Deutsche Bank Markets Research Asia Hong Kong Consumer Hotels / Leisure / Gaming Industry Macau Date 3 April 2017 Industry Update March beat; expect more Street upgrades For the 2nd month in a row, monthly GGR beat market expectations ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Karen Tang Research Analyst (+852 ) 2203 6141 karen.tang@db.com Top picks Melco Crown (MPEL.O),USD18.54 Buy Source: Deutsche Bank Companies Featured Sands China (1928.HK),HKD36.00 Buy 2016A 2017E 2018E P/E (x) 23.0 24.7 22.5 EV/EBITDA (x) 15.3 16.5 16.0 Galaxy (0027.HK),HKD42.55 Buy 2016A 2017E 2018E P/E (x) 19.0 23.4 22.3 EV/EBITDA (x) 10.1 13.2 12.8 SJM (0880.HK),HKD6.32 Buy 2016A 2017E 2018E P/E (x) 13.6 18.0 18.7 EV/EBITDA (x) 5.3 14.8 11.5 Wynn Macau (1128.HK),HKD15.82 Buy 2016A 2017E 2018E P/E (x) 24.0 25.2 20.7 EV/EBITDA (x) 17.3 14.5 13.1 MGM China (2282.HK),HKD16.20 Buy 2016A 2017E 2018E P/E (x) 14.8 24.1 22.2 EV/EBITDA (x) 13.1 16.9 12.7 Melco Crown (MPEL.O),USD18.54 Buy 2016A 2017E 2018E P/E (x) 37.1 31.8 31.6 EV/EBITDA (x) 10.2 9.3 9.6 Source: Deutsche Bank Thanks to strong VIP trends, Macau's GGR gth accelerated from 11% yoy in Jan-Feb to 18% yoy in March. March's gth beat both our forecast (15-17% yoy) and the recently-raised mkt expectations (+15% yoy). This yr, March's GGR/day (MOP685m) was only 4% below Jan-Feb average, a smaller dip than in previous years (6-9% dip in 2015-16). This echoes with we're hearing from junkets: VIPs are back even in the slow mth. This bodes well for 2Q, a traditionally slow qtr. We remain bullish on Macau as we see GGR gth accelerating from 13% yoy in 1Q to high-teens in 2Q. Top pick is MPEL (strong 1Q trends). We also like Wynn (VIP beneficiary) and Sands (ytd laggard). Bullish into 2Q: Low season not as slow; expect GGR gth to accelerate We believe the March beat came from accelerating VIP growth. We recently met up with Macau’s top 3 junkets (Suncity, Tak Chun & Guangdong). All are seeing positive signs for 2Q: (1) shorter repayment cycles; (2) new VIP sign-ups during CNY; and (3) VIPs are keeping winnings in their junket accounts instead of withdrawing the money, usually a signal that they plan to return to Macau soon. In fact, top 2 junkets are targeting to grow their VIP roll by 30% in 2017. Street has started to lift 2017 GGR forecasts; more to come In our March 21 report “Macau: Coal miners are back!”, we expected the Street would soon lift 2017 GGR forecasts from the current 10% towards our forecast level of 15%. Indeed, a few brokers have lifted estimates last week. With GGR gth accelerating into 2Q, we expect more Street upgrades, pushing valuation of Macau stocks up. Over the past mth, mass-focus stocks (Sands, MGM China & MPEL) have joined the sector rally initially led by the VIP stocks (Wynn & Galaxy). Next, we think the market will focus on 1Q surprises: MPEL’s 1Q should have the biggest surprise, in our view. While the market has focused on Wynn & Galaxy as VIP beneficiaries, our junket checks suggest MPEL’s Studio City is ramping up its VIP rooms very well. Our 1Q17 and 2017 EBITDA forecasts for MPEL are 17% and 13% above consensus respectively. Consensus upgrade to drive re-rating for stocks over 2Q During March, Macau stocks had risen 11%, outperforming MSCI HK (+3%) by a wide margin. Macau sector is now trading at 14x 12m fwd consensus EV/EBITDA, at +1 std deviation vs historical avg (12x). We use SOTP to value Macau stocks. Risks: an abrupt end to GGR recovery & regulatory changes. Figure 1: Macau GGR per day 63858057859352957360861370462663972168513%18%-20%0%20%40%-400-2000200400600800Jan-Feb 16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Jan-Feb 17Mar 17EMOP m/dayMar GGR +18 % yoy Source: DICJ Distributed on: 02/04/2017 23:54:24 GMT0bed7b6cf11c 3 April 2017 Hotels / Leisure / Gaming Macau Page 2 Deutsche Bank AG/Hong Kong VIP growth accelerating, encouraged by more credits Junket agents seeing signs that VIP recovery is sustainable In March, we met up with a couple of junket agents in Macau. These conversations affirmed our above-consensus view that VIP GGR could accelerate from 10% yoy in 4Q16 to mid-teens in 1Q17, and then to over 20% yoy by 2Q17. In particular, junket agents have noticed the