Macau Gaming:Shifting away from a cautious stance

Near term downside risks limited post policy change.

    We are moving away from a cautious sector view and take a more constructive stance.

    We believe market expectations have been low in the sector, with concerns on furtherpolicy tightening and large consensus downgrades. The recent visa policy changedampens fears on further local tightening, in our view. It also reduces the risks of largeconsensus downgrades, even though fundamentally the policy change is not enough tocause any upward GGR revisions in the near term. We believe it is unattractive to take anegative sector position in this backdrop.

    Consensus downgrades could be more muted than feared.

    Given a weak Q2 (GGR -12% QoQ), market has been expecting further large consensusdowngrades. We believe this could now be more muted than feared. Partially causedby visa tightening, sector GGR dropped from MOP1.14bn daily at the peak toMOP620m in Q215, a drop of 46%. Illustratively, assuming 5 pct points of the 46%decline is caused by visa changes, then ~MOP60m of daily GGR could gradually comeback, +10% from Q2 run rate. Our FY15 forecast of -27% YoY implies MOP730m inH2, which is aggressive, but risks of large downgrades now appear reduced. Further,the govt had now signalled an intention to support the industry, further underpinningour medium term forecasts. We assume GGR growth of +7% YoY in 2016.

    Valuation supportive but sector still heavily dependent on high end recovery.

    Sector is trading on 11.5x our 2016E EBITDA. With more clarity in forecasts and bettersentiment, we think sector could re-rate to closer ~13x historical average, implying 10-15% price upside potential, in addition to 4-5% dividend yield. However, larger upsidedepends on an earnings upgrade cycle: this requires concrete recovery in high enddemand, the outlook of which remains murky and requires improvements in macro andpolitical dynamics in China.

    Preferred picks.

    Our relative preferred names in the sector are MPEL, MGM China & Wynn Macau.