Hong Kong/Macau Gaming:Growth is Back in 2017;Seeking Better Entry Point for the Industry and Selective on Stocks

We raise Macau GGR growth in 2017to +10% from +2%.Cyclical upturn may continue until March 2017, but we keep anIn-Line view due to regulatory risk and rich valuation. Weremain selective and prefer Wynn Macau and Galaxy in 2017.

Conclusion - We believe the Macau cycle has turned and 2017could show 10%GGR and 13% EBITDA growth, the first in four years. Positive estimate revisionsand growing dividends should support higher multiples, however, 2H16sawcyclical growth in the Macau group (EBITDA up 19% HoH drove 28% stockoutperformance), which is unlikely to be repeated in 1H17(EBITDA +3% HoH)when commodity prices and China real estate volume could peak and roll over.In addition, China capital outflow and Rmb depreciation could result in apotential clampdown and lower purchasing power, respectively. We retain ourIn-Line view on the industry, since valuation is 1SD more expensive than its longtermhistory (since 2009) on the basis of EV/EBITDA (14x) and FCFF yield (6%).

Cyclical drivers may turn – 1) China PPI, strongly correlated with Macau GGRgrowth, could peak in Jan/Feb 2017; 2) SHIBOR (1-9months) spiked in the lasttwo weeks by 30-40bps; 3) low base would help GGR growth of >10% in 1H17but may not in 2H17; and 4) a potential VIP smoking ban in 2H17.Stock ideas - Wynn is our top pick for 2017– driven by: a) 30% EBITDA growth;

b) dividend yield of 4.7% for FY16(to be announced in March 2017) withsustainable growth; and (c) to de-lever the fastest among peers. Our OW ratingon Galaxy is driven by attractive valuation and stable EBITDA growth (+14% in2017). Sands' (EW) stock appears fully priced for its FY16DPS and FY17DPSwould have to rise to drive outperformance. MGM's (EW) valuation is at an alltimehigh on FY17estimates. We are UW on SJM as Cotai is not opening until2018and dividends will likely fall in FY16/17due to market-share loss. Weresume coverage on MPEL at EW. Despite Studio City ramping up from a lowbase in 2017, we expect premium mass (the core of EBITDA) market-share loss toWynn Palace and MGM Cotai.

What's Changed (Exhibits 1and 2): We expect GGR to grow 10% in 2017(previously 2%) and 6% in 2018(previously 4%). Accordingly, our industryEBITDA estimates are raised by 5-6% for 2017/18and are 3-4% above consensusfor 2016/17and in-line for 2018. Our PTs are increased by 8-28% due to higherEBITDA and we apply our target FCFF yield on 2018e FCFF for MGM and SJM(previously 2017) to fully reflect their Cotai EBITDA.