0621macau Gaming Sector

Regional Industry Focus
Macau Gaming
DBS Group Research Equity 21 June 2010
HSI : 20,287
Bet on the leaders

Favourable demand/supply dynamics in 2010, but sizeable new supply at Cotai post-2011 As competition intensifies, we prefer concessionaires with strong branding, strategic properties at Macau Peninsula, and strong balance sheets Macau gaming sector is a good proxy to Chinas fast growing domestic consumption; initiate coverage with Wynn Macau and SJM as top picks Growth holding up. Thus far, Chinas visa restriction and monetary tightening have not dampened Macaus gross gaming revenue (GGR) growth. GGR growth has rebounded strongly since 3Q09 (partly from a low base), with 5M10 GGR at a staggering MOP72b (+67% y-o-y). We expect growth to ease in 2H10 but remain decent to average 28% in 2010F (MOP153b) and 11% in 2011F (MOP170b). This would represent 2.5x and 1.1x Chinas GDP growth respectively, within historical range of 1.1-4.4x. Macaus gaming industry would be supported by Chinas macro factors: (i) low gaming penetration rate; (ii) accelerating GDP growth; (iii) increased discretionary spending with rising income; (iv) improving transport infrastructure; and (v) extension of individual visa scheme to more provinces. EBITDA margins should also gradually improve with higher mass-market contribution and more direct VIPs, along with positive impact from junket commission cap (effective since Dec 09). Better demand/supply at Macau Peninsula. 2010F will see the slowest supply growth since the liberalization of Macaus gaming sector, with only Encore opening. But there will be large new supply of integrated resorts in 2011-12F at less matured Cotai (Galaxy Macau, Parcels 5 & 6). Table cap although raises uncertainty, should help ensure industry stability. Cotai may be the next growth story, but this could materialise later rather than sooner as the hard-core gaming mentality of mainland Chinese cannot change overnight, and most infrastructure improvements will be completed post2013. Undemanding valuation for strong growth, at 12.1x 2011 EV/EBITDA vs 2-year EBITDA CAGR of 23%. Macau gaming stocks are trading at 9-16% discount to Chinas consumer stocks. As competition intensifies, we prefer proven market leaders with strong branding, strategic properties in Macau Peninsula, and healthy balance sheets. Top picks: SJM and Wynn Macau. We also like Galaxy, which should see a rerating with the opening of Galaxy Macau in 1Q11 (boost long-term growth/market share and diversify earnings).
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed: SGC / sa: DC
Chinas macro factors will support Macaus robust gaming Analyst Yee Mei Hui +603 2711 1332 revenue growth
Ken Chen +852 2863-8923 ken_chen@hk.dbsvickers.com
meihui@hwangdbsvickers.com.my
Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (DBSVR), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.
TOP PICKS Mkt Cap (US$m) SJM Holdings (880 HK) Wynn Macau (1128 HK) Galaxy Entertainment (27 HK) Sands China (1928 HK) 25,706 64,533 14,663 103,013 Price Target Price Potential (HK$) (HK$) Upside 6.60 13.20 4.11 12.06 8.10 15.40 5.00 12.40 23 17 22 3 Rating BUY BUY BUY HOLD
Source: DBS Vickers

SJM Holdings : Incumbent with largest market share by number of casinos, gaming revenue and tables. Owns 23 casinos mainly at Macau Peninsula, namely Grand Lisboa, Lisboa, Oceanus, Jai Alai and thirdparty promoted casinos/slot halls. Wynn Macau : Owns Wynn Macau and newly opened Encore at Macau Peninsula. Potential Cotai expansion at 52-acre site. Galaxy Entertainment : Owns Starworld and City Clubs at Macau Peninsula. Galaxy Macau at Cotai completing in early-2011. Sands China : Largest exposure to Cotai - owns Venetian Macao, Plaza Macao, Parcels 5 & 6 (opening in Sep 2011) and rights to develop Parcels 3, 7 & 8. Also owns Macaus first Las Vegas-styled casino ie Sands Macau at Macau Peninsula.
Figure 1: GGR riding on Chinas robust domestic consumption

(MOPb) 180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010F 2011F (%) 14 13 12 11 10 9 8 7 6
Gross Gaming Rev enue (LHS)
Real GDP growth (RHS)
Source: CEIC, DBS Vickers
Industry Focus Macau Gaming
Yee Mei Hui Ken Chen
(603) 2711 1332 meihui@hwangdbsvickers.com.my (852) 2863-8923 ken_chen@hk.dbsvickers.com
Table of Contents
Investment Summary Wind Beneath Macau Wings VIP Segment: Still Expanding Mass Segment: Potential New Growth Driver A Tale of Two Cities Biggest Market Share Gainers: Wynn, Galaxy Risks Valuation: Still Room for Expansion Strategy and Stock Picks Stock Profiles
SJM Wynn Macau Galaxy Sands China 28 44 58 74
3 5 12 14 16 20 21 23 26
Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (DBSVR), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.
Appendices
92
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Investment Summary
We initiate coverage of the Macau gaming sector because it is a good proxy to Chinas rapidly growing domestic consumption. Macaus gaming revenue growth will be supported by Chinas macro factors: a) Low gaming penetration rate (0.3% of GDP vs 0.6% in the US); b) Accelerating GDP growth (2010F: 11%; 2011F: 10% vs 2009: 8.7%) and improving consumer sentiment; c) Increased discretionary spending with rising income; d) Improving transport infrastructure in China and accessibility to Macau; and e) Extension of individual visa scheme to more provinces/cities. Although 4Q09-May10s strong GGR growth may not be sustainable (>50% y-o-y), we expect it to be decent in 2010-11F at 28% (MOP153b) and 11% (MOP170b) representing 2.5x and 1.1x Chinas GDP growth respectively (within historical range of 1.1-4.4x). Impact of monetary tightening may be less damaging than feared as money supply is still expanding, while property prices have largely held up despite administrative measures. Europes sovereign debt crisis and nascent US economic recovery should have minimal impact on Chinas GDP (largely domestic-driven) and could lead to further deferment of interest rate hikes. Gongbei Gate expansion and Guangzhou-Zhuhai Mass Rapid Transit, expected to be completed within the next 614 months, could attract new demand. 2010 will be a sweet spot given minimal new supply (only Encores opening at Macau Peninsula in Apr10). But the environment could be challenging from 2011 given new supply of integrated resorts at less matured Cotai (Galaxy Macau in early 2011, Parcels 5 & 6 in 3Q11-1Q12). Incremental demand is unlikely to match supply perfectly in the short-term, as Cotai may be a longer-term story with its higher non-gaming offering. EBITDA margins should gradually improve with: a) Higher mass-market contribution driven by infrastructure improvements reaching out to cities further away, b) More direct VIPs (junkets however will still be important, so long as China still has capital controls and do not recognize gaming debts), and c) Positive impact from junket commission cap at 1.25% rolling chip (since Dec 09). With stronger competition ahead, we prefer concessionaires with strong branding and strategic properties at Macau Peninsula (highest potential to grow/defend market share) as well as solid balance sheets. Top picks are SJM and Wynn Macau. Macau should be relatively less affected by rising regional competition as 82% of visitor arrivals originate from China and Hong Kong, with day-trippers constituting 52%. Macau will remain the preferred gaming destination given its proximity, convenience, and credit availability (via junkets). We see policy risk as the biggest concern, but the Macau government will likely be pragmatic as gaming tax contributes a significant 77% to public revenue. The imposition of table cap (5,500 up to 2013 vs 1Q10s 4,811) although raises uncertainty, should help ensure industry stability. The table cap could affect Parcels 5 & 6 (670 tables) more than Galaxy Macau (600 tables), given the formers later opening date but may be partially mitigated by reallocation of tables from existing properties and introduction of more electronic table games. Macau gaming sectors valuation remains undemanding at 12.1x 2011 EV/EBITDA, for a strong 23% earnings growth (2-year EBITDA CAGR). Some individual stocks are trading at 9-16% discounts to China consumer stocks. Stock picks: SJM (Buy; TP HK$8.10). This Macau incumbent has the largest market share by gaming revenue (32%) and tables (36%). Earnings growth will be driven by maiden contribution from Oceanus (100% mass-market), two new VIP floors at Grand Lisboa (opening in 4Q10), and restructuring of third-party service agreements. Its HK$4.2b net cash should help support expansion plans ie redevelopment of Portugese school site next to Grand Lisboa, renovation of Casino Lisboa, and potential Cotai ventures. SJM is attractive while trading at 7.4x 2011 EV/EBITDA vs sectors 12.1x and China mid-cap consumer stocks 8.4x, despite stronger EBITDA growth (2-year CAGR: 31% vs 23%, 17% respectively). SJM is the only Macau gaming company with a dividend policy (50% of distributable profits). Wynn Macau (Buy; TP HK$15.40). The recent opening of VIP-centric Encore should help boost EBITDA (2-year CAGR: 25%) and market share (17% from 14%), while creating synergy by allowing adjoining Wynn Macau to expand in the more profitable grind segment. The company deserves to trade at a premium given its strong brand name, management and balance sheet (which should help support its Cotai venture). Valuation is attractive at 12.7x 2011 EV/EBITDA vs large-cap Chinese consumer stocks 15.2x, with comparable earnings growth. Galaxy (Buy; TP HK$5.00). Potential re-rating with the opening of Galaxy Macau in 1Q11, which should boost long-term earnings growth potential/market share and diversify earnings from Starworlds VIP operations which is expected to continue to do well given its strategic location at Macau Peninsula (adjacent to Wynn Macau and Grand Lisboa). Although Galaxy is trading on par with the sector (11.8x 2011 EV/EBITDA vs 12.1x) and premium to China mid-cap consumer stocks 8.4x, but on EV/EBITDA relative to growth basis, Galaxy looks attractive at 0.3x vs the latters 0.5x. Plus, we have used conservative assumptions for Galaxy Macau even then, Galaxy is expected to have the strongest EBITDA growth in the sector (2-year CAGR: 39%).
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Figure 2: Sector valuation

Share price (LC$) Mac au Sands China Wynn Macau SJM Galaxy Melco 12.06 13.20 6.60 4.11 3.37 M arket Cap (USDm) 12,466 8,795 4,279 2,081 533 28,154 Hold Buy Buy Buy NR Rating TP Upside 2-year CAGR (%) 14 25 31 39 n.m. 23 2009 (x) 17.8 22.3 12.3 16.8 n.m. 18.3 EV /EBITDA 2010F (x) 15.8 15.3 8.0 18.6 32.0 14.4 2011F (x) 13.8 12.7 7.4 11.8 27.8 12.1 2011F EV/ EBITDA vs growth (x) 1.0 0.5 0.2 0.3 n.m. 0.5 PE 2009 (x) 58.3 33.1 36.4 18.3 n.m. 66.4 2010F (x ) 34.5 21.6 14.4 31.6 n.m. 25.0 2011F (x) 29.8 18.5 12.6 27.1 80.2 21.3 2010F Divd Yield (%) 0.0 0.0 2.6 0.0 0.0 0.5 P/BV
(HK$) 12.40 15.40 8.10 5.00 n.a.
(%) 3 17 23 22 n.a.
(x ) 3.4 18.2 3.9 2.0 0.6 5.6
Source: DBS Vickers
Figure 3: Comparison between casino operators

Company Stock code FY09A Casinos - Macau Peninsula - Cotai Tables Slots Revenue (HK$bn) - VIP - Mass - Slots Revenue mix (%) - VIP - Mass - Slots Market Share - VIP - Mass EBITDA (HK$bn) - Growth - Margin Cotai Exposure 59% 38% 3% 29% 25% 36% 2.3 43% 6% 60% 37% 3% 29% 25% 39% 3.6 58% 8% Yes No schedule Net Gearing Net Cash 64% 33% 3% 27% 25% 32% 3.9 9% 9% 72% 20% 8% 14% 15% 12% 3.2 38% 23% 81% 13% 6% 17% 20% 11% 4.5 12% 21% Yes Early 2014 Net Cash 28% 82% 12% 5% 17% 21% 10% 4.0 5% 21% 78% 16% 6% 9% 11% 4% 1.1 106% 9% 87% 12% 1% 9% 11% 4% 1.4 21% 9% Yes Early 2011 97% 96% 84% 15% 2% 11% 13% 6% 2.2 61% 11% 54% 38% 8% 23% 18% 32% 6.3 18% 25% 55% 38% 7% 20% 16% 30% 7.1 13% 25% Yes Operational and developing (3Q11-1Q12) 51% 48% 44% 55% 37% 8% 21% 17% 30% 8.2 15% 26% 18 16 2 320 4,567 34.1 20.0 13.0 1.0 SJM 880 HK FY10F 18 16 2 360 4,567 44.1 26.5 16.2 1.4 FY11F 18 16 2 360 4,567 45.7 29.3 15.2 1.3 FY09A 1 1 1 196 1,195 16.9 12.2 3.4 1.3 Wynn Macau 1128 HK FY10F 1 1 1 233 1,290 26.1 21.2 3.4 1.4 FY11F 1 1 1 233 1,290 29.6 24.4 3.7 1.5 FY09A 5 4 1 213 502 10.8 8.4 1.7 0.7 Galaxy 27 HK FY10F 5 4 1 235 502 13.5 11.8 1.6 0.1 FY11F 6 5 1 635 1,502 17.9 15.0 2.6 0.3 FY09A 3 1 2 1,128 3,491 27.1 14.5 10.4 2.1 Sands China 1928 HK FY10F 3 1 2 1,128 3,491 30.6 16.8 11.5 2.2 FY11F 4 1 3 1,528 5,691 35.2 19.5 13.0 2.7
Source: Respective companies, DBS Vickers
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Wind beneath Macaus wings
Proven resilience. Despite the financial crisis and Influenza A (H1N1) outbreak, Macaus gross gaming revenue (GGR) continued to hit fresh highs of US$15.4b (+10% y-o-y) in 2009 - maintaining its position as the worlds largest gaming market. GGR staged a remarkable rebound in 2H09 (+36% y-o-y), making up for 1H09s 12% y-o-y contraction. Growth was strongest in the VIP segment (+42% y-o-y), which constitute 69% of GGR, followed by mass tables (+24% y-o-y) and slots (+18% y-o-y). GGR has been growing consistently for the past six years (27% CAGR), driven by Chinas healthy GDP growth and influx of Las Vegas-style casinos which tripled the number of casinos to 33. We expect GGR to continue to expand steadily driven by conducive macro factors in China: (i) low gaming penetration rate; (ii) accelerating economic growth; (iii) rising discretionary spending; (iv) infrastructure improvements; and (v) extension of visas to more provinces/cities. Figure 4: Strong GGR growth driven by VIP segment
(MOPb) 180 160 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 2009 2010F 2011F V IP Mass YOY Chg (%) 50 45 40 35 30 25 20 15 10 5 0
Should growth revert to 2006-08 average of 2.9x Chinas GDP growth, 2010F GGR may touch MOP159b (+32%) implying a monthly average of MOP12.3b for Jun-Dec10. Although 2H10 growth will not be as explosive as 1H10, it could still be a decent 10% y-o-y in line with GDP growth. For 2011F, we expect GGR to expand by 11% to MOP170b driven by 10% and 15% growth in the VIP and mass segments. This puts GGR growth rate at 1.1x Chinas GDP growth of 10% (house estimate) lower end of historical average, after the explosive growth seen in 2010F. There could be potential upside to our estimates with the completion of Guangzhou-Zhuhai Mass Rapid Transit by end-10 (cut travelling time from 2-3 hours to 47 minutes), and Gongbei Gate expansion by Aug11 (capacity to handle 350k-500k visitors daily vs 150k currently), which could attract new mass market demand. Figure 5: Strong growth momentum since Jul 09
(MOPb) 18 16 14 12 10 8 6 4 2 0 J ul-05 J ul-06 J ul-07 J ul-08 J ul-09 -20 -40 % YOY Chg (RHS) Monthly gaming rev enue (LHS) (%) 100 80 60 40 20 0
Source: CEIC
Figure 6: Ratio of GGR growth to Chinas GDP growth

Gaming Revenue MOPb 29 41 46 57 83 109 119 152 170 GGR Growth (%) 44 11 23 47 31 10 28 11 China Real GDP growth (%) 10.0 10.1 10.4 11.6 13.0 9.6 8.7 11.0 10.0 Ratio (x) 4.4 1.1 2.0 3.6 3.2 1.1 2.5 1.1
Hitting new highs. We expect GGR to grow by 28% y-o-y to MOP153b in 2010F, breaking 2009s record MOP120b. 5M2010 GGR was a staggering MOP72b (+67% y-o-y), with May10 coming in at MOP17b (+95% y-o-y) - rewriting previous benchmarks set in Apr10 (MOP14.3b) and Jan10 (MOP14.0b). But since 2H10 could see GDP/money supply growth moderating and administrative measures kicking in to affect property prices, we conservatively based our forecast for the remaining months on 2H09 average monthly GGR of MOP11.4b. Our GGR growth projection works out to 2.5x Chinas GDP growth (2010F: 11%) within the historical range of 1.1x-4.4x.
2003 2004 2005 2006 2007 2008 2009 2010F 2011F
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Chinas macro factors support gaming revenue growth a) Low gaming penetration rate We see ample room for continued GGR growth as China and Hong Kongs gaming penetration rate is only 0.3% vs 0.6%-5.2% for other markets. Based on US penetration rate of 0.6%, Macaus gaming sector has the potential to grow by 91% to US$29b even before factoring in Chinas strong GDP growth. Macau is currently the only legal gaming area in China. Figure 7: Chinas gaming penetration rate still low
Country Casino Revenue (US$b) 3.5 0.2 1.5 4.3 15.4 32.5 2.4 Total Gaming Revenue (US$b) 8.5 n/a 4.0 n/a 15.5 92.3 14.3 2009 GDP (US$b) 163 11 207 755 4,907 14,256 727 Casino Revenue as % GDP (%) 2.1% 1.8% 0.7% 0.6% 0.3% 0.2% 0.3% Gaming Revenue as % GDP Remarks (%) Estimates for 5.2% integrated resorts n/a 1.9% n/a 0.3% 0.6% 2.0% Based on China + HK GDP
Figure 8: GGR strongly correlated to Chinas GDP growth

70(%) 60 50 40 30 20 10 0 -10 -20 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10
(%)
15 14
Gaming revenue growth (LHS) China Real GDP growth (RHS)
13 12 11 10 9 8 7 6
Source: CEIC
Singapore Cambodia Malaysia Australia Macau US South Korea
Source: Media reports, DBS Vickers
b) Accelerating GDP growth GGR has been strongly correlated to Chinas GDP growth (+0.7 since 2005), as mainlanders make up 50% of visitor arrivals to Macau, and Hong Kong 31%. Our house expects Chinas 2010-11 GDP growth to accelerate to 11% and 10% respectively vs 2009s 8.7%, while Hong Kong to 5.5% and 4.5% respectively vs 2009s -2.7%. Our economist believes Chinas economy is in good shape and should achieve a soft landing ahead in view of the sequence of macroeconomic policy implementation. Europes sovereign debt crisis and US nascent economic recovery will unlikely derail growth as Chinas primary growth driver is domestic demand, not trade. Our house still expects the central bank to raise the benchmark 1-Y lending rate/1-Y deposit rate by 27bps/18bps, respectively, in 3Q10, followed by another similar hike in 4Q10 to contain inflation expectations. That would raise rates to 5.85%/2.61% by the end of 2010, which are still below the 7.47%/4.14% levels in Sep 08, just before the US credit crisis spread.
Monetary tightening may be less damaging than expected. Historically, money supply growth tended to lead GGR growth by about two quarters. This could explain the strong growth seen since 2H09, especially for VIP segment that is mainly driven by junkets. Money supply growth has started to ease to 22% in Apr10 (vs 4Q09s 28%) while regulatory measures on property market have led to a substantial drop in sales volume (but prices have largely held up). Even then, GGR continued to hit fresh highs. It remains to be seen what impact falling property prices may have on wealth effect, although we believe gaming demand is relatively inelastic (bad habits die hard). Despite PBOCs acknowledgement of rising inflation expectation, senior officials have repeatedly emphasized the need to keep a moderately loose monetary policy stance. PBOCs target for M2 growth in 2010 has been set at 17%, while our economist expects money supply (M2) growth to be gradually reduced to its 10-year average of 16% in 2011 and beyond. Although growth would be slower, it would still be strong enough to drive gaming demand. Figure 9: Money supply growth leads GGR growth
80 60 40 20 0 1Q06 -20 -40 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09
(%) VIP revenue growth (LHS) Money supply growth (RHS) (%)
30 28 26
Gaming revenue growth (LHS)
24 22 20 1Q10 18 16 14
Source: CEIC
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c) Rising income to boost discretionary spending Chinas GDP per capita has been rising rapidly at 13% CAGR since 2003 to RMB24k (USD3,500). Disposable income per capita for urban households (average for 36 cities in China) has leapt by 25% to RMB22k since 2006. Despite the global financial crisis, Chinas unemployment rate has remained stable at about 4.3% since 2002. These numbers will only improve with Chinas GDP growth accelerating to 11% in 2010 and 10% in 2011. Private consumption contributed 4.6ppt to 2009s GDP growth of 8.7%. Seven provinces have raised minimum wages by 10-15% to fend off rising inflationary pressure that could erode consumers real income. 20 more provinces will follow in the later half of this year. Labour disputes in Southern China in relation to demand for higher wages have seemingly increased with some successfully attaining wage hikes of 20-30%. In tandem with rising income, Chinas discretionary spending had doubled over the past 10 years, while number of outbound tourists grew 4-fold to 48m. This positive trend spilled-over to Macau as per capita visitor spending (excluding gaming) grew 29% to MOP7k in 2009, with strongest growth seen for China visitors (+60% to MOP14k). As Chinas income level continues to improve, we expect discretionary spending to expand further, which should augur well for the Macau gaming sector. Figure 10: Discretionary spending rising with higher income
(Per 100 household) 350 300 250 200 15 150 100 50 0 99 00 01 02 03 04 05 06 07 08 09 GDP per capita (RHS) 10 5 0 Discretionary spending (LHS) (RMB'000) 30 25 20
Figure 11: China visitor per capita spending rising steadily

(MOP'000) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 Overall vistor per capita spending China visitor per capita spending
Source: CEIC
d) Potential extension of IVS to more provinces/cities Since its introduction in Jul 03, the Individual Visiting Scheme (IVS) has been extended to all 21 cities in Guangdong province and 28 other cities. IVS has contributed to the strong growth in visitor arrivals, which more than doubled between 2003 and 2007 (23% CAGR), before the financial crisis and Influenza A (H1N1) outbreak struck in 2008-2009. We expect IVS to be extended to more provinces/cities, driven by infrastructure improvements and rising domestic tourism. Although the government has been stricter on the IVS in the last 2-3 years to contain GGR growth to a more sustainable level, recent restrictions seemed to have minimal impact, unlike in the past. We understand VIP visitors (constitute 67% of 2009 GGR) get through under business visas, while mass market visitors join package tours (constituting 30% of mainland visitors from 20% two years ago). Although the recent strong GGR growth could prompt the central government to impose further restrictions, mainland visitor arrivals are expected to remain resilient, driven by: a) Strong population growth in Guangdong province: 5year CAGR of 3.7% vs national averages 0.6%. Guangdongs 95m population is the largest in China (7% market share); Macaus market share of Chinas domestic tourism is still low at 0.6%; More traveling and discretionary spending as affluence improves; Improving consumer sentiment with stronger economic outlook; Infrastructure improvements will improve accessibility to Macau and around China; and New supply of casinos at Cotai could attract new demand given more non-gaming offerings.
b) c) d) e) f)
Source: CEIC
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Figure 12: Minimal impact on China visitor arrivals from recent visa restrictions
(m) 1.4 J ul 08: IV S tightened to once every two months Aug 08: Stay of Chinese passport holders with permission to visit Macau before heading on to third destination reduced to 7 days from 14. Those who return to China without proceeding to third destination will be allowed only 2-day stay in Macau if apply using same method. For second offence, future applications will be rejected. Oct 09: IV S restricted again to once ev ery two months
1.2
1.0
0.8
0.6
May 08: IV S restricted to once from twice per month with extended waiting period of 15 from 10 day s. Corporate v isa restricted to 4 from 10.
Oct 08: IV S further restricted to one every three months Sep 09: IV S relaxed to once per month
0.4
0.2
Sep 08: Separate visa required by mainland Chinese residents for entry into Macau (prev iously entry into Macau from Hong Kong with Hong Kong v isa is permissable)
0.0 J an-08 Apr-08 J ul-08 Oct-08 J an-09 Apr-09 J ul-09 Oct-09 J an-10 Apr-10
Source: CEIC, media reports
Figure 13: Entry via package tours rising for China visitors
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 IVS, 48% IVS, 57% IVS, 44% Package tour, 20% Others, 14% Others, 32% Package tour, 29% Others, 26%
Figure 15: Strongest rebound in China visitor arrivals

(% YOY) 40 30 20 (% YOY) 100 80 60 40 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 20 0 -20 Overall (LHS) Others (RHS) China (LHS) ASEAN (LHS) HK (LHS) -40
Package tour, 30%
10 0 -10 -20 -30 -40 -50
Source: CEIC
Source: CEIC
Figure 14: Visitors mainly from China and Hong Kong
Figure 16: GGR strongly correlated to visitor arrivals

(% YOY) 70 60 50 40 30 Gaming revenue
ASEAN 7%
Others 12%
Hong Kong 31%
China 50%
20 10 0 -10 1Q06 -20 -30 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10
Visitor arrivals
Source: CEIC
Source: CEIC
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e) Infrastructure improvements Last year, Macau welcomed 11m mainland visitors - a fraction of Chinas 1.3b population. We believe the majority originated from adjacent Guangdong province, as 53% were day-trippers. With infrastructure improvements on the way, we expect more visitors not only from Guangdong, but from other provinces/ cities further away which have not been be tapped. Visitors generally prefer to enter Macau via land or sea, which account for 53% and 40% of arrivals, respectively. Currently, there are two gateways into Macau via land Barrier/Gongbei Gate at Macau Peninsula and Cotai Frontier Post at Taipa. There are also regular ferry rides (every 15-30 minutes) from Hong Kong Island, Kowloon and Shenzhen to ferry terminals at Macau Peninsula and Taipa, which journey takes 60-80 minutes. Alternatively, visitors can fly directly to Macau International Airport, hop onto a helicopter from Hong Kong/Shenzhen (15-25 minutes), or take a ferry/taxi directly from Hong Kong International Airport to Macau (30-45 minutes). Figure 17: Visitor arrivals mainly via land and sea
A ir 7%
Figure 18: Barrier Gate expansion

Before Site area Max. capacity for visitors Max. capacity for vehicles No. of immigration counters Electronic (self-processing) Vehicle lanes (entering Macau) Vehicle lanes (exiting Macau) 17,800 sq m 300,000/day 24,000/day 52 15 10 11 98 80 8 10 After 23,120 sq m 500,000/day
Source: Media reports
ii)
Cotai Checkpoint/ Lotus Bridge-Hengqin Island Gate. The new custom building has capacity to handle 70,000 visitors/day (36 counters including 12 electronic/self-processing counters), with 20 vehicle lanes added recently to boost capacity to 10,000 vehicles/day. The Guangzhou-Zhuhai Intercity Mass Rapid Transit to be completed at end-2010 will be connected to Cotai checkpoint. Guangzhou-Zhuhai Intercity Mass Rapid Transit (expected completion in Nov10). It will have capacity to handle 395k passengers daily and runs at 160-200kmh. Traveling time from Guangzhou to Gongbei Gate will be cut from 2 hours 45 minutes via coach to 47 minutes (non-stop)/ 76 minutes (including all stops), to Cotai checkpoint c. 55 minutes, and to Zhuhai Airport <1 hour. Another 5 intercity mass rapid transit routes within Guangdong province are expected to be constructed by 2014, linking most of the major cities in the Pearl River Delta region. High Speed Railway (expected completion by 2015). The 16,000km 4 longitude and 4 latitude network will link 9 cities in 6 provinces with an estimated population of 420m, with passengers able to transit easily to Macau via Guangzhou. At average speed of 250-350km/hr, estimated traveling time for BeijingGuangzhou and Guangzhou-Hong Kong will be reduced to 7 hours and 48 minutes, respectively. Macau-Zhuhai-Hong Kong Bridge (expected completion by 2015/2016; construction started in Dec 09). The 29.6km-bridge will cut driving time to just 1520 minutes from 4.5 hours currently, for an estimated charge of RMB100-150 each way. Golden Sea Bridge. The Zhuhai government announced plans in Dec 07 to build a 10.7km-bridge linking Zhuhai Airport and Henqin Island that will reduce travelling time to 20-30 minutes. No firm commencement date has been set (preliminary work has commenced), with construction expected to take two years.
iii)
Sea 40% - Macau Peninsula main L and 53% ferry terminal (28%) - Gongbei Gate (48%) - Taipa Pac Onn ferry - Cotai Checkpoint (4%) terminal (11%)
iv)
Source: CEIC
A string of infrastructure developments should improve Macaus accessibility further. These include: i) Gongbei/ Barrier Gate at Macau Peninsula. The recently completed expansion of the immigration and customs building at Barrier Gate (Macau side) raised daily visitor capacity to 500k from 300k. For Gongbei Gate (China side), the customs building will be extended by Aug 2011 to handle 350k-500k visitors daily from 150k currently, with >150 new counters. The Zhuhai Government may consider extending operating hours at Gongbei Gate to 24 hours from 17 hours currently (7am-12am). v)
vi)
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vii) Light Rail connecting Macau Peninsula, Taipa and Cotai (expected completion by 2014). Capacity will be up to 8000 passengers per hour per direction, 19 hours per day. The first phase will span over 20km comprising 23 stations (second phase yet to be confirmed). Currently, Macau Peninsula is connected to Taipa and Cotai via three bridges - Friendship Bridge, Macau-Taipa Bridge, and Sai Van Bridge. Figure 19: Current modes of transportation to/from Macau
Time Land (gateway) Barrier Gate COTAI Frontier Post Sea a) To/from HK Island Ferry terminal at Shun Tak Centre -TurboJET -Cotai Strip CotaiJet b) To/from Kowloon -First Ferry -Cotai Strip CotaiJet c) To/from Shenzhen -Yuet Tung Shipping Co -TurboJET Air Macau International Airport (Taipa Island) HK International Airport to Macau Ferry Terminal - Sea Express - Cross Boundary Passenger Ferry Terminal -Airport Express to HK Station in Central + Taxi to ferry terminal -Public Bus No. A11 -Taxi Helicopter Service -from Hong Kong -from Shen Zhen 45 min 24 min + 10-15min (taxi) 30-40min 30 min 16 min 15 min (day), 25 min (night) MOP235-335 HK$100 (single trip) + HK$15-20 (taxi fare) HK$40 HK$350-400 MOP2600- 2800 MOP2700-3190 Hourly Every 12 min Every 20-25 min n/a Every 30min, 15min on weekends/ peak holidays 5x daily 10am-10pm 5.54am-12.48am 6.10am-12.30am n/a 9am-11pm 11.45am- 8.30pm No need to pass through HK Customs and carry luggage to ferry terminal Cost Frequency Operating hours 7am-12am 9am-8pm Remarks
viii) Expansion of Pac On ferry terminal on Taipa (expected completion by 2013). Number of berths will be increased from 8 (for 400-passengers ferries) to 19, comprising 16 for 400-passengers ferries and 3 for 1000-passengers ferries. ix) Extension of Macau International Airport (expected completion by 2017). The Macau government plans to invest MOP60-100b to extend the airport within 10 years that could double the current capacity to 6m.
60 min 60 min 60-75 min
MOP142-275 MOP142-275 MOP140-275 MOP142-275 MOP171 MOP196-296
Every 15 min Every 30 min Every 30 min Every 30 min 4x daily 6x daily
24 hours 7am-1am 24 hours 7am-1am 8.15am-8.15pm 8.45am-7.30pm
Macau Ferry Terminal Macau Taipa Temporary Ferry Terminal Macau Ferry Terminal Macau Taipa Temporary Ferry Terminal Macau Taipa Temporary Ferry Terminal Macau Ferry Terminal
80 min 60 min
Source: Macau Government Tourist Office
Figure 20: Macaus distance from key cities in China
Source: Galaxy
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Figure 21: Proposed infrastructure improvements
Source: DBS Vickers
Page 11

VIP Segment: Still Expanding Growth may ease, but revenue still expanding nonetheless. Following the 19% y-o-y plunge in 1H09 due to the financial crisis and Influenza A (H1N1) outbreak, VIP revenue rebounded strongly by 42% y-o-y in 2H09. Successive new highs were seen since 3Q09, with 1Q10 coming in at MOP29b (+71% y-o-y). 2Q10 will likely be another record quarter with May10s strong GGR in conjunction with Chinas Golden Week. VIP revenue has been expanding at 24% p.a. since 2003, driven by the influx of Las Vegasstyled casinos and junkets growing in size (some have even gone for listing and operate casinos). Junkets contribute between 70-95% of VIP revenue. We expect 2010-2011F VIP revenue to increase to MOP107b (+34%) and MOP118b (+10%) respectively, from 2009s MOP80b, driven by higher rolling chip with minimal impact from normalization of win percentage (most major casinos hold were within the theoretical 2.7-3.0% range in 2009). Our VIP revenue growth projections are ahead of GDP growth by 3.1x and 1.0x respectively, well within the historical range of 0.9-4.0x. With 5M2010 GGR coming in at MOP72b (+67% y-o-y), VIP revenue may have hit MOP50b (assuming VIP constitute 70% of GGR, as seen in 1Q10). As 2H10 growth will likely ease, we have conservatively based our forecasts of the remaining months on 2H09 average monthly VIP revenue of MOP8b. As for 2011F, we used a more prudent ratio of 1.0x China's GDP growth in view of 2010Fs explosive growth. There could be potential upside to ours estimates given the rapid increase in private wealth in China. According to the latest surveys done by Boston Consultancy Group, China has the worlds third highest number of millionaire households (after US and Japan), +31% y-o-y in 2009. Total household wealth in China is expected to grow at a 5-year CAGR of 17.2% to reach US$7.6tn by 2013 (2009: ~US$4.5tn). No of millionaire households are also expected to grow at 13.6% over the same period to reach 788k (2009: 453k, already exceeded pre-crisis level). Figure 22: VIP revenue should continue to expand
(MOPb) 140 120 100 80 60 40 20 0 04 05 06 07 08 09 10F 11F YOY Chg (RHS) V IP Gross Rev enue (LHS) (%) 60 50 40 30 20 10 0 (10)
Figure 23: VIP revenue growth relative to sector and GDP

Gross Gaming Revenue Sector VIP (MOPb) (MOPb) 41,378 29,783 46,047 28,864 56,623 36,783 83,022 55,762 108,772 73,772 119,369 79,834 152,475 107,088 169,992 117,796 Growth GGR VIP (%) (%) 44 34 11 (3) 23 27 47 52 31 32 10 8 28 34 11 10 GDP Growth (%) 10 10 12 13 10 9 11 10 Ratio (VIP/GDP) (x) 3.4 (0.3) 2.4 4.0 3.4 0.9 3.1 1.0
2004 2005 2006 2007 2008 2009 2010F 2011F
Figure 24: Strong growth in rolling chip

(MOPb) 1000 Rolling chip (LHS) 900 800 700 600 500 400 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 V IP rev enue (RHS) (MOPb) 31 29 27 25 23 21 19 17 15
Source: CEIC, Respective companies
Figure 25: Explosive growth in China private wealth

(US$tn) 8 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2013F 900 800 700 600 500 400 300 200 100 0
Household wealth (LHS)
No of millionaire households (RHS)
Source: Boston Consultancy Group
New casinos could attract fresh demand, but in longer-term. 2010F will see the opening of Encore in Apr 10 (37 VIP tables) and two newly refurbished VIP floors at Grand Lisboa (31 tables). Collectively, these 68 VIP tables at Macau Peninsula will boost total existing VIP tables supply by a manageable 5%. Next year could see 264 new VIP tables opening at Cotai: ~120 at Galaxy Macau in early-2011 and ~144 at Parcel 5 & 6 in Sep 2011-Mar 2012, which together will boost total VIP tables supply by 20% and Cotais by 60%.
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During the last supply boom in 2006-07, VIP revenue leapt by 2.4-4.0x China GDP growth partly due to the influx of VIP-centric Las Vegas-styled casinos which offered significantly improved gaming experience. It may be difficult to replicate previous explosive growth, as the new integrated resorts at Cotai are aimed at attracting mass market players and to a lesser extend direct VIPs. But higher offering of non-gaming entertainment may appeal to a more discerning market (likely in the longer term). Please see A Tale of Two Cities section for a more detailed discussion. VIP market share to gradually fall. VIPs contribution to GGR has fallen steadily from 77% in 2003 to 67% in 2009, but should inch up to 70% in 2010F with minimal incoming supply (only VIP-centric Encore and Grand Lisboa expansion). With new mega casinos opening in Cotai in 2011-12F, VIP market share will likely resume its descend although in the short-term, it could still hold up as the new Cotai casinos may rely more on junkets initially to bring in the dough (like for Venetian Macau and City of Dreams), before gradually attracting more mass market with the completion of most infrastructure improvements post-2013. Figure 26: VIP market share to gradually decline post-2010
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010F 2011F 72% 63% 65% V IP 67% 68% 67% 70% 69% 28% 37% 35% 33% Mass 32% 33% 30% 31%
(typically 40% of net winnings). Most of the commission/profit share will be returned by the junkets to VIP patrons via rebates and non-monetary compensation (e.g. hotel room, food and beverage), averaging 0.9% of rolling chip. Concessionaires can also extend credit directly to players, offering rebates of 0.6-1.1% of rolling chip. This helps to double EBITDA margin to 21% (after factoring in higher marketing expenses) vs 10% under the junket VIP model. But it could also lead to higher bad debts/ provision for doubtful debts and create tension between casino operators and junkets (incumbent SJM has minimal direct VIPs to protect its long-standing relationship with junkets). Direct VIPs as a share of VIP GGR has been rising, with Venetian Macau achieving 30% (2008: 10%), and Wynn Macau and City of Dreams 20% each. Nevertheless, we expect junkets to still feature prominently given their entrenched position, and so long China still imposes capital controls and do not recognize gaming debts. Commission cap to drive up margins. Effective 1 Dec 09, junket commissions are capped at 1.25% of rolling chip in order to stem the price war among concessionaires which have hurt margins. EBITDA margins should improve in 2010F, as a 10bps saving in commission rate translates into higher VIP EBITDA margin of 10% vs 7% previously. All concessionaires stand to benefit from the commission cap, with Galaxy being the biggest winner as junket VIPs constitute 78% of GGR compared to 44-63% for other concessionaires. Figure 28: Galaxy biggest winner of commission cap
VIP as % of Total GGR (%) 87% 81% 60% 55% Junket as % of VIP GGR (%) 95% 80% 95% 80% Junket VIPs as % of Total GGR (%) 83% 65% 57% 44%
Higher margins with direct VIPs, but junkets still important. Concessionaires rely on junkets to bring in VIP patrons and manage credit risk, in return for a junket commission (currently capped at 1.25% of rolling chip) or profit share Figure 27: VIP segment cost structure
Junket VIP - before commission cap Rolling chip Win % (theoretical average) Net winning (gross revenue) Gaming tax @ 39% Junket @ 1.35% rolling chip Opex @ 6% of revenue EBITDA EBITDA margin 3,571 2.8% 100 39 61 48 6 7 7%
2010F Galaxy Wynn SJM Sands
Junket VIP - after commission cap Rolling chip Win % (theoretical average) Net winning (gross revenue) Gaming tax @ 39% Junket @ 1.25% rolling chip Opex @ 6% of revenue EBITDA EBITDA margin 3,571 2.8% 100 39 61 45 6 10 10%
Direct VIP Rolling chip Win % (theoretical average) Net winning (gross revenue) Gaming tax @ 39% Rebate @ 0.6-1.1% rolling chip (assume 0.9% average) Opex @ 8% of revenue EBITDA margin 3,571 2.8% 100 39 61 32 8 21 21%
Source: DBS Vickers
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Mass Segment: Potential New Growth Driver Resilient demand. Despite the financial crisis and Influenza A (H1N1) outbreak, mass market revenue still grew 3% y-o-y in 1H09 (vs VIP segments 19% contraction). 2H09 saw a stronger growth of 23% y-o-y, while 1Q10 continued to set a new record of MOP12b (+33% y-o-y). Mass market revenue has been expanding at 35% p.a. since 2003 (ahead of the sectors 27%), driven by the extension of Chinas IVS scheme to more provinces/cities, infrastructure improvements, and influx of Las Vegas-styled casinos. We expect 2010-2011F mass market revenue to increase to MOP45k (+15%) and MOP52k (+15%) vs 2009s MOP40b, driven by higher visitor arrivals and average spending. Revenue growth is expected to be between 1.3-1.5x Chinas GDP growth, at the lower end of the 1.3-7.8x historical range. There could be potential upside to our estimates with the completion of Guangzhou-Zhuhai Mass Rapid Transit by end-10 (cut travelling time from 2-3 hours to 47 minutes), and Gongbei Gate expansion by Aug11 (capacity to handle 350k-500k visitors daily vs 150k currently), which could attract new demand. With Jan-May 2010 GGR hitting MOP72b (+67% y-o-y), mass revenue may have come in at MOP22b (assuming mass constituted 30% of GGR, as seen in 1Q10). We expect growth to ease in 2H10 with moderating GDP growth and potential normalization of win percentage for some properties (e.g. Venetian Macau: 25.1%; Plaza: 25.3% vs 18-20% average). Win percentage however may stay high depending on games mix, quality of players (which affects bet size) and hours spent (which may be prolonged by providing more non-gaming amenities to keep patron within the premises). We based our forecast for 2010F remaining period on 2H09 average monthly revenue of MOP3.5b. For 2011F, we used 1.5x Chinas GDP growth ahead of 2006s 1.3x at the beginning of the previous supply boom, as new incoming integrated resorts will focus more on grind market vs VIP-centric casinos previously. Figure 29: Mass revenue expansion intact
(MOPb) 55 45 35 25 15 5 -5 04 05 06 07 08 09 10F 11F YOY Chg (RHS) Mass Gross Rev enue (LHS) (%) 90 80 70 60 50 40 30 20 10 0
Figure 30: Mass revenue growth relative to sector and GDP

Gross Gaming Sector (MOPb) 41,378 46,047 56,623 83,022 108,772 119,369 152,475 169,992 Revenue Mass (MOPb) 11,595 17,183 19,840 27,260 35,000 39,535 45,388 52,196 Growth GGR Mass (%) (%) 44 79 11 48 23 15 47 37 31 28 10 13 28 15 11 15 GDP Growth (%) 10 10 12 13 10 9 11 10 Ratio (Mass/GDP) (x) 7.8 4.6 1.3 2.9 3.0 1.5 1.3 1.5
04 05 06 07 08 09 10F 11F
Visitor arrivals recovering. Visitor arrivals fell two years in a row (2008: -15%, 2009: -5%) due to the IVS tightening, global financial crisis, and Influenza A (H1N1) outbreak. 4Q09 saw a rebound (+5% y-o-y driven by 17% jump in mainland visitors), with 1Q10 already back above pre-crisis level at 6.1m (+12% y-o-y). We expect visitor arrivals to continue to improve on the back of: (i) better economic outlook, (ii) rising discretionary spending, (iii) infrastructure improvements, (iv) possible extension of IVS to more provinces/ cities, and (v) new casino openings. Figure 31: Visitor arrivals heading north
(m) 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Total visitor arrivals China visitors (m) 1.2 1.1 1.0 0.9 0.8 0.7 0.6
Source: CEIC
Higher contribution from grind to boost EBITDA margin. Grind segment average EBITDA margin of 33% is 3-4x higher than the VIP segments 10%, so it is only natural for concessionaires to want to focus on this segment. Grind currently constitute just 30% of GGR that could rise in the longer run with infrastructure improvements reaching out to China cities further away/ cutting travelling time and new integrated resorts opening at Cotai which offers more nongaming entertainment to attract new demand. In addition, we should see full-year impact of the restructuring of service agreements for third-party promoted casinos. For SJM, 12 out of its 14 satellite casinos are operating under new agreements whereby SJM gets a fixed 3% (VIP) and 5% (mass) share of revenue. This compares favourably to previous agreements where SJM incurred losses or barely break-even after casino operating expenses. The new agreements effectively transfer the responsibility for opex to the service provider for a higher commission (SJM will still account for all the gaming revenue).
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Figure 32: Mass EBITDA margin
Self-promoted casinos HK$ 556 18.0% 100 39 61 28 33 33% EBITDA margin -7% Third-party operated casinos Old agreement Drop Win % (theoretical average) Net winning (gross revenue) Gaming tax @ 39% Third-party operator @ 40% Opex @ 25-30% of revenue EBITDA margin HK$ 556 18.0% 100 39 61 40 28 (7)
Drop Win % (theoretical average) Net winning (gross revenue) Gaming tax @ 39% Opex @ 25-30% of revenue EBITDA margin EBITDA margin
Melcos mocha clubs). We believe Venetian Macau at Cotai should be less affected given its unique product it is not only the most profitable property in Macau (highest EBITDA and margin), but also most popular with 23.8m visitors in 2009 (including multiple-entries) vs 21.7m total visitors to Macau. VIP-centric properties with strong branding strategically located at Macau Peninsula should also be insulated (e.g. Wynn Macau, Grand Lisboa, Starworld). In terms of concessionaire, Sands China will have the highest risk as it has the largest exposure to Cotai and mass market segment (likely to surpass current leader SJM with the completion of Parcels 5 & 6 by 2012F, and not to mention future developments at Parcels 3, 7 & 8). Figure 33: Sands China has biggest exposure to Cotai
Concessionaire Cotai Venetian Macau Parcel 5 & 6 Galaxy Macau City of Dreams Macau Peninsula Sands Macau Grand Lisboa MGM Opening Date Aug 08 Sep 11 Early-11 Jun 09 No of mass tables 441 432 320 353 Mass as % revenue 47% 45% 44% 22%
But potential oversupply in Cotai in the short-term. 2010 will only see the addition of 24 mass tables with Encores opening at Macau Peninsula, a mere 1% of total existing supply. But 2011 will welcome ~912 new mass tables at Cotai, i.e. ~480 at Galaxy Macau and ~432 at Parcel 5 & 6. This will boost total existing mass tables supply by 26% and Cotais by 118%, which could create potential oversupply in the short-term as demand may not expand in tandem (although in the longer-term we expect it to catch up with infrastructure improvements and rising discretionary spending). See the next section A Tale of Two Cities for a more detailed discussion. Most at risk will be City of Dreams at Cotai which has not been performing below expectations since its Jun 09 opening (albeit improving), and smaller/older casinos (e.g. SJMs third-party promoted casinos, Galaxys city clubs,
Sands China Sands China Galaxy Melco/ MPEL
Sands China SJM MGM
May 04 Feb 07 Dec 07
335 245 308
44% 28% n/a
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A Tale of Two Cities
Minimal new supply in 2010. This year will see the slowest supply growth since Macau gaming market was liberalized in 2001, with just one new casino opening at Macau Peninsula, aside from SJM opening two new VIP floors at Grand Lisboa (31 tables in 4Q10). Wynns Encore (adjoining Wynn Macau) was launched on 22 Apr 2010, offering 61 tables (37 VIP, 24 mass) and 95 slots boosting existing supply by 1%. Encore should compliment Wynn Macau as it caters more to VIP patrons, releasing capacity for the latter to focus on the mass market. We expect Encore to do well given its strategic location at the matured Macau Peninsula and leverage on Wynns strong branding/VIP clientele. Figure 34: Incoming supply
VIP SJM Wynn Sands China Galaxy Melco MGM Total % of existing supply SJM Wynn Sands China Galaxy Melco MGM Total % market share SJM Wynn Sands China Galaxy Melco MGM Total Macau Peninsula Cotai Total % of existing supply Macau Peninsula Cotai Total % market share Macau Peninsula Cotai Total 295 196 259 201 280 80 1,311 Mass Existing Supply Total tables 1,562 1,857 209 405 869 1,128 247 448 331 611 280 360 3,498 4,809 Slots 5,051 1,195 3,491 1,006 2,760 880 14,383 VIP New supply in 2010F Total Slots Mass tables 31 31 37 24 61 95 VIP New supply in 2011F Total Slots Mass tables VIP 326 233 403 321 280 80 1,643 Mass Total Total tables 1,562 1,888 233 466 1,301 1,704 727 1,048 331 611 280 360 4,434 6,077 Slots Remarks
But massive incoming supply at Cotai in 2011. Two mega integrated resorts will be coming on stream: Galaxy Macau (600 tables, 1500 slots) in early 2011 and Sands Chinas Parcel 5 and 6 (576 tables, 2200 slots) in Sep 2011-Mar 2012. These will collectively add 1176 tables and 3700 slots, boosting total supply by 24% and 26% respectively. For Cotai alone, supply of tables and slots will jump by 97% and 107%, respectively, over the next 3 years. By 2012, Cotai is expected to have 39% market share of gaming tables (from 25% currently) with its mass market share expanding faster (38% from 22%) compared to VIP (44% from 33%).
144 120
432 480
576 600
2,200 1,500
68
24
92
95
264
912
1,176
3,700
5,051 1,290 Encore (Apr 10) 5,691 Parcel 5 & 6 (Sep 11) 2,506 GalaxyWorld (Early-11) 2,760 880 18,178
11% 19%
11%
2% 15%
8% 56% 60% 50% 194% 51% 134% 63% 149%
19% 56% 60%
11% 50% 194%
15% 51% 134%
8% 63% 149%
5%
1%
2%
1%
20%
26%
24%
26%
25%
27%
26%
26%
23% 15% 20% 15% 21% 6% 100% 873 438 1,311
45% 6% 25% 7% 9% 8% 100% 2,726 772 3,498
39% 8% 23% 9% 13% 7% 100% 3,599 1,210 4,809
35% 8% 24% 7% 19% 6% 100% 10,910 3,473 14,383 37 24 61 95 37 24 61 95 264 264 912 912 1,176 1,176 3,700 3,700
20% 14% 25% 20% 17% 5% 100% 910 702 1,612
35% 5% 29% 16% 7% 6% 100% 2,750 1,684 4,434
31% 8% 28% 17% 10% 6% 100% 3,660 2,386 6,046
28% 7% 31% 14% 15% 5% 100% 11,005 Encore Parcel 5 & 6, 7,173 GalaxyWorld 18,178
4%
1%
2%
1% 60% 118% 97% 107%
4% 60%
1% 118%
2% 97%
1% 107%
67% 33% 100%
78% 22% 100%
75% 25% 100%
76% 24% 100%
56% 44% 100%
62% 38% 100%
61% 39% 100%
61% 39% 100%
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Build and they will come? Although we expect GGR to continue to expand, incremental demand may not match incoming supply perfectly especially since new supply will be mainly at less matured Cotai. Currently, only 15% of visitors enter Macau via Taipa/Cotai. Even though it takes 10-15 minutes each way to commute between Macau Peninsula and Cotai, Cotai casinos (Venetian Macau, City of Dreams, Four Seasons and Altira) only control ~20% of 2H09s GGR vs 25% market share of table supply. This could be due to: a) there being too few casinos at Cotai currently, and they are not as densely located as in Macau Peninsula which makes it convenient to hop from one to another, and b) relatively less accessible, although infrastructure improvements are underway. We believe Cotai is more of a longer term story as: a) Old habits die hard. The more wholesome entertainment, Cotai IRs may be the next earnings growth driver, catering to a more discerning crowd as affluence improves. But this could happen later rather than sooner as the hard-core gaming mentality of mainland patrons, which comprise 50% of Macau visitors, is hard to change overnight. Time is money, and the majority of visitors are day-trippers (52% of visitors) while average stay in Macau remains low at 1.5 days (albeit creeping up from 2003s 1.2 days). Some may blame this on the lack of non-gaming entertainment to make Macau a more wholesome tourist destination in the first place.
(days) 1.6 Average 1.5 1.4 1.3 1.2 1.1 1.0 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Guangzhou-Zhuhai Intercity Mass Rapid Transit by Nov10 (Guangzhou to Cotai checkpoint in 55 minutes vs 3 hours previously); and (iv) Light Rail Transit (connecting Macau Peninsula, Taipa and Cotai) by 2014. c) Chicken and egg problem. Instead of demand leading supply, new casinos have been sprouting to draw in demand. The strategy has worked well to expand the Macau gaming pie, but incremental revenue has been waning with every new launch, especially at Cotai. Recent new casino openings such as City of Dreams and Four Seasons had been disappointing, albeit operating performance is improving. We assessed the impact of major casino openings, which had been picking up since 2006 (Figure 37). Almost all saw positive impact on GGR in the first 1-6 months of operations, helping to build an increasingly higher base. But average revenue/table fell with most new openings, although it had recently rebounded to 1Q06 levels. With robust gaming demand and limited new casino openings in 2010, we expect average daily win/table to expand by 11% before easing marginally by 1% in 2011 with new incoming supply. As visitors expectations grow with each new opening, upcoming casinos would need to be unique (not necessarily larger) to attract new visitors (especially if located in Cotai), in order to continue to expand the gaming pie (rather than only wrestling market share from existing casinos). Competition could intensify in the short-term as supply may take a while to be absorbed. Success of IRs will depend on: a) Location and accessibility, b) Design, product and brand, c) Management and financial strength. Figure 36: Massive incoming supply, especially at Cotai
40 35 No of casinos (LHS) ('000) 7 6 5 No of tables (RHS) 4 3 2 1 0 2004 2005 2006 2007 2008 2009 2010F 2011F
Figure 35: Average length of stay rising, but slowly
China visitors
30 25 20 15 10
Source: CEIC
5 0
b)
Infrastructure improvements will only be completed post-2013, more than two years after the large incoming supply in 2011. They include: (i) expansion of Pac On Ferry Terminal to 19 berths from 8 by 2013; (ii) Macau-Zhuhai-Hong Kong Bridge by 2015; (iii)
Page 17

Figure 37: Impact of new launches
(MOPb) 40
F H (MOPm) G
8.0 7.5 7.0 6.5
35 30 25
E A B C D
6.0 20 15 10 5 1Q06 3Q06 1Q07 3Q07 Gross gaming revenue

No of tables 515 286 252 591 388 108 489 280
Financial crisis, Influenza A (H1N1) outbreak
5.5 5.0 4.5 4.0
1Q08
3Q08 Average GGR/table
1Q09
3Q09
Date A B C D E F G H 6, 19 Oct 2006 11 Feb 2007 12 May 2007 28 Aug 2007 18 Dec 2007 28 Aug 2008 1 Jun 2009 15 Dec 2009
Major casino opening Wynn Macau, Star World Grand Lisboa Crown Macau Venetian Macau MGM Grand Four Seasons City of Dreams Oceanus
GGR yoy growth for first: 1 mth 3 mths 6 mths^ (%) (%) (%) 44 44 45 33 36 43 67 51 51 55 53 53 34 53 49 44 (1) (8) (17) 1 24 48 61 n/a
^ possible overlapping impact
Source: CEIC
Table cap should help ensure industry stability. Recently, the government announced that it would cap the number of gaming tables at 5500 up to 2013. While casinos which had obtained approvals earlier can proceed with their plans, the government will not accept anymore applications for the next three years. A regulatory body to monitor the growth of the gaming industry may also be set up. With 1Q10 table count at 4811, that leaves only 689 tables to be shared between Galaxy Macau and Parcels 5 & 6 significantly below the collective 1,176 tables planned. Parcels 5 & 6 may be at higher risk given its later opening date (3Q11-1Q12 vs Galaxy Macaus 1Q11). We understand Sands China is still targeting to open with 570 tables,
consisting of 400 new tables, 170 tables reallocated from other properties (likely from Venetian Macau), and 100 electronic table games (classified as slots). The recent finalization of financing package for both Galaxy Macau and Parcels 5 & 6 could be an indication that a favourable resolution may have been reached. We have assumed slower ramp-ups for both projects i.e. Galaxy Macau (60% capacity utilization in 2011F), and Parcels 5 & 6 (25%). The table cap may also affect approvals for future projects, e.g. Wynn Cotai (targeted for completion in 2014) yet to be factored in our Wynn Macau valuation.
Page 18

Figure 38: Map of current and future supply of casinos
Source: DBS Vickers
Page 19

Biggest Market Share Gainers: Galaxy, Wynn
Competition intensifies, but leaders should prevail. We expect Macaus competitive landscape to heat up with the large incoming supply from 2011 onwards. Demand may not be able to catch up with supply in the short-term (especially at Cotai), possibly leading to another price war as players jostle for market share. The grind segment will be most at risk, with tables supply jumping by 26% over the next 3 years (Cotai alone by 118%!). But battle scars from the previous junket commission price war may serve as a grim reminder. Junket commissions went up to as high as 1.45% of rolling chip during 2009s tough operating environment, before easing to 1.25% since Dec 09 with the commission cap. Every 10bps change in commission will have a 3ppt impact on EBITDA margin (currently ~10% for junket VIP segment). The recently announced table cap of 5500 over the next 3 years could help to ease some pressure, while infrastructure improvements should allow Macau to tap on cities further away (i.e. beyond Guangzhou) in the longer run. The new integrated resorts at Cotai, if unique enough, could attract new demand altogether, like Venetian Macau. We expect properties with strong branding in prime locations at Macau Peninsula to be relatively less affected by the large incoming supply, eg. Wynn Macau, Grand Lisboa, and Starworld. Biggest gainers: Wynn and Galaxy. Losing market share is not the end of the world - as more supply comes on stream, there are bound to be winners and losers. A smaller stake in a larger pie could be good, as long as earnings expand. Market share can also be affected by win percentage which fluctuates with luck factor. With only Encore opening in 2010F, Wynn is expected to gain significant mileage with its market share leaping by 3ppt to 17%. Similarly, Galaxy is expected to see its market share increasing by 2ppt to 11% in 2011F with the opening of Galaxy Macau. As for leader SJM, there could be a 2ppt dip in 2011F to 27% with the renovation of Casino Lisboa and loss of grind market share to newer IRs (especially at third-party promoted casinos). Sands China may see its market share decline to 20% in 2010F due to normalization of win percentage at Venetian and Plaza, but should rebound to 21% in 2011F with the opening of Parcels 5 & 6 in 3Q11. We expect other concessionaires (ie Melco and MGM) collective market share to continue to decline to 24% by 2011F with rising competition from new supply. Figure 39: Biggest overall market share gainers Galaxy, Wynn
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 Wy nn Macau 2009 Sands China SJ M 2010F Galaxy Others 2011F 15% 16% 14% 17% 17% 21% 23% 23% 20% 21% 39% 12% 14% 27% 26% 9% 25% 9% 24%
8% 26%
11%
29%
29%
27%
Figure 40: Venetian and Wynn most profitable properties

2009 Venetian Wynn Sands Grand Lisboa Starworld Lisboa City of Dreams Plaza Oceanus Altira 3rd party promoters Mocha Clubs City clubs Sub-total Others Industry GGR HKDm 15,687 16,894 9,387 9,436 9,435 9,418 5,834 1,985 681 7,749 14,529 741 1,346 103,122 16,247 119,369 Market share 13% 14% 8% 8% 8% 8% 5% 2% 1% 6% 12% 1% 1% 86% 14% 100% EBITDA HKDm 4,300 3,242 1,886 1,338 983 481 439 312 139 106 521 197 157 14,101 Market share 30% 23% 13% 9% 7% 3% 3% 2% 1% 1% 4% 1% 1% 100% EBITDA margin 27% 19% 20% 14% 10% 5% 8% 16% 20% 1% 4% 27% 12% 14%
Page 20

Risks
Rising regional competition. With the success of Macau and Singapore, more countries are expanding/ opening up their gaming markets to boost tourism and economic activities. Although this could heat up competition especially in the VIP segment (mass market tend to be stickier), Asia has a large illegal gaming market yet to be fully tapped and the overall gaming pie is still growing with rising discretionary spending and improving infrastructure. Although the number of casinos in Macau jumped from 15 in 2004 to 33 in 2009, there was minimal cannibalization Macau GGR still grew at 6-year CAGR of 27% while Malaysia expanded by 11%. Recent new casino openings in the region i.e. Resorts World at Manila in Aug 09, Resorts World at Sentosa in Feb 10 and Marina Bay Sands in Apr 10 had minimal impact on Macau. 82% of Macaus visitors originate from China and Hong Kong with day-trippers constituting 52%. Macau will still be Figure 41: Incoming casinos in the region
No of casinos Existing markets Macau 7 n/a n/a Capped at 40 (vs 33 currently), freeze on new casino licence.. At US$15b Bagong Nayong Pilipino Manila Bay Tourism City (40ha). Phase 1 will comprise of 4 IRs by: a) Bloomsbury (owned by Crown Casinos James Packer, expected completion in 4Q12), b) Aruze (Japanese slot machine manufacturer, in partnership with Wynn), c) SM Investments (local retail chain), and d) Genting Hong Kong-Alliance Global. At Ho Tram strip. Asian Coast Development will build the first IR (capex: US$4.2b; operated by MGM) completing in 2013. Restrictions on local patronage, no proper gaming legislation yet, infrastructure still lacking. Flight from HK (hours) Flight from Guangzhou (hours) Remarks
their preferred gaming destination given its proximity (1-2 hours away via land and sea), convenience (similar language and custom), and credit availability via junkets (travelers are only permitted to carry RMB20k cash/US$5k foreign currency per trip and gaming debts are not enforceable in China). Even though Singapore has the capacity to offer higher junket commissions due to lower gaming taxes (VIP 12%/mass 22% vs Macaus 39% flat), Singapores stricter junket regulations could deter some junkets and VIP patrons who prefer more flexibility and less transparency. Most of the upcoming casinos in the region are >2 hours away by flight from China/Hong Kong. Some of them may even open later rather than sooner as proper gaming legislation and/or infrastructure are still not in place. Taiwan may be the biggest threat to Macau given its proximity and link to China (Special Administrative Region), but offshore islands will unlikely be conducive to attract mass market.
Phillippines
Vietnam
5 16
New markets Japan Taiwan Thailand 2-10 3 5 10-18 Total 26-34 4 2 3 4 2 3 Penghu referendum rejected, Kinmen (adjacent to Fujian province) next. Offshore islands not convenient and lack infrastructure, no proper gaming legislation yet. Strong opposition (including from Thai King), civil unrest.
Source: Media reports, DBS Vickers
Policy risk. The new Chief Executive Fernando Chui Sai On has pledged to stick to the previous policies announced by his predecessor, aimed at preventing the Macau gaming market from over-expanding. Key points from his recent maiden policy address: a) Number of gaming tables to be capped at 5500 over the next three years (1Q10: 4811). While casinos which have already obtained approvals earlier can still go ahead, the government will not accept new applications for the next three years. A regulatory body to monitor the growth of the gaming industry may also
be set up. Please see A Tale of Two Cities section for a more detailed discussion. b) Potential reclamation of idle land. The government will reclaim lands previously granted to gaming operators for casino project development that have been left idle for years, and which are found to have breached contracts signed with the government. The government was considering building public residential buildings on the lands that might be recovered, while auctioning off the others.
Page 21

Most at risk will be Sands Chinas Parcels 7 & 8 which development timeline remains uncertain. Construction work has just resumed for Parcels 5 & 6 while the development deadline for Parcel 3 was recently extended to 2014. Costs capitalized so far in respect of Parcels 3, 7 & 8 amounted to US$36m and US$116m, respectively (collectively 71% of 2009 earnings if written off). c) Relocation of slot machine parlours from residential neighborhoods to gaming & entertainment areas. Minimal impact expected as slot machines currently contribute just 5% of GGR. Most slot machines are found within casinos/hotels, with six slot machine establishments located outside, out of which only two are close to residential areas. Raising minimum age requirement to 21 from 18. Minimal impact expected as the change will be gradually implemented over three years. Currently, casinos employ >30k staff, including several thousand fresh secondary school graduates annually. choice. Las Vegas Sands also has exposure in Singapore (via Marina Bay Sands) which regulatory regime may be just as strict. Rising regional competition could force Macau to adopt better transparency and conformity with international standards (albeit have been improving with the influx of global casino operators). Another flu outbreak or economic crisis. Visitor arrivals to Macau fell two years in a row (2008: -15%, 2009: -5%) due to the global financial crisis and Influenza A (H1N1) outbreak. Although visitor arrivals have rebounded since 4Q09, visitor arrivals may be hit again should another flu outbreak occur or economic growth decelerates sharply. While the former is difficult to predict, the latter should be unlikely our economist expects Chinas GDP to grow 11% in 2010 and 10% in 2011 from 2009s 8.7%. Increased credit risk from rising direct VIPs, junket loans. Direct VIPs as a share of VIP GGR has been rising, up 30% of VIP revenue for some properties. Direct VIPs offer twice as high EBITDA margins, but could lead to higher bad debts/ provision for doubtful debts and create tension between casino operators and junkets. Concessionaires also extend temporary interest-free credit to promoters/ junkets as working capital, typically up to the amount of commission payable for the month. Among the concessionaires, Sands China has the largest overall exposure (7% of GGR), and Wynn the least (1%). SJM could also see potentially higher allowance for doubtful debts as 14% of receivables are >6 months overdue (albeit small relative to GGR). Figure 42: Sands China has highest credit risk exposure
Direct VIP Trade (% of VIP receivables* revenue) Sands China Wynn Macau SJM Galaxy 20% 20% 5% 5% (HK$m) 1,960 236 n/a n/a Aging >90 days 11% n/a^ n/a n/a % Total GGR 7% 1% n/a n/a Receivables from promoters* n/a n/a 823 414 % Aging >90 TotalG GR days n/a n/a 14% n/a n/a n/a 2% 4%
d)
The central government may also resume IVS tightening to contain Macaus strong GGR growth. However, the impact had been more muted recently and would not go hand in hand with the various infrastructure developments to improve Macaus accessibility. In any case, we believe the Macau government will be pragmatic given the gaming sectors importance to the economy (gaming tax constituted 77% of governments total revenue in 2009). Regulatory sanction from the US. In May09, the New Jersey Division of Gaming Enforcement found MGMs JV partner for MGM Grand Macau ie Pansy Ho of STDM, unsuitable and recommended that MGM disengage from any business association. As a result, MGM will be selling its 50% stake in Borgata Hotel Casino & Spa in Atlantic City as part of a settlement. Recently, there were also reports of alleged links between Las Vegas Sands and a junket promoter with triad links in Macau and that the Nevada Gaming Commission was carrying out its own investigations. Increased scrutiny by US regulatory authorities could force concessionaires to choose between maintaining exposure in Macau, or selling US-based assets, which may be a difficult
^ Fully provided for * Net provision, gaming related
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Valuation: Still Room For Expansion The Macau gaming sector outperformed Hang Seng Index over the last 3 months (+27% vs -5%), driven by record GGR and recovery in visitor arrivals. But we still see value in the sector given its strong earnings growth potential. Macau gaming vs China consumer stocks: Macau gaming sectors valuation of 12.1x 2011 EV/EBITDA is comparable to China consumer sectors 12.2x, with similar EBITDA growth (2-year CAGR: 23% vs 20%). But bigger cap China consumer stocks are trading at much higher multiple of 15.2x vs Wynns 12.7x; Sands Chinas 13.8x. Similarly, SJM (7.4x) is still trading at a 12% discount to mid-cap China consumer stocks (8.4x). Although Galaxy (11.8x) is trading at a premium, on a EV/EBITDA relative to growth basis, it still looks cheap at 0.3x vs sectors 0.5x largely driven by explosive earnings growth with the opening of Galaxy Macau in early 2011. Macau gaming vs US gaming: Macau gaming sectors valuation of 12.1x 2011 EV/EBITDA is also comparable to US gaming sectors 12.2x. But Wynn Macau and Sands China are trading at a small 7-13% premium to parents Wynn Resorts and Las Vegas Sands due to their stronger long-term earnings growth potential. Wynn Macau contributed 67% to its parents 2009 EBITDA, while Sands China 78%. Figure 43: Macau gaming sector performance
(HK$)
Current vs historical valuation: A comparison with Macau gaming sectors historical valuations may not be meaningful given the current larger investable universe and short trading history (Wynn and Sands China were only listed in 4Q09, and SJM in Jul08). But we can benchmark against US gaming stocks historical performance as Macau contributes ~70% of earnings. US gaming stocks traded at >20x EV/EBITDA at the peak in 4Q07 and 5-10x at the trough in 1Q09, vs 12x currently, suggesting still some room for growth. Valuation methodology: Our target prices for the four Macau gaming companies for which we are initiating coverage in this report are based on sum-of-parts methodology. We value the individual major properties based on EV/EBITDA (typical for gaming sector given varied gearing levels) as follows: a) b) c) 15x 2011 EV/EBITDA for premium properties i.e. Wynn Macau and Venetian Macau; 10-12x 2011 EV/EBITDA for most i.e. Starworld, Grand Lisboa, Sands Macau, and Plaza Macau; 5-8x 2011 EV/EBITDA for assets that are older (Lisboa, third-party promoted casinos, city clubs), shorter earnings track record (Oceanus), or with lower earnings visibility (Galaxy Macau, Parcel 5 & 6).
(HK$)
14 12 10 8 6
SJM (LHS)
M elco (LHS)
Galaxy (LHS)
Sands China (RHS)
Wynn M acau (RHS)
14 13 12 11 10 9
4 2 0 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
8 7 6
Source: Bloomberg
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Figure 44: Gaming sector peer comparison
Sh are p ric e ( L C$ ) M ac au Sands China Wy nn Macau SJ M Galaxy Melco 12.06 13.20 6.60 4.11 3.37 M ark et Cap ( U SD m) 12,466 8,795 4,279 2,081 533 28,154 2009 ( U SD m) 809 411 291 144 (4) 1,651 EB IT D A 2010F ( U SD m) 914 574 460 173 19 2,141 2011F ( U SD m) 1,053 644 503 280 22 2,501 2 - y ear CA G R (% ) 14 25 31 39 n.m. 23 2009 (x) 17.8 22.3 12.3 16.8 n.m. 18.3 EV / EB IT D A 2010F (x) 15.8 15.3 8.0 18.6 32.0 14.4 2011F (x) 13.8 12.7 7.4 11.8 27.8 12.1 2 0 1 1 F EV / EB IT D A v s g ro w t h (x ) 1.0 0.5 0.2 0.3 n.m. 0.5 PE 2009 (x) 58.3 33.1 36.4 18.3 n.m. 66.4 2010F (x) 34.5 21.6 14.4 31.6 n.m. 25.0 2011F (x) 29.8 18.5 12.6 27.1 80.2 21.3 2010F D iv d Y ield (% ) 0.0 0.0 2.6 0.0 0.0 0.5 P/ B V
(x ) 3.4 18.2 3.9 2.0 0.6 5.6
US Las V egas Sands MGM Mirage Wy nn
26.72 12.18 85.55
17,644 5,375 10,549 33,568
736 1,142 674 2,552
1,610 1,188 929 3,727
2,132 1,403 1,028 4,563
70 11 24 34
35.3 15.4 18.1 21.9
16.1 14.8 13.2 15.0
12.2 12.6 11.9 12.2
0.2 1.2 0.5 0.4
n.m. n.m. 503.2 n . m.
111.8 n.m. 96.0 377.8
44.3 n.m. 64.1 57.5
0.1 0.0 0.5 0.2
3.2 1.4 3.4 2.7
A s ia- Pac if ic Genting Genting Malay sia Genting Singapore Kangw on Land Crow n TabCorp Sky City Ent
7.34 2.83 1.14 18,500 8.00 6.69 2.84
8,366 5,142 10,001 3,291 5,266 3,557 1,148 36,772 98,494
1,019 614 52 434 619 927 207 3,872 8,075
1,343 533 515 498 565 891 215 4,559 10,427
1,646 546 736 528 628 917 217 5,218 12,282
27 -6 277 10 1 -1 2 16 23
11.3 5.8 206.9 5.7 9.3 5.4 7.6 10.5 15.7
9.3 6.2 22.7 4.9 10.2 5.7 7.3 8.9 12.1
7.6 5.5 16.0 4.6 9.2 5.5 7.2 7.8 10.3
0.3 (1.0) 0.1 0.5 12.8 (9.9) 3.0 0.5 0.4
24.7 12.1 n.m. 9.7 n.m. 7.2 12.1 66.2 n . m.
19.9 13.8 54.3 9.3 21.6 8.4 12.3 17.9 30.2
16.1 13.4 29.6 8.8 16.8 8.3 11.5 15.1 22.6
1.1 2.2 0.0 5.4 4.5 8.6 5.5 3.9 2.2
2.0 1.6 3.3 2.1 1.8 1.2 2.1 2.0 3.4
Sec t o r
Source: Bloomberg, DBS Vickers
Figure 45: China consumer sector peer comparison

EBITDA Share price 18-Jun-10 (HK$) Macau gaming stocks Sands China Wynn Macau SJM Galaxy Melco Average China consumer stocks (market cap >HK$15b) Li & Fung Tingyi Holding Want Want China Hengan China Mengniu China Yurun Yue Yuen Li Ning Tsingtao Brewery - H China Food Big-cap (>HK$50b) Medium-cap (<HK$50b) 12.06 13.20 6.60 4.11 3.37 Market Cap (HK$m) 97,057 68,475 33,311 16,205 4,147 219,195 EV/EBITDA 2009 2010F 2011F (x) (x) (x) 17.8 22.3 12.3 16.8 n.m. 18.3 15.8 15.3 8.0 18.6 32.0 14.4 13.8 12.7 7.4 11.8 27.8 12.1 2-year CAGR (%) 14 25 31 39 n.m. 23 2011 EV/ EBITDA vs growth (%) 1.0 0.5 0.2 0.3 n.m. 0.5 2009 (x) 58.3 33.1 36.4 18.3 n.m. 66.4 PE 2010F (x) 34.5 21.6 14.4 31.6 n.m. 25.0 2011F (x) 29.8 18.5 12.6 27.1 80.2 21.3 P/BV 2011F (x) 3.4 18.2 3.9 2.0 0.6 5.6 ROE 2011F (%) 9.8 42.2 25.6 6.4 1.2 17.0 Div d Y ield 2011F (%) 2.6 0.5
38.30 19.06 6.50 61.50 25.00 24.50 24.40 27.45 38.65 4.76
144,939 106,484 85,876 74,988 43,430 43,200 40,234 28,784 25,318 13,292 606,546 412,287 194,258
31.6 17.1 25.7 24.8 15.4 18.4 8.5 15.7 17.7 10.6 18.2 23.9 11.9
23.3 14.4 19.9 21.9 13.9 16.0 7.4 13.1 16.3 9.2 15.0 19.1 10.2
17.2 12.2 15.6 17.6 10.8 12.7 6.7 10.5 14.3 6.5 12.2 15.2 8.4
35.0 15.5 28.6 20.1 20.2 23.2 11.8 19.1 9.8 30.7 20.7 24.2 16.7
0.5 0.8 0.5 0.9 0.5 0.5 0.6 0.5 1.5 0.2 0.6 0.6 0.5
41.7 35.7 35.3 35.4 34.1 24.8 10.8 26.7 35.6 23.4 30.2 37.4 21.4
28.6 30.1 27.5 31.3 26.6 22.6 10.2 22.0 31.9 17.3 24.8 29.2 18.7
20.6 25.5 21.8 25.5 20.8 18.5 9.0 17.9 28.4 12.1 19.8 22.8 15.6
6.7 6.7 8.1 6.6 3.4 3.8 1.4 5.5 2.1 1.9 4.4 6.9 2.5
34.3 28.5 39.8 27.6 17.4 22.0 16.2 34.2 7.7 16.8 23.8 32.5 17.1
3.9 1.9 4.0 2.5 1.0 1.6 4.9 2.3 0.6 3.3 2.9 3.2 2.3
Page 24

Figure 46: Wynns EV/EBITDA Historical Trend
(US$) 200 25x 150 100 50 0 Oct-02 (50) (100) Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09
20 0 Jan-00 (20) Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Figure 48: MGMs EV/EBITDA Historical Trend

(US$) 120 100 80 60 40 18x 16x 14x 12x 10x
20x 15x 10x 5x
Source: Bloomberg
Source: Bloomberg
Figure 47: Las Vegas Sands EV/EBITDA Historical Trend

(US$) 160 140 120 100 80 60 40 20 0 Dec-04 (20) Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 30x 25x 20x 15x 10x
Source: Bloomberg
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Strategy & Stock Picks
We initiate coverage of the Macau gaming sector as it appears to be a good proxy to Chinas fast growing domestic consumption. Macro factors in China should support Macau gaming revenue growth: a) b) c) d) e) Low gaming penetration rate of 0.3% of GDP vs 0.6% in the US; Accelerating GDP growth (2010F: 11%; 2011F: 10% vs 2009: 8.7%) and improving consumer sentiment; Increased discretionary spending with rising income; Infrastructure developments to improve Macaus accessibility and Chinas transportation system; and Potential extension of individual visa scheme to more provinces/cities. in the sector to Cotai (potentially up to 80% of EBITDA vs Galaxys 43%), which will likely see longer than expected payback period. Although Melco (Not rated) also has exposure to the Macau gaming sector, we prefer direct plays rather than holding companies, as the latter usually trade at a discount. Melco has also been losing market share despite launching City of Dreams in Jul 2009 (partly due to poor luck factor), while valuation remains rich at 28x 2011 EV/EBITDA (based on consensus earnings). Stock picks: SJM (Buy; TP HK$8.10). SJM is the incumbent in Macau, with the largest market share by revenue (32%) and tables (36%). Earnings growth will be driven by maiden contribution from Oceanus (100% mass-market, opened in Dec09), two new VIP floors at Grand Lisboa (opening in 4Q10), and restructuring of third-party service agreements. Its HK$4.2b net cash position should help support expansion plans ie redevelopment of Portugese school site next to Grand Lisboa, renovation of Casino Lisboa, and potential Cotai ventures. SJM is trading at an attractive 7.4x 2011 EV/EBITDA vs sectors 12.1x and China mid-cap consumer stocks 8.4x, despite stronger EBITDA growth (2year CAGR: 31% vs 23%, 17% respectively). SJM is the only Macau gaming company with a dividend policy (50% of distributable profits). Wynn Macau (Buy/ TP: HK$15.40). Wynn Macau is the second most profitable casino in the sector, boasting above average daily win per table/slots. The recent opening of VIPcentric Encore in Apr 10 should help boost EBITDA (2-year CAGR: 25%) and market share (17% from 14%), while creating synergy by allowing adjoining Wynn Macau to expand in the more profitable grind segment. The company deserves to trade at a premium given its strong brand name, management and balance sheet (which should help support its Cotai venture in 2011). Valuation is attractive at 12.7x 2011 EV/EBITDA vs large-cap Chinese consumer stocks 15.2x, with comparable earnings growth. Galaxy (Buy; TP HK$5.00). Potential re-rating with the opening of Galaxy Macau in 1Q11, which should boost long-term earnings growth potential/market share and diversify earnings from Starworlds VIP operations which should continue to do well given its strategic location at Macau Peninsula (adjacent to Wynn Macau and Grand Lisboa). Although Galaxy is trading at par to sector (11.8x 2011 EV/EBITDA vs 12.1x), and also at a premium to China mid-cap consumer stocks 8.4x, but on an EV/EBITDA relative to growth basis, Galaxy looks attractive at 0.3x vs the latters 0.5x. Plus, we have used conservative assumptions for Galaxy Macau even then, Galaxy is expected to have the strongest EBITDA growth in the sector (2-year CAGR: 39%).
Although 3Q09-May10s strong GGR growth may not be sustainable, we still expect decent 2010-11F growth of 28% and 11% (1.1x and 2.5x China GDP growth respectively, within the 1.1-4.4x historical range). Monetary tightening and potentially lower property prices may be dampeners, but gaming demand has proven to be largely inelastic (especially grind segment). EBITDA margins should also gradually improve with higher mass-market contribution and more direct VIPs, along with positive impact from junket commission cap (effective since Dec 09). 2010 will be a sweet spot given minimal incoming supply i.e. only Encore opening at Macau Peninsula in Apr 2010. But from 2011F onwards, there will be large incoming supply of IRs at less matured Cotai i.e. Galaxy Macau in early 2011, and Parcel 5 & 6 in Sep 2011-Mar 2012. Incremental demand is unlikely to match supply perfectly in the shortterm, as we see Cotai being a longer-term story: a) Taste for non-gaming entertainment cannot be acquired overnight; b) Most infrastructure developments will only be completed post-2013; and c) IRs would need to be unique to be able to draw in sufficient fresh demand to fill supply. With demand growth decelerating and more competition looming ahead, we prefer concessionaires with strong branding and strategic properties at Macau Peninsula (highest potential to grow/defend market share), as well as solid balance sheets. Cotai exposure is a plus, but not essential for now. Top picks: SJM (Buy; TP HK$8.10) and Wynn Macau (Buy; TP HK$15.40). We also like Galaxy, which should see a re-rating with the on-track opening of Galaxy Macau in 1Q11. As for Sands China (Hold; TP HK$12.40), there could be potential risk of Parcels 5 & 6s completion in 3Q11 being delayed (just recommenced construction after finalizing its financing package), which may strain its balance sheet/cashflow. Sands China will have the largest exposure
Page 26
STOCK PROFILES
Page 27
Macau Gaming Sector
SJM Holdings
Bloomberg: 880 HK | Reuters: 0880.HK
BUY HK$6.60 HSI : 20,287

(Initiate coverage) Price Target : 12-Month HK$8.10 Potential Catalyst: New VIP table injection, quick ramp-up at new self promoted casino ie the Oceanus, benefits from new service agreements at satellite casinos Analyst Ken Chen +852 2863 8923 ken_chen@hk.dbsvickers.com Yee Mei Hui +603 2711 1332 meihui@hwangdbsvickers.com.my
Rising to new heights

Strong dominance in grind segment on Macau Peninsula Strong EBITDA growth from additional VIP tables, Oceanus and new contract arrangements Healthy balance sheet with strong cash inflow Initiate coverage with BUY, TP HK$8.10.
Price Relative
HK$ Relative Index 219 169 119 3.20 2.20 1.20 Jul-08 69 19 Jan-09 Jul-09 Jan-10
6.20 5.20 4.20
The Empire just got bigger and better. SJM is the incumbent in Macau, with the largest market share by gaming revenue (32%) and tables (37%). The opening of mass-focus Oceanus in Dec09 should help boost SJMs EBITDA fairly quick given limited incoming supply in 2010 and strategic location adjoining Macaus main ferry terminal. As SJMs casinos are mainly located on Macau Peninsula, it should be more insulated from the massive incoming supply at Cotai from 2011 onwards. SJM has also restructured 12 of 14 of its satellite casinos service agreements, which should continue to provide positive EBITDA contribution going forward. Strong earnings growth momentum. EBITDA is expected to grow at 31% 2-year CAGR, driven by: a) opening of two new VIP floors at flagship Grand Lisboa in 4Q10 (46% increase in VIP tables), b) maiden contribution from Oceanus (c.12% boost to EBITDA), and c) full impact of restructuring of third-party service agreements (3%-5% share of gaming revenue without the need to bear any expenses). However, this could be partially offset by the renovation of Old Lisboa likely in phases from 2H10-1H12) which should be positive in the longer-term to arrest SJMs slide in VIP market share. Solid balance sheet supports expansion plans. SJM has an enviable HK$4.2bn net cash position at end 09, which should support maintenance expenses, Lisboa redevelopment and potential Cotai penetration (although SJM is in no hurry). SJM is the only Macau gaming company with a dividend policy (50% of distributable profit). Initiate coverage with BUY, TP: HK$8.10. Despite attaching conservative multiples to SJMs casino properties, SJM is still trading at a 23% discount to our target price of HK$8.10. At 7.4x 2011F EV/EBITDA, valuation is attractive vs Macau gaming sectors 12.1x, and mid-cap China consumer stocks 8.4x.
At A Glance Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) Major Shareholders STDM Inv (%) Ho Hung Sun, Stanley (%) Free Float (%) Avg. Daily Vol.(000) 5,047 33,311 / 4,280 61.0 8.0 31.0 18,095
SJM Holdings (LHS)
Relative HSI INDEX (RHS)
Forecasts and Valuation
FY Dec (HK$ m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (HK$):
2008A 27,992 1,582 672 796 796 0.21 (48.1) 0.21 0.06 1.94 31.1 15.8 12.9 0.9 3.4 CASH 11.7
2009A 34,066 2,269 812 907 907 0.18 (14.6) 0.18 0.09 1.69 36.4 16.3 12.3 1.4 3.9 CASH 11.5
2010F 44,100 3,583 2,316 2,298 2,298 0.46 153.5 0.46 0.23 1.92 14.4 9.6 8.0 3.5 3.4 CASH 25.5 New 0.43
2011F 45,741 3,913 2,645 2,628 2,628 0.53 14.3 0.53 0.26 2.18 12.6 8.8 7.4 4.0 3.0 CASH 25.6 New 0.51
ICB Industry: Consumer Services ICB Sector: Travel & Leisure Principal Business: Casino and Entertainment
Source of all data: Company, DBSV, Bloomberg, HKEX
Page 28
www.dbsvickers.com Refer to important disclosures at the end of this report ed-JS / sa- DC
Macau Gaming Sector SJM Holdings

SWOT Analysis Strengths The Lisboa brand is well known in Mainland China. An empire of casinos on the Macau Peninsula, continues to dominate with the largest market share by number of tables (37%) and gaming revenue (32% as at 1Q10). Mass gaming segment continued to grow strongly with new properties introduced in FY09 (Oceanus, LArc, LKF and Jimei). More diversified revenue base (57% VIP & 43% mass, VIP growing from 2010F onwards). Weaknesses Less competitive in VIP segment compared to peers, but opening of new VIP floors at Grand Lisboa and upcoming renovation of Old Lisboa (including installation of new IT system) should help arrest decline in VIP market share. Low EBITDA margin relative to sector (2009: 6% vs 14%) due to third party-promoted casinos, but this should pick up post-restructuring of new contract arrangements. No control over third party operatorss business and any misconduct could have negative impact on the reputation of SJM.
Opportunities
Threats
Strong balance sheet (net cash) and strong operating cash flows that should enable SJM to fund its capex (including Lisboa redevelopment) comfortably. Also in position to take advantage of any investment or development opportunities such as acquiring older properties for conversion or expansion into Cotai. Oceanus should ramp up fairly quickly given limited incoming supply in 2010 and strategic location which should help attract hardcore gamers straight from the main ferry terminal and divert traffic away from competitors. Help to reduce reliance on Grand Lisboa which contributed 73% of FY09 adjusted EBITDA.
Succession planning post-founder Dr. Stanley Ho who has built long-standing relationship with junkets, promoters and local authorities. A professional management team in place at SJM to ensure continual growth. Massive incoming supply on Cotai expected which could result in destructive price war as competition intensifies. SJMs properties are mainly in Macau Peninsula, hence should be more insulated.
Source: DBS Vickers
Page 29
Investment Highlights 1) Leading with dominance. With the long running history behind the Lisboa brand, Old Lisboa and Grand Lisboa, located at the centre of Macau Peninsula have been a popular destination - continuing to attract day trippers, tour groups and vacation travellers from Greater China and the rest of Asia. As of end-09, SJM accounted for 29% of Macau gaming revenue, c.26% of VIP and c.41% of mass segment. With maiden contribution from the newly opened casinos in 2009 (Oceanus, Lan Kwai Fong, Jimei and LArc), SJM managed to achieve higher market share of 32% in 1Q10 - cementing its leading position in the industry. 2) Tightening stronghold in the mass segment. In Dec 09, SJMs self-promoted casino, the Oceanus () was launched. With its Chinese name and exterior design similar to the famous Water Cube () that symbolised the Beijing Olympics 2008, Oceanus stood out despite being a new entrant. It comprises of 345,000 sf of gaming space devoted entirely to mass gaming, consisting of 276 mass gaming tables and 605 slots. The casino is the first property visitors see after coming out of Macau Peninsula ferry terminal (which welcomed 28% of 2009 visitor arrivals); a few minutes walk via a pedestrian bridge. This should capture strong traffic volume, especially day-trippers and hardcore mass patrons seeking convenience. We expect Oceanus to ramp-up fairly quickly given limited incoming supply (only VIP-centric Encore in 2010) and robust gaming demand. The Oceanus
3) Strong earnings growth momentum. SJMs EBITDA is expected to grow at 31% 2-year CAGR, driven by: a) Two new VIP floors opening at Grand Lisboa in 4Q10 (31 tables), in addition to the new floor that was opened in Oct 09 (16 tables). These provide luxurious sky-high accommodation for VIP gaming rooms, hotel suites and the award-winning Robuchon, a Galera Restaurant which will be relocating from Hotel Lisboa. Grand Lisboa is the main earnings driver for SJM we expect its 2010-11F property EBITDA to improve by 63% and 24%, constituting 58% and 66% of SJMs EBITDA respectively, benefiting the strong growth of VIP gaming in Macau. There could also be a table re-allocation strategy to make up for some VIP tables which may be closed during the renovation of Old Lisboa. Although the exact schedule has yet to be announced, early indication suggests that Lisboa redevelopment could start in 2H10, to be implemented in phases up to 1H12. b) Junket commission cap of 1.25% since Dec 09 (vs 2009s 1.35% of rolling chip). SJM stands to benefit as >95% of its VIP business is junket-driven, while VIP segment makes up 59% of revenue. We estimate the cap can boost VIP EBITDA margin by ~3ppt. Maiden contribution from Oceanus We estimate EBITDA contribution of HK$370m (2010F) and HK$462m (2011F), which should boost SJMs EBITDA by 10% and 12% respectively. Restructuring of third-party service agreements. As of end 09, 12 out of 14 satellite casinos are operating under new service agreements where SJM will receive 3% and 5% of VIP and mass revenue (after gaming tax) respectively, without bearing any further operating expenses. This compares favourably to the previous 40:40:20 agreement (40% of gross revenue to government for gaming tax, 40% to service provider, and 20% for SJM) as SJM used to incurred loss or barely break-even after casino operating expenses. There were also three new satellite casinos opened in 2009 ie Lan Kwai Fong, Jimei, and LArc which collectively offered 151 mass tables, 105 VIP tables and 568 slot machines. We expect 2010-11F EBITDA contribution from third-party promoted casinos to be HK$851m and HK$737m respectively compared to HK$500m (FY09). We expect a decline in 2011 due to new supply incoming in Cotai. In our view, we also believe Big will eat small as older casinos will become less competitive compared to openings of new mega resorts going forward.
c)
d)
Source: Company
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4) Strong balance sheet poised for opportunities. As of end-09, SJM was back in strong net cash position of HK$4.2bn, with HK$9.3bn of available cash. Its enviable balance sheet and sustainable HK$4bn p.a. operating cashflows should allow SJM to comfortably fund: a) b) HK$1bn annual debt repayment; HK$663m capex commitments for the construction works at Grand Lisboa in respect of its new VIP floors, remaining capex for Oceanus (brought forward from 2009), additional gaming and non-gaming facilities at Ponte 16, and construction of another walkway leading from Casino Jai Alai to the Oceanus (to create more synergy); Remaining capex for Oceanus (brought forward from 2009), additional gaming and non-gaming facilities at Ponte 16, and construction of another walkway leading from Casino Jai Alai to the Oceanus (to create more synergy); Renovation of Casino Lisboa (HK$200m). SJM plans to install new IT and player-tracking systems and undertake renovation of certain mass market and VIP gaming areas beginning 2H10 (in phases over the next two years) Redevelopment of Portugese school site next to Grand Lisboa, which should prove synergistic (estimated capex: HK$4b). The reallocation of the school is still pending approval from the Portugese government; Cotai expansion (two sites identified, but timing uncertain);
g)
50% dividend pay-out (the only Macau gaming company with a dividend policy).
In our opinion, it could be in SJMs interests to acquire or renovate old properties on the Macau Peninsula into quality casinos to expand its mass gaming business. SJMs management is prudent in its Cotai investment strategy, in light of its capital-intensive nature and ROI may not be as attractive in the short-mid term due to intense competition. Potential Cotai sites
c)
d)
e)
Source: Company, DBS Vickers
f)
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Attractive Valuation Sum of the parts (SOTP) valuation. We have applied different EV/EBITDA multiples to SJMs respective casino properties: a) Grand Lisboa (10x 2011F EV/EBITDA). Although Grand Lisboa has the highest VIP daily win per table in the sector, it has been steadily losing VIP market share. We have conservatively used a lower EV/EBITDA multiple of 10x compared to the 15x ascribed to Wynn Macau and Venetian Macau (most profitable properties in Macau), and 12x for Starworld (biggest beneficiary of recent junket commission cap). There could be potential upside to our valuation as Grand Lisboa will be opening another two VIP floors in 4Q10 (in addition to the floor opened in Oct 09) which could help arrest its slide in VIP gaming market share. Lisboa (8x 2011F EV/EBITDA). We have used a lower multiple to factor in the upcoming renovations in 2H10, which could disrupt operations up to 2012. In our estimates, we assumed the average number of tables in operation at 75%-80% between 2010-12F. We have ascribed a higher multiple compared to satellite casinos 5x due to Lisboas strong branding, strategic location at Macau Peninsula and ability to generate higher EBITDA. Oceanus (8x 2011F EV/EBITDA), based on average valuation for Grand Lisboa and Old Lisboa but lower than Sands Chinas 10x given Oceanus short operating history. We expect SJMs new self-promoted casino to ramp up fairly quickly in view of limited incoming supply in 2010F and its strategic location adjoining Macau main ferry terminal. So far, Oceanus performance has been impressive - raking in HK$139m EBITDA after just two weeks of operations in 2009 and we expect c.HK$120m was delivered in 1Q10. Third party promoted casinos (5x 2011F EV/EBITDA), to factor in lower EBITDA margin and competitiveness (especially for older properties). Contribution should improve with: i) 12 out of 14 third-party service agreements restructured as of end 09; and ii) opened 3 new casinos in 2009, including LArc which is adjacent to Wynn Macau, and Starworld. Hence, we believe 5x multiple should be reasonable (similar to valuation ascribed to Galaxys City Clubs).
Initiate coverage with BUY rating, TP HK$8.10. Despite attaching conservative multiples to SJMs casino properties, SJM is still trading at a deep 30% discount to our target price of HK$8.10 with undemanding 2011F EV/EBITDA multiple of 7.4x. This compares favourably to Macau gaming sectors 12.1x. Sum of parts valuation
Sum of parts Gam ing Grand Lisboa Lisboa Oceanus Third party casinos Less: Other expenses Total Net Cash Equity value Fully diluted no of shares Target Price 2,563.2 580.8 461.6 737.0 4,342.6 (300.0) 10 8 8 5 9 9 25,632 4,646 3,693 3,685 37,656 (2,601) 35,055 8,347 43,402 5,373.8 8.10 EBITDA EV/EBITDA (HKDm) (x) Valuation (HKDm )
b)
Source: DBS Vickers
c)
EV/EBITDA band
HK$ 7 6 5 4 3 4x 3x 1x
7x 6x
d)
2 1 0 Mar-10 May-09 May-10 Mar-09 Sep-09 Nov-09 Sep-08 Nov-08 Jan-09 Jan-10 Jul-08 Jul-09
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Earnings to Leapfrog Resilient earnings. Despite a challenging 2009, SJMs gross gaming revenue and EBITDA grew 22% and 14% to HK$34.1bn and HK$2.3bn respectively, with EBITDA margin expanding by 1ppt to 7% on efficiency gains. VIP segment, which accounted for 59% of gaming revenue, expanded by 25% as rolling chip increased by 30% - helping to offset lower win rate (2.78% vs 2.88%). Mass segment (38% of gaming revenue) and slots (3% of gaming revenue) also rose by 18% and 3% respectively. Robust growth ahead. We expect SJMs gaming revenue growth to be driven by: a) new VIP floors at Grand Lisboa; and b) new properties opened in 2009 (Oceanus, Lan Kwai Fong, Jimei, LArc), but partially could get dragged down by renovation of Old Lisboa from 2H10 onwards. We estimate gaming revenue to increase by 29% and 4% to HK$44.1bn and HK$45.7bn in FY10F and FY11F, respectively. The slowdown in FY11 is likely to be offset by the Lisboa rennovation. FY10-11F EBITDA expected to surge 58% and 9% to HK$3.6bn and HK$3.9bn as margins start to improve to 8% and 9%, respectively, benefiting from the impact of junket commission cap (1.25%) and restructuring of service agreements for satellite casinos. Flagship Grand Lisboa should remain the key contributor to EBITDA although we also anticipate rising contributions from the Oceanus and the satellite casinos. VIP segment the main earnings driver. We expect 2010-11F VIP gaming revenue to expand by 32% and 11% to HK$26.5bn
and HK$29.3bn respectively, increasing its contribution to SJMs revenue from 59% to 64% in 2011F. This should come on the back of: a) 31 new tables at Grand Lisboa in 4Q10, on top of the 16 tables added in 4Q09; and b) robust growth in daily net win per table assuming 10% and 9% in 2010-11F (still conservative as based on China GDP growth). As for mass market segment (including slots), we expect revenue to increase by 25% to HK$16.2bn in 2010F with fullyear contribution from newly opened Oceanus. 2011F could see a 7% contraction to HK$15.2bn with lower contribution from Lisboa (renovation) and satellite casinos due to increased competition from massive incoming supply at Cotai. Strong 1Q10 results. SJMs gaming revenue increased by 74% y-o-y to HK$12,683m in 1Q10, on the back of strong contribution from VIP segment which grew 104% to HK$8,282m. VIP rolling volume more than doubled to HK$289bn in 1Q10, while win rate remained flat at 2.87%. Mass table and slot revenue increased by 39% and 11% to HK$4,122m and HK$279m, respectively. Of the total gaming revenue, Grand Lisboa contributed 25% (HK$3,165m), selfpromoted casinos ie Old Lisboa, Oceanus and Jai Alai 23% (HK$3bn), while satellite casinos 52% (HK$6,6bn). EBITDA increased by 155% y-o-y to HK$1,096m as margin improved by 2.7% to 8.6%. Main contributors were Grand Lisboa at 46% (HK$508m) and self-promoted casinos at 22% (HK$240m). Satellite casinos saw a turnaround, contributing c.25% (HK$270m) thanks to the new service arrangements.
Sales Trend
Operating Cost Trend
Profitability Trend
HK$ m
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2007A 2008A 2009A 2010F 2011F
Total Revenue Revenue Growth (%) (YoY)
40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%
40000 35000 30000 25000 20000 15000 10000 5000 0 2007A 2008A 2009A 2010F 2011F
Other Operating Expenses (-) Cost of Goods Sold (-)
2500 2000 1500
149% 99% 49%
1000 500 0 2007A 2008A 2009A 2010F 2011F Net Profit (After-extraordinaries) Net Profit Growth (%) (YoY) (01%) (51%)
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Income statement
FY Dec (HK$m) Gam ing re venue - VIP ga ming - M ass - Slots - Others Specia l gam ing ta x, levy & ga ming premium Rev enue a fte r tax Hotel, cate ring a nd re late d se rvices Cost of sal es a nd se rvices Othe r incom e M ark eti ng and promotiona l expenses Operating and admi nistrative e xpe nses Finance costs Share of results of an associa te Share of profi ts of a JCE Profit before taxa tion Ta xa tion M inori ty intere st Profit attributabl e to equity holders EBI TDA EBI TDA M argin 2 008 27 ,992 15 ,970 11 ,064 957 2 (10 ,915 ) 17 ,077 173 (134 ) 131 (10 ,115 ) (6 ,307 ) (158 ) (2 ) 7 672 (17 ) 141 796 1 ,582 6% 20 09 34, 066 20, 017 13, 039 1, 008 2 (13, 220 ) 20, 846 287 (165 ) 123 (13, 318 ) (6, 756 ) (198 ) (14 ) 5 812 (18 ) 112 907 2, 269 7% 2 010F 44, 100 26, 474 16, 248 1, 376 2 (17, 101) 26, 999 334 (122) 42 (17, 937) (6, 852) (140) (14) 5 2, 316 (18) 0 2, 298 3, 583 8% 20 11F 45,7 41 29,2 64 15,1 64 1,3 12 2 (17,7 25) 28,0 17 3 40 (1 24) 45 (18,3 89) (7,0 64) (1 72) (14) 5 2,6 45 (18) 0 2,6 28 3,9 13 9%
Sensitivity analysis
EBITDA 2010F Base case a) 10% c hg in VIP daily win/table - Grand Lisboa - Old Lisboa - Satellite casinos b) 10% chg in mass daily win/table - Grand Lisboa - Old Lisboa - Oceanus - Satellite casinos 2,162 814 410 909 2,670 615 511 785 8.30 8.10 8.20 8.10 2,593 822 879 3,024 610 763 8.90 8.10 8.10 (HK$m) 3,583 2011F (HK$m) 3,913 TP based on FY11F (HK$) 8.10
Source: DBS Vickers
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Gross gaming revenue by segments (HK$m)

FY09A 34,066 9,436 9,418 681 14,529 2 20,017 5,900 7,761 20 6,336 13,039 3,207 1,630 627 7,575 1,008 329 27 34 618 FY10F 44,100 13,942 8,882 1,606 19,668 2 26,474 10,034 7,184 0 9,257 16,248 3,532 1,622 1,534 9,560 1,376 377 75 72 852 FY11F 45,741 18,554 8,005 1,975 17,206 2 29,264 14,293 6,466 0 8,505 15,164 3,850 1,460 1,823 8,030 1,312 411 79 152 671
Gross gaming revenue - Grand Lisboa (commenced in Aug 07) - Lisboa - Oceanus - Third party casinos - Others VIP - Grand Lisboa - Lisboa - Oceanus - Third party casinos Mass - Grand Lisboa - Lisboa - Oceanus - Third party casinos Slots - Grand Lisboa - Lisboa - Oceanus - Third party casinos
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Table expectations
FY09A 1,724 320 1,404 4,567 FY10F 1,764 360 1,404 4,567 FY11F 1,764 360 1,404 4,567
No of tables VIP Mass Slots Average in operation VIP Mass Slots
239 1,192 3,955
330 1,404 4,567
360 1,404 4,567
Revenue assumptions
FY09A VIP Rolling volume Win rate Gross revenue Daily win per table - HKD Daily win per table - USD Growth Rolling volume Gross revenue Daily win per table Mass Gross revenue Daily win per table - HKD Daily win per table - USD Growth Gross revenue Daily win per table Slots Gross revenue Daily win per slot - HKD Daily win per slot- USD Growth Gross revenue Daily win per slot 718,849 2.78% 20,016.7 229,836 29,656 FY10F 943,780 2.81% 26,474.5 219,796 28,361 FY11F 1,044,632 2.80% 29,263.8 222,707 28,736
30% 25% 23%
31% 32% -4%
11% 11% 1%
13,039.1 29,978 3,868
16,248.2 31,706 4,091
15,163.9 29,590 3,818
18% 18%
25% 6%
-7% -7%
1,008.3 698 90
1,375.8 825 106
1,312.1 787 102
5% 3%
36% 18%
-5% -5%
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Strong Balance Sheet & Cashflows As of end-09, SJM had a healthy HK$4.2bn net cash position, with HK$9.3bn of available cash. Its enviable balance sheet and sustainable HK$4bn p.a. operating cashflows should allow SJM
Breakdown of Assets Breakdown of Capital
to comfortably fund its capex, repay debts and maintain its dividend payout over the next three years, without any need to take up new borrowings.
Financial Leverage & Net Debt to Equity
430
3.0 2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2007A 2008A 2009A 2010F 2011F
Inventory 0.3%
Debtors 7.4%
ST Debt 7.8%
380 330 280
Bank, Cash and Liquid Assets 40.5%
Net Fixed Assets 51.8%
Common Shareholder s' Equity 55.5%
LT Debt 36.7%
230 180 130
Net Debt/(Cash) Financial Leverage (X) (R.H.S)
Net Debt to Equity (X) (R.H.S)
Source: Company, DBS Vickers Cash Flow Trend Free Cash Flow Per Share Free Cash Flow As At Year End
0.80
5,613 3,613 1,613 -387 -2,387 -4,387 2007A 2008A 2009A 2010F CF from Fin 2011F
0.60 0.40 0.20 (0.00) (0.20) (0.40) (0.60) (0.80) (1.00) 2007A 2008A 2009A 2010F 2011F
3,500 3,000 2,500 2,000 1,500 1,000 500
CF from Op
CF from Invt
Free Cash Flow Per Share
Free Operating Cash Flow Per Share
2007A
2008A
2009A
2010F
2011F
ROAE / ROAA Trend (%)
Margin Trend (%)
Total Debt & Gross Interest Cover
29.0% 24.0% 19.0% 14.0% 9.0% 4.0% 2007A 2008A 2009A 2010F 2011F Ret on Avg Equity (ROAE) % Ret on Avg Assets (ROAA) %
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2007A EBITDA Margin % 2008A 2009A 2010F 2011F EBIT Margin % Net Income Margin %
1000 0 2007A 2008A 2009A 2010F 2011F
Total Debt (+) Gross Interest Cover (X) (YoY)
6000 204.4x 5000 4000 3000 2000 54.4x 154.4x
104.4x
4.4x
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Key Risks 1) Less competitive in VIP segment. Although Grand Lisboa and Casino Lisboa boast the highest daily win per VIP table in the sector, this may be due to its lower number of VIP tables, which could be affected by: a) Less competitive junket commissions the imposition of 1.25% junket commission cap should ensure a more level playing field; b) Rise of resort casino complexes with new non-gaming amenities that has diverted high rollers away; and c) Minimal direct VIPs vs 20-30% at Wynn Macau, Galaxy and Venetian. In order to mitigate its VIP market share slide, SJM opened a new VIP gaming floor at Grand Lisboa in 4Q09 and will be opening another two floors in 4Q10. SJM is also planning to install new IT and player-tracking systems and undertake renovation of certain mass market and VIP gaming areas at Casino Lisboa beginning 2H2010. 2) Succession planning. Chairman Dr. Stanley Ho has over 40 years of experience in the Macau gaming industry and has established strong relationships with service providers, junket operators and local authorities which may not be easily replicated. The succession of his crown has been a concern for investors due to his complex family structure. Nevertheless, SJM has a professional management team with proven track record in place and this should ensure continual growth going forward.
3) Reputation. Third-party promoted casinos allow SJM to expand its presence without having to invest significant capex and time. But SJM has minimal control over how its 14 third-party promoted casinos are run. Any misconduct by the third party promoters could be damaging to SJMs reputation, while unsuccessful casino operations could translate to disappointing contributions to SJM. This is partially mitigated by SJM being responsible for employment of key operational staff eg treasury, surveillance, and internal audit to ensure compliance with relevant regulations. 4) No clear strategy for Cotai. SJM is in no rush to invest in Cotai which may be a sensible decision given the large amount of supply coming onstream from 2011. If establishments in Cotai prove to be successful in attracting new and existing visitors away from the Macau Peninsula, this could negatively impact SJMs operations which is concentrated at the latter. As the Government is promoting sustainable growth in the gaming industry and diversifying economic growth drivers via tourism, events and conventions, SJM could lose out in this emerging market segment. We believe SJM is not too disadvantaged for now in not having any Cotai exposure, as we see Cotai as a longer term story. SJM has already identified two sites for potential Cotai expansion - 10,000 sqm directly across from the convention centre and 73.856sqm adjacent to the Macau East Asian Games Dome.
Page 38
Company Background SJM is the only casino gaming concessionaire with its roots in Macau.Parent Sociedade de Turismo e Diversoes de Macau (STDM) held exclusive gaming concession from the Macau Government to engage in gaming operations in Macau from 1962 to 2002. STDM is the largest controlling shareholder of SJM, made up of a number of corporate and individual shareholders. Dr Stanley Ho owns directly and indirectly more than 30% of equity share capital in STDM. SJM is one of six concessionaires and sub-concessionaires permitted by Macau government to operate casino games in Macau. SJM is the largest casino operator in Macau, with a portfolio of 4 self promoted and 14 third-party promoted casinos based on the Macau Peninsula and Taipa. It has a leading market share based on gross gaming revenues- 41% in mass gaming and 26% in VIP gaming with an overall market share of 29% (+2.9% yoy) as of end-09. Casino Lisboa has been for many years a popular destination in Macau for gaming patrons, contributing to the strength of the Lisboa brand in Greater China and Asia. The opening of Grand Lisboa in 2008, which is integrated with Casino Lisboa, adds another iconic property at the centre of Macau Peninsula. SJM has developed clusters of gaming properties in various strategic locations within Macau, aimed at attracting a broader spectrum of gaming patrons.
two floors slated to be opened in 4Q10) and three new satellite casinos in 2009 ie LArc, Lan Kwai Fong (site of former Casino Kingsway), and Jimei (site of former Casino Oriental). Grand Lisboa and Lisboa
As competition intensified within the VIP market, SJM expanded its current portfolio on the Macau Peninsula and strengthened its grip on the mass market segment. In Dec 09, SJM opened Source: Company the Oceanus, a pure mass gaming property located within walking distance from Macau Peninsula ferry terminal. SJM also opened a high-vista VIP gaming floor at Grand Lisboa (another
Page 39
Organisation Structure
Source: Company
Page 40

Key management team
Nam e & Position Age Dr. Ho Hung Sun, Stanley 88 Chairman Executive Direc tor Experience and qualific ation MD of SJM since 2001 Direc tor of many subsidiaries of the Group Founder and MD of STDM since 1962 Vic e-chairman of the Macau int'l Airport Company Co-Chairman of Advisory Comm ittee of Seng Heng Bank Chairman of Macau Horse Racing Group Exec utive Chairman of Shun Tak Holdings Chairman of Estoril Sol, SGPS, S.A Chairman of Covergence Holdings until Apr 2008 Chairman of Melco Int'l Dev until Mar 2006 Honorary doctoral degrees from University of Macau, University of Hong Kong, the Hong Kong Director and senior management of SJM since 2002 Director of many subsidiaries of the Group Director of Zhen Hwa Harbour Construction company, an associate of the company and Chong Responsible for execution of the Company's strategy and overall management of company's Joined STDM in 1976 Over 30 years of experience in the casino business Executive director of Shun Tak Holdings Independent non-executive director of Yu Ming investment Director of Estoril SOL, SGPS SA and Seng Heng Bank Chairman of Macauport SAP SA Bachelor of Science degree from the University of Hong Kong in 1973 Doctoral degree in Management Studies from the IMC/Southern Cross University in 2001 Director, COO and senior management of SJM since 2002 Director of many subsidiaries of the Group Responsible for overseeing SJM's operations. Joined STDM in 1978 Has 30 years of experience in the casino business Served as the Deputy General Manager for Casino Administration and Operations of STDM from Bachelor's degree from the University of Hong Kong Master of Managem ent Studies degree from Asia International Open University (Macau) Director of SJM since 2001 Director of many subsidiaries of the Group Company secretary since 2003 Responsible for overseeing the company secretarial and legal affairs of SJM Founding member of Macau Bar Association, Attoney at law in Mac au since 1981 Founder and senior partner of C&C Advogados, a law office based in Macau and Lisbon Served as Public Prosecutor, Attorney General and Judge of High Court in Portugal and various exGraduate from the University of Lisbon in 1964 Director of SJM since 2007 and of STDM since 2005 A mem ber of the 3rd Legislative Assembly of the Macau Spec ial Administrative Region since 2005 President of the General Association of Adm inistrators and Promoters for Macau Gaming Industry Director of Po Leung Kuk since 2005 Director of SJM since 2007 Director of STDI SARL since 2008 Executive director of Shun Tak Holdings Director of a number of subsidiaries of the Shun Tak Group Bachelor's degree from the University of Illinois Master's degree in Business Administration from the University of California Director and president of SJM since 2001 Operate extensive business portfolio from jewellery, real estate, infrastructure, hotels to logistics Chairman of New World Development, Chow Tai Fook Enterprises and Melbourne Enterprises Non executive Chairman of Lifestyle International Holdings Non executive director of Shun Tak Holdings
Dr. So Shu Fai CEO Executive Direc tor
58
Ng Chi Sing COO Executive Direc tor
58
Rui Jose da Cunha Executive Direc tor
68
Leong On Kei, Angela Executive Direc tor
49
Shum Hong Kuen, David 55 Executive Direc tor
Dato' Dr. Cheng Yu Tung 84 Non-executive Director
Source: Company
Page 41

Income Statement (HK$ m) FY Dec Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Balance Sheet (HK$ m) FY Dec Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Cap Net Cash/(Debt)
2008A 27,992 (10,915) 17,077 (16,252) 825 0 5 (158) 0 672 (17) 141 0 796
2009A 34,066 (13,220) 20,846 (19,828) 1,018 0 (8) (198) 0 812 (18) 112 0 907
2010F 44,100 (17,101) 26,999 (24,536) 2,464 0 (8) (140) 0 2,316 (18) 0 0 2,298
2011F 45,741 (17,725) 28,017 (25,192) 2,825 0 (8) (172) 0 2,645 (18) 0 0 2,628
2008A 9,536 498 1,585 5,860 43 1,130 269 18,921 1,020 4,651 4,824 989 7,287 149 18,921 (3,210) 16
2009A 10,140 470 2,627 7,966 52 1,448 665 23,367 1,040 6,980 4,102 2,725 8,455 65 23,367 (4,815) 2,824
2010F 10,196 462 2,587 9,226 62 1,615 665 24,811 1,040 8,409 3,062 2,632 9,604 65 24,811 (6,067) 5,124
2011F 9,906 454 2,547 10,037 64 1,667 665 25,340 3,062 8,757 0 2,539 10,918 65 25,340 (6,361) 6,975
Sales Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (HK$ m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
(12.9) (44.7) (48.1) 2.5
21.7 23.4 13.9 2.2
29.5 142.0 153.5 0.8
3.7 14.7 14.3 0.7
2008A 672 775 0 (5) 0 (995) 175 623 (2,085) 0 227 1 (274) (2,130) (3,500) 936 3,850 (442) 844 (664)
2009A 812 1,115 (17) 8 0 1,793 350 4,063 (1,351) 0 7 1 (1,519) (2,862) (300) (702) 0 1,891 889 2,090
2010F 2,316 1,128 (18) 8 0 1,075 227 4,736 (1,177) 0 0 1 42 (1,134) (1,149) (907) 0 (286) (2,342) 1,260
2011F 2,645 1,096 (18) 8 0 116 256 4,103 (800) 0 0 1 45 (753) (1,314) (907) 0 (318) (2,539) 812
Rates & Ratio FY Dec Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Asset Turnover (x) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) Z-Score (X) N.Cash/(Debt)PS (HK$) Opg CFPS (HK$) Free CFPS (HK$)
2008A 61.0 2.9 2.8 11.7 4.3 6.1 28.3 5.2 1.5 15.2 190.1 1.2 1.3 1.2 CASH 35.7 CASH 0.4 43.1 (39.0)
2009A 61.2 3.0 2.7 11.5 4.3 6.5 49.6 5.1 1.6 13.8 173.1 1.4 1.3 1.2 CASH 26.3 CASH 56.5 45.4 54.2
2010F 61.2 5.6 5.2 25.5 9.5 14.9 50.0 17.6 1.8 12.7 171.9 1.3 1.2 1.1 CASH 28.7 CASH 102.5 73.2 71.2
2011F 61.3 6.2 5.7 25.6 10.5 17.0 50.0 16.4 1.8 13.1 180.7 1.4 1.1 1.0 CASH 26.1 CASH 139.5 79.7 66.1
Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2008A 2009A Revenues (HK$ m) - VIP gaming - Mass - Slots - Others Total Key Assumptions VIP no of tables Mass no of tables Daily win per VIP table Daily win per mass table Junket commission 15,970 11,064 957 2 27,992 180 1,154 186,470 25,338 1.35% 20,017 13,039 1,008 2 34,066 320 1,404 229,836 29,978 1.40%
2010F 26,474 16,248 1,376 2 44,100 360 1,404 219,796 31,706 1.25%
2011F 29,264 15,164 1,312 2 45,741 360 1,404 222,707 29,590 1.25%
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Macau Gaming Sector
Wynn Macau
BUY HK$13.20 HSI : 20,287

(Initiate coverage) Price Target : 12-Month HK$ 15.40 Potential Catalyst: Encore ramping up rapidly, synergy between Wynn Macau and Encore in expanding market share, Cotai expansion Analyst Ken Chen +852 2863 8923 ken_chen@hk.dbsvickers.com Yee Mei Hui +603 2711 1332 meihui@hwangdbsvickers.com.my
Strong VIP synergy

Significant growth from VIP expansion and Encore Strong business model and brand name, and ability to generate lucrative EBITDA; no funding issues for Cotai Valuation undemanding, initiate coverage with BUY rating and HK$15.40 TP
Price Relative
HK$ Relative Index 219 13.10 12.10 11.10 10.10 69 9.10 8.10 Oct-09 19 Jan-10 Apr-10 169
Expansion + Encore = Acceleration. The VIP expansion in Nov 09 and Encore should accelerate Wynn Macau (WM)s VIP gaming business; we estimate its EBITDA could rise by 38% and 12% y-o-y to HK$4,469m and HK$5,014m in FY10 and FY11, respectively. Encore being the only VIP property injected into the market in 2010 should offer strong synergy to its current VIP business at adjoining WM property. We estimate WMs market share could expand to c.17% in FY10F from 14% (FY09A). Strong management and branding. The Wynn brand, built on the premium business model, has been a success since WM opened in Sep 06, attracting the highest caliber VIP gamers from mainland China. The WM property delivers the second highest EBITDA among casino properties in Macau, partly due to its strategic location at Macau Peninsula. Major shareholder, Steve Wynn, has a strong track record of building successful properties in Las Vegas and Macau. Cotai funding? No problem! WM plans to expand on Cotai by late 2011 with expected completion in early 2014; its site located next to the City of Dreams seems ready for development (awaiting land lease approval from the Government). Funding for the single hotel resort complex should be easy as our forecasts suggest strong earnings growth from its current business; WM should turn net cash in FY10 (c.HK$205m) with c.HK$6bn cash. We believe the expansion is essential to enhance its competitiveness in Macau, and should provide long term growth opportunities. Initiate coverage with BUY, TP HK$15.40. Based on 15x 2011F EV/EBITDA. While trading at 12.7x 2011F EV/EBITDA, we believe its valuation is still undemanding and any weakness should provide a good entry level to accumulate on the stock. We believe WM deserves to trade at a premium to Macau gaming sector given its strong brand name and balance sheet.
At A Glance Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) Major Shareholders WM Cayman Holdings (%) Free Float (%) Avg. Daily Vol.(000) 5,188 68,475 / 8,797 72.3 27.7 13,670
119
Wynn Macau (LHS)
FY Dec (HK$ m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (HK$):
2008A 14,711 3,138 1,982 2,040 2,163 0.41 48.4 0.41 1.66 0.15 32.4 24.1 20.3 12.6 89.5 7.4 52.9
2009A 14,077 3,242 2,074 2,069 2,097 0.40 (2.3) 0.40 0.19 0.73 33.1 24.6 22.3 1.5 18.2 0.7 91.8
2010F 20,786 4,469 3,209 3,171 3,171 0.61 53.3 0.61 0.00 1.34 21.6 17.2 15.3 0.0 9.9 CASH 59.2 New 0.63
2011F 23,378 5,014 3,748 3,710 3,710 0.72 17.0 0.72 0.00 2.05 18.5 15.2 12.7 0.0 6.4 CASH 42.2 New 0.71
ICB Industry: Consumer Services ICB Sector: Travel & Leisure Principal Business: Gaming and entertainment
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www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- DC
Macau Gaming Sector Wynn Macau

SWOT Analysis Strengths Successful premium business model gives WM a strong branding, enabling it to capture the top end of the VIP segment in the gaming business. Sound growth and management has ability to deliver strong EBITDA and earnings growth. Strong balance sheet with prudent capital management and healthy operating cash flows. Sound relationship with seven junket operators and over 200+ personnel in its in-house marketing team. Opportunities Encore is the only new supply in 2010 with enhanced VIP gaming to capture more market share. VIP synergy from Encore should result in strong growth. The Cotai development could materialize in late 2011. Weakness Focusing on the premium segment may be lucrative, but WM could lose out on a bigger slice of the pie since the mass market is also important, and its contribution to total gaming revenue is increasing. No secure relationship with junket operators as WM uses mix methods - commission rate and profit sharing schemes to attract junket operators. High reliance on low-margin VIP segment
Threats Credit tightening may lead to slower growth in VIP segment, which WM has high exposure to. WM could also face risk of higher provisions for bad debts as direct VIPs make up 20% of VIP gaming revenue. Expiry of gaming concession in 2022; although extendable by 5 years, the Macau Government reserves the right to redeem the concession. Incoming supply on Cotai could lead to destructive price war in 2011. WMs properties are in Macau Peninsula, hence should be relatively less affected.
Source: DBS Vickers
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The Encore held its grand opening in Apr 10, and has been integrated into the existing property. It has increased VIP tables 1) Strong branding with proven track record. The Wynn brand is and high limit slots by 37 and 20, respectively. Also it will include built on the premium business model that has proven to be a 24 premium mass tables and 75 premium mass market slots. We success in penetrating the premium segment by providing expect Encore to be well utilized as it is the only new supply in quality services and commssions to its junkets operators. As a 2010 that offers VIP gaming of the highest quality (classification result, WM should continue to expect returning and new high of VIP gamers depends on their membership status). Along with rollers from Mainland China. It has differentiated itself through the new Encore hotel tower that offers 400 luxury suites (c.1,000 innovative casino designs with high-quality and luxurious sf per unit) including 4 villas (7,000sf per unit), the property commercial-style accommodation. Its strong operating track should continue to attract and retain high rollers. record also ensures its premier brand is not easily replicated. The VIP expansion and Encore should be WMs key drivers in WMs operations are managed by an experienced and strong FY10 and FY11. We estimate WMs VIP revenue will grow 74% management team under the leadership of Mr. Wynn (who has and 15% y-o-y to HK$21.1bn and HK$24,4bn in FY10 and been accredited with building successful properties in Las Vegas, FY11, respectively. This is based on our assumption of 37% and eg Bellagio, Mirage, Treasure Island, Wynn, Encore). This is 9% increase in VIP daily wins, taking into account an increase in reflected in the results of its VIP gaming operations, where high the average number of tables. It should take WMs VIP business class table management and executions have placed WM on the to c.81% of gross gaming revenue from FY10 onwards, up top of the VIP business in Macau. 10% from the previous years. As a result, we expect strong EBITDA growth of 38% and 12% y-o-y to HK$4.5bn and Following its successful penetration of the premium segment, HK$5bn for FY10 and FY11, respectively. WMs gaming revenue market share rose to 16% in 2008. 1H09 was hit by the financial tsunami which saw its market WM will benefit from the timing of its new supply, as the share edged down to 14% in FY09. Given the continued strong industry has seen a strong recovery and escalating growth since growth of gaming revenue in May 10 from 3Q09, we believe 3Q09. This should help WM to gain market share to in FY10F. WM should benefit from its VIP expansion and Encore. We SJMs Oceanus is the only other new supply in FY10 (opened in estimate WMs market share could expand to c.17% in FY10. Dec 09), but there is no direct competition as the Oceanus operates in the mass segment. Wynn Macau Investment Highlights Encore at Wynn Macau
Source: Company Source: Company 2) VIP expansion and ENCORE driving growth. The VIP expansion and Encore should increase WMs aggregate VIP tables from about 196 to 233, an increase of 19%. These new additions should satisfy the junket operators increasing demand. WM currently has sound working relationships with 9 junket operators, which account for 80% of WMs VIP business.
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4) Cotai play is good timing. WM has identified a 52-acre site Wynns Cotai site through Palo Real Estate Company (an indirect wholly-owned subsidiary). The site is located on the Cotai Strip, next to the City of Dreams (COD) with an open ocean view. Application to the Macau Government to obtain the right to lease this parcel is pending approval. It plans to develop one large property that boasts large airy spaces for open public areas, bars and restaurants, and offer about 400 gaming tables, 2,000 hotel rooms, and non-gaming amenities such as restaurants, high-end retail and MICE space. WM may start to develop the Cotai site in late 2011. This should be good for WMs future operations in Macau. WMs management should be praised for their decisive and prudent approach. Like Encore, its Cotai development is expected to be the only new supply, which could pay off nicely. However, this would depend on Sands Chinas parcels 3, 7 & 8 completion schedule, which at the moment remains misty. This is how we see it: i) As competition looms on both sides of Macau, the Cotai development would be crucial for WM. We feel SJM will continue to dominate the Macau Peninsula with its clusters of casinos and enjoy its cash rich position. However, its main focus should remain the renovation of its existing properties instead of funding capital intensive developments, which mean it should have no plans to advance onto Cotai in the short-mid term. Sands China, Galaxy and Melco have all marked their footprints on Cotai. In our view, the new mega-resorts will inevitably divert market share from the Macau Peninsula in the future. So if WM does not take action now, it may be vunerable in the short-mid term. ii) If WMs Cotai development starts in late 2011 as planned, and is completed on schedule at end 13 or early 14, WM should have much to benefit. It could: a) avoid early competition i.e. price war, b) avoid hotel oversupply, and c) avoid table cap limits. Also, infrastracture on Cotai should improve, and the light rail system, when completed, will be able to bring mass traffic to WMs new resort. iii) Above all, it should not have difficulty seeking funding for the development. We expect it to be debt financing, as we estimate it should turn net cash from FY10 (c.HK$205m) onwards with c.HK$10bn cash by FY11. We expect WM to retain its non-dividend policy for the next two years so it can fund the Cotai development.
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Valuation Sum of parts valuation Deserve to trade at a premium to peers. We estimate WMs sum-of-parts value at HK$15.40/share, based on 15x EV/EBITDA (average valuation for big-cap China consumer stocks. WM deserves to trade at this higher premium to the Macau industry average of 11.9x for the following reasons: i) Biggest market share gainer (FY10F: c.17% compared to FY09A: 14%) with the sectors only new VIP casino opened in Apr 10 (Encore); ii) Strong branding and strategic properties on Macau Peninsula should insulate it against the large incoming supply on Cotai from 2011 onwards; iii) Strong single property that generates the second highest EBITDA in the industry. It has the potential to replicate this strength at its new property on Cotai; and iv) Strong balance sheet and operating cashflows will support Cotai expansion plans (late 2011-14, planning stages). Initiate coverage with BUY rating, TP HK$15.40. While trading at 12.7x 2011F EV/EBITDA, we believe its valuation is still undemanding.
HK$m EV/EBITDA basis EBITDA EV/EBITDA (x) Enterprise Value Net cash Equity value No of shares TP
Source: DBS Vickers
FY11 5,014 15 75,207 4,845 80,052 5,188 15.40
EV/EBITDA band chart

HK$ 14 13 12 11 10 9 8 7 6 Oct-09 Nov-09 Dec-09 Feb-10 Mar-10 May-10 Jan-10 Apr-10 Jun-10 12x 11x 9x 8x
13x
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Strong operations and earnings ahead Impressive performance. Since Wynn Macau opened in 2006, WMs net profit has risen by 50% to HK$2.1b over the last three years. Despite a challenging 2009, EBITDA continued to grow by 3% to HK$3.2bn as margins expanded by 2ppt to 23% with improved cost efficiencies, mitigating a 4% revenue decline. With gaming demand staging a strong recovery since 2H09, 1Q10 EBITDA came in at a strong HK$1.4bn (+58% y-o-y). Net revenue grew 32% y-o-y to HK$4.6bn, driven by: a) VIP expansion in Nov 09 (29 additional tables), b) strong VIP rolling volume growth (+89% y-o-y to HK$158bn), but slightly offset by lower win rate (2.7% vs 3.55%), and c) higher mass drop (+5% y-o-y) with win percentage steady at 22%. EBITDA margin improved by 5.1ppt to 30.7%. Explosive growth ahead. 1Q10s strong performance did not include contribution from Encore, which was launched in Apr 10. We expect WMs earnings to leap by 53% and 17% y-o-y to HK$3.2bn and HK$3.7bn in FY10 and FY11, respectively.
We forecast EBITDA is expected to grow at 24% 2-year CAGR based on the following assumptions: a) b) 19% increase in average number of VIP tables to 233; VIP daily net win per table reverting to 2008 level (adjusted for inflation) due to minimal incoming supply and robust gaming demand in 2010F. For FY11, we assumed 9% growth in tandem with Chinas GDP growth and full impact of new supply at Cotai; and Minimal change in 2010F mass daily net win per table due to normalisation of win percentage (20% vs 2009s 22%; theoretical average 18-20%). For FY11, we imputed conservative 5% growth rate, in view of large new supply (especially mass tables) at Cotai.
c)
2010-11F VIP contribution is expected to increase to 82% of gross gaming revenue (2009: 72%), EBITDA margin could edge down to c.21% from 2010F onwards. Non-gaming contribution is expected to remain small at 4-5% of revenue (2009: 6%).
Sales Trend
Profitability Trend
HK$ m
400.0% 20,000 15,000 10,000 5,000 0 2007A 2008A 2009A 2010F 2011F
18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2007A 2008A 2009A 2010F 2011F
350.0% 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0%
3500 3000 2500 2000 1500 1000 500 0 2007A 2008A 2009A 2010F 2011F Net Profit (After-extraordinaries) Net Profit Growth (%) (YoY)
39% 19% (01%) (21%) (41%) (61%) (81%)
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Profit & Loss

FY Dec (HK$m) Operating revenues Casino VIP gross table gam es win Mass market gross table games win Slot machine win Poker revenue Commisions and discounts Rooms F+B Retail and others Total operating revenues Operating costs and expenses Gam ing taxes and premiums Staff cost Other operating expenses Dep & Amort Property charges and others Operating profit/(loss) Finance revenues Finance cost Net foreign currency differences Change in FV of interest rate swaps Profit before tax Income tax benefit/(expenses) Net profit attributable to equity holders Other comprehensive income Currency translation reserve Total com prehensive income attri. to equity holders EBITDA EBITDA Margin
2008A 13,883 12,953 3,475 1,225 9 (3,779) 138 162 527 14,711 7,004 1,718 2,883 697 78 2,331 94 (320) (33) (90) 1,982 57 2,040 16 2,055 3,138 21%
2009A 13,186 12,207 3,383 1,304 97 (3,806) 103 133 655 14,077 6,742 1,610 2,573 718 19 2,414 6 (317) 1 (29) 2,074 (6) 2,069 (0) 2,068 3,242 23%
2010F 19,755 21,197 3,443 1,442 116 (6,444) 101 200 729 20,786 10,303 1,884 4,175 800 19 3,604 8 (403) 0 0 3,209 (38) 3,171 0 3,171 4,469 21%
2011F 22,322 24,396 3,679 1,523 140 (7,416) 119 210 727 23,378 11,674 1,992 4,744 781 19 4,168 12 (431) 0 0 3,748 (39) 3,710 0 3,710 5,014 21%
FY10F Gam ing revenue Base VIP daily win Mass daily win Slots daily w in 263,176 44,083 3,140 +10% 289,494 48,491 3,454 (HK$) FY10F (HK$) FY10F EBITDA (HK$m) 4,469 4,719 4,640 4,540 6% 4% 2% 286,862 45,405 3,234 +10% 315,548 49,946 3,557 (%) FY11F (HK$) FY11F (HK$) FY11F EBITDA (HK$m ) 5,014 5,330 5,223 5,116 6% 4% 2% (%) FY11F TP (HK$) 15.40 16.26 15.96 15.65 6% 4% 2% (%)
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Gaming Assumptions
Year End Dec Tables VIP tables Mass tables Slots Poker tables In operation Average no of tables Average no of VIP tables Average no of mass tables Average no of slots VIP VIP turnover VIP gross table win Win rate Daily gross win per table Daily gross win per table (USD) Growth VIP turnover VIP gross table win Daily gross win per table Mass Mass table drop Mass gross table win Win rate Daily gross win per table Daily gross win per table (USD) Growth Mass table drop Mass gross table win Daily gross win per table Slot Slot handle Slot win Win rate Daily gross win per slot Daily gross win per slot (USD) Growth Slot handle Slot win Daily gross win per slot FY08A HK$m 371 143 228 1,250 8 FY09A HK$m 394 196 198 1,195 11 FY10F HK$m 455 233 222 1,290 11 FY11F HK$m 455 233 222 1,290 11
371 143 228 1,243
377 174 221 1,195
435 221 214 1,258
455 233 222 1,290
431,598 12,953 3.0% 248,173 32,022
421,045 12,207 2.9% 191,933 24,766
706,570 21,197 3.0% 263,176 33,958
813,206 24,396 3.0% 286,862 37,014
47% 42% 42%
-2% -6% -23%
68% 74% 37%
15% 15% 9%
17,726 3,475 19.6% 41,753 5,387
15,481 3,383 21.9% 41,984 5,417
17,746 3,443 19.4% 44,083 5,688
18,962 3,679 19.4% 45,405 5,859
14% 18% 18%
-13% -3% 1%
15% 2% 5%
7% 7% 3%
23,481 1,225 5.2% 2,701 348
26,332 1,304 5.0% 2,991 386
27,760 1,442 5.2% 3,140 405
29,313 1,523 5.2% 3,234 417
79% 76% 77%
12% 6% 11%
5% 11% 5%
6% 6% 3%
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Solid balance sheet and cashflows WM was in net cash position prior to the development of Encore in 2008-09. Now that Encore has opened, WM is expected to turn net cash again in FY10 (FY09: 74% net gearing) on the back of rising free cashflow. As at 1Q10, WM has paid HK$3.9bn of Encores total development cost of HK$4.5bn, and still has c.HK$6.1bn undrawn facility. WM has even started prepaying its 5-year senior revolving credit facility that matures in Jun 12 - as of end 1Q10, it had repaid HK$2.2bn. We expect WMs operating cashflow to improve strongly from HK$4.5bn (FY09A) to HK$5b (FY12F). This should boost WMs 2011-11F net cash to HK$205m and HK$4.8bn, respectively, providing WM with sufficient ammunition to proceed with its plan to start construction of Wynn Cotai in late-2011 (estimated capex: US$2.3bn or HK$17.8bn, likely to be partially funded by debt).
Breakdown of Assets
Breakdown of Capital
Inventory 1.4%
Debtors 2.3%
Common ShareholderST Debt s' Equity - 0.0% 8.5%
5,130 4,130 3,130
14.7 12.7 10.7 8.7 6.7 4.7
Bank, Cash and Liquid Assets 36.6%
2,130 1,130
LT Debt 91.5%
2.7 0.7 2007A 2008A 2009A 2010F 2011F
130
Cash Flow Trend
Free Cash Flow As At Year End
18,546 13,546 8,546 3,546 -1,454 -6,454 -11,454 -16,454 2007A 2008A 2009A 2010F CF from Fin 2011F
1.03
5,000
0.83
4,000
0.63
3,000
0.43
2,000
0.23
1,000
0.03 2007A 2008A 2009A 2010F 2011F
CF from Op
CF from Invt
2007A
2008A
2009A
2010F
2011F
Margin Trend (%)
30%
90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 2007A 2008A 2009A 2010F 2011F Ret on Avg Equity (ROAE) % Ret on Avg Assets (ROAA) %
8000 10.5x
25%
7000 6000
9.5x 8.5x 7.5x 6.5x 5.5x 4.5x 2007A 2008A 2009A 2010F 2011F
20%
5000 4000 3000
15%
2000 1000
10% 2007A EBITDA Margin % 2008A 2009A 2010F 2011F EBIT Margin % Net Income Margin %
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Key Risks Reliant on junkets. 72% of WMs casino revenue came from the VIP segment in FY09, and we expect it to increase to 82% from FY10 onwards. 80% of WMs VIP gaming business is junket driven and 20% in-house. Since the rise of gaming in Macau, competition for junket services have intensified and will continue to intensify in the future as new mega casinos are completed on Cotai. In order to beat off competition, WM allowed profit sharing schemes (60% house and 40% junkets) to attract junket operators. WM has good working relationship with seven junket operators, but there is no assurance that this is permanent. If WM cannot maintain its service quality or satisfy the junket operators needs, it could lose important junket operators to competitors. And this will have a negative impact on WMs casino revenue. Since Dec 09, commission caps have been set at 1.25% of turnover or a fixed percentage of gross VIP table wins in Macau. Lowering the cap may be good for WM, but it could mean junket operators would have less incentive to bring clients to WM or Macau. Nevertheless, WM could still offer profit sharing, which is preferred by some junket operators. WM may need to improve service quality further in order to maintain the junket operators. Increase in doubtful debts. Credit tightening could limit the junket operators ability to grant credit to their clients, and the credits already extended to their clients could be increasingly difficult to collect. As a result, WMs VIP business could be affected.
To address this, WM has been offering company credit to selected VIP players, but this could potentially lead to bad debts or provision for doubtful debts and create conflict of interest with the junket operators. Concessionaires extend temporary interest-free credit to promoters/junkets as working capital, typically up to commissions payable within a month. Encore fails to shine. If Encore fails to compete or does not live up to its expectations due to lower win rates and a slow down in the VIP segment, this could have a negative impact on WMs business, and our FY10 and FY11 forecasts. Playing catch up on Cotai. WMs competitors could successfully gain more traffic volume, and might pull VIP players away from the Macau Peninsula. Additionally, the nongaming and convention business could also pick up fasterthan-expected, and there could be a change in visitor preference. Limited by excessive focus on premium market. WM targets the premium segment, and although return is lucrative, it might be unnecessarily restricting itself to this small part of the market. Given the growing the mass gaming market and shifting dynamics in the gaming industry, WM could lose out on a bigger share of the pie in the short-mid term.
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Company Background Corporate History. Wynn Macau Ltd (WM) is a leading developer, owner and operator of destination casino gaming and entertainment resort facilities in Macau. WM is authorized under a sub-concession contract from Melco Crown Gaming (Macau) to own and operate casinos in Macau. WM is led by Mr. Stephen A. Wynn, the owner of Wynn Resorts who has been in casino development and operation for over 40 years, who will see to the continuity of the strong branding of its premium business model. Some of the other most recognized resorts and hotels include The Mirage, Treasure Island, Bellagio, Wynn and Encore Las Vegas. Wynn Macau opened to the public in Sep 06. The property consists of a casino with approximately 369 table games and 1,220 slot machines, a hotel resort with 600 luxury rooms & suites, and a high-end retail promenade. WM should be in the sweet spot as the Encore, which opened in April, is the only VIP property in 2010.
Going forward, WMs Cotai expansion should come as soon as late 2011. Funding for the development should be supported by the expected strong earnings from its current business on the Peninsula. Wynn Macau
Source: Company
Structure Wynn Macau
Source: Company
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Key management team

Nam e & Position Stephen A. Wynn Executive Direc tor Chairman CEO President Age 68 Experience and qualifications Served as Director, Chairm an and CEO of WRM since Oct 2001 Served as Chairman and CEO of Wynn Resorts since Jun 2002 Over 40 years experience in the gaming industry Managing member of Valvino Lamore from Apr 2000 to Sept 2002 Officer/Director of serveral subsidiries of Wynn Resorts Chairm an, President and CEO of Mirage Resorts from 1973 to 2000 Developed and opened The Mirage, Treasure Island and Bellagio in 1989, 1993 and 1998, respectively President of WRM since Jul 2007 Responsible for the entire operation and development of WM Prior was Director of Hotel Operations - Worldwide for Wynn Resorts Over 30 years of hospitality experience with leading hotels across Asia, Europe and US Spent 10 years with The Peninsula Group, dutied as the Gneral Manager of The Peninsula HK from Sept 2004 to Jan 2007 General Manager of The Peninsula Bangkok from Sept 1999 to Aug 2004 Held senior Management positions at The Oriental Singapore, and a number of Ritz Carlton properties in the US Diplom a from Shannon College of Hotel Management, Ireland COO since Jun 2002 Responsible for the marketing and strategic development of WRM Director of Wynn Resorts and President of Wynn Marketing Responsible for the set up of international marketing operations of Wynn Resorts. Served as the Executive Vice President - International Marketing at MGM Mirage, responsible for International marketing operations for MGM Grand, Bellagio and The Mirage from Jun-00 to May-02 Served as the Executive Vice President of International Marketing for Bellagio Involved with opennings of the Bellagio, MGM Grand and The Mirage in 1998, 1993 and 1989, A Bachelor of Science Degree in Hotel Administration from Cornell University in 1989 Stamford Graduate School of Business Executive Developm ent Program in 1997 Kazuo Okada 67 Non-Executive Director Non-Executive Director and Vice-Charman of the board of Wynn Resorts since Oct 2002 Founder of Universal Lease in 1969 that became Aruze Corp. in 1998 Founder of Universal Distributing Nevada in 1983, changed to Aruze Gaming Am erica in 2005 Currently serves as director and Chairman of the board of Aruze Corp Director, President, Secretary and Treasurer of Aruze USA Director, President, Secretary and Treasurer of Aruze Gaming America Non-Executive Director of Wynn Resorts since Oct 2002 Founder of The Colby Int'l Group in 1975 Chairm an of Lan Kwai Fong Holdings Owner of Paradise Properties Group Chairman of Ocean Park in Hong Kong Director of the "Star" Ferry Company Independent non-executive director of Pacific Century Premium Dev, Sino Land and Tsim Sha Tsui Properties, all HK listed com panies Independent non-executive director of the Link Management Honorary Doctor of Law Degree from The University of Western Ontario in Canada COO of Wynn Resorts and Director of WRM since 2002 Over 30 years of experience in casino gaming industry COO of Valvino Lamore from Jun 2000 to Apr 2001 President of The Mirage Casino-Hotel from Jan 1997 to May 2000 President and CEO of Treasure Island at The Mirage from Aug 1992 Established a casino marketing department and a branch office network throughout the US as Director of Casino Marketing for the Golden Nugget in Las Vegas in 1984 President and CEO managing the Golden Nugget in Laughlin, Nevada and its multi-m illion dollar expansion program in 1989
Ian Michael Coughlan Executive Direc tor
51
Linda Chen Executive Direc tor COO
43
Allan Zeman, GBS, JP 61 Non-executive Director
Marc D. Schorr 62 Non-Executive Director
Source: Company
Page 55

Income Statement (HK$ m) FY Dec Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit 2008A 14,711 (8,156) 6,555 (4,224) 2,331 0 0 (226) (123) 1,982 57 0 0 2,040 2009A 14,077 (7,931) 6,145 (3,731) 2,414 0 0 (312) (29) 2,074 (6) 0 0 2,069 2010F 20,786 (12,408) 8,378 (4,774) 3,604 0 0 (395) 0 3,209 (38) 0 0 3,171 2011F 23,378 (14,084) 9,294 (5,126) 4,168 0 0 (419) 0 3,748 (39) 0 0 3,710 Balance Sheet (HK$ m) FY Dec Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Cap Net Cash/(Debt) 2008A 7,047 0 952 2,544 199 208 166 11,117 0 2,198 7,973 208 738 0 11,117 (1,625) (5,429) 2009A 8,528 0 1,146 5,229 203 325 161 15,592 0 3,553 8,017 251 3,771 0 15,592 (2,864) (2,788) 2010F 8,873 0 1,128 6,005 297 394 161 16,858 0 3,865 5,801 251 6,942 0 16,858 (3,013) 205 2011F 8,110 0 1,110 10,256 334 443 161 20,413 0 4,100 5,411 251 10,651 0 20,413 (3,162) 4,845
35.5 62.1 48.4 N/A
(4.3) 3.6 1.4 0.3
47.7 49.3 53.3 1.2
12.5 15.6 17.0 1.0
2008A 1,982 697 0 0 0 489 2 3,170 (1,541) (45) 0 0 66 (1,520) (8,320) 3,698 0 (17) (4,639) (2,989)
2009A 2,074 718 (21) 0 0 1,731 15 4,517 (2,167) (157) 0 0 (12,634) (14,958) (1,009) (355) 0 14,490 13,126 2,685
2010F 3,209 800 0 0 0 506 0 4,515 (1,127) 0 0 0 8 (1,119) 0 (2,620) 0 0 (2,620) 776
2011F 3,748 781 0 0 0 530 0 5,060 0 0 0 0 12 12 0 (821) 0 0 (821) 4,251
2008A 44.6 15.8 13.9 52.9 16.5 23.2 407.9 10.3 1.2 6.8 109.1 7.7 1.4 1.3 7.4 19.3 CASH (108.6) 53.6 32.6
2009A 43.7 17.2 14.7 91.8 15.5 23.0 48.8 7.7 1.1 6.9 144.9 10.2 1.7 1.6 0.7 27.0 CASH (53.7) 53.7 45.3
2010F 40.3 17.3 15.3 59.2 19.5 28.5 0.0 9.1 1.3 6.3 115.8 7.9 1.8 1.7 CASH 19.4 CASH 3.9 77.3 65.3
2011F 39.8 17.8 15.9 42.2 19.9 28.1 0.0 9.9 1.3 6.5 108.2 8.7 2.7 2.6 CASH 0.0 CASH 93.4 87.3 97.5
Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2008A 2009A Revenues (HK$ m) Casino Rooms F+B Retail and others Total Key Assumptions VIP no of tables Mass no of tables Daily win per VIP table Daily win per mass table 13,883 138 162 527 14,711 13,186 103 133 655 14,077
2010F 19,755 101 200 729 20,786
2011F 22,322 119 210 727 23,378
143.0 196.0 233.0 233.0 228.0 198.0 222.0 222.0 248,172.8 191,933.1 263,176.2 286,862.1 41,752.8 41,983.7 44,082.9 45,405.4
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Macau Gaming Sector
Galaxy Entertainment
BUY HK$4.11 HSI : 20,287

(Initiate coverage) Price Target : 12-Month HK$5.00 Potential Catalyst: Continual strong operations at Starworld, opening of Galaxy Macau Analyst Ken Chen +852 2863 8923 ken_chen@hk.dbsvickers.com Yee Mei Hui +603 2711 1332 meihui@hwangdbsvickers.com.my
Full steam ahead

Starworld should continue to deliver impressive results, as the biggest beneficiary of junket commission cap A foot on both Macau Peninsula and Cotai with the opening of Galaxy Macau in 1Q11 HK$9bn loan is positive, but table cap is a challenge Attractive growth ahead; initiate coverage with BUY and sum-of-parts TP HK$5.00
Price Relative
HK$ 9.50 8.50 7.50 6.50 5.50 4.50 3.50 2.50 1.50 0.50 2006 2007 2008 2009 7 2010 57 107 157 R elative Index 207
Robust operation at Starworld. Galaxy Entertainments (GEG) flagship property, Starworld, added 22 VIP tables in mid-2009 to accommodate new junket operators, and renovated its mass gaming floor (re-launched in Aug 09). The property has seen seven consecutive quarters of record EBITDA growth. We expect FY10F growth to remain strong with full year impact of enhancements and junket commission cap (VIP constitute 89% of revenue), and limited incoming supply. Galaxy Macau on track. GEGs first integrated resort on Cotai should be completed in early 11, and boost EBITDA by c.25% and gradually raise its market share. GEG recently secured a HK$9bn Club Loan, which eases concerns about funding and completion. The table cap limit could affect construction progress and ROI payback period, but we do not expect any impact on Starworld given its strategic location on Macau Peninsula and established VIP business. Conversely, its presence on both Macau Peninsula and Cotai could lead to synergies, earnings diversification, and boost its long-term competitiveness. Initiate coverage with BUY rating, HK$5.00 TP. The opening of Galaxy Macau in 1Q11 should re-rate Galaxy, which is expected to have the strongest EBITDA growth in the sector at 2-year CAGR of 39%. We believe our valuation is conservative for Galaxy Macau. Although Galaxy is trading at par with Macau gaming sector (11.8x 2011 EV/EBITDA vs 12.1x), but on EV/EBITDA relative to growth basis, Galaxy nevertheless still looks attractive at 0.3x vs 0.5x.
Galaxy E ntertainment (LHS )
R elative HS I INDE X (R HS )
FY Dec (HK$ m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (HK$):
2008A 10,520 544 (13,058) 839 (11,852) (2.89) 2,342.0 (2.89) 1.78 (1.4) (1.4) 31.5 0.0 2.3 CASH (89.6)
2009A 12,233 1,119 971 113 983 0.23 (107.8) 0.23 2.07 18.3 20.2 16.8 0.0 2.0 0.2 11.7
2010F 15,334 1,351 512 512 512 0.13 (42.2) 0.13 2.30 31.6 38.7 18.6 0.0 1.8 0.8 5.9 New 0.12
2011F 20,384 2,177 598 598 598 0.15 16.7 0.15 2.43 27.1 32.8 11.8 0.0 1.7 0.8 6.4 New 0.21
ICB Industry: Consumer Services ICB Sector: Travel & Leisure Principal Business: Owns Starworld and City Clubs at Macau Peninsula, and upcoming Galaxy Macau at Cotai (opening in early 11).
At A Glance Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) Major Shareholders Galaxy Entertainment Group Limited (%) Private equity firm Free Float (%) Avg. Daily Vol.(000)
3,943 16,205 / 2,082 75.8 24.2 6,286
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Macau Gaming Sector Galaxy Entertainment

SWOT Analysis Strengths Niche in building Asian-centric properties Strong VIP business at Starworld with continuous expansion. Biggest beneficiary of junket commission cap as VIP constitute 89% of revenue. Should be relatively less affected by large incoming supply at Cotai given its strategic location on Macau Peninsula. Active capital management repurchased c.HK$3.1bn debts since 2009 and in Jan 10 with strong operating cashflows, to make way for cheaper project financing for Galaxy Macau. Opportunities Galaxy Macau will boost mid-long term earnings growth and market share, as demand for integrated resorts (non-gaming) picks up with rising affluence and infrastructure improvements Potential synergies from exposure to both Macau Peninsula and Cotai. 3 more phases to be developed, and additional Cotai landbank yet to be developed (Galaxy Macau Phase 1) Threats Large incoming supply from Sands Chinas parcel 5 & 6 will intensify already stiff competition at Cotai Table cap could lead to Galaxy Macau opening with less tables than initially targeted (potentially mitigated by reallocating low-yielding tables from Starworld, introducing more electronic table games). Weakness High reliance on VIP revenue. Galaxy Macau should help to diversify GEGs revenue to include more mass and non-gaming contribution. City Clubs could lose out to newer and bigger casinos. GEG has minimal control over the City Clubs business and any misconduct could have negative impact on GEGs reputation
Source: DBS Vickers
Page 59
Investment Highlights 1) Improving core operations. In mid-09, Starworld fitted in 22 new VIP tables (+32% to 91) to satisfy the needs of newly introduced junket operators. It also re-launched its mass gaming floor in Aug 09 after a planned upgrading and refurbishment exercise. Along with the strong rebound in gaming demand since 3Q09, Starworld achieved two consecutive quarters of record VIP rolling volume and EBITDA, hitting HK$102bn and HK$369bn, respectively, in 1Q10. We expect FY10F growth to remain strong with: a) Full year impact from the enhancements. In 1Q10, GEG expanded its VIP gaming area further with two new rooms (22 tables including 12 re-allocated from mass gaming floor); b) Higher EBITDA margin with junket commission cap at 1.25% of rolling chip, effective Dec09 (vs 1.35-1.45% previously). GEG will be the biggest beneficiary as VIP business makes up 89% of revenue with minimal direct VIPs (albeit some junkets are under profit sharing agreements); and c) Favourable demand-supply dynamics with only Encore opening in Apr 10 and robust gaming demand. 2) Best of both worlds. Despite the opening of Galaxy Macau on Cotai in early 11, we expect minimal impact on Starworlds operations given the latters strategic location on Macau Peninsula and established VIP business. Conversely, exposure to both Macau Peninsula and Cotai should benefit GEG due to the following: a) Potential synergies (as seen for Sands China). Starworld can continue to focus on its stronghold in the VIP segment, while Galaxy Macau will allow GEG to expand in the grind segment, which currently constitutes just 15% of gross gaming revenue; b) Diversification of earnings. Starworld currently makes up 86% of GEGs adjusted EBITDA, but this should fall to 73% in 2011F with maiden contribution from Galaxy Macau. c) Boost to GEGs long-term competitiveness. Cotai is set to benefit from the governments promotion of non-gaming activities. Demand for this should pick up with rising affluence and infrastructure improvements. 3) Explosive growth with Galaxy Macau. This mega resort will be GEGs latest addition and first foray into Cotai, due to open in 1Q11. It will consist of: a) casino with c.400 tables, and 2,000 slot machines (subject to government approval), b) three hotels offering a total of c.2,000 rooms, to be operated by GEG, Okura and Banyan Tree, and c) oasis resort featuring the worlds largest sky wave pool, a white sandy beach, lush gardens and numerous water features along with al fresco dining. Galaxy Macau is expected to provide visitors with a unique Asian experience and entertainment under one roof.
The 440,000 sm site obtained from the Macau Government in Oct 09 on a 25-year lease will have 1.7m sm of buildable GFA. Capex for the entire development is estimated at HK$14.1b (including HK$2.8bn land premium), with HK$5.1bn already incurred to date. The recent conclusion of a HK$9bn Club Loan with a consortium of seven banks is seen as a strong vote of confidence in the company, and should eliminate funding concerns. Galaxy Macau is expected to be completed on schedule and within budget, as 85% of construction contracts had been awarded on fixed term basis (minimising risk of rising raw material prices), although approval for foreign workers and table cap limit could be a challenge. We expect Galaxy Macau to generate HK$3bn revenue and HK$502m EBITDA in 2011F (based on nine months of operations), which should boost GEGs EBITDA by c.22%. Our assumptions are conservative, i.e. low capacity utilisation rate of 60% for tables and 30% for slots, and daily win per table/slots at 20% discount to Venetian Macao (similar to Parcels 5 & 6). The construction of the light rail system to connect Macau Peninsula, Taipa and Cotai expected to be completed in 2014. This should benefit Galaxy Macau, as the first station along the Cotai stretch is expected to be located just outside its doors and would welcome a significant volume of mass traffic from Macau Peninsula. Other infrastructure improvements will also improve access to Cotai in the medium-term. CAD of Galaxy Macau
Source: Company
Page 60
CAD of Galaxy Macau Wave pool
We expect 2010-11F EBITDA contribution from City Clubs to remain stable at HK$135m. 1Q10 saw EBITDA touching HK$30m, above its long-run guidance of HK$20-25m/quarter. Although management will likely remain vigilant to ensure continued profitability, rising competition and changing industry dynamics could be a threat for City Clubs and likewise, other older casinos on the Macau Peninsula, in the future. 6) Beneficiary of strong demand for construction materials. GEGs construction materials business benefited from the central governments stimulus package and cost control initiatives, and EBITDA grew 10% to HK$237m in 2009 (21% of GEGs adjusted EBITDA). We expect the segment to continue to grow, contributing HK$261m and HK$287m to GEGs 2010-11F EBITDA, respectively. Potential business opportunities include: a) Macau Governments recently announced plans for land reclamation and city development, b) Infrastructure improvements - although the central government is expected to cut stimulus spending on infrastructure (post-2010 World Expo at Shanghai), there will still be large infrastructure projects such as the High Speed Railway and Macau-Zhuhai-Hong Kong bridge; and c) New slag production facilities in Qing An, Qinghuangdao and Nanjing, which construction are progressing as planned. Its joint ventures on the mainland to manufacture and sell slag have continued to generate good profits.
Source: Company
4) City Clubs still making meaningful contribution to earnings. All small casinos have been adversely affected by significant new supply entering Macau since 2006, and City Clubs was no exception. But GEG has restructured its management agreements and adjusted City Clubs business model and scale. As a result, these casinos turned profitable from 4Q08 onwards, contributing HK$157m EBITDA in 2009 (vs only HK$46m in 2008) or 14% of GEGs adjusted EBITDA.
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Valuation Initiate coverage with BUY rating and TP HK$5.00 based on sum-of-parts valuation. We applied different EV/EBITDA multiples to GEGs casino properties: a) Starworld (12x 2011F EV/EBITDA). Starworld has proven to be a success since its opening in 2006, and has remained competitive (especially in the VIP segment) despite the influx of newer casinos and strong foreign operators. We ascribed a 12x multiple, in-line with industry average valuation. b) Galaxy Macau (7x 2011F EV/EBITDA). Due to higher earnings visibility than Parcels 5 & 6, we applied 7x multiple on we 2012F EBITDA (instead of 2011F) to reflect the full-year impact on operations (methodology similar for Sand Chinas Parcels 5 & 6). There could be upside to our valuation as we have not factored in potential synergies with Starworld, and the opening of Parcels 5 & 6 could be delayed to beyond Sep 11 (if construction progress halts further), which could extend Galaxy Macaus novelty period as the newest casino in town. c) City Clubs (5x 2011F EV/EBITDA). We applied a conservative multiple as these four smaller casinos are facing intense competition from newer casinos and have limited coverage on the Macau Peninsula (valuation is similar for SJMs third-party promoted casinos). Nevertheless, GEG has resized/restructured operations and put in place tight management to ensure continued profitability. d) Construction materials (3x 2011F EV/EBITDA). This is a discount to other H-share listed construction material companies 2011F EV/EBITDA of 7.2x, because of its smaller size and intense competition in the industry. Nevertheless, GEGs construction materials business should make decent contributions to the group, which should continue to benefit from Chinas large infrastructure spending. Undemanding valuation for growth. The opening of Galaxy Macau in 1Q11 should re-rate Galaxy, which is expected to have the strongest EBITDA growth in the sector at 2-year CAGR of 39%. We believe our valuation is conservative for Galaxy Macau. Although Galaxy is trading at par with Macau gaming sector (11.8x 2011 EV/EBITDA vs 12.1x), but on
EV/EBITDA relative to growth basis, Galaxy nevertheless still looks attractive at 0.3x vs 0.5x. Sum-of-the-parts valuation
FY11 E V/EBITDA EBITD A (HK$m) Sta rworld Galaxy Ma cau^ City Clubs Construction M ate ria ls Sub-total Less: Corporate e xpe nses Net De bt Equity Val ue No. of share s Ta rget price (HK$) 1,69 0 1,30 9 13 5 28 7 3,42 1 (25 0) (x) 12 7 5 3 9 9 (HK$ m) 20 ,27 5 9 ,16 6 67 7 86 0 30 ,97 9 (2 ,25 0) 28 ,72 9 (9 ,20 6) 19 ,52 3 3 ,93 8 5.0 0 Value
^ Based on FY12 Source: DBS Vickers
EV/EBITDA band
HK$ 10 9 8 7 6 5 4 3 2 1 0 May-09 May-10 Nov-09 Mar-09 Mar-10 Nov-08 Sep-09 Sep-08 Jan-09 Jan-10 Jul-08 Jul-09
20x
14x 11x 7x 4x
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Financials So far so good. Despite the financial tsunami in the 1H09, GEG impressed the market with its EBITDA more than doubling to HK$1.1bn (FY09) from HK$544m (FY08). This was mainly because the impressive increase in VIP gaming volume at Starworld contributed to revenue growth. GEG continued to register decent revenue growth in 1Q10 (HK$4bn), up 51% from 1Q09 (HK$2.6bn), with contributions from Starworld growing 67% y-o-y to HK$3.4bn. Compared to 4Q09, GEG saw a 2% drop in revenue as VIP win rates normalised from 4Q09 (3.1%) to 1Q10 (2.9%). We believe operations should improve, led by the following: (i) more tables for VIP segment, (ii) turning the mass table area into new VIP space, (iii) City Clubs should continue to make descent contribution as restructuring have improved operations significantly.
Impressive growth ahead. We expect GEGs EBITDA to remain impressive, at HK$1.4bn and HK$2.2bn for FY10F and FY11F, respectively. We estimate its EBITDA will register 2-year CAGR of 39%, based on the following assumptions: a) the number of VIP tables in operation will grow by 47% and 7% to 230 in 2010F and 235 in 2011F; b) VIP daily net win per table will revert to 2008 levels (adjusted for inflation) due to minimal incoming supply and robust gaming demand in 2010F; and c) Galaxy Macau should make significant contributions to GEG following its opening in 1Q11, earnings visibility is expected to be positive if the current economic fundamentals continue into 2011.
Sales Trend
Profitability Trend
HK$ m
20,000 180.0% 15,000 130.0% 80.0% 30.0% -20.0% 2007A 2008A 2009A 2010F 2011F
Total R evenue Revenue Growth (%) (YoY)
900
20000 15000 10000 5000 0 2007A 2008A 2009A 2010F 2011F
Other Operating E xpens es (-) C os t of Goods S old (-)
2386% 1886% 1386% 886% 386% (114%) 2007A 2008A 2009A 2010F 2011F
800 700 600 500 400 300 200 100 0
10,000
5,000
Net Profit (After-extraordinaries )
Net Profit Growth (%) (YoY)
Page 63
Income statement
Year End Dec (HK$m) Total revenue Sales of construction materials Gam ing operations Net gam ing wins Contributions from certain city club casinos Tips received Hotel operations Room rental F+B Others Administrative fee income from gaming operations Other incom e Raw materials and consumables used Impairm ent of gaming license Commission and allowances to gam ing counterparties Special gam ing tax and other related taxes to the Macau Gov Administrative expenses Other operating expenses Depreciation & amortisation Net gain on buyback guaranteed notes Gain on buyback of convertible notes Operating (loss)/profit Finance costs Change in FV of derivative under the convertible notes Share of profits less losses of Jointly controlled entities Associated c ompanies P/L before Tax Taxation Minority interests Profit /Loss attributable to shareholders Galaxy EBITDA EBITDA Margin 2008A 10,520 1,603 8,431 117 17 154 88 87 23 201 (860) (12,330) (3,249) (3,382) (1,418) (1,526) (1,144) 0 0 (13,189) (383) 462 0 52 0 (13,058) 1,503 165 (11,390) 544 5% 2009A 12,233 1,245 10,578 102 10 122 81 81 13 221 (588) 0 (4,426) (4,216) (1,189) (1,189) (541) 624 191 1,120 (139) (96) 0 86 0 971 (76) (9) 887 1,119 9% 2010F 15,334 1,370 13,494 115 13 149 91 90 13 221 (646) 0 (5,336) (5,113) (1,565) (1,639) (541) 0 0 715 (297) 0 0 94 0 512 0 0 512 1,351 9% 2011F 20,384 1,506 17,916 120 18 359 354 97 13 221 (711) 0 (7,182) (6,530) (2,080) (2,179) (1,041) 0 0 882 (388) 0 0 104 0 598 0 0 598 2,177 11%
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Assumption - Starworld
(HK$m) Starw orld Tables VIP Mass Slots Average usage Tables VIP Mass Slots VIP revenue Rolling chip Win % Daily win/table Daily win/table - USD Mass revenue Drop Win % Daily win/table Daily win/table - USD Slot revenue Handle Win % Daily win/slot Daily win/slot - USD
Source: DBS Vickers
FY08 191 69 122 502
FY09 213 91 122 502
FY10 235 125 110 502
FY11 235 125 110 502
191 69 122 502 5,771 206,092 2.8% 229,127 29,565 1,007 6,320 15.9% 22,614 2,918 125 1,978 6.3% 680 88
202 80 122 502 8,356 288,151 2.9% 287,977 37,158 940 6,030 15.6% 21,109 2,724 139 2,019 6.9% 758 98
230 117 113 502 11,002 381,024 2.9% 258,725 33,384 1,007 6,410 15.7% 24,418 3,151 139 2,166 6.4% 759 98
235 125 110 502 12,395 429,265 2.9% 271,661 35,053 1,029 6,552 15.7% 25,639 3,308 146 2,274 6.4% 797 103
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Assumption Galaxy Macau

(HK$m) Galaxy Macau Tables VIP Mass Slots Average usage Tables VIP Mass Slots VIP revenue Rolling chip Win % Daily win/table Daily win/table - USD Mass revenue Drop Win % Daily win/table Daily win/table - USD Slot revenue Handle Win % Daily win/slot Daily win/slot - USD 400 80 320 1,000 600 120 480 1,500 FY11 FY12
180 36 144 225 1,824 65,138 2.8% 138,803 17,910 1,010 6,425 15.7% 19,208 2,478 167 2,599 6.4% 2,033 262
460 92 368 900 4,894 174,787 2.8% 145,743 18,806 2,709 17,242 15.7% 20,168 2,602 668 10,394 6.4% 2,033 275
Source: DBS Vickers
Daily win rates +10% FY10F EBITDA (HK$m) Daily w in rates +10% FY11F EBITDA (HK$m)
Scenario Analysis
FY10F EBITDA (HK$m) Base 1,538 135
FY11F EBITDA (HK$m ) Base 1,690 135 1,309
FY11F TP Chg (HK$) 5.00 5.40 5.20 5.00 8% 4% 0%
Property performance Starw orld City clubs Galaxy Macau ^

^ Based on FY12 Source: DBS Vickers
1,681 184
9% 36%
1,847 184 1,427
9% 36% 9%
Page 66
Active capital management. In FY09, GEG repurchased US$288m (HK$2.2bn) worth of guaranteed notes and convertible notes for US$162m (HK$1.3b), which resulted in a one-off gain of HK$815m and interest savings of US$465m. It redeemed another US$106m (HK$824m) 2010 floating rate notes in Jan 10 and US$281m (HK$2.2bn) of 9.875% Guaranteed Senior Notes 2012 in May 10. This allows GEG to refinance with cheaper debt, and provides room to gear up for the construction of Galaxy Macau. Concerns about funding of Galaxy Macau eliminated. In Apr 10, GEG secured a HK$9bn Club Loan from a consortium of seven banks, with a 6-year maturity period and borrowing cost at HIBOR + 4.5%. The loan contract terms include a Take & Hold with no sell down provision, which ensures stable funding. Repayment will be quarterly of 1% of aggregate loan outstanding commencing on the 30th month post signing (commence in 2013), gradually escalating up to 5% of aggregate loan outstanding with a balloon of 49% at maturity. We believe funding should be adequate as total capex for Galaxy Macau is estimated at HK$14.1bn (including land
premium), with HK$5.1bn incurred to date. Land premium amounts to ~HK$2.8bn with the initial HK$1.1b paid in Sep 09, and the balance payable semi-annually in installments of HK$225m over the next four years (can be comfortably met by Galaxy Macaus operations). But gearing may be a concern in 2011. The loan, when fully drawn down, is expected to raise GEGs net gearing to 96% by 2011. GEGs strong EBITDA and operating cashflows boosted by maiden contribution from Galaxy Macau should come in handy then. Convenants should not be too demanding. The HK$9b Club Loan imposed a maximum debt/EBITDA ratio of <4.7x and minimum EBITDA/interest ratio of 2x, which will gradually decrease/increase to 3.5x for both from mid 2014 onwards. This will be applicable for Starworld and Galaxy Macau on a combined basis beginning end 2011, about two quarters after Galaxy Macaus launch in early-2011. On a group basis from Jul 10, GEG needs to adhere to the maximum debt/tangible net worth (TNW defined as tangible net worth plus book value of gaming licence) ratio of 1.75x, and minimum TNW of HK$8 billion from mid-2012 onwards. We believe GEG should be able to meet all these covenants comfortably.
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Breakdown of Assets
8,130
2.6 2.1 1.6 1.1 0.6 0.1 2007A 2008A 2009A 2010F 2011F
Bank, Cas h and Liquid As s ets 32.4%
Inventory 0.8% Debtors 0.0% Common Shareholder s' Equity 51.1%
7,130
ST Debt 3.2%
6,130 5,130 4,130 3,130
Net Fixed As sets 66.8%
LT Debt 45.7%
2,130 1,130 130
Net Debt/(C as h) Financial Leverage (X) (R .H.S )
Net Debt to Equity (X) (R.H.S )
Cash Flow Trend
3,912 1,912 -88 -2,088 -4,088 -6,088 -8,088 2007A 2008A 2009A 2010F C F from F in 2011F
0.18
(614) 2007A (1,614) 2008A 2009A 2010F 2011F
(0.32)
(2,614)
(0.82)
(3,614) (4,614) (5,614)
(1.32)
(1.82) 2007A 2008A 2009A 2010F 2011F
(6,614) (7,614)
C F from Op
C F from Invt
F ree Cas h Flow P er S hare
Free Operating C as h F low Per S hare
Margin Trend (%)
5.0% 2007A -15.0% -35.0% -55.0% 2008A 2009A 2010F 2011F
0% 2007A -20%
8000
7.1x
2008A
2009A
2010F
2011F
10000
2.1x (2.9x) (7.9x)
-40%
6000
(12.9x) (17.9x)
-60%
4000
-80%
-75.0% -95.0% Ret on Avg Equity (ROAE) % R et on Avg Assets (ROAA) %
2000
(22.9x) (27.9x) (32.9x)
-100%
0
(37.9x) 2007A 2008A 2009A 2010F 2011F

Total Debt (+) Gros s Interes t Cover (X) (YoY)
-120% EBITDA Margin % EBIT Margin % Net Income Margin %
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Key Risks Large incoming supply at Cotai. It could take some time for Galaxy Macau to gain market share given the intense competition from existing resorts at Cotai. City of Dreams is coveniently across the road from Venetian and Plaza, while Galaxy Macau is further away to the left of Venetian (less accessible by foot). The opening of Parcels 5 & 6 (next to City of Dreams) in Sep11 could turn the heat up, not to mention Parcels 3, 7 & 8 which could be developed in the near future. Nevertheless, critical mass might build up at Cotai in the longer term with infrastructure improvements and clusters of quality supply to attract new demand. Possible construction delays/cost overun at Galaxy Macau. Although funding is no longer a major concern after GEG secured a HK$9bn syndicated loan recently, potential policy changes (including strict approvals for foreign labour) and unexpected events (health scare, financial crisis) could derail construction progress. Risk of cost overruns should be relatively low as 85% of contracts had been awarded on fixed term basis.
Macau may have an advantage given its earlier opening date in 1Q11 vs Parcels 5 & 6 in Sep11. Nevertheless, the Macau Government has indicated that it would not disregard developments that are already in progress. We believe competition for market share on Cotai will be tough. We see two possible scenarios : a) Galaxy Macau and Parcels 5 & 6 share the 600 tables between them, which may not be adequate unless both open in more phases (i.e. with less number of tables), reshuffle low-yielding tables from existing casinos and/or introduce more electronic table games/slots ,which are not affected by the cap;
b) Galaxy Macau opens on schedule, but Parcels 5 & 6 are delayed to beyond 2013.
Hotel oversupply on Cotai. It may be hard to absorb the additional 2,000 new rooms at Galaxy Macau, on top of the existing c.12,000 rooms at Cotai, and 6,000 more from Parcels 5 & 6 in 2011-12. Even if all the rooms could be used for gaming rebates, it may not be fully utilized as visitor arrivals and Table cap limit could be a concern. The Macau Government recently imposed a 5,500 table cap up to 2013. Currently there gaming revenue may not expand as quickly (most infrastructure are nearly 4,900 tables in the industry (post-opening of Encore), improvements that are expected to bring critical mass to Cotai leaving a balance of 600 allowable tables. This could complicate will only be completed post-2013), and the average length of stay of only 1.5 days currently. GEGs expansion strategy as Parcels 5 & 6 is also planning to offer over 600 tables from 2011 onwards. However, Galaxy
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Company Background GEG is primarily engaged in gaming and entertainment in Macau, and the manufacture, sale and distribution of construction materials in Hong Kong, Macau and Mainland China. In Oct 06, it opened its flagship property, StarWorld Hotel and Casino on the Macau Peninsula. Prior to that, GEG launched four CityClub casinos (Rio, President, Waldo and Grand Waldo) that are dedicated to the VIP market and run by third party promoters under service agremeents. Galaxy Macau will be Galaxys first venture into Cotai - currently under construction, the HK$14b property is expected to be opened by 1Q11. Partnering Okura Hotels (Japanese) and Banyan Tree, GEG targets to provide world-class hospitality to attract visitors from all over Asia.
Starworld
Source: Company
Structure Galaxy Entertainment
Source: Company
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Key management team
Nam e & Position Dr Lui Che Woo Executive Direc tor Chairman Age 80 Experience and qualific ation Founder of the Group Also director since Aug 1991 Executive direc tor, Chairman and MD of K'Wah Int'l Over 50 years experience in quarrying, construc tion m aterials and property development Founding Chairman of Instituite of Quarrying in the UK (HK branch) Chairman of Tung Wah Group of Hospitals Founding Chairm an of the Feration of Hong Kong Hotel Owners The President of Tsim Sha Tsui East Property Developers Association The founding President of Hong Kong - Guangdong Economic Development Association and an Honorary President of Hong Kong - Shanghai Economic Developm ent Association Dr Lui is the father of Mr Francis Lui Yiu Tung and Ms. Paddy Tang Lui Wai Yu Joined the Group in 1979 Deputy Chairman of the Company Executive director of K'Wah Int'l Bachelor of science degree in civil engineering and a master of science degree in structural engineering from the University of California at Berkeley, USA Son of Dr Lui Che Woo and a younger brother of Ms Paddy Tang Lui Wai Yu Joined the Group in 1982 Executive direc tor of the Company since Apr 2004 MD of the construction materials division Over 27 years of broad experience in the construction material industry including operations and management, technical and quality assurance, envirnmental protection, c ommercial and strategic Bachelor degree in Mechanic al Engineering from the University of Western Ontario in Canada International Masters degree in business administration from the University of South Australia Paddy Tang Lui Wai Yu Executive Direc tor 56 Joined the Group in 1980 Executive director of K'Wah Int'l Bachelor of commerce degree from the Mc Gill University, Canada Daughter of Dr Lui Che Woo and elder sister of Francis lui Yiu Tung Joined the Group in 2003 Non-executive direc tor of the Company since Apr 2007 A solicitorin the UK and HK Extensive experience in strategic planning and business management as well as in corporate finance and development Prior his retirement in Mar 2007, was the CEO of Galaxy Casino, S.A. L.L.B (Hons) from the University of Leeds, UK Non-executive director of the Company since Sept 2007 Becam e a partner at Permira in 2004 Member of Permira's Executive Committee and Head of the Consum er Sec tor Worked on numerus of transac tions including Gala Coral Group, New Look, Principle Hayley Group, Telepizza and Galaxy Entertainment Over 25 years of experience of private equity Prior was a founding direc tors of PPM capital involved in over 20 deals m ainly in consumers Early career was spent at CIN industrial investments MA and PHD in History from Cambridge University, UK Non-exec utive director of the Company since Jan 2010 Joined Permira in Aug 08 and responsible for running Perm ira's HK office overseeing developments Prior Permira, spent 9 years in Senior positions at Goldman Sachs, Head of General Industrials Groups, m anaging and cover: Industrials, Transposrtation, Consumer retail and healthc are COO of Corporate Finance that led the execution of Lenovo acquisition of IBM PC business and Temasek's investment in CCB Bachelor and Master of Arts and History and Science from Harvard University and a Juri Doctorate from Harvard Law School
Franc is Lui Yiu Tung Executive Direc tor
54
Joseph Chee Ying Keung 52 Executive Direc tor
Anthony Thomas Christopher Carter Non-executive Director
64
Dr Martin Clarke Non-executive Director
54
Henry Lin Chen Non-executive Director
39
Source: Company
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Income Statement (HK$ m) FY Dec Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Balance Sheet (HK$ m) FY Dec Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Cap Net Cash/(Debt)
2008A 10,520 (7,492) 3,028 (16,218) (13,189) 0 52 (383) 462 (13,058) 1,503 165 0 (11,390)
2009A 12,233 (9,230) 3,003 (1,882) 1,120 0 86 (139) (96) 971 (76) (9) 0 887
2010F 15,334 (11,095) 4,239 (3,524) 715 0 94 (297) 0 512 0 0 0 512
2011F 20,384 (14,423) 5,960 (5,078) 882 0 104 (388) 0 598 0 0 0 598
2008A 6,545 833 3,320 7,859 94 0 0 18,652 436 4,266 6,276 401 7,011 263 18,652 (4,172) 1,147
2009A 7,242 1,004 6,091 4,541 85 0 0 18,963 1,383 4,182 4,460 503 8,169 267 18,963 (4,097) (1,303)
2010F 13,701 1,098 6,091 2,604 98 0 0 23,593 2,817 3,533 7,418 503 9,055 267 23,593 (3,435) (7,632)
2011F 14,160 1,202 6,091 2,456 108 0 0 24,018 3,038 3,225 7,418 503 9,568 267 24,018 (3,117) (8,000)
(19.3) (16,326.8 2,343.2 N/A
16.3 (108.5) (107.8) 7.8
25.4 (36.2) (42.2) 0.0
32.9 23.3 16.7 0.0
2008A (13,189) 1,144 (18) (52) 0 (1,056) 12,275 (897) (1,539) 98 (164) 24 163 (1,417) (2) 103 1 24 126 (2,188)
2009A 1,120 541 (21) (86) 0 657 (909) 1,303 (2,119) 92 (20) 44 17 (1,987) 0 (536) 2 (1,307) (1,841) (2,526)
2010F 715 541 0 (94) 0 (95) (127) 940 (7,450) 40 0 21 36 (7,353) 0 4,392 0 0 4,392 (2,020)
2011F 882 1,041 0 (104) 0 (309) (117) 1,393 (1,950) 40 0 21 30 (1,859) 0 221 0 0 221 (245)
2008A 28.8 (125.4) (108.3) (89.6) (45.2) (62.5) N/A (34.5) 0.4 N/A 198.7 4.5 1.7 1.7 CASH 22.9 CASH 29.1 4.1 (61.8)
2009A 24.5 9.2 7.2 11.7 4.7 7.1 0.0 8.1 0.7 N/A 165.5 3.5 0.8 0.8 0.2 36.3 CASH (33.1) 16.4 (20.7)
2010F 27.6 4.7 3.3 5.9 2.4 4.1 0.0 2.4 0.7 N/A 124.7 3.0 0.4 0.4 0.8 72.8 CASH (193.8) 26.3 (165.3)
2011F 29.2 4.3 2.9 6.4 2.5 4.3 0.0 2.3 0.9 N/A 83.8 2.6 0.4 0.4 0.8 18.6 CASH (203.2) 43.2 (14.2)
Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2008A 2009A Revenues (HK$ m) Sales of construction Net gaming wins Others Total 1,603 8,565 352 10,520 1,245 10,690 297 12,233
2010F 1,370 13,622 342 15,334
2011F 1,506 18,054 823 20,384
Key Assumptions VIP no of tables Mass no of tables Junket commission
69.0 122.0 1.40
91.0 122.0 1.35
125.0 110.0 1.35
205.0 430.0 1.25
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Macau Gaming Sector
Sands China
HOLD HK$12.06 HSI : 20,287

(Initiate coverage) Price Target : 12-Month HK$12.40 Potential Catalyst: Resumption of Parcel 5 & 6s construction, faster than expected ramp up at Cotai, ownership of Parcel 3, 7 & 8 secured for medium-term growth Analyst Ken Chen +852 2863 8923 ken_chen@hk.dbsvickers.com Yee Mei Hui +603 2711 1332 meihui@hwangdbsvickers.com.my
Big Bet on Cotai

First mover advantage in Macau Peninsula and Cotai Largest exposure to Cotai - long term growth potential from non-gaming and infrastructure improvements Key risks - table cap and construction delays for Parcel 5 & 6, straining balance sheet and cashflows Initiate coverage with Hold and sum-of-parts TP of HK$12.40
Price Relative
HK$ Relative Index 219 14.30 13.30 12.30 11.30 10.30 9.30 8.30 Nov-09 19 Feb-10 May-10 119 169
69
Best of both worlds. Sands China (SCL) is the largest Macau gaming company by market cap and EBITDA, with synergistic exposure to both Macau Peninsula and Cotai. Its flagship properties ie Sands and Venetian Macao were the first Las Vegasstyled casinos at Macau Peninsula and Cotai respectively. Both projects are profitable with Sands Macao as the prominent and stratgically located property and Venetian Macao is well-known for its unique concept. With future integrated resorts developments at Parcels 5 & 6, 3 and 7 & 8 in Cotai, SCL could well be the leading operator to transform Macau into an entertainment hub like Las Vegas. Challenges lie ahead. Key risks stem from construction delays at Parcels 5 & 6 development and recent imposition of table cap of 5,500 by 2013. Opening of Parcels 5 & 6 development will be later (Sep 11-Mar 12) than Galaxy Macau (early 2011), and potentially with lesser tables than the 670 targeted. To-date sunk-in cost for Parcels 5 & 6, 3 and 7 & 8 is a huge US$2.16bn. With government looking to seize idle land, SCL could also risk losing Parcel 3 (previously granted an extension). Although existing operations remain robust, continuous development will put pressure on ROI in the short term and strain balance sheet/cashflows. We see Cotai as a longer-term story given its higher non-gaming offering and lack of infrastructure (albeit being developed). Initiate coverage with Hold and TP of HK$12.40 based on sum-ofparts valuation. After the recent market hike, SCLs valuation is a more reasonable 13.8x 2011F EV/EBITDA vs sectors 12.1x, Las Vegas Sands 12.2x, and large-cap China consumer stocks 15.2x.
At A Glance Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) Major Shareholders Las Vegas Sands Corp. (%) Free Float (%) Avg. Daily Vol.(000)
Sands China (LHS)
Forecasts and Valuation FY Dec (US$m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (US$) EPS (HK$) EPS Pre Ex. (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (HK$):
2008A 3,053 686 176 176 176 0.02 0.17 0.17 (10.4) 0.17 0.00 1.21 70.9 70.9 22.9 0.0 10.0 2.6 15.3
2009A 3,301 809 214 214 220 0.03 0.21 0.21 21.6 0.21 0.00 3.56 58.3 58.3 17.8 0.0 3.4 0.5 8.7
2010F 3,673 914 362 362 362 0.04 0.35 0.35 69.1 0.35 0.00 3.91 34.5 34.5 15.8 0.0 3.1 0.5 9.4 New 0.41
2011F 4,118 1,053 418 418 418 0.05 0.40 0.40 15.6 0.40 0.00 4.32 29.8 29.8 13.8 0.0 2.8 0.4 9.8 New 0.47
ICB Industry: Consumer Services ICB Sector: Travel & Leisure Principal Business: Largest exposure to Cotai - owns Venetian Macau, Plaza/Four Seasons, Parcel 5 & 6 (opening in Sep 2011) and rights to develop Parcel 3, 7 & 8. Also owns Sands Macau at Macau Peninsula.
8,048 97,032 / 12,466 70.3 29.7 9,277
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Macau Gaming Sector Sands China

SWOT Analysis Strengths Largest gaming company by EBITDA and market cap. First mover advantage in Macau Peninsula via Sands Macau and Cotai via Venetian (most profitable and popular property in Macau). Diversified revenue mix from multiple properties, exposure to both Macau Peninsula/Cotai (35%: 65%) and VIP/mass (54%: 46%). Biggest non-gaming exposure such as integrated resorts that could potentially attract broader customer base in the longer term Leverage on parent Las Vegas Sands (LVS) strong branding and established VIP clientele Weakness Although existing operations remain robust, continuous development will put pressure on ROI in the short term and strain balance sheet/cashflows.
Opportunities Macau Government promoting healthy industry growth by preventing uncontrolled expansion of gaming while encouraging non-gaming activities (eg MICE) - SCL has biggest exposure to Cotai integrated resorts. Infrastructure improvements should open up Macau to new markets further away - SCL has biggest pipeline of new casinos to benefit from long-term influx of mass market Potential synergy with LVS other properties eg Marina Bay Sands (Singapore)
Threats Potential delay in construction progress and/or cost overruns for Parcels 5 & 6. Table cap could lead to potential delay in approvals and/or Parcels 5 & 6 opening with lesser tables than initially targeted Potential seizure of Parcel 3 by Macau government which has remained idle, leading to write-offs of initial investment (US$36m) Massive potential supply at Cotai could lead to destructive price-war as competition intensifies SCL has the biggest exposure to Cotai.
Source: DBS Vickers
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Investment Highlights 1) The first on two sides. SCL is the first gaming operator to introduce Las Vegas-styled mega casinos in Macau. Sands Macau was opened in May 04 consisting entirely of mass gaming before VIP gaming was added later on. Sands Macao is a well-recognised property - located at the waterfront near the Macau Peninsula ferry terminal with its SANDS() name clearly visible as visitors approach Macau via ferry either from Hong Kong or mainland China. On a clear day and night, Sands Macao can be seen from the coastal strip of Zhuhai (a mainland city at the border of Macau). Sands Macao primarily attracts mass gaming visitors and is very popular with day-trippers. The Sands Macao
SCLs properties are considered must-see tourist destinations in Macau and can be reached by free coach rides provided by SCL from the ferry terminals and the GongBei immigration control points. Sands Macao and Venetian Macao embody the essence of Las Vegas styled entertainment facilities - therefore, Asians especially the Chinese nationals, do not need to travel far in order to get the feel of Las Vegas and for that matter, Venice. 2) Leader in EBITDA. SCL has the largest EBITDA in the sector at US$809m (HK$6.3bn) in FY09, and owns the most profitable and popular property in Macau ie Venetian Macao. Sands Macao is already a cash cow, having broke-even in just 6 months of operations. SCL enjoys synergies between its properties on both sides of Macau Peninsula and Cotai. It provides free shuttle buses for visitors to travel between Sands Macao and its Cotai properties, thus retaining visitors within its premises. Plaza Macao (opened in Aug 08) also welcomes premium VIP customers from both Venetian and Sands Macao who prefer more private entertainment. We expect SCL to remain in the lead, with 2010-11F EBITDA grow to US$914m (+13%) and US$1.1bn (+15%) respectively. SCLs dominance and long-term growth in Macau may be enhanced further with the completion of Parcels 5 & 6 in 201112 and potential integration of all its Cotai properties (including Parcels 3, 7 & 8). 3) Leading non-gaming operator. SCL has the highest exposure in the non-gaming sector (12% of 2009 revenue), which helps diversify its earnings from a broader base of visitors. SCL also has the largest exposure to Cotai, which will be the hub for non-gaming activities. Although we see Cotai as a longer-term story, demand for non-gaming should pick up amid rising affluence and improvements in infrastructure. The high quality rooms in Venetian Macao and Four Seasons can accommodate the needs of both business and leisure travellers. The Paiza suites and mansions are available for certain selected VIPs and premium players only. Since the Venetian Macao opened, the average length of stay in Macau has risen from 1.3 nights in 2007 to 1.5 nights in 2009. The Venetian Macao consistently register high occupancy of 85%, well above the industry average of 72%. The Macau Governments long term strategy to promote Macau as a gaming friendly and convention destination in Asia should further improve the average length of stay going forward. The Venetian Macao features approximately 1.2m sf of MICE facilities, highest in the sector. Conventions and group meetings typically generate mid-week demand, creating longer length of stay and repeat visits which should also boost mass gaming demand. The Venetian Macao has been named by CEI Asia as the Best MICE Hotel in Asia two years running since its opening.
Source: Company
The Venetian Macao opened in Aug 07, making its mark in Cotai. It is the first resort-styled entertainment property that contains gaming and non-gaming facilities in Macau. Its CotaiArena and other theatre facilities host world class events, concerts and performances that are attracting a growing volume of gaming & non-gaming visitors. The Venetian Macao
Source: Company
Page 76
SCLs retail malls, The Grand Canal Shoppes at the Venetian CAD of Parcels 5 & 6 and the Shoppe at the Four Seasons, makes up 1.2m sf in GFA and features high-end designers as well as mass-appeal retailers, along with more than 60 restaurants and food outlets with a 1,000 seat food court. All these non-gaming facilities should also add value towards SCLs gaming business via non-cash rebates eg free tickets to entertainment venues, ferries, food & beverages and hotel rooms. This could enhance customer loyalty and minimise the use of cash rebates which have a bigger impact on margins (since non-gaming facilities are burdened with large sunk/fixed costs). 4) A masterpiece in the making. Over the next few years, SCL plans to develop Macaus largest integrated resort (combining Venetian Macao and Plaza Macao with Parcels 5 & 6, 3 and 7 & 8 on Cotai). When fully completed, SCLs Cotai development will have 20,000 hotel rooms, approximately 1.6m sf GFA of MICE space, over 2m sf GFA of retail malls, six theatres and other amenities. The parcels will be interconnected via pedestrian bridge crossings to improve accessibility to all parts of development. This will help turn Macau into a more attractive convention and leisure destination which should boost visitor arrivals from the rest of Asia and further away. This strategy should also help create more consistent demand, longer average length of stay and improve profit margins from the non-gaming segment in the longer run. Final land concessions have been granted by the Macau Government for Parcels 5 & 6 and 3 with site area of aprroximately 320,000sqm. Development plans have also been submitted to the authorities for Parcels 7 & 8. Near term growth for SCL should come from the completion of Parcels 5 & 6 by Sep 11 (Phase I) and Mar-2012 (Phase II), which will comprise of: a) gaming space (300,000 sf accommodating 670 tables and 2,200 slot machines, subject to Macau governments approval); b) 6,000 rooms at Sheraton, Shangri-la and Traders Hotels; c) retail and MICE space (1.2m sf). Parcels 5 & 6 will be connected to SCLs existing properties and hence providing potential synergies.
Source: Company
5) Monetization strategies. SCL is looking to eventually dispose off all its non-core assets to realise returns on invested capital and improve financial flexibility. Sale of these assets could also boost traffic volume to the existing properties. The malls are expected to be up for sale in 2012 with sales of hotelapartments expected to begin in 2H10. The Plaza Apartment-Hotel Tower should be reaching completion soon with little internal fittings left over. Market value of the apartments is estimated at US$212m after all-in costs and discounted over 2 years, which we believe is conservative. Our valuation is based on the average selling price of HK$6,000 psf for luxury residential units in Macau. Several sale options available as follows: a) En-bloc sale; b) Exclusive rights to use individual units under a cooperative scheme; and c) Sale of individual titled apartments - sub-dividing the tower into separate lots to be approved by the Macau Government.
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The Apart-Hotel
2014, it should face risks of losing the parcel along with the initiatial commitment. As for Parcels 7 & 8, land concessions have not been obtained from the Government. The government has recently announced that lands previously granted to gaming operators for casino development will be reclaimed if they have been left idle for years and the operators are found to have breached contracts signed with the government. The land concession could be terminated without any compensation. Other Parcels will depend on the success of Parcels 5 & 6 as SCL will need further financing for Parcels 3 and 7 & 8, the availability of funds will determine these Parcels future but the Government may not be patient enough to wait for SCL. Hotel oversupply on Cotai. At the current average length of stay of just 1.5 days, it may be hard to absorb 6,000 new hotel rooms from Parcels 5 & 6 in 2011-2012 with another 2000 from Galaxy Macau. Even if all rooms could be used for gaming rebates, it may not be fully utilized as visitor arrivals and gaming revenue may not expand as fast (most infrastructure improvements which should help bring critical mass to Cotai will only be completed post-2013).
Source: Company
Land reclaimation by the Government. As of Dec 09, an extension was granted to SCL for the development of Parcel 3. The current development contains some pre-construction costs of approximately US$35.7m. Under the terms of the land concession approved by the Macau Government in Aug 09, SCL has to complete Parcel 3 by Apr 2013. If SCL is unable to complete the development by the extended deadline given til
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Valuation Initiate coverage with Hold, TP HK$12.40 based on sum-ofparts (SOP) valuation. We have used the following EV/EBITDA multiples in valuing SCLs key properties: Venetian Macao (15x 2011F EV/EBITDA). The Venetian Macao is the most popular property Must See in Macau - raking in US$555m EBITDA in 2009 (27% market share) and attracting 23.8m visitors (including multiple entries) vs Macaus total 21.7m visitors. Its unique concept is an advantage amid intensifying competition at Cotai from 2011 onwards. Sands Macau (12x 2011F EV/EBITDA). Sands Macau was the first Las-Vegas styled casino to open in Macau (in 2004) and has been SCLs cash cow after breaking even within just 6 months of operation. Sands Macau however has been facing heavy competition on the Macau Peninsula and losing market share since new casinos started sprouting out from 2006 onwards. We believe competition would intensify, especially with the Oceanus (opened in Dec 09) diverting traffic away (day-trippers, hardcore gamers) from other properties given its strategic location adjoining Macau Peninsula ferry terminal. Nevertheless, Sands Macau should remain competitive given its strong branding and established clientele. The Plaza Macao (10x 2011F EV/EBITDA). We have conservatively used a similar multiple as Sands Macau given The Plazas lacklustre performance since its opening in 2008. There could be potential upside as The Plaza can leverage more on Venetian just next door (focusing on direct VIPs and premium mass), and benefit from future integration of all SCLs Cotai properties. Parcels 5 & 6 (5x 2012F EV/EBITDA). Due to lower earnings visibility (Phase I to complete in Sep 11 and Phase II in Mar 12) and potential construction delay and cost overuns, we have ascribed a conservative multiple of 5x. But we have used 2012 EBITDA (instead of 2011) to reflect impact of full-year operations (similar to methodology for Galaxy Macau). In our valuation, we have yet to factor in the Apart-hotel at the Plaza Macao (sale of is believed to commence in 2H10). Average selling price should be around US$775 psf (HK$6,000 psf), we estimate SCL could rake in US$212m profits (discounted over three years). In SCLs prospectus, independent valuer CB Richard Ellis, valued SCLs assets at US$16.1b upon full completion translating to a potential HK$13.60/share (after net debt). Also, we did not include in our valuation SCLs retail portion from Venetian and Four Seasons Macao, they could fetch a
lucractive sum for SCL when sold and fix all financing problems in the future, but there is no real timing for these sales. Current, we believe there is still not enough demand in Macaus retail investment, especially on Cotai where nongaming contributions are still insignificant compared to gaming. After the recent market hike, SCLs valuation has narrowed to 13.8x 2011F EV/EBITDA vs Macau gaming sectors 11.9x, parent Las Vegas Sands 12.2x, large-cap China consumer stocks 15.2x. Initiate coverage with Hold, TP HK$12.40. Sum of the parts
Sum of the parts FY11 EV/EBITDA EBITDA (US$m) Venetian Macao Sands Macao Plaza Macao Parcel 5 & 6^ Corporate expenses Net debt Sum-of-parts No of shares Valuation per share (US$) Valuation per share (HK$) 657 277 65 313 (50) (x) 15 12 10 5 12 Valuation (US$m) 9,859 3,329 649 1,566 (587) 14,816 (1,983) 12,834 8,047 1.59 12.40
Source: DBS Vickers
SCLs EV/EBITDA
HK$ 14 15x 13 12 11 10 9 8 7 Jan-10 Mar-10 Nov-09 May-10 11x 14x 13x 12x
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Strong earnings momentum Resilient earnings. Despite a challenging 2009, SCLs net gaming revenue and adjusted EBITDA grew 8% and 3% to US$3.3b and US$809m respectively, on the back of a) stronger operations at Venetian Macao (69% of adjusted EBITDA), b) full-year contribution from Plaza Macao (opened in Aug 08), and c) overall EBITDA margin expansion (2ppt to 25%) on cost saving initiatives. VIP segment, which accounted for 54% of gaming revenue, grew by a slower but commendable rate of 5% compared with 11% growth in the mass segment. Nongaming constituted 12% of net revenue. Sustainable growth ahead. After commissions and rebates, we expect casino revenue to continue to expand by 11% and 15% to US$3.2bn and US$3.7bn for FY10 and FY11 respectively, based on following assumptions: a) Growth in FY10-11F daily win per VIP table of 16% and 5% respectively (assuming stable win rates). We expect gross VIP gaming revenue to increase by 16% to US$2.2bn and US$2.5bn in FY10F and FY11F respectively; and b) Mass gross gaming revenue increasing by 11% and 12% to US$1.5bn and US$1.7bn in FY10F and FY11F respectively, despite factoring lower win rates (FY09 was more than industry average of 18-20%). Win percentage however may stay high depending on games mix, quality of players (which affects bet size) and hours spent (which may be prolonged by providing more non-gaming amenities to keep patron within the premises). Maiden revenue and EBITDA contributions from Parcels 5 & 6 Phase I in 2011F (expected completion in Sep 11) of US$386m and US$53m respectively. We have assumed 144 tables in operation (25% of total 570 tables), VIP table daily win rate of c.US$18,000 (20% discount to Venetian), mass table daily win rate of c.US$2,500 and c.US$262 for slots (similar to Plaza).
c)
With higher EBITDA margins (based on gross revenue) of 21% lifted by full impact of junket commission cap (1.25%), we forecast Sands Chinas EBITDA to rise by 13% and 15% to US$914m (FY10) and US$1.1bn (FY11).
Sales Trend
Profitability Trend
US$ m
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2007A 2008A 2009A 2010F 2011F
70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
3500
400
3000 2500 2000 1500 1000 500 0 2007A 2008A 2009A 2010F 2011F
69% 49% 29% 09% (11%) (31%) (51%) 2007A 2008A 2009A 2010F 2011F Net Profit (After-extraordinaries) Net Profit Growth (%) (YoY)
350 300 250 200 150 100 50 0
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Income statement
Year ended in 31st Dec (US$m ) Net revenue Casino Rooms Food and beverage Mall Convention, ferry, retail and other Operating expenses Gam ing tax Inventories consumed Em ployee benefit expenses Depreciation and amortization Gam ing prom oter/agency c om misions Other expenses Operating profit Interest income Interest expense, net of amounts capitalized Loss on modification or early retirment of debt Profit before income tax Income tax (expenses)/credits Profit for the year/period Adjusted EBITDAR EBITDA Margin % (on Net Revenue)
2008A 3,053 2,670 140 54 123 66 (2,759) (1,300) (42) (518) (268) (162) (468) 294 5 (123) 0 176 (0) 176 686 22.5
2009A 3,301 2,889 123 62 137 90 (2,931) (1,396) (40) (463) (320) (187) (525) 370 1 (150) (6) 214 (0) 214 809 24.5
2010F 3,673 3,216 126 70 160 102 (3,190) (1,577) (45) (496) (320) (183) (569) 483 1 (123) 0 362 0 362 914 24.9
2011F 4,118 3,686 103 72 152 105 (3,555) (1,821) (50) (535) (320) (210) (618) 562 1 (146) 0 418 0 418 1,053 25.6
EBITDA TP based on 2011F FY11F (US$m) (HK$) 1,053 12.40 672 287 68 325 12.57 12.47 12.39 12.42
Base case a) 10% c hg in VIP daily win/table - Venetian Macao - Sands Macao - Plaza Macao - Parcels 5 & 6 ^ b) 10% chg in mass daily win/table - Venetian Macao - Sands Macao - Plaza Macao - Parcels 5 & 6 ^
^ Parcels 5 & 6 using 2012F EBITDA Source: DBS Vickers
2010F (US$m) 914 650 273 66
667 282 66
689 296 67 328
12.82 12.57 12.38 12.43
Page 81
Strong 1Q10 results. Net profit more than tripled to US$111m in 1Q10 on the back of higher adjusted EBITDA (+49% y-o-y to US$254m) and lower pre-opening cost (related to Parcels 5 & 6). Net revenue expanded by 24% y-o-y to US$946m, with growth seen across all properties (Venetian Macao +13%, Sands Macao +26%, Plaza Macao +117%). EBITDA margin also improved 7ppt to 27% on improved cost efficiencies. The Venetian Macao continued to lead in number of visits with strong financial performance, contributing 58% and 67% to SCLs revenue and EBITDA respectively. Adjusted property EBITDA grew 41% y-o-y to reach US$170m, as margin improved 6ppt to 31% with higher mass market First quarter result
contribution (49% vs 46%). Gaming volumes were strong in all segments while direct VIPs made up 21% of rolling chip. VIP win rate edged lower to 2.9% from 3.2%, while mass win percentage rose to 25.1% from 21.9% - above theoretical average of 18-20%. Sands Macao adjusted EBITDA grew 38% y-o-y to US$70m as margin expanded by 2ppt to 25% with higher win rate (for both VIP and mass), which help mitigated the 4% decline in mass drop (due to opening of Oceanus in Dec 09). As for Plaza, EBITDA rose by 3.8x to US$19b, driven by introduction of marketing programs and opening of Paiza Mansions.
Three months ended Adjusted EBITDA The Venetian Macao
1Q09 (US$m) 120
1Q10 (US$m) 170
% Chg 41
Comments Strong gaming volumes thanks to continued market-leading visitation. Slots volume increased by 20.1%, mass win average was 25.1% and direct VIP made up c.21% of VIP VIP volume increased by 24.8% and its win rate improved significantly to 3.18% while the mass segment saw slight decline in ol me or in rate Although VIP grew strongly but was set back by much lower win rate losses from CotaiJet
Sands Macao
50
70
38
The Plaza Macao Ferry and other operations Total adjusted EBITDA Share-based compensation granted to employees by LVSC Corporate expense Pre-opening expense Depreciation and amortisation Amortization of show production costs Net foreign exchange losses Loss on disposal of property and equipment Fair value losses on financial assets at fair value through profit and Operating profit Interest income Interest expense, net of amounts capitalized Profit before income tax Income tax expenses Profit attri. to equity holders of the company EPS (US cents)
4 (4) 170 (3) (2) (30) (81) 1 (0) (0)
19 (5) 254 (4) (6) (4) (87) 1 (3) (0) (1)
385 15 49 21 160 (88) 8 (1) 723 158
Parcels 5 & 6
55 0 (28) 27 (0) 27
149 1 (39) 111 (0) 111
173 232 40 314 29 315
Mainly from increase in average interest rates from amendment of the Macao Credit
0.42
1.37
226
Page 82
Tables of Sands China

No of tables VIP Venetian Sands Plaza Phase 5 & 6 158 78 23 259 144 403 Mass 441 335 93 869 432 1,301 Total 599 413 116 1,128 576 1,704 2,153 1,172 166 3,491 2,200 5,691 Slots
Source: DBS Vickers
Daily Win Assumptions

FY08 Venetian Assum ptions VIP & Premium Rolling chip Win % Gross revenue (before commissions/rebates) Daily Win per table Mass Drop Win % Gross revenue (before commissions/rebates) Daily Win per table Slots Handle Win % Gross revenue (before commissions/rebates) Daily Win per slot
Source: DBS Vickers
FY09
FY10
FY11
36,894 3.0% 1,106.8 19,192
37,701 2.8% 1,055.6 18,305
43,913 2.8% 1,229.6 21,321
46,109 2.8% 1,291.1 22,387
3,530 19.9% 702.5 4,364
3,363 23.6% 793.6 4,930
4,202 21.8% 913.9 5,678
4,412 21.8% 959.6 5,961
1,942 8.0% 155.4 198
2,363 7.4% 174.8 222
2,311 7.8% 179.5 228
2,427 7.8% 188.5 240
Page 83
Daily Win Assumptions - continued

FY08 Sands Assum ptions VIP & Premium Rolling chip Win % Gross revenue (before commissions/rebates) Daily Win per table Mass Drop Win % Gross revenue (before commissions/rebates) Daily Win per table Slots Handle Win % Gross revenue (before commissions/rebates) Daily Win per slot FY09 FY10 FY11
25,182 2.6% 654.7 22,997
21,920 3.0% 657.6 23,098
25,182 3.0% 742.9 26,093
26,441 3.0% 780.0 27,398
2,627 18.9% 496.5 4,060
2,413 19.5% 470.6 3,849
2,586 19.2% 496.5 4,060
2,715 19.2% 521.3 4,263
1,039 7.8% 81.1 190
1,257 6.6% 83.0 194
1,257 7.3% 91.1 213
1,320 7.3% 95.7 224
Plaza Assum ptions VIP & Premium Rolling chip Win % Gross revenue (before commissions/rebates) Daily Win per table Mass Drop Win % Gross revenue (before commissions/rebates) Daily Win per table Slots Handle Win % Gross revenue (before commissions/rebates) Daily Win per slot
Source: DBS Vickers
630 4.5% 28.4 10,045
7,059 2.3% 162.4 19,174
7,059 2.8% 197.7 23,342
7,377 2.8% 206.6 24,393
100 21.1% 21.1 1,865
336 23.7% 79.6 2,349
368 21.8% 80.0 2,360
386 21.8% 83.9 2,478
38 5.6% 2.1 106
240 5.9% 14.2 234
263 5.8% 15.1 250
276 5.8% 15.9 262
Page 84
Daily Win Assumptions - continued

FY11 Parcel 5 & 6 VIP & Premium Rolling chip Win % Gross revenue (before commissions/rebates) Daily Win per table Mass Drop Win % Gross revenue (before commissions/rebates) Daily Win per table Slots Handle Win % Gross revenue (before commissions/rebates) Daily Win per slot 678 7.8% 52.7 262 2,793 7.8% 216.9 270 449 21.8% 97.7 2,478 1,851 21.8% 402.5 2,553 8,405 2.8% 235.3 17,910 34,627 2.8% 969.6 18,447 FY12
Source: DBS Vickers
Page 85
On a Tight Rope
Sound balance sheet, for now. Post-IPO, SCLs net debt fell to US$1.9bn as of Dec 09 from FY08s US$3.1b with net gearing improved to 51% from 248%. Net debt however is expected to increase again to US$1.9bn in 2010F with US$1.75b project financing for Parcels 5 & 6 (concluded recently). Nevertheless, net gearing will unlikely spike up (2010F: 48%, 2011F: 44%) due to strong operating cashflows from existing operations (>US$1b p.a.). SCL may need to raise capital in 2011 for the development of Parcel 3 that needs to be completed by 2014, or face the risk of losing its land concession which could lead to potential write off of US$36m initial investment. There will be no loan maturing until 2012 we forecast minimal debt repayment of US$102m and US$439m in 2010F and
2011F respectively. Repayment for Parcels 5 & 6s US$1.75b credit facility will only commence from 1Q13 (a year after full commencement of operations) and is mainly backloaded (5% quarterly repayment in 2013, 7.5% quarterly repayment in 2014, and balance by May 2015). Covenant test will be the biggest challenge. With existing properties being profitable, SCL should not face any issues in meeting the covenants for the older debts (minimum interest cover of 4x and maximum leverage ratio of 4.5x). As for the US$1.75b credit facility for Parcels 5 & 6, covenant testing will begin from 2Q12 onwards (two quarters after substantially open). Leverage ratio will need to be maintained at below 4.25x while interest cover at above 3.5x.
Page 86
Breakdown of Assets
Inventory Bank, Cash 0.1% Debtors and Liquid 4.3% Assets 13.3%
Common Shareholder s' Equity 25.5%
3,210
5.4 4.4 3.4 2.4 1.4 0.4 2007A 2008A 2009A 2010F 2011F
ST Debt 0.9%
3,010 2,810 2,610 2,410 2,210
LT Debt 73.6%
2,010 1,810
Cash Flow Trend
2,890 1,890 890 -110 -1,110 -2,110 2007A 2008A 2009A 2010F CF from Fin 2011F
0.16 0.11 0.06 0.01 (0.04) (0.09) (0.14) (0.19) (0.24) 2007A 2008A 2009A 2010F 2011F
140 120 100 80 60 40 20
CF from Op
CF from Invt
2007A
2008A
2009A
2010F
2011F
Margin Trend (%)
22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 2007A 2008A 2009A 2010F 2011F Ret on Avg Equity (ROAE) % Ret on Avg Assets (ROAA) %
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007A EBITDA Margin % 2008A 2009A 2010F 2011F EBIT Margin % Net Income Margin %
4500 4000 3500 3000 2500 2000 1500 1000 500 0 2007A 2008A 2009A 2010F 2011F
4.0x
3.5x
3.0x
2.5x
2.0x
Page 87
Risks
competition for market share on Cotai would be tough. We see two possible scenarios:
Potential construction delay/cost overun at Parcels 5 & 6. Construction of Parcels 5 & 6 in 2007 was shelved due to global a) SCL and Galaxy share the 600 tables between them which may not be adequate unless both open in more phases (ie financial crisis. After SCLs successful IPO which raised with lesser number of tables), reshuffle low-yielding tables US$1.64bn in Nov 09, the development was supposed to restart from existing casinos and/or introduce more electronic in Mar 10. However, further delays in finalizing its US$1.75b table games/slots which are not affected by the cap; financing and government approvals for foreign construction workers pushed completion dates to Sep 11 and Mar 12 for b) Galaxy opens on track, while Parcels 5 & 6 delayed to Phase I and Phase II, respectively. Any further disruptions or beyond 2013. delays would significantly impact SCLs strategy and lower our forecasts and valuation. More financing to go. The success of Sands China will very much depend on its development of Parcels 5 & 6. The ability of Compromised by table cap limit. The Macau Government has recently imposed a 5,500 table cap up to 2013. Currently there SCL to access further financing in the future for its Parcels 3 and 7 & 8 could be jeopadised if Parcels 5 & 6 continues to suffer are c.4,900 tables in the industry (post opening of Encore), leaving a balance of 600allowable tables. This could complicate from delays or failure to produce attractive ROI after opening. SCLs expansion strategy as Galaxy Macau (600 tables) will likely Hard sell for non-core assets. Although non-gaming makes up complete by 1Q11 ahead of SCLs Parcel 5 & 6 with expected 12% of SCLs revenue contribution, but compared to gaming opening in Sep 11. SCL is planning to open c.600 tables over ROI may not be strong enough to covince investors to invest in two phases at Parcels 5 & 6 by 2012. residential or malls within a casino in the short term. However, the Macau Government indicated that they will not disregard those developments already in progress. We believe
Page 88
Company Background Leading entertainment and non-gaming operator. SCL is a leading developer, owner and operator of integrated resorts and casinos in Macau. Besides gaming SCL also has the largest MICE, retail space and entertainment venues in Macau. SCL is 70.3% owned by its controlling shareholder Las Vegas Sands Corp, listed in US. Through a subsidiary, Venetian Macau Limited, SCL holds a sub-concession contract under Galaxy that
has been permitted by the Macau Government to operate casinos and/or gaming areas in Macau. Over the past few years, SCL has opened up Sands Macao on Macau Peninsula (May 04), Venetian Macao (Aug 07) and the Plaza (Aug 08) at Cotai. Going forward, SCL plans to expand the integrated resort business by developing Parcels 5 & 6, 3 and 7 & 8 on the Cotai Strip in order to create Asias premier gaming and leisure destination.
Structure Sands China
Source: Company
Page 89

Key management team
Nam e & Position Steven Craig Jacobs CEO, President-Macau and Executive Director Age 47 Experience and qualification Joined LVS since Mar 2009 Appointed as the President-Macau of LVS since May 2009 and Executive Director as of Aug The President and CEO of Vagus Group between 1994-08 Undertaken various senior executive roles in companies including Louvre Hotels, US Franchise Systems, Hyatt and Best Western International Bachelor of Arts from Harvard University Joined the Group since Aug 2005 Served as the President of Asian region since Sept 2006 and appointed as an Executive Director in Aug 2009 Responsible for overseeing all development and Government relation activities in Macau, including real estate development transactions, retail m all leasing, and other business development-related activities Has broad experience in all elem ents of property developm ent and business management, initially gained 12 years of private practice as a property lawyer and subsequently in senior management positions with Savills and JLLS Worked as a solicitor of the Supreme Court of Queensland and High Court of Australia Bachelor of Law from Queensland University of Technology Master of Business Administration from the University of Southern Queensland Appointed as Chairman and non-executive Director in Aug 2009 Chairm an of LVS, CEO and Director of LVS since 2004 Chairman, CEO and a Director of LVS LLC that own and operates the former Sands Hotel and casino since April 1988 Extensive experience in convention, trade show, tour and travel businesses Created and developed COMDEX trade shows and the Sands Expo Center President and Chairman of Interface Group since mid-1970s Chairman of LVS's affiliate Interface-Group Massachusetts since 1990 Appointed in 2009 Director of LVS since March 2009 Chairman and co-founder of Global Logistic Properties CEO of Prologis (NYSE listed company) in 2005-08 Chairman of Prologis in 2007-08 Served as Director of Prologis European Properties (EuroNext and Luxembourg listed) President of international operations of ProLogis in 2003-04, and also Asia President and CEO between 2002-04 Appointed in 2009 Director of LVS since Feb 2005 A CPA holder and was a partner in the international accounting and consulting firm of Deloitte & Touche LLP between 1973-03 Served as CEO of Deloitte Touche LLP's operations in the former Soviet Union between 1996Worked as a business consultant since 2003 Served on the board of directors of many charitable and civic organizations
Stephen John Weaver CDO and Executive Director
49
Sheldon Gary Adelson Chairman and NonExecutive Director
76
Jeffrey Howard Schwartz Non-Executive Director
50
Irwin Abe Siegel Non-Executive Director
69
Page 90

Income Statement (US$ m) FY Dec Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Balance Sheet (US$ m) FY Dec Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Cap Net Cash/(Debt)
2008A 3,053 (1,300) 1,753 (1,459) 294 0 0 (118) 0 176 0 0 0 176
2009A 3,301 (1,396) 1,905 (1,535) 370 0 0 (150) (6) 214 0 0 0 214
2010F 3,673 (1,577) 2,096 (1,613) 483 0 0 (122) 0 362 0 0 0 362
2011F 4,118 (1,821) 2,296 (1,734) 562 0 0 (145) 0 418 0 0 0 418
2008A 5,574 0 473 418 11 288 124 6,888 44 1,982 3,599 13 1,250 0 6,888 (1,559) (3,225)
2009A 5,603 0 502 908 10 295 17 7,336 87 819 2,733 13 3,685 0 7,336 (496) (1,911)
2010F 6,448 0 443 2,526 11 306 17 9,751 439 1,224 4,028 13 4,047 0 9,751 (890) (1,941)
2011F 7,127 0 443 2,028 13 305 17 9,933 1,277 1,373 2,751 68 4,465 0 9,933 (1,038) (2,000)
Sales Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (US$ m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. Other Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
55.3 20.6 (10.4) 0.1
8.1 25.8 21.6 0.1
11.3 30.7 69.1 0.0
12.1 16.4 15.6 0.0
2008A 176 268 0 0 0 0 (188) (1,998) 0 0 135 (55) (1,918) 0 1,836 0 (196) 1,640 (22)
2009A 214 320 0 0 0 0 (998) (24) 0 0 0 (106) (130) 0 (195) 0 1,280 1,085 491
2010F 362 320 0 0 0 0 616 (1,165) 0 0 0 1 (1,164) 0 1,648 0 (164) 1,484 1,618
2011F 418 320 0 0 0 0 393 (1,000) 0 0 0 1 (999) 0 (439) 0 (191) (630) (498)
Rates & Ratio FY Dec Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Asset Turnover (x) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) Z-Score (X) N.Cash/(Debt)PS (US$) Opg CFPS (US$) Free CFPS (US$)
2008A 57.4 9.6 5.8 15.3 3.0 6.6 0.0 0.5 31.6 406.2 2.7 0.4 0.3 2.6 54.8 CASH (40.1) 3.2 (21.6)
2009A 57.7 11.2 6.5 8.7 3.0 6.5 0.0 0.5 32.3 366.2 2.7 1.4 1.3 0.5 0.9 CASH (23.7) (5.8) (6.1)
2010F 57.1 13.2 9.8 9.4 4.2 6.4 0.0 0.4 29.9 236.4 2.4 1.7 1.7 0.5 26.1 CASH (24.1) 16.1 1.6
2011F 55.8 13.7 10.1 9.8 4.2 6.6 0.0 0.4 27.1 260.2 2.4 0.9 0.9 0.4 24.8 CASH (24.9) 14.1 1.6
Segmental Breakdown (US$ m) / Key Assumptions FY Dec 2008A 2009A Revenues (US$ m) Casino Rooms Food and beverage Mall Total Key Assumptions VIP no of tables Mass no of tables Junket commission 2,670 140 54 123 3,053 259.2 868.8 1.40 2,889 123 62 137 3,301 259.2 868.8 1.35
2010F 3,216 126 70 160 3,673 259.2 868.8 1.25
2011F 3,686 103 72 152 4,118 403.2 1,300.8 1.25
Page 91
Appendices Background Macau is located to the west of Guangdong province along the southeast coast of Mainland China. It consists of the Macau peninsula, which is connected by three bridges to the island districts of Taipa, Coloane and Cotai. Macau is the only region in China able that offers legal casino gaming. From July 2003, mainland residents were allowed to apply for a visa to visit Macau and Hong Kong on an individual basis under the Individual Visiting Scheme. Visitors from Mainland China and Hong Kong currently constitute 81% of Macau visitor arrivals. The monopoly of the Macau gaming industry by SJM ended in 2002 when the Macau Government launched an international tender process and granted three concessions to Galaxy, SJM and Wynn Macau to operate casino gaming.
Three sub-concessions were also authorized, permitting each of the concessionaires to enter into sub-contracts to operate casinos in Macau. The sub-concessions were granted to MGM Grand Paradise, Venetian Macau and Melco PBL. Macau currently has 33 gaming facilities, of which 22 are located on Macau Peninsula. Cotai is a new gaming area that features large-scale integrated resorts (modern casinos with non-gaming amenities), and will broaden Macaus appeal. Future land reclamation at Macau will only be designated for non-gaming development. In 2006, Macau became the largest gaming market in the world, surpassing Las Vegas. Macaus casino gaming revenue was more than two times Las Vegas and three times Atlantic Citys (2008). Casinos contribute to 99% of Macaus gaming market, with baccarat being the most popular game (88% of casino gaming revenue).
Figure 48: Gaming concessions and sub-concessions in Macau

Concessionaires SJM Wynn Galaxy
Sub-concessionaires
Pansy Ho/ MGM
Melco Crown
LVS Venetian
Source: DBS Vickers
Figure 49: Macau gaming market

(MOPm) Games of Fortune (casinos) Greyhound Racing Horse Racing Chinese Lottery Sports Lottery - Football Sports Lottery - Basketball Total Casinos market share 2003 28,672 74 1,004 3 510 52 30,315 95% 2004 41,378 84 1,566 5 442 36 43,511 95% 2005 46,047 67 636 7 333 44 47,134 98% 2006 56,623 67 437 7 327 60 57,521 98% 2007 83,022 98 403 6 273 44 83,847 99% 2008 108,772 186 501 6 304 57 109,826 99% 2009 119,369 327 333 6 279 69 120,383 99%
Source: DICJ
Figure 50: No of casinos by concessionaire

Concessionaires SJM Galaxy Venetian Macau (Sands China) Wynn Macau Melco Crown MGM TOTAL 2003 11 11 2004 13 1 1 15 2005 15 1 1 17 2006 17 5 1 1 24 2007 18 5 2 1 1 1 28 2008 19 5 3 1 2 1 31 2009 20 5 3 1 3 1 33
Source: DICJ
Page 92

Figure 51: No of tables and slots
Gaming Tables Slot Machines YOY Growth (%) Gaming Tables Slot Machines 2003 424 814 2004 1,092 2,254 2005 1,388 3,421 2006 2,762 6,546 2007 4,375 13,267 2008 4,017 11,856 2009 4,770 14,363
158 177
27 52
99 91
58 103
-8 -11
19 21
Source: DICJ
Figure 52: No of games

Game Types Roulette Black Jack VIP Baccarat Baccarat Mini Baccarat Fantan Cussec Paikao Boule Mahjong Slot Machines Mahjong Paikao Makccarat 3-Card Poker Fish-Prawn-Crab 3-Card Baccarat Game Craps Texas Holdem Poker Pachinko Tombola Lucky Wheel Football Poker Stud Poker Q Poker Casino War Fortune 3 Card Poker 2003 47 637 22,178 3,102 136 682 149 4.2 236 54 185 1,071 153 8 1.6 7 4 16 28,672 Baccarat market share (%) VIP Mass Slots 88 22,178 6,258 236 28,672 2004 128 1,211 29,783 5,617 363 147 1,212 136 5.7 640 35 199 1,295 225 8 1.3 32 2 337 41,378 86 29,783 10,955 640 41,378 2005 186 1,459 28,864 9,929 519 143 1,526 95 0.2 1,250 6 172 1,053 257 2 1.2 39 522 24 46,047 84 28,864 15,933 1,250 46,047 2006 248 1,622 36,783 11,526 385 145 1,923 76 2,053 4 128 874 247 2.0 27 556 24 0.1 56,623 85 36,783 17,787 2,053 56,623 2007 371 1,917 55,762 16,211 304 164 2,755 77 3,594 3 9 114 654 231 9 2.0 17 750 20 61 83,022 87 55,762 23,666 3,594 83,022 2008 693 2,247 73,772 21,052 212 190 3,043 54 9 5,653 2 16 73 264 209 89 54 2 21 925 7 185 108,772 87 73,772 29,347 5,653 108,772 2009 694 1,903 79,834 25,498 174 2,826 44 27 6,503 0 8 94 152 184 92 146 2 25 938 5 164 55 119,369 88 79,834 33,032 6,503 119,369
Source: DICJ
Page 93

Figure 53: Existing and future supply
VIP SJM Casino Lisboa (reopens in 1Q 2012) Grand Lisboa Casino Jai Alai Winner's Bar Slot Lounge Yat Yuen Canidrome Slot Lounge Macau Jockey Club Slot Lounge Oceanus (opened in Dec 09) The Pearl (opens 2012 or beyond) Subtotal Third Party-Promoted Casino New Century Casino Ponte 16 Club VIP Legend Casino Golden Dragon Casino Casa Real Casino Emperor Palace Casino Macau Jockey Club Casino Diamond Casino Fortuna Casino Babylon Tiger Slot Lounge Casino Kam Pek - Paradise Entertainment Jimei Lan Kwai Fong (opened Aug 09) L'Arc (opened in Sep 09) Subtotal Total Wynn Wynn Macau Encore (opens in Apr 10) Total Sands China Sands Macao The Venetian Macao Plaza Macao Parcels 5 & 6 (Ph1 & Ph2) Total Galaxy StarWorld GalaxyWorld City Club: Waldo, Rio, President, Grand Waldo Total Melco Altira Macau City of Dreams (Phrase I opened in Jun09) Mocha Clubs Total MGM Grand Macau Grand Total 2009 Mass Total Mkt tables 152 245 80 276 753 212 313 83 276 884 Slot VIP 2010F Mass Total Mkt tables 152 245 80 276 753 212 344 83 276 915 Slot VIP 2011F Mass Total Mkt tables 152 245 80 276 753 212 344 83 276 915 Slot
60 68 3 131
384 756 299 113 240 242 605 2,639
60 99 3 162
384 756 299 113 240 242 605 2,639
60 99 3 162
384 756 299 113 240 242 605 2,639
13 8 4 13 3 12 6 35 30 40 164 295
110 97 73 65 40 60 19 32 48 62 52 12 60 79 809 1,562
110 97 86 73 44 73 22 44 48 62 58 47 90 119 973 1,857
90 278 252 136 259 105 221 200 303 68 100 400 2,412 5,051
13 8 4 13 3 12 6 35 30 40 164 326
110 97 73 65 40 60 19 32 48 62 52 12 60 79 809 1,562
110 97 86 73 44 73 22 44 48 62 58 47 90 119 973 1,888
90 278 252 136 259 105 221 200 303 68 100 400 2,412 5,051
13 8 4 13 3 12 6 35 30 40 164 326
110 97 73 65 40 60 19 32 48 62 52 12 60 79 809 1,562
110 97 86 73 44 73 22 44 48 62 58 47 90 119 973 1,888
90 278 252 136 259 105 221 200 303 68 100 400 2,412 5,051
196 196
209 209
405 405
1,195 1,195
196 37 233
209 24 233
405 61 466
1,195 95 1,290
196 37 233
209 24 233
405 61 466
1,195 95 1,290
78 158 23 259
335 441 93 869
413 599 116 1,128
1,172 2,153 166 3,491
78 158 23 259
335 441 93 869
413 599 116 1,128
1,172 2,153 166 3,491
78 158 23 144 403
335 441 93 432 1,301
413 599 116 576 1,704
1,172 2,153 166 2,200 5,691
91 110 201
122 125 247
213 235 448
502 504 1,006
91 110 201
122 125 247
213 235 448
502 504 1,006
91 80 110 281
122 320 125 567
213 400 235 848
502 1,500 504 2,506
170 110 280 80 1,311
31 300 331 280 3,498
201 410 611 360 4,809
1,320 1,440 2,760 880 14,383
170 110 280 80 1,379
31 300 331 280 3,522
201 410 611 360 4,901
1,320 1,440 2,760 880 14,478
170 110 280 80 1,603
31 300 331 280 4,274
201 410 611 360 5,877
1,320 1,440 2,760 880 18,178
Page 94

Sector At A Glance Figure 54: GGR growing strongly
(MOPb) 18 16 14 12 10 8 6 4 2 0 J ul-05 J ul-06 J ul-07 J ul-08 J ul-09 -20 -40 % YOY Chg (RHS) Monthly gaming rev enue (LHS) (%) 100 80 60 40 20 0
Figure 55: Recovery in visitor arrivals

(m) 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 J an 08 Apr 08 J ul 08 Oct 08 J an 09 Apr 09 J ul 09 0.6 Oct 09 J an 10 Apr 10 0.8 0.7 0.9 1.1 1.0 Total visitor arrivals China visitors (m) 1.2
Source: CEIC
Source: CEIC
Figure 56: VIP segment driving GGR growth

(%) 80 70 60 50 40 30 20 10 0 -10 1Q06 -20 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 Total GGR VIP GGR Mass GGR
Figure 57: Minimal new supply in 2010

(MOPb) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 No of tables Average GGR/table (MOPm) 1300 1200 1100 1000 900 800 700 600
Source: CEIC
Source: CEIC
Figure 58: Rapid growth in rolling chip

(MOPb) 1000 Rolling chip (LHS) 900 800 700 600 500 400 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 V IP revenue (RHS) (MOPb) 31 29 27 25 23 21 19 17 15
Figure 59: Market share

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1H08 SJ M 2H08 Wy nn Macau Galaxy 1H09 Sands China Melco 2H09 Others 19% 12% 18% 8% 17% 19% 9% 21% 8% 16% 26% 19% 7% 20% 9% 16% 20% 10% 18% 9% 14% 29%
27%
29%
Source: Respective companies
Source: CEIC
Page 95

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10 to +15% total return over the next 12 months for small caps, -10 to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends

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0621macau Gaming Sector

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0621macau Gaming Sector

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Regional Industry Focus

Bet on the leaders

Source: DBS Vickers

Figure 1: GGR riding on Chinas robust domestic consumption

Gross Gaming Rev enue (LHS)

Real GDP growth (RHS)

Source: CEIC, DBS Vickers

Industry Focus Macau Gaming

Yee Mei Hui Ken Chen

(603) 2711 1332 meihui@hwangdbsvickers.com.my (852) 2863-8923 ken_chen@hk.dbsvickers.com

Industry Focus Macau Gaming

Industry Focus Macau Gaming

Figure 2: Sector valuation

(HK$) 12.40 15.40 8.10 5.00 n.a.

(x ) 3.4 18.2 3.9 2.0 0.6 5.6

Source: DBS Vickers

Figure 3: Comparison between casino operators

Source: Respective companies, DBS Vickers

Industry Focus Macau Gaming

Figure 6: Ratio of GGR growth to Chinas GDP growth

Source: CEIC, DBS Vickers

2003 2004 2005 2006 2007 2008 2009 2010F 2011F

Source: CEIC, DBS Vickers

Industry Focus Macau Gaming

Figure 8: GGR strongly correlated to Chinas GDP growth

Gaming revenue growth (LHS) China Real GDP growth (RHS)

Singapore Cambodia Malaysia Australia Macau US South Korea

Source: Media reports, DBS Vickers

Gaming revenue growth (LHS)

Industry Focus Macau Gaming

Figure 11: China visitor per capita spending rising steadily

Industry Focus Macau Gaming

Source: CEIC, media reports

Figure 15: Strongest rebound in China visitor arrivals

Package tour, 30%

10 0 -10 -20 -30 -40 -50

Figure 14: Visitors mainly from China and Hong Kong

Figure 16: GGR strongly correlated to visitor arrivals

Hong Kong 31%

Industry Focus Macau Gaming

Figure 18: Barrier Gate expansion

Source: Media reports

Industry Focus Macau Gaming

60 min 60 min 60-75 min

MOP142-275 MOP142-275 MOP140-275 MOP142-275 MOP171 MOP196-296

24 hours 7am-1am 24 hours 7am-1am 8.15am-8.15pm 8.45am-7.30pm

Source: Macau Government Tourist Office

Figure 20: Macaus distance from key cities in China

Industry Focus Macau Gaming

Source: DBS Vickers

Industry Focus Macau Gaming

Figure 23: VIP revenue growth relative to sector and GDP

2004 2005 2006 2007 2008 2009 2010F 2011F

Source: CEIC, DBS Vickers

Figure 24: Strong growth in rolling chip

Source: CEIC, Respective companies

Figure 25: Explosive growth in China private wealth

Household wealth (LHS)

No of millionaire households (RHS)

Source: Boston Consultancy Group

Source: CEIC, DBS Vickers

Industry Focus Macau Gaming