Macau Legend (1680.HK): Adjust to the New Normal

Q1 Highlights -GGR was down 54% while net revenues fell 22% in Q1. Adj. EBITDA dropped 66%y/y. EBITDA was negatively impacted by increased marketing cost associated with the promotion of its new property and absorbing some expenses from the 3 external junkets that closedoperations at the Landmark in the quarter. Hotel occupancy room rates dropped precipitously in the quarter. The Landmark Macau occupancy was 64% down from 93% last year while room rates fell from HK$1,375 to HK$1,038 per night. The Rocks Hotel occupancy slipped 12ppt to 74% and room rates fell 27%y/y. The new Harbourview Hotel which opened at the start of February appeared to havea slow start with occupancy at 42% and room rates at affordable HK$509/night. Management said occupancy and rate figures were impacted due to having only half of the rooms open during the period. According to management, recent occupancy rates are closer to 80% on the weekends with rates near HK$1,000/night.

Outlook -Management noted that the firm is suffering from an overall market contraction in Q1. Company said all segments VIP, premium mass and mass were all negatively impacted and that improvements unlikely to be seen until the end of 2016. The focus for MLD will be on completing their planned property projects but adjusting marketing and customer targeting efforts as needed given the changing market dynamics in Macau. The company is also seeing increased competition from other gaming companies on the Peninsula side. Notably, higher rebates and incentives were being offered for mass gamers. Management said they will be revisiting all corporate cost and tightening as necessary.

Forecasts and Valuation -Weare adjusting our estimates down for MLD due to the soft Q1 results and continued market contraction. Our 2015 EPS estimateis reduced from 13cents/shareto 1.4cents/shareand Our 2016 EPS from 20cents/share to 3.9cents/share. We lower our target price from HK$4.30/share to HK$2.50/share based our SOTP valuation and implied EV/EBITDA multiple of 19.5X our 2016 EBITDA estimate. The slowdown in hotel occupancy is not a good sign for new property openings, including Galaxy’s new property opening on May 27th and Melco’s Studio City in 3Q. We maintain our Neutral rating on MLD.

Landmark -The firm’s flagship property saw Q1 revenues dip 25%y/y. The property saw all of its junkets close operations at the property due to weakness in the VIP market and MLD focussing on its own self-run VIP operations. 22 gaming tables were returned by the junkets to MLD. MLD plans to shift these tables and operating staff to the Babylon in Q2.

Harbourview -The grand opening event in February was well attended by media, investors and government. Fernando Chui, Chief Executive of Macau, participated in the ribbon cutting. The 35 tables received from the DICJ are in play and 22 tables will be shifted from the landmark along with the table operations staff. The firm also noted that its Flamingo slot hall has justopened. There had been no slot revenue from the MFW operations for the past two quarters but 29 new machines have now been installed at the Flamingo.

Legend Palace Hotel -Superstructure construction expected to commence soon on Legend Palace hotel with foundation mostly complete and permits granted for the construction of the structure. No labour issues are expected for construction and property will open in Q2 2016. There is no planned changeto the capital expenditure of the new building.

Risks:1) Further delays in MFW expansionplans; 2) Soft mass gaming growth; 3) Rising competitionin a contracting gaming environment.