is 12% above consensus. Top pick Wynn.。
Tighter junket regulations have little impact on VIP GGR, in our view.
2Q17wrap: Wynn the biggest beneficiary in this Macau recovery。
At a gaming conference, the Head of Gaming Bureau (DICJ) said the regulatorplans to lift standards for junket operators beginning in January when they submittheir licenses for annual renewal. This may include closer monitoring of junkets'credit records and of the practice of taking temporary deposits from unqualifiedlocal citizens. We believe such regulations would have little impact on VIP GGRin 2018. Over the past 3 years, consolidation has left the Top 5 junkets controllingover 85% of the VIP market. These Top 5 junkets have strong balance sheets andare likely to be better at coping with regulations (Fig 3). Indeed, we expect thenew wave of junket room opening to support VIP GGR in 2018 (Fig 4).
Five of the 6Macau gaming operators had reported 2Q results. Key takeaways:
Greater Bay Area initiative to improve Macau's infrastructures.
(1) In the 2Q low season, Macau GGR slipped 1% qoq as VIP (roll +4% qoq)did not grow enough to offset the seasonal softness in mass (Mass GGR -4%qoq).
As part of his policy address, Macau's Chief Executive highlighted theopportunities brought about by the Central Government's "Guangdong-HKMacauGreater Bay Area" initiative. The HK-Zhuhai-Macau Bridge will be aninstrumental project to provide long-term visitor growth. The 55-km bridge canshorten travel time between HK and Macau from 1 hour by ferry to 30 min byroad, and buses can run as frequently as every 5 minutes during peak hours(vs existing ferry schedule every 15 minutes). We believe the portion connectingZhuhai to Macau may start operations by early 2018, but the portion connectingHK to Macau may not open until late 2018. We lift our forecast of Macau's longtermvisitor growth from 2% CAGR in 2012-16 to 7.5% CAGR in 2017-20 (Fig 8).
(2) Cotai continued to gain share, esp in the mass market.
Free cash flow yield attractive for Wynn Macau; key risks.
(3) Competitionsremained largely disciplined - Promotional allowances (comps) rose from 10% ofMass GGR in 1H16to 11% in 2H16after Wynn & Sands openings, but remainedlargely flattish in 1H17. That said, Cotai casino comps are noticeably higher thanPeninsula (11% vs 9% of Mass GGR), which may become a problem when moreCotai casinos open. Thankfully, other cost items such as junket commissions andlabour costs had remained stable (Figure 24).。
We maintain our above-consensus 2018 GGR forecast of 13% (vs consensus 9%)as strong junket liquidity should keep VIP growth solidly at 15% (vs consensus VIPGGR +8%). We reiterate Wynn Macau (Buy) as our top pick given what we see as an attractive 7% 2018F FCF yield. Macau stocks are trading at 14.0x DB 2018Efwd EV/EBITDA, at +1 standard deviation over the historical average. We viewcurrent valuation as reasonable in an upcycle. We value Macau stocks on SOTP.
2H17outlook: GGR growth slows, but not as much as the market fears。
Downside risks include a sharp slowdown in GGR momentum and regulatorychanges. Upside risks include faster-than-expected GGR growth in 2018.
Consensus is expecting a sharp slowdown in GGR momentum from 29% yoy inJuly to 12% yoy in Aug-Dec. While we agree that GGR growth will slow giventougher comps, we think it will only slow to 17% yoy in Aug-Dec. We're morebullish than the Street because we’ve learnt from junkets that China's Tier-3cities are minting new VIPs as the "Shanty Town Reimbursement Plan" has beenpropping up property prices in Tier-3cities. Recall that Macau's VIP GGR is mostlycorrelated to Tier-3city property prices (75% correlation Figure 6) , and not toTier-1city property prices (Figure 5).。
Valuation now more reasonable after pullback; key risks。
We value Macau stocks on SOTP with target multiples on 2017e EV/EBITDA.Downside risks: a sharp slowdown in GGR momentum, a change in investorpreference from momentum stocks to value stocks and regulatory changes.Upside risks: milder-than-expected tightening of China's macro credit policy.。