Thursday, November 9, 2017

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

To access our research reports on the Bloomberg terminal, type CMHK <GO> 1

MGM China (2282 HK) 3Q17 pleasant surprise to market on VIP luck factor

■ 3Q17 EBITDA of HK$1,049mn (-18% YoY, +3% QoQ) was 2% lower

than our estimate but 8% higher than street consensus on better-

than-expected VIP win rate

■ Fine-tuned FY17E/18E EBITDA by 1% on slightly weak mass. Our

FY17E/18E EBITDA are 2%/6% lower than the consensus. Our TP is HK$18.00, in line with 1-SD above 5-yr averages of 21x P/E and 18x EV/EBITDA ■ MGM Cotai will boost earnings after opening in 1Q18E, but mass-

oriented property’s ramp-up might be slower. Maintain NEUTRAL

Lucky VIP offset mass’s weakness 3Q17 net revenue of HK$3,679mn was 5% lower YoY, but 5% higher QoQ, implying continued market share loss on both YoY and QoQ basis. By segment, VIP GGR advanced 4% YoY, or 9% QoQ thanks to win rate of 3.3% which offset 4% QoQ drop in rolling chip volume. Mass table/slot GGR recorded 2%/14% QoQ improvement, implying weak mass table business despite the peak season. MGM Grand’s occupancy rate remained high at 95.2%. EBITDA margin fell 0.6ppt QoQ to 28.5%.

More takeaways from conference call 1) Macau market has recovered quickly from typhoon. 2) VIP is still doing good and MGM will open a new VIP room in Peninsula property soon. 3) MGM Cotai will not have junkets initially. Mgmt is bringing mansions from Las Vegas to Cotai before the middle of 2018E. These duplex spacious skylofts are expected to be unique and competitive for high roller business, so we believe high-end gaming business will start ramping up when skylofts are operational.

Visibility improving but ramp-up is still an uncertainty MGM China is trading at 27x FY18E P/E and 16x EV/EBITDA, at 10% premium to its Macau peers due to elevated earnings expectation for MGM Cotai’s opening in 1Q18E. While earnings in FY18E are likely to climb sharply with MGM Cotai’s contribution, we think slower-than-expected ramp-up might cause more volatility in share price at the early stage. Thus, we maintain NEUTRAL rating with TP of HK$18.00.

Financials

HK$ mn FY15 FY16 FY17E FY18E FY19E

Revenue 17,170 14,907 14,858 22,265 25,399

Net profit 3,113 3,037 2,705 2,676 3,884

Growth (%) -45.5% -2.4% -10.9% -1.0% 45.1%

EPS (HK$) 0.82 0.80 0.71 0.70 1.02

DPS (HK$) 0.25 0.28 0.25 0.25 0.36

P/E (x) 23.1x 23.7x 26.6x 26.9x 18.5x

EV/EBITDA (x) 18.4x 20.2x 21.8x 15.9x 12.5x

Dividend yield (%) 1.3% 1.5% 1.3% 1.3% 1.9%

ROE (%) 63.3% 42.1% 30.8% 25.4% 29.3%

Source: Company data, CMS (HK) estimates

Angela HAN LEE

+852 3189 6634

angelahanlee@cmschina.com.hk

WHAT’S NEW

Estimates fine-tuned

NEUTRAL

Previous NEUTRAL

Price HK$18.92

12-month Target Price (Potential downside)

HK$18.00 (-5%)

Previous HK$18.00

Price Performance

Source: Bloomberg

% 1m 6m 12m

2282 HK 5.1 14.4 31.2 HSI 1.6 14.9 29.0

Industry: Macau Gaming

Hang Seng Index 28,906

HSCEI 11,646

Key Data

52-week range (HK$) 13.58 / 19.36

Market cap (US$ mn) 9,287

Avg. daily volume (mn shares) 7.5

BVPS (HK$) 2.1

Shareholdings Structure

MGM Resorts (56%) 2,126mn

Ms. Pansy Ho (22%) 855mn

No. of shares outstanding 3,800mn

Free float 22%

Related Research 1. NagaCorp (3918 HK) – Naga2: product upgrade to

improve penetration (NON RATED) 2017/11/06 2. Melco Intl Development (200 HK) – MLCO 3Q17 beat;

4Q trends good (BUY) 2017/11/03

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Thursday, November 9, 2017

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Focus charts Figure 1: Revenue Figure 2: Revenue breakdown by properties

Sources: Company data, CMS (HK) estimates Sources: Company data, CMS (HK) estimates

Figure 3: Adjusted EBITDA Figure 4: EBITDA breakdown by properties

Sources: Company data, CMS (HK) estimates Sources: Company data, CMS (HK) estimates

Figure 5: 1-year forward P/E Figure 6: 1-year forward EV/EBITDA

Sources: Company data, Bloomberg, CMS (HK) estimates Sources: Company data, Bloomberg, CMS (HK) estimates

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Thursday, November 9, 2017

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Quarterly results HK$ mn 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 YoY QoQ

Net revenue 3,866 3,647 3,508 3,877 3,876 3,899 3,494 3,679 -5% 5%

Adjusted EBITDA 1,124 995 1,034 1,278 1,185 1,225 1,019 1,049 -18% 3%

Adjusted EBITDA margin 29.1% 27.3% 29.5% 33.0% 30.6% 31.4% 29.1% 28.5%

VIP gaming tables 171 165 162 161 161 149 145 145 -10% 0%

Rolling chip volume 74,462 72,865 64,847 68,330 62,642 61,077 66,810 64,417 -6% -4%

VIP gross win 2,269 2,222 2,005 2,058 2,347 2,073 1,963 2,141 4% 9%

VIP win rate 3.0% 3.0% 3.1% 3.0% 3.7% 3.4% 2.9% 3.3% Daily win/VIP table (HK$) 144,600 148,400 136,200 139,000 158,800 154,200 149,000 160,400 15% 8%

Mass gaming tables 250 256 254 248 257 271 270 270 9% 0%

Mass gross win 1,921 1,847 1,863 2,098 1,882 2,157 1,824 1,861 -11% 2%

Daily win/mass table (HK$) 83,400 79,300 80,500 91,900 79,600 88,400 74,300 74,800 -19% 1%

Slot machines 1,238 1,183 1,024 1,032 1,002 1,016 1,033 1,040 1% 1%

Slot handle 7,645 6,605 6,935 7,707 7,568 7,435 7,147 7,750 1% 8%

Slot gross win 394.5 320.5 306.8 296.3 333.7 340.1 314.9 360.6 22% 14%

Slot hold rate 5.2% 4.9% 4.4% 3.8% 4.4% 4.6% 4.4% 4.7% Daily win/slot (HK$) 3,500 3,000 3,300 3,100 3,600 3,700 3,300 3,800 23% 15%

Room occupancy rate 97.5% 94.1% 95.8% 95.7% 96.0% 94.3% 96.5% 95.2% REVPAR (HK$) 2,367 2,138 2,180 2,157 2,170 2,000 2,008 2,009 -7% 0%

Sources: Company data, CMS (HK) estimates

Earnings revision

HK$mn New Old % New Old %

Comments FY17E FY17E chg FY18E FY18E chg

Overall

Net revenue 14,858 14,813 0% 22,265 22,225 0%

EBITDA 4,051 4,109 -1% 5,371 5,434 -1% EBITDA margin 27% 28% 0ppt 24% 24% 0ppt Net profit 2,705 2,710 0% 2,676 2,701 -1% EPS (HK$) 0.71 0.71 0% 0.70 0.71 -1% DPS (HK$) 0.25 0.25 0% 0.25 0.25 -1%

MGM Macau

Net revenue 14,858 14,813 0% 14,674 14,666 0%

EBITDA 4,439 4,498 -1% 4,562 4,629 -1% EBITDA margin 30% 30% 0ppt 31% 32% 0ppt

VIP GGR 8,295 7,995 4% 7,910 7,619 4% Better than expected win rate

Mass GGR 9,200 9,316 -1% 9,273 9,387 -1%

MGM Cotai

Net revenue - - - 7,591 7,559 0%

EBITDA - - - 1,201 1,197 0% EBITDA margin - - - 16% 16% 0ppt

VIP GGR - - - 952 891 7% Mass GGR - - - 4,676 4,676 0% Sources: Company data, CMS (HK) estimates

Thursday, November 9, 2017

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Valuation Our TP of HK$18.00 is based on the average of 21x FY18E P/E and 18x EV/EBITDA, which are both 1-SD above its five year averages of historical trading levels, to reflect its earnings growth after MGM Cotai’s opening. Our TP implies 25x/26x P/E for FY17E/18E and 21x/15x EV/EBITDA.

Key downside risks are 1) any delay of opening date of MGM Cotai, and 2) slower-than-expected ramp-up of MGM Cotai.

Peer valuation table

Company Ticker Rating Target Px (lcl crncy)

Current Px (lcl crncy)

+/- side

Mkt Cap (US$ mn)

52-Wk Price (lcl crncy)

Avg T/O (US$mn)

P/E (x)

FY17E FY18E FY19E

Galaxy 27 HK BUY 56.10 56.10 0% 31,167 30.72 / 56.70 80.3 26.5 24.7 23.0

SJM 880 HK NEUTRAL 7.40 6.56 13% 4,789 5.18 / 8.60 9.1 22.1 27.5 17.8

Wynn Macau 1128 HK BUY 22.20 21.85 2% 14,649 11.02 / 21.95 24.0 33.7 25.8 22.5

Sands China 1928 HK BUY 42.70 38.10 12% 39,691 31.25 / 41.85 64.3 26.3 23.0 21.9

MGM China 2282 HK NEUTRAL 18.00 18.94 -5% 9,287 13.58 / 19.36 16.8 26.6 26.9 18.5

Melco Resorts MLCO US BUY 30.50 25.01 22% 12,304 13.78 / 26.54 70.5 32.8 22.9 17.2

Simple Avg 28.0 25.1 20.0

Mkt Cap Avg 27.9 24.3 21.3

Melco Group 200 HK BUY 25.40 22.50 13% 4,455 9.91 / 23.25 15.0 19.1 15.8 10.9

Company Ticker EV/EBITDA (x) ROE (%) Dividends Yield (%) Net Debt/Equity (%)

FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E

Galaxy 27 HK 16.4 15.2 14.1 17.3 16.4 15.6 1.1 1.2 1.3 (39.9) (47.4) (54.1)

SJM 880 HK 9.3 9.7 6.8 6.2 4.9 7.2 2.3 1.8 2.8 (30.1) (21.9) (29.0)

Wynn Macau 1128 HK 17.6 15.4 14.4 140.4 119.5 89.9 2.7 2.7 2.7 1,138.1 647.7 354.3

Sands China 1928 HK 17.5 16.2 15.8 34.0 42.1 47.2 5.2 5.2 5.2 79.3 94.9 115.9

MGM China 2282 HK 21.8 15.9 12.5 30.8 25.4 29.3 1.3 1.3 1.9 187.3 126.9 84.3

Melco Resorts MLCO US 11.4 9.7 8.2 12.9 16.4 18.8 1.4 1.4 1.4 78.3 49.5 19.9

Simple Avg 15.6 13.6 11.9 40.2 37.5 34.8 2.4 2.3 2.6

Mkt Cap Avg 16.5 14.8 13.6 39.5 39.3 37.7 2.9 2.9 3.0

Melco Group 200 HK 8.9 7.5 6.5 8.6 9.8 12.9 0.4 0.4 0.4 39.2 27.8 14.5

Sources: Bloomberg, CMS (HK) estimates

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Financial summary

Statement of financial position

HK$ mn 2015 2016 2017E 2018E 2019E Current Assets 5,941 4,042 1,733 3,454 4,203

Cash and cash equivalents 5,421 3,547 1,237 2,844 3,544

Account receivables 243 225 224 336 383

Inventories 108 92 94 96 98

Other current assets 170 178 178 178 178

Non-current assets 16,014 23,038 30,023 31,345 32,540

Property and equipment 13,828 21,210 28,391 29,910 31,302

Sub-concession premium 539 412 285 157 30

Land use right premium 1,330 1,260 1,191 1,122 1,052

Other non-current assets 317 156 156 156 156

Total assets 21,955 27,080 31,756 34,798 36,743

Current liabilities 4,850 5,492 5,591 8,399 9,130

ST borrowings - 605 605 605 605

Account payables 4,586 4,469 4,569 7,376 8,107

Other current liabilities 264 418 418 418 418

Non-current liabilities 12,189 14,371 17,371 15,871 14,371

LT borrowings 11,732 14,104 17,104 15,604 14,104

Other non-current liabilities 457 267 267 267 267

Total liabilities 17,040 19,864 22,963 24,270 23,501

Common stock - par value 3,800 3,800 3,800 3,800 3,800

Reserves 1,115 3,417 4,993 6,728 9,442

Minority interest - - - - -

Shareholders' equity 4,915 7,217 8,793 10,528 13,242

Total equity and liabilities 21,955 27,080 31,756 34,798 36,743

Statement of cash flows

HK$ mn 2015 2016 2017E 2018E 2019E CF from OA 3,210 2,762 4,008 7,925 7,232

Net income 3,113 3,037 2,705 2,676 3,884

D&A 834 806 1,136 2,468 2,589

Finance costs 133 47 69 87 78

Changes of WC (1,122) (1,219) 98 2,694 682

Others 252 92 - - -

CF from IA (4,581) (6,273) (8,116) (3,788) (3,782)

Capital expenditure (4,988) (8,049) (8,184) (3,875) (3,875)

Investment income 12 6 4 1 3

Other investments 395 1,769 64 85 90

CF from FA 2,560 1,637 1,798 (2,530) (2,750)

Borrowings 7,654 2,847 2,926 (1,589) (1,581)

Share capital and reserves 0 (0) - - -

Dividends (4,625) (806) (1,129) (941) (1,169)

Others (470) (402) - - -

Forex adjustment - (2) - - -

Net cash flow 1,189 (1,874) (2,310) 1,607 700

Income statement HK$ mn 2015 2016 2017E 2018E 2019E Total net revenue 17,170 14,907 14,858 22,265 25,399

Gaming tax (8,306) (6,999) (6,935) (9,027) (10,339)

Labor expenses (1,966) (1,949) (2,106) (3,830) (4,242)

D&A (806) (772) (1,066) (2,399) (2,520)

Other OP expenses (2,813) (2,089) (1,964) (4,233) (4,318)

Adj. EBITDA 4,257 4,108 4,051 5,371 6,673

Op Profit 3,281 3,099 2,787 2,777 3,981

Fin. costs (146) (53) (74) (89) (81)

Inv income 12 6 4 1 3

Other non-OP items (18) (1) - - -

Pre-tax Profit 3,129 3,052 2,718 2,690 3,903

Taxes (17) (15) (13) (13) (20)

After-tax Profit 3,113 3,037 2,705 2,676 3,884

NCI - - - - -

NP to Parents 3,113 3,037 2,705 2,676 3,884

EPS (HK$) 0.82 0.80 0.71 0.70 1.02

DPS (HK$) 0.25 0.28 0.25 0.25 0.36

Financial ratios

2015 2016 2017E 2018E 2019E YoY growth rate

Total revenue -32.5% -13.2% -0.3% 49.8% 14.1%

Adj. EBITDA -36.1% -3.5% -1.4% 32.6% 24.2%

Op profit -43.1% -5.5% -10.1% -0.4% 43.4%

Net profit -45.5% -2.4% -10.9% -1.0% 45.1%

Profitability EBITDA margin 24.8% 27.6% 27.3% 24.1% 26.3%

OP margin 19.1% 20.8% 18.8% 12.5% 15.7%

NP margin 18.1% 20.4% 18.2% 12.0% 15.3%

ROE 63.3% 42.1% 30.8% 25.4% 29.3%

ROIC 20.0% 13.4% 9.2% 8.8% 12.1%

Liquidity Debt/equity 238.7% 203.8% 201.4% 154.0% 111.1%

Net debt/equity 128.4% 154.7% 187.3% 126.9% 84.3%

Current ratio 1.2x 0.7x 0.3x 0.4x 0.5x

Quick ratio 1.2x 0.7x 0.3x 0.4x 0.4x

Operating efficiency Asset turnover 0.8x 0.6x 0.5x 0.6x 0.7x

Valuation ratios P/E 23.1x 23.7x 26.6x 26.9x 18.5x

P/B 14.6x 10.0x 8.2x 6.8x 5.4x

EV/EBITDA 18.4x 20.2x 21.8x 15.9x 12.5x

Dividend yield 1.3% 1.5% 1.3% 1.3% 1.9%

Sources: Company data, CMS (HK) estimates

Thursday, November 9, 2017

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Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

Analyst Disclosure

The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the

personal views of each such analyst about the subject securities and issuers; and (ii) no part of the analyst’s compensation was, is, or will be directly or indirectly, related to the specific

recommendations or views expressed in this research report.

Regulatory Disclosure

Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html or http://www.cmschina.com.hk/Research/Disclosure.

Disclaimer

This document is prepared by China Merchants Securities (HK) Co., Limited (“CMS HK”). CMS HK is a licensed corporation to carry on Type 1 (dealing in securities), Type 2 (dealing in futures),

Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance (Chapter 571). This

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advertisement, inducement, recommendation or representation of any kind or form whatsoever to buy or sell any security, financial instrument or any investment or other specific product. The

securities, instruments or strategies discussed in this document may not be suitable for all investors, and certain investors may not be eligible to participate in some or all of them. Certain

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