Macau Gaming:Where Mr,Market is wrong

Macquarie’s proprietary industry model projects 10%/11% gross gaming revenue(GGR) growth for 2017/18vs consensus’ 9%/7%. We reiterate our bullish sectorview post Q4results and raise GGR forecasts by 2% and lift FY18companyEBITDAs by 1-10% (with the exception of MGM and SJM due mainly to newopening pushback). We now have Outperforms for all the six Macau operatorsafter we upgrade Sands. Wynn and Galaxy remain our top picks.

We believe Macau is on track to be a world-class leisure destination, consideringthat(1) new integrated resorts have been adding to Macau’s overall appeal, asevidenced by 10% overnight visitation increase in 2016; (2) improvinginfrastructure incl. the HK-Zhuhai-Macau Bridge (2018) and Pac-on ferry terminal(mid-2017); and (3) central government provides policy support and land supply(Hengqin and Land reclamation). The sector trades at an 11x FY18EEV/EBITDA vs a 16% FY16-19E EBITDA CAGR, which we consider attractive.

Where Mr. Market is wrong. Mass to remain key driver

GGR has grown by 11% YTD, on the back of(1) double-digit VIP growth, assome legacy players return to Macau after 4Q16due to new openings(especially Wynn Palace) and Beijing’s restraints on other markets incl. Koreaand Australia; and (2) continuing solid growth in mass GGR. However, themarket doesn’t appear excited by the strong numbers due to concerns of marginpressure from higher VIP growth where profitability is lower than mass. We thinkthe concern is over-done and still expect mass to be the major driver in themedium to long run as demonstrated in our initiation. We expect GGR to showan 11% CAGR until 2020, led by mass (see chart at left). That said, if VIPcontinues strong growth for the rest of the year, there will be some upside to our10% GGR growth forecast for this year.

Who will gain market share?

We consider market share among the most important data to track for futureshare prices. We project Wynn Macau to gain the most market share of 1.7pptsby end-2017E on gradual ramp-up of Wynn Palace (see GGR chart at left).Wynn Macau and Galaxy remain our top picks