Macau Gaming:Cotai novelty effect has worn off for the VIPs

VIP liked Peninsula, Mass chose Cotai: 2Q17VIP revenue (+2% q-o-q/+31% y-o-y)outpaced mass (-3% q-o-q/+14% y-o-y). Strength in VIP was not due to luck, rollingvolume was +3% q-o-q/+31% y-o-y. Q-o-q drop in mass was in line with seasonality,strength in VIP was driven by strong demand and liquidity. The spilt over effect fromVIP into mass may take another 1-2quarters to materialize. However, amid gaming mixshift and wage hike, 2Q17sector EBITDA -4% q-o-q/+28% y-o-y. It is interesting tonote that after three sequential quarters of outperformance, Cotai (-4% q-o-q) VIPgrowth finally began to lag that of Peninsula (+9% q-o-q). This could be a sign that thenew supply has been digested by the market and more importantly, novelty effect mayhave worn off. VIP players could be going back to their old favourite casinos on theconvenient and intimate Macau Peninsula. On the mass market front, Peninsula’soutperformance over Cotai in 1Q17(P: +7% q-o-q/C: +2% q-o-q) reversed into 2Q17(P: -5% q-o-q/C: -2% q-o-q). Seasonality may have played a role in that trend.

    Scorecard by operators: In VIP, Melco topped the chart, gaining 2% in marketshare versus 1Q17. Studio City (+80% q-o-q) is the key driver. This came at theexpense of Sands, -2% in market share. Luck aside, Wynn remained the winner,picking up 3% in VIP volume market share. The growth is driven more by Peninsula(+21% q-o-q) than Cotai (+5% q-o-q). Sands lost 2% in VIP volume market share,dragged by Venetian (-16% q-o-q) and Sands Macao (-49% q-o-q). For mass, Sandsrecouped some lost ground, gaining 1% in market share, helped by 7% q-o-q growthat the Parisian. MGM financed bulk of that market share gain, recording 15% q-o-qdrop in revenue due to fluctuation in luck. Lastly, in terms of EBITDA, Galaxyreported the strongest q-o-q growth of 3% and SJM recorded the biggest q-o-q dropof 21%. But adjusting for one-offs, MGM result came in the weakest, - 17% q-o-q.

    Stick to quality names: Now that 2Q17results are almost behind us, consistent andhealthy sequential gaming revenue growth in 3Q17is the new focus. We think strongdemand amid the impact of the terrible weather is the best evidence thatfundamentals remain intact. We may even see stronger-than-expected demand in 2HSeptember given potential pent-up demand. Among Macau names, we continue toprefer Galaxy (27HK, HKD49.1, Buy) for its defensive operations and undemandingvaluation. We also like Melco Resorts (MLCO US, USD21.1, Buy) as we expect lossin market share to stabilise and its valuation is attractive.