MACAU_GAMING：MACAU_TOUR_TAKEAWAYS_FOCUS_ON_MARKET_SEGMENTATION;_BUY_GALAXY-2012-11-08.ppt

jun2008,nov2008,feb2009,may2009,nov2009,feb2010,may2010,nov2010,feb2011,may2011,nov2011,feb2012,may2012,nov2012,aug2008,aug2009,aug2010,aug2011,aug2012,17.0,(x),15.0,11.0,7.0,5.0,november 7, 2012 macau: gaming equity research macau tour takeaways: focus on market segmentation; buy galaxy signs of vip ggr stabilization; companies guide mid-single to low-,teen% growth for 2013e,our key gaming industry estimates,we hosted an investor tour to macau and invited a few gaming companies to join our greater china ceo conference last week. we came out from the meetings feeling more comfortable about the market outlook and the degree of competition. much of the discussion was focused on their cotai,no of devices at year-end vip tables %yoy mass tables %yoy total tables %yoy slots %yoy,2010 1,629 27% 3,162 -9% 4,791 0% 14,050 -2%,2011 1,842 13% 3,460 9% 5,302 11% 16,056 14%,2012e 1,923 4% 3,577 3% 5,500 4% 18,828 17%,2013e 1,940 1% 3,760 5% 5,700 4% 18,828 0%,2014e 1,940 0% 3,760 0% 5,700 0% 18,828 0%,strategies and how each of them would strive to improve profitability,revenue (us$m),before the next phase of project completions in 2015-17. we maintain our,vip tables %yoy,16,954 70%,24,459 44%,26,771 9%,30,251 13%,34,183 13%,above-consensus ggr growth forecast of 16% yoy in 2013, mainly attributed to our stronger vip ggr assumption (+13%, vs. 0-5% for,mass tables & slot machines 6,586 8,947 %yoy 34% 36% gross gaming revenue 23,540 33,406 %yoy 58% 42% sources: dicj, goldman sachs research estimates,11,814 32% 38,585 16%,14,565 23% 44,816 16%,17,754 22% 51,938 16%,consensus). we reiterate our cl-buy on galaxy. aside from room for mass-,global gaming valuation comps,market table efficiency improvement, galaxy would also benefit, should,price ,ev/ebitda (x),the market turn incrementally more positive on vip market, from which,ticker galaxy entertainment 0027.hk,rating buy*,6-nov 28.65,2012e 2013e 11.6 9.3,galaxy generates 45% of its ebitda. key takeaways summarized below:,sands china melco crown - adr,1928.hk mpel,buy buy,31.20 14.78,18.4 9.9,13.0 8.7,signs of vip ggr stabilization but too early to call for recovery yet:,melco crown - hk sjm holdings mgm china,6883.hk 0880.hk 2282.hk,buy neutral neutral,38.00 17.70 13.92,9.8 10.3 8.7,8.6 9.1 7.2,most operators attribute the drastic slowdown since 4q11 to weaker,wynn macau 1128.hk market cap weighted avg,neutral,23.00,14.4 13.9,12.9 11.0,macro environment which affects mainlanders appetite to gamble. it is too early to call for recovery yet, but most believe we are close to the bottom of the cycle and see signs of stabilization given no further deterioration in debt collection. they generally guide mid-single digit to low-teen % yoy vip ggr growth for macau in 2013. in the medium,* on conviction list in hkd, except that for mpel, which is in usd source: bloomberg, goldman sachs research estimates. gaming sector ev/ebitda chart average ev/ebitda = 11.4x,term, a key challenge for market expansion is junkets ability to look for new players and cope with the sizeable agency network.,13.0,+1 stdev,more emphasis on market segmentation: though concurring that,9.0,1 stdev,competition in the premium mass segment is intensifying, most operators remain bullish about its growth potential and do not seem to be overly concerned about table affordability amidst the rapid increase,in minimum bets. over time, not every player can afford to gamble on tables, and some may shift to slots or electronic table games (etg). table quota unlikely to be awarded anytime soon: dicj reiterated the governments stance that macaus table growth will be capped at 3% per annum over the next 10 years, translating to 2,000 tables to be awarded by 2023. with 200 tables confirmed to be awarded to scc, it would leave 1,800 tables to be shared among the remaining 5-6 cotai projects implying 300-350 tables each. in assessing the number of tables to be awarded to individual projects, one of the key considerations is the non-gaming component these projects offer the more they include, the more tables dicj is likely to award.,source: datastream, goldman sachs research related research macau gaming: ebitda decelerates further in 3q; ggr trend to stabilize in 4q; oct 24, 2012,simon cheung, cfa +852-2978-6102 goldman sachs (asia) l.l.c. janet lu +852-2978-1642 goldman sachs (asia) l.l.c. the goldman sachs group, inc.,goldman sachs does and seeks to do business with companies covered in its research reports. as a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. for reg ac certification and other important disclosures, see the disclosure appendix, or go to /research/hedge.html. analysts employed by non- us affiliates are not registered/qualified as research analysts with finra in the u.s. global investment research,2,november 7, 2012,macau: gaming,macau tour and investor conference highlights (1) vip - signs of stabilization but too early to call for sharp recovery most operators attribute the drastic vip ggr slowdown since 4q of last year to weaker macro environment which affect mainlanders appetite to gamble. according to them, while there has not been much reduction in the number of players coming to macau, average bet size or spending per player has shrunk somewhat. looking ahead, they are cautiously optimistic about the market outlook and expect mid-single digit to low teen % yoy vip ggr growth in 2013. while it is too early to call for a strong recovery as yet, most operators believe it is close to the bottom of the cycle and there are signs of stabilization given no further deterioration in debt collection from the players and certain junkets starting to turn less cautious regarding credit extension. by assuming steady debt collection cycle and money velocity, we maintain our 13% vip ggr growth forecast for next year, above consensus forecasts of 0-5%.,exhibit 1: macau monthly ggr,exhibit 2: macau monthly ggr yoy growth,(mopmn) jan feb mar apr may jun jul aug sep oct nov dec,2007 6,178 5,905 6,324 6,330 7,477 5,760 6,529 6,667 7,145 9,224 7,359 8,124,2008 10,338 9,362 10,123 9,118 9,793 9,974 9,286 9,613 7,088 8,869 7,551 7,657,2009 8,575 7,912 9,531 8,340 8,799 8,269 9,570 11,268 10,943 12,600 12,215 11,347,2010 13,937 13,445 13,569 14,186 17,075 13,642 16,310 15,773 15,302 18,869 17,354 18,883,2011 18,571 19,863 20,087 20,507 24,306 20,792 24,212 24,769 21,244 26,851 23,058 23,608,2012 25,040 24,286 24,989 25,003 26,078 23,334 24,579 26,136 23,866 27,700,(yoy%) jan feb mar apr may jun jul aug sep oct nov dec,2007 71% 33% 35% 40% 67% 43% 42% 41% 55% 56% 49% 34%,2008 67% 59% 60% 44% 31% 73% 42% 44% -1% -4% 3% -6%,2009 -17% -15% -6% -9% -10% -17% 3% 17% 54% 42% 62% 48%,2010 63% 70% 42% 70% 94% 65% 70% 40% 40% 50% 42% 66%,2011 33% 48% 48% 45% 42% 52% 48% 57% 39% 42% 33% 25%,2012 35% 22% 24% 22% 7% 12% 2% 6% 12% 3%,full yr / ytd,83,022 108,772 119,369 188,345 267,868 251,011,full yr / ytd,47,31%,10%,58%,42%,13%,source: dicj.,source: dicj.,exhibit 3: we maintain our 13% vip ggr growth forecast for next year, above consensus forecasts of 0-5% our forecast of ggr, number of gaming tables and net win per table,2004,2005,2006,2007,2008,2009,2010,2011,2012e,2013e,2014e,no of devices at year-end,vip tables %yoy mass tables %yoy total tables %yoy slots %yoy,266 82% 826 239% 1,092 180% 2,254 177%,299 12% 1,089 32% 1,388 27% 3,421 52%,565 89% 2,197 102% 2,762 99% 6,546 91%,1,124 99% 3,251 48% 4,375 58% 13,267 103%,1,063 -5% 2,954 -9% 4,017 -8% 11,856 -11%,1,279 20% 3,491 18% 4,770 19% 14,363 21%,1,629 27% 3,162 -9% 4,791 0% 14,050 -2%,1,842 13% 3,460 9% 5,302 11% 16,056 14%,1,923 4% 3,577 3% 5,500 4% 18,828 17%,1,940 1% 3,760 5% 5,700 4% 18,828 0%,1,940 0% 3,760 0% 5,700 0% 18,828 0%,revenue (us$m),vip tables %yoy mass tables & slot machines %yoy gross gaming revenue %yoy,3,722 34% 1,449 79% 5,172 44%,3,603 -3% 2,145 48% 5,748 11%,4,584 27% 2,473 15% 7,057 23%,6,950 52% 3,397 37% 10,347 47%,9,194 32% 4,362 28% 13,556 31%,9,950 8% 4,927 13% 14,877 10%,16,954 70% 6,586 34% 23,540 58%,24,459 44% 8,947 36% 33,406 42%,26,771 9% 11,814 32% 38,585 16%,30,251 13% 14,565 23% 44,816 16%,34,183 13% 17,754 22% 51,938 16%,net win per table per day (us$),vip revenue per table per day %yoy mass table revenue per table %yoy slot revenue per slot %yoy,40,726 -24% 5,647 -43% 136 13%,29,392 -28% 5,457 -3% 142 4%,26,687 -9% 3,637 -33% 138 -3%,24,257 -9% 2,967 -18% 122 -12%,21,849 -10% 3,230 9% 159 31%,18,517 -15% 3,500 8% 173 9%,26,314 42% 4,537 30% 206 19%,32,263 23% 6,225 37% 250 21%,31,098 -4% 7,927 27% 249 0%,34,934 12% 9,373 18% 293 18%,39,308 13% 11,147 19% 357 22%,source: dicj, goldman sachs research estimates. goldman sachs global investment research,3,november 7, 2012,macau: gaming,potential challenges to growing the vip market in the medium term in the medium term, our discussions with operators suggest some challenges in further developing the vip gaming industry: vip market more penetrated geographically: since 2008, macaus vip ggr has almost tripled to us$27bn in 2012e, as junkets have been aggressively expanding their agency network to look for more high rollers from inland provinces in china. based on our estimates, close to half of vip players come from provinces outside of guangdong province now, compared to merely 20% a few years ago. our analysis suggests that macaus vip market is not fully penetrated yet (for details, please refer to “boom or bust? stocks price in flat 2012 ggr; initiate on mgm china”, dated oct 7, 2011). this said, it may be incrementally more difficult to look for new agents and players as many of the low hanging fruits may have already been picked. junkets ability to cope with sizeable agency network: the junket market has always been quite concentrated, with the top five operators (or its subsidiaries) capturing close to 80% of the vip market (exhibit 4). given the rapid growth in market size, each junket is now operating close to 500 gaming tables and dealing with over 20,000 agents. this raises questions about their ability to cope with the sizeable agency network on various issues, such as due-diligence, debt collection etc. while our forecasts suggest potential upside to consensus estimates for vip market in the near term, we maintain a more constructive stance on the long-term growth potential of the mass market segment given the above issues. exhibit 4: the junket market has always been quite concentrated, with the top five operators (or its subsidiaries) capturing close to 80% of the vip market structure of the macau junket market,junket market share no. of vip tables avg monthly rolling chip turnover (hk$bn) no. of junket agents casinos,neptune c. 12-14% 220 c. 65-75 25,000 sands macao starworld,golden resorts 13.5% n.a. c. 65-70 n.a. casa real grandview,suncity 10.5% 221 c. 50-60 n.a. city of dreams four season,jimei 9.0% n.a. c. 40-50 n.a. altira city of dreams,david group 6.5% n.a. c. 30-40 n.a. city of dreams four season,aerl c. 2-3% 29 c. 10-15 1,500 galaxy macau starworld,a-max n.a. 5 n.a. n.a. greek mythology,dore n.a. 14 n.a. n.a. the venetian,the venetian city of dreams four season galaxy macau,sjm,galaxy macau grand lisboa larc lan kwai fong,four season jimei mgm grand sands macao,galaxy macau larc mgm grand wynn,the venetian,grand lisboa larc mgm grand wynn,mgm grand starworld the venetian wynn,the venetian wynn,sands cotai central source: company data. (2) market segmentation and premium mass market potential there has been much discussion about the premium-mass market segment, in which casino operators appear to have put more emphasis on. the premium mass players typically have the following characteristics: gamble on cash, unlike vip players, who play on credit and have accessibility to liquidity outside of china without having to rely on junkets. younger entrepreneurs, most aged below 40, who got their wealth relatively quickly benefiting from chinas economic liberalization since the 1990s. goldman sachs global investment research,4,november 7, 2012,macau: gaming some of them do not want to be seen as being associated with junkets. every operator segments the market differently. mgm, for example, has four-tiered membership programs, including supreme (hk$0.8mn annual loss), platinum (hk$0.25mn annual loss), elite (hk$0.1mn annual loss) and gold (anything below). the first two tiers generated over 70% of mgms mass-market ggr last year. mpel, on the other hand, segments the market by table minimum bets and areas in the casino hall. premium mass accounts for roughly half of its mass-market ggr. rationale for targeting premium mass market players we see two reasons why operators put more emphasis on market segmentation and target the premium mass market: (1) casino operators need to better serve the players who become more sophisticated as the gaming market grows; (2) with the implementation of table cap, some operators, particularly those who do not yet have cotai projects, may face capacity constraints. during the busier hours when the tables are fully occupied, they have no choice but to adjust the minimum bet sizes to improve table efficiency and yield. sjm, for example, mentioned that their target is to maintain 42 hands or games per hour at their tables. operators whom we met concur that the competition in this segment is intensifying, although they remain optimistic about its growth potential, given the emergence of middle- class and the growing portion of income they are willing to allocate to leisure or other discretionary spending. they do not seem to be overly concerned about the issue of table affordability and agree that overtime not every player can afford to gamble on tables, and some would have to shift to slot or electronic table games (etg). as far as profitability is concerned, mgm indicates that the average yield per premium mass table is 2.2 times that of its vip table. with premium mass tables ebitda margin 4-5x that of vip (i.e., 45-50%, vs. 10-15%), we estimate that mgms daily net win per premium mass table is roughly half of vips and double of middle-mass tables (exhibit 5). exhibit 5: we estimate that mgms daily net win per premium mass table is roughly half of vips and double of middle-mass tables vip, premium mass and general mass tables profitability (3q12),vip,premium mass,overall mass,net win per table per day (us$) * ebitda per table per day (us$) ebitda margin,33,170 3,317 10%,16,216 7,297 45%,10,191 4,076 40%,* indicates mgm actual net win per table in 3q12 for vip and overall mass source: company data, goldman sachs research estimates. (3) regulatory and cotai project updates as most operators have been awarded the land concession for their projects recently, investors expressed interest in the latest construction progress and the governments stance toward awarding table quotas to individual operators. piling work for studio city and galaxy macau 2 to be completed by year-end galaxy said that the construction of galaxy macau phase 2 is on track with around 700 workers on site now targeted to complete the piling work by year-end (exhibit 6). we have also taken a photo of mpels macau studio city site from city of dream (exhibit 7) which shows that construction is in progress. both companies target to complete the projects by mid to end-2015. in response to questions as to whether there are sufficient workers to complete all the cotai casino and other infrastructure projects on time, most operators goldman sachs global investment research,5,november 7, 2012,macau: gaming believe the government would likely relax the existing foreign labor policy which only allows companies to hire one foreign worker for each local worker they hire. as for the other cotai projects, mgm and sjm said that they are close to completing their design work and will start construction once they receive the construction permits from the macau government.,exhibit 6: galaxy targets to complete the piling work of galaxy macau phase 2 by year-end site of galaxy macau phase 2 source: goldman sachs research.,exhibit 7: construction of mpels macau studio city is in progress site of macau studio city source: goldman sachs research.,dicj meeting: table quota unlikely be awarded anytime soon at our meeting with the dijc (macaus gaming regulator), they reiterated the governments stance that macaus overall gaming table growth will be capped at 3% per annum over the next 10 years, translating to around 2,000 tables to be awarded by 2023. with 200 tables confirmed to be awarded to sands cotai central (scc) early next year, this would leave 1,800 tables to be shared among the other cotai projects. among the six in the pipeline, the government has so far officially approved and recognized five of them, including galaxy macau phase 2, macau studio city (for which mpel can also apply for gaming facilities), wynn macau, sjm and mgms cotai projects. as sands china mentioned at its 3q results conference call, they are still waiting for government approval for parcel 3 (or the parisian). hence, we expect each project would on average be granted 300-350 tables. in assessing the actual number of tables to be awarded to individual operators, dicj said that one of the key considerations is the non-gaming component these projects offer. the more non-gaming facilities they include, the more tables dicj is likely to award to them. for the time being, dicj has not received the detailed design for any of the five projects. they will only review after receiving all projects design, which could mean the table quota is unlikely to be awarded anytim