Macau Gaming:Don’t miss this boat

Addressing investors’ concerns: 1) Is VIP recovery sustainable? Yes: wecontinue to think easing of over-caution stoked by anti-corruption and improvingcredit availability from junkets will collectively sustain VIP momentum. Strongnumbers recorded in 1H Feb over the CNY period were further evidence that strongdemand is returning. 2) Is mass growth disappointing? We expect 1Q17grossgaming revenue (GGR) to grow 3%q-o-q. By segment, that translates to +3-4% q-o-q/+7-8% y-o-y for VIP (Figure 1) and +1-2%q-o-q/+13-14% y-o-y for mass (Figure 2).Mass growth may appear a little sluggish at the start of a VIP-led recovery becausewhen some small junkets resurfaced and began extending credit, selected premiummass players could be attracted away. However, over time, the reverse shouldhappen as VIP clients start to spill over, according to historical trends. 3) Valuationis not attractive: Valuation has clearly re-rated versus the trough in early 2016but at12x FY17e EV/EBITDA, it remains undemanding in our view (Figures 3, 4). We seeroom for further multiple re-rating as the GGR recovery continues to follow through.

    Catalysts in the pipeline: Investors think expectations are already high andnumbers are unlikely to beat. We disagree. The market expects February to deliver8-10% y-o-y growth but junket events scheduled towards the end of the month couldmake room for positive surprise. More importantly, we think y-o-y growth couldaccelerate into March and 2Q17to hit mid-teens and potentially surprise the marketon the upside (Figure 5). We expect FY17e GGR to grow 15% y-o-y (Figure 6) andwe continue to think this is achievable. On Bloomberg estimates our FY17e revenueand EBITDA forecasts are on average 5% ahead of consensus numbers.

    Stay selective: We continue to prefer Galaxy (27HK, HKD36.2, Buy) and MelcoCrown (MPEL US, USD16.8, Buy). We like Galaxy for its VIP exposure anddefensive performance in the premium mass segment. Galaxy also has the bestlong-term growth prospects with Phase 3, 4and Hengqin in the pipeline. Valuation isundemanding at c12x FY17e EV/EBITDA (Figures 7, 8). We like Melco for itsattractive valuation at c9x FY17e EV/EBITDA (Figures 9, 10). Continual ramping upof the Studio City and resilient performance from City of Dreams are dual earningsdrivers for the operator.