Macquarie Research, Regional gaming 2Q11 Results preview

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Regional gaming
2Q11 Results preview
Event
 Macquarie has expanded its regional gaming coverage to include Korea,
Philippines and Malaysia as well as Singapore and Macau. With the 1H11
results season beginning this week (with Wynn Macau reporting first), we
revisit our expectations for each market and operator. Our key pick continues
to be GKL in Korea. In Macau, we believe Melco-Crown, Galaxy and MGM
will shows trong EBITDA momentum, while we remain cautious on Singapore.
Impact
 Macau – Surprises in store: Macau’s gaming market grew by 46% YoY in
2Q11 after a strong May, which included Golden Week and the opening of
Galaxy’s Cotai property. Market shares have moved in favour of Galaxy, as
expected, while it looks like Sands China, MGM and SJM have lost some
market share. We think the best QoQ EBITDA momentum occurred at Melco-
Crown, Galaxy and MGM. Sands China may show the weakest QoQ EBITDA
momentum, after a very weak performance at the Four Seasons’s property.
 Korea – Macquarie’s key gaming pick: Korea is currently a small gaming
market at US$2bn in gaming revenues, but has been growing fast since the
easing of visa restrictions for Mainland Chinese tourists in 3Q10. A key
concern for investors is Japanese visitation given the recent earthquake.
However, we understand that visitation has remained quite stable so far in
2011. On the other hand, Chinese visitation is picking up, with around 30%
YoY growth YTD and also driving up gaming revenues at foreigner casinos.
 Singapore – 2Q market growth may disappoint: Singapore showed a 2%
QoQ decline in gaming volumes over 1Q11, with Resorts World Sentosa
having hold-adjusted market shares of 60% and 40% in the VIP and mass
markets, respectively. However, the decline in the growth rate was masked by
an exceptional VIP hold rate for RWS. The key issue for 2Q is how gaming
volumes grew QoQ. We believe that 2Q market growth could come in at
c.10% QoQ. This could be a disappointment, with consensus still looking for
25% growth in 2011, and with management indicating that mass market play
is likely to be flat in 2011 (ie, VIP needs to grow by 45-55% in 2H11).
Action and recommendation
 Key Regional Long pick: GKL, our key pick in the regional gaming
market: After GKL’s 18% YoY EPS growth in 1Q11, our Korean Gaming and
Consumer analyst HongSuk Na thinks GKL’s positive earnings momentum
continued in 2Q11. The growth was driven by a greater focus on direct-play
VIP visitation. GKL is aggressively growing its direct marketing presence in
China, which is bearing early fruit. GKL could record a 22% 3-year EBITDA
CAGR and is trading at a 6.6x 2012E EV/EBITDA with a 4% dividend yield.
We are significantly ahead of consensus on GKL.
 Key Regional Short pick: Genting Singapore, 2Q11 may disappoint: We
like Genting Singapore for its management strength and the Singapore
gaming market structure. However, we think that consensus may be too
optimistic on 2011 growth projections. According to Bloomberg, the market
expects FY11 EBITDA of S$1,572–2,276m (Macq: S$1,642m). Given Genting
Singapore is trading at a 2012E EV/EBITDA multiple of 12.6x, it could be
poised for a de-rating if EBITDA disappoints consensus expectations.