Buffet's Checklist on Macau Gaming

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Macau gaming Sector outlook - Overweight The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc. For important disclosure information please refer to page 80. Produced by Produced by Produced by CLSA Aaron Fischer, CFA Head of Consumer/Gaming Res [email protected] (852) 26008256 Richard Huang (852) 26008455 Credit Agricole Securities (USA) Jon Oh (1) 212 261 3865 15 November 2012 Global Hotels & Leisure BUYs Galaxy 27 HK Market cap US$14.8bn Up/downside +21% Las Vegas Sands LVS US Market cap US$36.6bn Up/downside +36% Melco Crown MPEL US Market cap US$8.1bn Up/downside +37% MGM China 2282 HK Market cap US$6.7bn Up/downside +37% MGM Resorts MGM US Market cap US$4.8bn Up/downside +43% Sands China 1928 HK Market cap US$31.7bn Up/downside +16% SJM 880 HK Market cap US$12.3bn Up/downside +35% Wynn Macau 1128 HK Market cap US$15.2bn Up/downside +20% Wynn Resorts WYNN US Market cap US$11.0bn Up/downside +16% www.clsa.com Buffett's checklist Macau scores 8/10 on key criteria

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A checklist for investing in macau casinos

Transcript of Buffet's Checklist on Macau Gaming

Page 1: Buffet's Checklist on Macau Gaming

Macau gaming Sector outlook - Overweight

The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc. For important disclosure information please refer to page 80.

Produced byProduced byProduced by

CLSA Aaron Fischer, CFA

Head of Consumer/Gaming Res [email protected]

(852) 26008256

Richard Huang (852) 26008455

Credit Agricole Securities (USA) Jon Oh

(1) 212 261 3865

15 November 2012

Global Hotels & Leisure

BUYs Galaxy 27 HK Market cap US$14.8bn Up/downside +21% Las Vegas Sands LVS US Market cap US$36.6bn Up/downside +36% Melco Crown MPEL US Market cap US$8.1bn Up/downside +37% MGM China 2282 HK Market cap US$6.7bn Up/downside +37% MGM Resorts MGM US Market cap US$4.8bn Up/downside +43% Sands China 1928 HK Market cap US$31.7bn Up/downside +16% SJM 880 HK Market cap US$12.3bn Up/downside +35% Wynn Macau 1128 HK Market cap US$15.2bn Up/downside +20% Wynn Resorts WYNN US Market cap US$11.0bn Up/downside +16%

www.clsa.com

Buffett's checklist Macau scores 8/10 on key criteria

Page 2: Buffet's Checklist on Macau Gaming

Macau gaming

2 [email protected] 15 November 2012

Contents

Executive summary ............................................................................ 3

Macau’s winning scorecard ................................................................ 4

Top performers ................................................................................ 20

Annualised average return of 20% to 2016 ...................................... 32

Best way to play Chinese consumption ............................................ 36

Company profiles

Galaxy ....................................... 43

Las Vegas Sands¹ ........................ 47

Melco Crown ............................... 51

MGM China ................................. 55

MGM Resorts¹ ............................. 59

Sands China ............................... 63

SJM ........................................... 67

Wynn Macau ............................... 71

Wynn Resorts¹ ............................ 75

¹ Covered by Credit Agricole Securities (USA) Inc. All prices quoted herein are as at close of business 8 November 2012, unless otherwise stated

Game for growth

Page 3: Buffet's Checklist on Macau Gaming

Executive summary Macau gaming

15 November 2012 [email protected] 3

Buffett's checklist After years of explosive growth, Macau’s gaming sector is on the cusp of a major transformation from which it will emerge as a solid yield play. Given gaming’s high-risk reputation, we are concerned that conservative investors may miss out on what we see as a Raining cash opportunity. Indeed, our analysis suggests that even Warren Buffett, the ultra-safe Sage of Omaha, would score Macau highly on his well-known investment checklist. Our top picks are Melco Crown, SJM, Wynn Macau and Las Vegas Sands.

Macau scores eight out of 10 on our Buffett-inspired scorecard, which draws on his key investment criteria. The gaming enclave has a straightforward business model with wide economic moats, excellent earnings visibility, high ROEs, robust balance sheets, disciplined capital management, strong free-cashflow generation and generous dividends. The sector also has a wide margin of safety on valuations, trading on a dividend of 5% relative to the market’s 3%.

We analyse nine gaming companies under our coverage individually to see how they fare. Most companies do well, but the better performers - Sands China, Wynn Macau, MGM China and SJM - pay high dividends and have heavier exposure to the mass market and nongaming, as well as lower capex requirements. A lack of dividends hurts Melco Crown and Galaxy, but they have the strongest potential growth. Note that these are not stocks that Buffett has purchased or plans to purchase. They are simply stocks that meet the criteria that Buffett has emphasised.

Like the market, we value Macau stocks on a sum-of-the-parts methodology, applying an EV/Ebitda multiple to earnings from existing operations and adding a discounted-cashflow-derived fair value for future projects. However, we believe a dividend-yield derived valuation would now be better, as growth investors leave the sector and yield investors look to take their place. The market will take some time to view the sector in a different light, as it will only happen after it is confident in dividend sustainability - we are not there yet. Using this alternative methodology, we value stocks on yield, which would result in an average four-year annualised return of 12-23% to 2016.

As detailed in our recent Still raining cash report, we believe the Macau gaming sector is the best way to gain exposure to the rising Chinese middle class. In light of slower top-line growth, we would own the sector for dividend yield and the gradual pricing in of Cotai projects. Overlaying our Buffett-style analysis with valuations supports our BUY ratings.

Buffett-style analysis Warren Buffett’s stock-picking criteria1 Our Macau scorecard 1 Is the business simple and understandable? 6 2 Is there an economic moat protecting the business? 9 3 Is management candid with shareholders? 8 4 Does the business have long track record of earnings growth? 5 5 Does the business have a consistent operating history? 8 6 What is the rate of "owner earnings"? 9 7 Is it rational with managing capital? 9 8 Is the focus on return on equity? 9 9 Does the business avoid excess debt? 9 10 Does the valuation offer a margin of safety? 8 Average score 8 1 The Warren Buffett Way, Robert Hagstrom; The New Buffettology, Mary Buffett and David Clark

Macau’s winning scorecard

Top performers

Annualised average return of 20% to 2016

Best way to play Chinese consumption

Expect an investor rotation from growth

to yield

Macau scores eight out of 10 on our Warren-Buffett-

inspired scorecard

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Section 1: Macau’s winning scorecard Macau gaming

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Macau’s winning scorecard The gaming sector has a very wide economic moat with only six operators

being granted licences. This greatly reduces competition inside Macau. External competition from around the region is also light, with few governments legalising full-scale casinos aside from Singapore.

Gaming companies generate about two-thirds of earnings from mass market and nongaming businesses, which is easy to understand given that casino mathematics ensure stable returns over time. Arguably, some parts of VIP play have proven to be more volatile but this is a smaller share of earnings.

The Macau government has implemented a limit on supply of gaming tables. Slow project approvals support the industry’s strong pricing power (minimum table bets, room rates and retail rents). Limited expansion has meant that revenue growth has slowed sharply as casino properties are running at full capacity. Yet, a stable cost environment allows for excellent medium-term earnings visibility. Under-investment has led to a huge swing in the industry’s financial position, from potential bankruptcy to massive cash piles.

Companies have been remarkably disciplined by focusing investments on core areas of expertise, ie, Macau casinos. Firms are returning excess cash to shareholders and we expect dividend payout ratios of 80-100% for four of the six companies.

The Macau gaming sector generates the highest returns among all sectors in Asia, with an estimated 12CL ROE of 33%.

Investment criteria 1. Is the business simple and understandable? Just as Buffett favours simple and understandable businesses, so do we. Macau gaming companies are straightforward with around two-thirds of earnings derived from casino, hotel and retail operations. VIP is less transparent and accounts for two-thirds of revenue, but only one-third of the industry Ebitda.

Figure 1

Macau gaming: Revenue and Ebitda breakdown by segment, 2012

Source: CLSA Asia-Pacific Markets

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Easy to understand

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Macau gaming should be a simple enough business

Macau scores eight out of 10 on our Warren-Buffett-

inspired scorecard

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Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 5

Figure 2

Ebitda breakdown by segment, 2012

Source: CLSA Asia-Pacific Markets

Casino operations Each casino game entails a different house advantage, with the average advantage for Baccarat of 1.24%, Blackjack of 2%, Roulette of 5.26%, Craps of 1.0% and Caribbean Stud of 5.47%. The casino theoretical win depends not only on the house advantage but also the player’s average bet size and average length of stay. So it is critical for the casino to keep the players playing. Calculation of the casino theoretical win can be summarised as following.

Theoretical win = Average bet x hours played x decisions per hour x house advantage (on the VIP side, this is the Baccarat).

Casino games are games of probability and the theoretical win could deviate from the actual win of the casino. Outcomes of the casino games can be represented by the normal distribution curve, in which the actual win/loss of a certain gaming table could be volatile depending on the luck factor.

Figure 3

Normal distribution curve

Source: CLSA Asia-Pacific Markets, NY State Education Department

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SJM WynnMacau

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Mass Non-gaming VIP(%)

Different house advantages for various

casino games

Calculation for theoretical win

Win/loss of a gaming table could be volatile

depending on luck factor

MGM Resorts, LVS and Sands China have the

highest exposure to mass gaming and nongaming

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Section 1: Macau’s winning scorecard Macau gaming

6 [email protected] 15 November 2012

Outcomes at the gaming tables could be volatile and thus it is important for casinos to manage volatility, which could be done in three major ways:

By increasing overall business volume. Based on the “law of large numbers”, as the number of bets per hand at any given level wager increases, the actual outcome will move closer to the expected outcome. To illustrate, we have compared the historic VIP win rate of the two Sands China casinos - Venetian Macao and Four Seasons Macao.

Historically, Venetian has benefitted from the huge amount of gaming volume running through the casinos which lowered win-rate volatility. While in Four Seasons, the amount of play is lower and thus results in a more volatile VIP-win rate. In the past nine quarters, standard deviation of the VIP-hold rates at Venetian was at 0.29% (versus 0.65% at Four Seasons).

Figure 4

VIP win rate

(%) 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Four Seasons Macao 3.07 3.08 1.55 3.90 2.25 2.90 2.61 2.83

Venetian Macao 3.36 3.05 2.99 2.69 3.46 2.66 2.95 2.93

Note: VIP win rate is defined as VIP net win divided by VIP rolling chip turnover; Source: CLSA Asia-Pacific Markets

Figure 5 Figure 6

VIP win rates Standard deviation of VIP win rates

Source: CLSA Asia-Pacific Markets

Reduce risk exposure. Casinos can limit their risk exposure by setting a maximum betting limit, which forces more hands to be played at any given bankroll.

Shifting or sharing risk. Revenue-share arrangements with Macau junket operators (at predetermined percentages of 40-45%) versus a rolling programme can also reduce earnings volatility.

The casinos have a fairly simple cost structure:

The gaming tax is the largest component at 39% of the gross gaming revenue. This is very high relative to other markets (eg, Singapore at 16-17%, Las Vegas at 7%) and we do not see a high risk of the tax increasing.

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Volatility can also be reduced by setting max.

bet and using revenue sharing commissions

Macau casinos have a simple cost structure

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Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 7

The second-largest cost component is the junket commission, which is 40-45% of the gross VIP revenue (not mass market revenue). There is agreed maximum commission cap of 1.25% and therefore we do not expect this to increase.

Other operating expenses include staff costs, utilities, advertising and promotion costs.

The mass market generates margins of about 40% while VIP is around 10% due the inclusion of junket commissions.

Figure 7

Mass market vs VIP margin

Source: CLSA Asia-Pacific Markets

Hotel operations Hotel operations are simple, with the company charging a fee for hotel-room usage. With the strong inflow of visitors into Macau, hotel operators have enjoyed high hotel occupancy of more than 90% and have been able to charge high hotel room rates of US$200-300 per night.

Figure 8

Macau hotels, 1H12

Hotel Occupancy rate (%) Average room rate (US$)

Altria 97.0 210

MGM Macau 97.3 270

Wynn Macau 90.7 321

Grand Lisboa 92.9 276

City of Dreams 90.0 181

The Venetian 90.1 242

Sands Macao 93.5 247

Four Seasons 77.8 359 Source: CLSA Asia-Pacific Markets

HK$1.11

HK$1.74

HK$1.25

HK$0.49

HK$1.11

Win rate = 2.85%To operator 61%

Gaming tax 39%

Operating expenses

Ebitda 40%

Win rate = 2.85%To operator

Junket commission

Operating expenses

Ebitda 10%

Gaming tax 39%

Mass market

VIP

HK$100 HK$2.85

HK$1.14

HK$0.6

HK$100 HK$2.85

HK$0.29

HK$0.2

Ebitda margins are much wider in the mass market

gaming segment

Most hotels have occupancy rates

over 90%

Page 8: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

8 [email protected] 15 November 2012

Retail operations Some of the major Macau casinos such as Wynn Macau, Four Seasons Macao, Venetian Macao and City of Dreams have large retail shopping areas in their integrated resorts. The retail segment generates revenue by charging the tenants fixed rent or turnover-based rent. In 2011, Sands China’s retail properties generated HK$12bn in retail sales and HK$1.3bn in rental income, which is largely in line with what Times Square, a premium shopping mall in Hong Kong, generates.

Figure 9

Sands China retail properties: Valuation Sands China retail

properties Harbour City Time Square

2011 retail sales (HK$b)¹ 11.8 25.4 10.0 Leasable area (sf)² 608,450 974,000 468,000 2011 annual retail sales per sf (HK$) 19,474 26,052 21,291 2011 annual rental income (HK$m) 1,318 3,248 1,124 2011 annual rental income per sf (HK$) 2,165 3,335 2,402 ¹ 2011 Retail sales at Harbour City and Time Square are calculated by assuming 25% retail sales growth, which is in line with the overall market. ² Assume 50-60% of the GFA is leasable area; ³ NAV of Harbour City and Time Square are based on property team estimate; Source: CLSA Asia-Pacific Markets; Wharf 2010 annual report

VIP and other elements VIP gaming is perceived as the black box of the Macau gaming market, with the junkets assuming a key role in the gaming operations. The key reason for the existence of the VIP gaming market is because of the currency restrictions that the Chinese Central government imposes, limiting currency movement into and out of the country. With such restrictions, most VIP players have to rely on junket credit to fund their gaming expenditure. China also lacks a robust credit database, which prohibits casinos to directly extend credit to players and thus creates opportunities for the junkets.

Some perceive Macau as a sin city and a place for corrupt government officials to launder money. But in fact, over the past decade, we have not had any gaming company prosecuted for any crimes or violating the anti-money laundering control procedures. In fact, some of the world’s most prestigious financial institutions have been charged with greater and more frequent financial crimes than the global gaming companies.

Over the past 10 years, the number of criminal offences in Macau has remained low. In 2011, 12,500 crimes were recorded, representing a crime rate of only 2.5%.

Figure 10

Macau: No. of crimes cases

Source: CLSA Asia-Pacific Markets

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12,500 crimes recorded in 2011, representing a

crime rate of 2.5%

VIP market existed due to Chinese government’s

policy to restrict capital flow in and out of the

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Sands retail assets vs top-tier shopping

malls in Hong Kong

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Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 9

Comparing Macau’s crime rate with that of the major cities in the USA, Macau at 2.5%, is extremely low. Indeed, it is the lowest among all major US cities and is significantly lower than the 4% in Las Vegas.

Figure 11

Crime rates

Source: CLSA Asia-Pacific Markets, FBI, HK Police

2. Is there an economic moat protecting the business? . . . [the] most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.

Warren Buffett

Macau gaming operators are protected by a strong moat, with only six gaming licences issued there. We understand that the government has no intention of issuing additional permits which creates a very favorable industry environment for incumbents by installing a strong entry barrier. The fact that only six gaming licences have been issued. Government’s determination to tame table supply growth and to slow the pace of new project approval are also key factors in driving gaming companies’ strong earnings and cashflows.

Further, Macau casino operators do not face much external competition over the next decade, Macau and Singapore will remain the only two major gaming destinations in the region, serving billions of Asian gamers. Japan could be the next meaningful market but will most likely serve the local population (see our Asia’s wonderland report). Meanwhile, it is unlikely that the Chinese government will legalise gaming anywhere within the country, including island destinations such as Hainan. While Hong Kong would be an enormous market, we believe the probability of casinos being licensed there is less than 1%.

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(%)

. . . and limited external competition

Crime rate is low in Macau

Limited internal competition . . .

Page 10: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

10 [email protected] 15 November 2012

Figure 12

Macau gaming: Porter’s five-forces analysis

Source: CLSA Asia-Pacific Markets

3. Is management candid with shareholders? With a long-term investment horizon, Buffett favours companies that are candid with shareholders. In Macau’s gaming industry, analysts and investors generally enjoy excellent access to CEOs and other senior management over a period of time. Companies tend to host regular conference calls, attend investor conferences, host property tours and have strong investor-relations teams. Being Hong-Kong based, one of our few complaints is that Las Vegas Sands and Wynn host their conference calls at 4:30am Hong Kong time, which makes for a long day!

Since we started to cover Macau companies in 2005, the Macau gaming names have been fairly candid with analysts and shareholders. Companies update investors on their recent operational performance on a quarterly basis. Hong Kong-listed companies are obliged only to semi-annual reporting, but they still voluntarily report quarterly numbers. Quarterly earnings contain detailed analysis on the financial performance broken down into individual casino properties and by different business segments. Financial disclosure is world class in Macau, especially compared to some other Asian gaming companies such as Genting Singapore, which is weak on disclosure.

Industry competition - MediumThere are competition among the sixcasino operators and those which fail to bring new products to the market will be prone to market-share loss.

Threat of new entrants - LowVery unlikely to have another company entering the Macau gaming sector.

Bargaining power of suppliers - MediumSuppliers of gaming tables /machines do not have strong bargaining power, but labour is currently in shortage and employee s have strong bargaining power.

Bargaining power of customers - LowMacau is the only gaming city in China. Supply shortage endows casino operator with strong bargaining power.

Threat of substitutes - LowOnline gaming could potentially be a substitute to casino gaming, but online gaming is still illegal in most parts of Asia.

Since covering Macau companies in 2005, we believe they have been

honest with analysts and shareholders

Page 11: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 11

Figure 13

Key operational and financial metrics included in quarterly release

Revenue (broken down by individual casino property)

Ebitda (broken down by individual casino property)

Operating profit

Net profit

Rolling chip volume (broken down by individual casino property)

Rolling chip win rate (broken down by individual casino property)

Non-rolling chip volume (broken down by individual casino property)

Non-rolling chip win rate (broken down by individual casino property)

Slot handle (broken down by individual casino property)

Slot hold rate (broken down by individual casino property)

Number of tables in operation (broken down by individual casino property)

Number of slots in operation (broken down by individual casino property)

Hotel occupancy (broken down by individual hotel)

Hotel room rate (broken down by individual hotel)

Revenue per available room (broken down by individual hotel)

Source: CLSA Asia-Pacific Markets

4. Does the business have long track record of earnings growth? Buffett prefers companies with a long track record of delivering earnings growth. The Macau casino operators do not score well in this area, as most only have five years of operating history. US operators, such as Wynn Resorts and Las Vegas Sands, have a longer operating track record, but their earnings, historically, has been volatile due to high gearing levels during the financial crisis. This is unlikely to be repeated in the Macau gaming sector, with many companies in a net-cash position.

We expect Macau to deliver more consistent earnings growth as VIP gaming revenue moderates on a high base. With a slowing VIP segment, we are also seeing increased earnings exposure to the more robust mass-market segment, which will help lower gaming companies’ earnings volatility.

Figure 14

Macau gaming revenue/Ebitda growth

Source: CLSA Asia-Pacific Markets

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A list of key operational metrics that are disclosed

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Macau casinos do not score well on long track

record of earnings growth

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Section 1: Macau’s winning scorecard Macau gaming

12 [email protected] 15 November 2012

5. Does the business have a consistent operating history? Buffett dislikes companies that expand beyond their comfort zone and favours those with a consistent operating history. We note that the Macau gaming operators have, over past years, been very focused on their expertise, which is to develop gaming properties in Macau or in Asia. This is not true for others such as the Genting Group in Malaysia, which have been very aggressive in other industries and other markets.

6. High ‘owner earnings’ and lack of need to reinvest Buffett places significant emphasis on cashflow-generating capability and regards it as the best metric to evaluate the quality of the company. He favours firms that generate high ‘owner earnings’, also known as free cashflow. We share the same view and have been bullish on Macau gaming because of its strong free cashflow-generating capability. We were the first broker to discuss this theme in our Raining cash report in September 2011. We expect the sector to deliver US$3-4bn of free cashflow in 2012-14, representing 4-5% FCF yield.

Figure 15

Macau gaming: Free cashflow

Source: CLSA Asia-Pacific Markets

Buffett places huge emphasis on cash earnings generated by companies and gives preference to those where minimal capex is required to maintain competency. The Macau government has been very helpful by implementing a table cap of 5,500 tables to March 2013 and allowing about 3-5% growth thereafter with around 2,000 additional tables by the end of 2022.

Figure 16

Macau gaming tables

Source: CLSA Asia-Pacific Markets

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15 November 2012 [email protected] 13

Comparing the Macau gaming sector with other sectors in Asia, the capex-to-sales ratio is very low, allowing most of the earnings to flow back to company shareholders.

Figure 17

Asia capex as share of sales, 2009-11 average

Source: CLSA Asia-Pacific Markets

Over the past five years, casino operators have invested US$24bn in the Las Vegas gaming market, whose revenue is likely to reach US$6bn in 2012 and remain flat for some time. In Macau, the casino operators have invested US$18bn in the past five years, with expected gaming revenue of US$39bn in 2012. In other words, Las Vegas has invested 4x the size of the gaming market versus Macau which has invested only 0.5x the revenue level.

For casino properties that have been completed, maintenance caper required is also minimal. Not until recently have we seen a slight uptick in maintenance capes with high capacity utilisation and slightly intensifying competition. But relative to the Ebitda generated by the casino property, maintenance capex required is still minimal.

Figure 18

Investments in gaming sectors

Source: DICJ, company data

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Section 1: Macau’s winning scorecard Macau gaming

14 [email protected] 15 November 2012

Looking forward to the next round of projects, the capex requirement will not be too onerous. Macau’s gaming companies plan to spend US$2.0-3.5bn on their next Cotai projects, which looks like a huge figure on the surface. But the capex spend will span three to four years, implying that the average annual capex on a new project is around US$0.5-1.0bn. Companies also normally fund 50-75% of the Cotai expansion by debt financing, which implies the actual cashflow strain to the company would be even less.

Figure 19

Cotai capex

(US$m) Total capex Avg annual capex

Avg annual equity

investment

Adj Ebitda (2013)

Annual equity invest’t as % of

13CL Ebitda The Parisian (Sands Site 3) 3,000 750 300 2,471 12 Wynn Cotai 3,500 875 350 1,072 33 MGM Cotai 2,500 625 250 673 37 Macau Studio City 2,000 500 200 943 21 SJM Cotai 2,000 500 200 1,064 19 Galaxy Macau Phase II 2,000 500 200 1,355 15 Note: Assume the Cotai projects to take 4 years to build and also to assume 60% of the Cotai capex is to be funded by debt and 40% by equity; Source: CLSA Asia-Pacific Markets

7. Rational with managing capital Buffett praises companies which return excess cash to investors. Macau gaming operators score well in this aspect as they return cash generously to investors by means of dividends. In 2011, SJM, MGM China, Wynn Macau and Sands China maintained a dividend payout ratio of 80-100%, representing US$3bn of dividends returned to shareholders.

Figure 20

Dividend-payout ratio

(%) 2009 2010 2011 12CL 13CL 14CL MGM Resorts 0 0 0 0 0 0 Las Vegas Sands 0 0 0 52 47 54 Wynn Resorts 2,353 658 133 188 133 114 Sands China 0 0 107 100 80 80 Wynn Macau 0 89 106 80 80 80 Melco Crown 0 0 0 0 0 0 Galaxy 0 0 0 0 0 0 SJM 42 54 76 80 80 80 MGM China 0 0 95 80 80 80 Source: CLSA Asia-Pacific Markets

The strong dividend payout by gaming companies has been underpinned by three key factors.

First, the limited supply and strong demand for gaming has shaped a favorable industry dynamics for casino operators, allowing them to face minimal internal and external competition and to readily convert revenue growth into profit growth.

Second, capex requirement of the gaming companies has been low, which allowed earnings to be converted into free cashflows.

Lastly, senior management of the gaming companies has a very strong appetite for dividends, which allowed free cashflows to be distributed to shareholders as dividends.

Strong dividend payout underpinned by three

key factors

Macau casinos plan to spend US$2.0-3.5bn in

the next round of Cotai projects

Macau gaming operators generously return cash to

investors by means of dividends

Gearing level was much higher in 2007-08

Page 15: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 15

Figure 21

Dividend flow

Source: CLSA Asia-Pacific Markets

While Sheldon Adelson and Steve Wynn have had disagreements in the past, they seem to agree on one thing - to pay high dividends - which they have made clear in recent 3Q12 earnings conference calls.

We believe that companies should make money for their shareholders. That's the reason we exist. And to create safe, steady, secure jobs for the people that make the enterprise breathe: our staff. As long as we keep our staff healthy and safe we'd like to give the shareholders of this company the maximum benefit possible from the company's operations. And I say that because so many of us on the board are shareholders, including key members of management have most of their net worth invested in the company's stock. So we think like shareholders.

Steve Wynn

I'm focused on delivering growth and maximising shareholder value. I think our company assumes these goals in four key areas: one, organic growth in existing properties; two, development growth that's within our reach today; three, development of integrated reserve locations new to Las Vegas Sands; and four, return of capital to shareholders through growing annual dividends. It gives me great pleasure to announce that our Board of Directors has approved an increase of our recurring quarterly dividend in 2013 by 40% to US$0.35 per share per quarter or US$1.40 per year. Let me add that we have every intention of increasing the dividend in the years ahead as our business and cash flows continue to grow. I can only say one thing about that, Go Dividend.

Sheldon Adelson

Favourable industrydynamics allowingcompanies to convert revenue growth into profit growth

Low capex requirementallowing companies to convert profits into free cashflow

Management's strongappetite for dividends allowsfree cashflows to be convertedinto dividend payments

Revenue

Net profit

Free cashflow

Dividends

Page 16: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

16 [email protected] 15 November 2012

8. Generates high return on equity As a value investor, Buffett likes companies that generate high ROE. The Macau gaming sector scores well on this front, with its low capex requirement allowing high ROE. In 2012, we expect the Macau gaming sector to generate 33% ROE, which is the highest among all the sectors in Asia.

Figure 22

Asia: Return on equity, 2012

Source: CLSA Asia-Pacific Markets

The high return on equity of the Macau gaming sector has been underpinned by the respectable investment return generated by Macau casinos. In 2012, we expect these casinos to generate an investment return of 30-130%.

Figure 23

Casinos: ROIC, 2012

Note: Casinos in Macau are highlighted in yellow, while casinos in Singapore and Las Vegas are highlighted in Blue; Source: CLSA Asia-Pacific Markets

0 5 10 15 20 25 30 35

PowerProperty

TransportInfrastructure

MediaInsurance

ConglomeratesCapital goods

MaterialsPetro/Chems

TelecomsFinancial services

ConsumerTechnology

Hotels & LeisureHealthcare

AutosInternet

Macau Gaming

(%)

0 20 40 60 80 100 120 140 160

Wynn Las VegasResorts World Sentosa

Venetian Las Vegas (including Palazzo)Mariana Bay Sands

AltiraFour Seasons

City of DreamsGalaxy Macau

Venetian MacauMGM Macau

Wynn MacauGrand Lisboa

StarworldSands Macao

(%)

Sands Macao and Starworld generate

over 100% ROIC

Casinos in Macau generated 30-130%

ROIC in 2012

In 2012, we expect Macau to generate 33% ROE,

which is the highest among all Asian sectors

Page 17: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 17

9. Avoids excess debt Buffett prefers a prudent management style and would favour companies that avoid excess debt. The Macau gaming sector is highly rich in cash. By 2012, we expect the sector to have a net debt/(cash) as a share of equity ratio of 1%, with three out of the six Macau gaming operators in a net-cash position.

Figure 24

Asia: Net debt/(cash) as a share of equity, 12CL

Source: CLSA Asia-Pacific Markets

However, the situation only changed recently with some concerns of bankruptcy particularly at the US parent company level only a few years ago.

Las Vegas Sands was badly hit during the financial crisis. In 2008-09, the company had just opened the Venetian Macao and Four Seasons Macao, while Sands Cotai Central and Marina Bay Sands still remain under construction. The earnings base of the company was much smaller then, while net gearing was sky high at 300% in 2007 as project loans were yet to be repaid. With the low income base and the high interest cost, LVS recorded two consecutive years of net losses in 2008-09. The share price of Las Vegas Sands was down 97% from the peak and there were worries about the company going bankrupt.

10. Current valuation offers margin of safety Buffett also stresses the importance of a margin of safety, which is the discount to fair value that the stock is currently offering. We understand the importance of having a margin of safety and we do not rate a stock a ‘BUY’ unless we see more than 20% upside to our fair-value estimate of the stock.

You leave yourself an enormous margin of safety. You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges.

Warren Buffett

(40) (20) 0 20 40 60 80 100

InternetTechnology

Macau GamingHealthcareInsurance

Hotels & LeisureMedia

Capital goodsConsumer

PropertyAutos

TelecomsPetro/Chems

MaterialsConglomerates

TransportInfrastructure

Power

(62.9)(%)

102.8

The Macau gaming sector is highly rich in cash

LVS share price was down 97% during the

financial crisis

Margin of safety is the discount to fair value

that the stock is currently offering

Page 18: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

18 [email protected] 15 November 2012

Warren Buffett defines fair value as the discounted value of the cash that can be taken out of a business during its remaining life. That is different from our sum-of-the-parts’ valuation methodology, in which we value the existing operations on EV/Ebitda and add an additional option value for the upcoming Cotai project. Historically, EV/Ebitda is used because the gaming companies incur a large amount of pre-opening cost, noncash cost (depreciation and amortisation) and interest cost which resulted in a low net profit figure. That is no longer true, with most of the casino properties fully ramped up and companies generating strong net profits.

We value the Macau gaming companies based on 10-15x EV/Ebitda. We give preference to stocks that have: short-term earnings growth; higher exposure to more defensive mass-market and non-gaming segments; a Cotai or other growth story; and pay dividends. We score the six Macau operators on these metrics, with Sands China earning 14 ticks, Wynn Macau 11 and SJM 11.

Figure 25

Macau gaming: Stock selection scorecard

Earnings growth

Mass-market exposure

Additional projects

Dividend Ticks Target multiple

(x)

Sands China √√√√ √√√√ √√√ √√√ 14 15

Wynn Macau √ √√ √√√√ √√√√ 11 13

SJM √ √√√ √√√ √√√√ 11 11

MGM China √ √√ √√√√ √√√√ 11 11

Galaxy √√√ √ √√√√ - 8 11

Melco Crown √√ √√√ √√√ - 8 10

Source: CLSA Asia-Pacific Markets

Even if we were to abide to free cashflows and dividends that Warren Buffett pays most focus to, Macau is still undervalued with their expected free cashflow yield at 4-5% in 2012-13 (versus Asia consumer of 2-3%) and dividend yield at 4-5% (versus Asia consumer of 3%).

Figure 26

Valuation comparison

PE (x) FCF yield (%) Dividend yield (%)

2012 2013 2012 2013 2012 2013

Macau Gaming 19.4 16.3 4.8 4.1 4.3 4.9

China Consumer 25.7 19.9 0.7 3.0 1.8 2.1

Asia Consumer 19.2 16.9 1.8 3.3 2.9 3.3

Source: CLSA Asia-Pacific Markets

If we were to apply a discounted cashflow (DCF) valuation to the Macau gaming companies, we still see them as attractively valued. We apply conservative cashflow growth estimate of 5% pa to forecast the free-cashflow generation of the existing properties operated by the gaming companies. We also apply a 10% WACC and a terminal growth rate of 2% to derive the fair value of the existing casino properties.

Trading at discount to the consumer sector

Stock selection score card

We value Macau gaming companies on EV/Ebitda

Page 19: Buffet's Checklist on Macau Gaming

Section 1: Macau’s winning scorecard Macau gaming

15 November 2012 [email protected] 19

Figure 27

DCF valuation for existing properties

Wynn Macau

SJM MGM China

Galaxy Melco Crown

Sands China

Estimated cashflow growth (2014-2023) (%) 5 5 5 5 5 5

Estimated maintenance capex growth (2014-2023) (%) 5 5 5 5 5 5

WACC (%) 10 10 10 10 10 10

Terminal growth rate (%) 2 2 2 2 2 2

DCF fair value for existing operations 26.0 26.9 19.6 39.1 24.4 36.9

Current share price 22.7 17.2 13.7 27.4 15.0 30.5

% discount/(premium) to fair value for existing operations 15 57 43 43 63 21

Source: CLSA Asia-Pacific Markets

At current share prices, the Macau gaming operators are still trading at a 15-63% discount to the fair value of their existing properties, not to mention that there is still upside potential to the company’s fair value as the upcoming Cotai project start operation. We believe the valuations of the Macau gaming companies are still attractive at current levels and offer investors a reasonable margin of safety.

Figure 28

Macau gaming: % discount/(premium) to fair value for existing properties

Source: CLSA Asia-Pacific Markets

0 10 20 30 40 50 60 70

Wynn Macau

Sands China

MGM China

Galaxy

SJM

Melco Crown

(%)

Trading at 15-63% discount to fair value of

existing operations

All six companies offer reasonable margin of safety

Page 20: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

20 [email protected] 15 November 2012

Top performers We analyse nine Macau-related gaming companies under our coverage to see how they fare according to Buffett’s investment criteria. Most score well on the criteria but the better performers are those with heavier exposure to mass market and non-gaming, lower capex requirements and pay high dividends. Wynn Macau, MGM China and SJM score well. A lack of dividends hurts Melco Crown and Galaxy, but they also have better growth potential.

Figure 29

Our Buffett-style scorecard Sands

China Wynn

Macau Galaxy SJM MGM

China Melco

Crown LVS Wynn

Resorts MGM

Resorts 1 Simple and understandable business 8.0 7.0 6.0 7.0 7.0 7.5 8.0 7.0 8.0 2 Has an economic moat protecting the business 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 6.0 3 Candid with shareholders 8.0 8.0 7.0 7.0 8.0 8.0 8.0 8.0 8.0

4 Long track record of delivering earnings growth 6.0 6.0 5.0 6.0 5.0 5.0 5.0 5.0 4.0 5 Consistent operating history 9.0 9.0 9.0 9.0 9.0 8.0 6.0 6.0 6.0

6 Generates high ‘owner earnings’; lack of need to reinvest 9.0 8.0 8.0 9.0 9.0 8.0 8.0 8.0 9.0 7 Rational with managing capital 9.0 9.0 8.0 9.0 9.0 8.0 8.0 9.0 7.0

8 Generates high ‘return on equity’ 8.0 9.0 8.0 8.0 8.0 6.0 7.0 9.0 4.0 9 Avoids excess debt 8.0 9.0 8.0 9.0 9.0 8.0 6.0 6.0 5.0

10 Current valuation offers margin of safety 8.0 8.0 8.0 9.0 9.0 9.0 9.0 7.0 9.0 Average score 8.5 8.5 7.5 8.5 8.5 7.5 7.5 7.5 6.5

Source: CLSA Asia-Pacific Markets

1. Simple and understandable business When ranking the companies under the “simplicity” of the business model, we assess according to the earnings contribution from mass market and non-gaming (simple) versus VIP (less transparent). As the VIP segment is primarily specific to Macau, thus the US-listed companies with exposure in the USA, Singapore and others markets have the lowest exposure to VIP. This is especially true for MGM Resorts, which has a significant business in Las Vegas, and Las Vegas Sands, which generates close to half its Ebitda from Singapore and some from Vegas and Bethlehem. Among the Hong-Kong listed names, Sands China has the lowest exposure to VIP gaming while Galaxy has the highest.

Figure 30

Ebitda breakdown by segment (2012)

Source: CLSA Asia-Pacific Markets

Top scorers: MGM Resorts, Las Vegas Sands and Sands China

5462 63

4656 57 54

44 41

33 18 14

2110

3 3 138

1320 23

33 34 41 43 4451

0102030405060708090

100

MGMResorts

LasVegasSands

SandsChina

WynnResorts

MelcoCrown

MGMChina

SJM WynnMacau

Galaxy

Mass Non-gaming VIP(%)

Of all the gaming companies, SJM and

MGM China are the highest scorers

MGM Resorts, LVS and Sands China have the

highest exposure to mass gaming and non-gaming

Macau gaming should be a simple-enough business

Page 21: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

15 November 2012 [email protected] 21

2. Economic moats protecting the business To Buffett, the most important thing is to figure out how big a moat there is around the business. The Macau gaming operators are protected by a strong moat, as there are only six gaming licences issued in Macau. The table cap implemented by the government also limits table supply growth and keeps industry competition at bay.

As was detailed in The moat report, the definition of an “economic moat” is simple: having a durable competitive advantage which over time will lead to return ratios that can remain above cost of capital. The return ratios we focus on are ROE and ROIC. Businesses with ROE and/or ROIC above their relevant cost of capital are creating positive EVA®, ie, economic value added. High levels of profitability generally attract competition which drives down the returns. However, companies with a franchise have a durable edge to ward off competitors and thus are able to maintain high return ratios.

We believe economic value added (EVA®) is a good proxy to size of the economic moat protecting the business. Among the peer group, Sands China is the company with the widest moat. We expect Sands China to generate an economic value added of US$1.6bn in 2013.

Figure 31

Economic value added, 2013

Source: CLSA Asia-Pacific Markets

Top scorers: Sands China

3. Candid with shareholders Generally, all the companies are fairly proactive with meeting with analysts and investors. Among Chairmen and CEOs, Sheldon Adelson (Sands), Steve Wynn (Wynn), Jim Murren (MGM), Lawrence Ho (Melco Crown) have been best while we rarely hear from Galaxy Deputy Chairman, Francis Lui.

Gaming companies have been weaker at guiding on the approval timing of the upcoming Cotai projects. The Macau gaming operators were targeting to receive the Cotai approval around a year ago, but most of them did not receive it recently. To be fair, the poor guidance on the approval timing of the Cotai project rests partly on the government’s shoulders.

(400) 0 400 800 1,200 1,600

MGM Resorts

Melco Crown

Las Vegas Sands

MGM China

Galaxy

SJM

Wynn Resorts

Wynn Macau

Sands China

(US$m)(1,543)

The Macau gaming operators are protected

by a strong moat, as there are only six gaming

licenses issued in Macau

Sands China generate the highest EVA®

Companies are fairly proactive with meeting

with analysts and investors

Page 22: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

22 [email protected] 15 November 2012

The gaming companies all offer in-depth financial disclosure, but if one were to differentiate among the industry group, Las Vegas Sands, Sands China, Wynn Macau and Wynn Resorts offer the most detailed financial breakdown in their quarterly release, while SJM is weaker side in terms of disclosure of financials.

Top scorers: Las Vegas Sands, Sands China, Wynn Macau and Wynn Resorts

4. Long track record of earnings growth Macau has liberalised its gaming market in 2002, while Singapore issued the country’s first gaming concession in 2006. Most of the region’s flagship casinos were not opened until 2007. Before the opening, the earnings base of the gaming companies was much smaller and could be loss making, given the high interest cost, non-cash cost (like depreciation), pre-opening cost that need to be incurred before the full ramp up of the casino resort.

Figure 32

Casinos opening date Casino Opening year Sands Macao 2004 Wynn Macau 2006 Starworld 2006 Grand Lisboa 2007 MGM Macau 2007 Altira 2007 Venetian 2007 Four Seasons 2008 Ponte 16 2008 City of Dreams 2009 L’Arc 2009 Oceanus 2009 Wynn Encore 2010 Resorts World Sentosa 2010 Marina Bay Sands 2010 Galaxy Macau 2011 Sands Cotai Central 2012 Source: CLSA Asia-Pacific Markets

To identify gaming companies with the longest track record of earnings growth, we look at Ebitda generated by the casinos over the past 12 years. On an Ebitda basis, Las Vegas Sands stood out as the company with the longest track record of earnings growth, with its consecutive growth trend since 2002. Sands China has also been consistently expanding its Ebitda since 2006, when the company financials become publicly available.

Figure 33

Casino Ebitda Company Code Ebitda (US$m) Years of

consecutive earnings growth

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12CL

MGM Resorts MGM US 1,133 1,167 1,117 1,340 1,943 2,384 2,440 1,882 1,107 930 1,557 1,838 2 Las Vegas Sands LVS US 171 156 261 462 665 831 875 1,062 1,086 2,229 3,532 4,044 10 Wynn Resorts WYNN US na na na na 211 391 779 737 746 1,162 1,635 1,547 3 Sands China 1928 HK na na na na na 457 512 671 798 1,189 1,548 1,880 6 Wynn Macau 1128 HK na na na na na 44 316 405 418 758 1,017 991 5 Melco Crown MPEL US na na na na na na (37) 157 56 430 810 877 3 Galaxy 27 HK na na na na na na 188 70 150 288 625 1,264 4 SJM 880 HK na na na na na na 271 204 293 624 853 965 4 MGM China 2282 HK na na na na na na - 111 149 361 611 657 4 Source: CLSA Asia-Pacific Markets, company data

On Ebitda basis, Sands China and LVS has the longest track record of

earnings growth

The Singapore casinos were only opened in 2010

Page 23: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

15 November 2012 [email protected] 23

In addition to the low earnings base, the gaming companies’ net gearing was also much higher, as they rely on project loan or bank credit facilities to fund construction of the casino. Net gearing of the gaming companies declined rapidly post opening, with Las Vegas Sands net gearing falling form 297% in 2007 to an estimated of 53% in 2012, while Wynn Macau, SJM and MGM China has moved from a net debt position in 2008 to net cash position in 2012.

Figure 34

Net debt to equity ratio (%) 2006 2007 2008 2009 2010 2011 12CL MGM Resorts 342 190 351 326 413 126 132 Las Vegas Sands 177 297 157 83 84 65 53 Wynn Resorts 105 127 218 64 103 120 na Sands China 130 239 258 52 48 17 29 Wynn Macau (27) (21) 736 74 26 (11) (22) Melco Crown na (9) 30 63 55 37 11 Galaxy na (9) 9 28 53 39 6 SJM na (16) 13 (1) (34) (61) (52) MGM China na na 1,199 1,888 268 (30) (32) Source: CLSA Asia-Pacific Markets

The earnings track record of the gaming companies is weaker on net profit basis. Gaming companies’ gearing level has historically been quite high with many of the major integrated resorts under construction including projects in Macau, Singapore (eg Marina Bay Sands), and Las Vegas (eg MGM’s CityCentre). Most of the gaming companies have a much lower earnings base, with net profit significantly impacted by the high pre-opening and interest cost. Sands China has the longest track record of earnings growth with its net profit on consecutive growth for five years. Wynn Macau and SJM came in second by growing their net profit continuously for four years in a row.

Figure 35

Casino net profit Company Code Net profit (US$m) Years of

consecutive earnings growth

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12CL

MGM Resorts MGM US 170 292 244 412 443 648 1,584 (855) (1,292) (1,437) 3,115 (536) na Las Vegas Sands LVS US 8 (12) 67 495 284 442 117 (189) (540) 407 1,270 1,779 2 Wynn Resorts WYNN US na na na na (91) 629 196 210 21 160 613 528 2 Sands China 1928 HK na na na na na 376 196 174 216 678 1,119 1,219 4 Wynn Macau 1128 HK na na na na na 758 178 265 267 571 760 829 5 Melco Crown MPEL US na na na na na na (178) (2) (308) (11) 292 395 1 Galaxy 27 HK na na na na na na (60) (1,470) 68 233 388 940 3 SJM 880 HK na na na na na na 198 103 139 459 685 833 4 MGM China 2282 HK na na na na na na na (38) (22) 202 423 541 2 Source: CLSA Asia-Pacific Markets, company data

Top scorers: Wynn Macau, Sands China and SJM

5. Consistent operating history We assess each company one by one. Sheldon Adelson (Chairman and CEO of Las Vegas Sands) founded the company in 1988 after having successfully founded the computer trade show, Comdex, in 1979. Sheldon opened his first casino resort - Venetian Las Vegas in 1999, which turned out to be a huge success. Sheldon then brought his vision to Macau, where he was awarded a casino concession in 2002. He soon understood the enormous potential for gaming in Asia when the Sands Macao yielded over 100% investment return in its first year of operations in 2004. Sheldon then took on ambitious development plans in Asia by constructing Venetian, Four Seasons and Sands

Sands China, Wynn Macau and SJM have the longest

track record of net profit growth

Las Vegas Sands opened its first casino in LV in 1999 and moved into

Asia in 2004

Gearing level was much higher in 2007-08

Page 24: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

24 [email protected] 15 November 2012

Cotai Central on the Cotai Strip and also to develop Marina Bay Sands in Singapore. The financial crisis has impacted the development timeline of these projects, but they were all eventually opened in 2007-12 and have all turned out to be huge success, yielding investment returns in excess of 20%.

Steve Wynn, founder of Wynn Resorts, designed and built some of the most famous properties in Las Vegas including The Mirage, Bellagio, Treasure Island, and Golden Nugget. When Steve’s control of Mirage Resorts was wrestled away by MGM, Steve immediately started his next venture, Wynn Resorts, by buying Desert Inn on the Las Vegas Strip and constructed Wynn Las Vegas (US$2.7bn), the most expensive casino ever built up until the construction of MGM’s CityCenter (US$9bn). Given Steve’s strong track record in the US, the Macau government offered Steve Wynn a concession in Macau and Steve Wynn opened the Wynn Macau in 2006. After the split between Las Vegas Sands and Galaxy that resulted in the creation of a sub-concession, Steve Wynn sold his sub-concession to Melco for US$900m.

MGM was first founded by Kirk Kerkorian in the 1960s as a casino owner and operator. Through a series of mergers and acquisitions (Mirage Resorts in 2000 and Mandalay in 2004), the company controlled roughly one-quarter of gaming revenues on the Las Vegas Strip and owned operations across the US including Mississippi, Atlantic City (50% of Borgata), and Michigan. In 2005, in partnership with Pansy Ho (daughter of Stanley Ho, Chairman of SJM), MGM bought the sub-concession from SJM for US$200m to begin construction of MGM Grand Macau which opened in 2007.

When in 2002, Caesars missed the bid for a concession in Macau, the company was offered another chance to buy a stake into Macau. In 2005, Caesars Entertainment was the largest gaming company in the world (US$10bn in revenues and nearly 50 casino properties) at the time when Wynn offered to sell Caesars its sub-concession for US$900m (the only remaining sub-concession after MGM and Pansy bought SJM’s sub-concession for US$200m). However, Caesars felt the US$900m price tag was too high and ultimately allowed Melco to acquire the sub-concession. Quickly realizing its mistake, the company reportedly spent US$580m to acquire a golf course on Macau’s Cotai Strip in hopes of obtaining a casino license later on. However, the company announced in October 2012 that the Macau government has said they will not be issuing any new licenses to US companies, formally ending Caesars bid in Macau.

Unlike the parentco, we expect the Macau subsidiary of the US gaming companies to have a very consistent business operations, as they are bounded by their mandate to focus only on the Greater China region, while the parent company (ie, Las Vegas Sands, Wynn Resorts and MGM Resorts) will be the investment vehicle to carry out overseas expansion. With Hong Kong and China highly unlikely to legalize gaming, the country that the Macau gaming companies could possibly expand into would be Taiwan.

For the local Macau gaming operators (like SJM, Galaxy and Melco crown), they are not bounded by a business mandate and can expand overseas if any attractive investment opportunities prevail. In fact, Melco Crown has recently announced its plans to expand into the Philippines to develop Belle Grande Manila jointly with Belle Corp. But for SJM and Galaxy, we believe the chance of them winning a gaming concession in overseas location is low and therefore is more likely to be focusing on Macau in the future.

Steve Wynn, the designer of one of the best casinos

in the world, opened its first Asian casino in 2006

MGM, with the long heritage in Las Vegas,

opened MGM Macau in 2007

Caesars missed the boat

Macau subsidiary should have very consistent business operations

SJM and Galaxy are unlikely to divest out of Macau . . .

Page 25: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

15 November 2012 [email protected] 25

Figure 36

Asia/USA gaming: Business operations by location

Sands China

Wynn Macau

Galaxy SJM MGM China

Melco Crown

LVS Wynn Resorts

MGM Resorts

Macau √ √ √ √ √ √ √ √ √

HK/China × × × × × × × × ×

Taiwan O O × × O O × × ×

Singapore × × × × × × √ × ×

Philippines × × × × × √ √ √ √

Other Asia × × × × × √ √ √ √

United States × × × × × × √ √ √

Americas (ex-USA) × × × × × × √ √ √

Europe × × × × × × √ √ √ Note: Tick mark represents markets which the company is already operating in or is highly likely to be operating in, circle mark represents market which the company could potentially expand into, while cross mark represents markets which the company is highly unlikely to expand into; Source: CLSA Asia-Pacific Markets

Consistency is not true for some other gaming operators such as the Genting Group in Malaysia. Genting received the first and only gaming license in Malaysia in 1969 and opened the Genting highlands in 1971. The company moved out of its core business in 1977 by entering the Plantations division. In 1990, management turned their focus back to the gaming business by expanding the Genting Highlands. In 1993, Genting ventured into another new business by launching the Star Cruises.

In the 1990s, Genting moved into the paper manufacturing and oil and gas extraction business. The company also expanded into the power industry by acquiring power plants in India. In 2005, Genting expanded into the UK by acquiring the Maxim Casino Club. In 2010, Genting turned its focus back to Asean by opening Resorts World Sentosa before opening Resorts World New York in 2011.

Figure 37

Corporate history of Genting Bhd

1969 Begin construction of Genting Highland

1971 Genting Highland opens

1977 Company launches Plantation division

1990 Three new hotels and theme parks added to Genting Highland

1993 Company launches Star Cruise

1994 Company diversifies with purchase of Sanyen Paper Mill complex

1996 Purchased 45% stake in British Gas’ Muturi PSC in Irian Jaya, Indonesia

1998 Launch of corrugated packaging plant

2000 Stake in Muturi PSC sold to British Petroleum

2003 Acquired equity interest in power plant in India

2005 Expanded into UK by acquiring Maxims Casino Club

2010 Opened Resorts World Sentosa

2011 Opened Resorts World New York Source: CLSA Asia-Pacific Markets

Top scorers: Sands China, Wynn Macau and MGM China

. . . not really the case for Genting Bhd

Genting’s history

Page 26: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

26 [email protected] 15 November 2012

6. Generate high ‘owner earnings’ and lack of need to renivest All nine Macau gaming companies are cashflow positive and we expect them to generate average free cashflow of US$330-1,716m per annum in 2012-13. Las Vegas Sands is the strongest cashflow generator with expected free-cashflow generation of US$1,716m pa in 2012-13. We expect SJM to come in second and to generate an average free cashflow of US$1bn in 2012-13. SJM generates the highest free-cashflow yield of 9% followed by 7% from MGM China and MGM Resorts.

Figure 38 Figure 39

Free cashflow - 2012-13CL avg Free-cashflow yield - 2012-13CL avg

Source: CLSA Asia-Pacific Markets

Top scorers: SJM, MGM China, MGM Resorts

Lack of need to actively reinvest As mentioned above, the Macau government has implemented strict controls on expansion so all six gaming companies only have one or two more casino properties left to build in the enclave. Melco Crown is the only Macau concession holder investing outside the market with one investment thus far in the Philippines.

Gaming companies generally do not need to actively reinvest as the maintenance capex required by a casino property is quite minimal, compared to the huge operational in-cashflow. Maintenance capex should continue to be relatively low, although may increase slightly as companies improve premium mass gaming space.

US gaming operators continue to look for opportunities in other markets such as Spain and Japan, but globally governments have been slow to issue casino licenses, despite the potential need for increased tax revenues, job creation and tourism following the global financial crisis.

Figure 40

List of potential Cotai projects

Company Potential Cotai expansion Estimated capex (US$bn) Sands China Sands Site 3 3.0 Wynn Macau Wynn Cotai 3.5 Galaxy Galaxy Macau Phase II 2.0 Melco Crown Macau Studio City 1.9 SJM SJM Cotai 2.0 MGM China MGM Cotai 2.5 Source: CLSA Asia-Pacific Markets

0 500 1,000 1,500 2,000

MGM Resorts

Melco Crown

MGM China

Wynn Macau

Wynn Resorts

Galaxy

Sands China

SJM

Las Vegas Sands

(US$m)

0 2 4 6 8 10

Sands China

Wynn Macau

Las Vegas Sands

Galaxy

Wynn Resorts

Melco Crown

MGM Resorts

MGM China

SJM

(%)

Strong free-cashflow generation

Strong free cashflow generation

The Macau gaming companies only have one more casino left to build

Page 27: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

15 November 2012 [email protected] 27

Las Vegas Sands and Sands China stood out as the companies with the highest expected capex spend in 2012-13 as they are still constructing the Sands Cotai Central. We estimate LVS and Sands China to incur an average of US$1.3bn and US$1.1bn capex in 2012-13. SJM and MGM China will be the companies with the lowest expected capex, as they have only recently received the Cotai approval and are likely to be just spending mostly on maintenance capex in 2012-13. On capex to OCF ratio, Melco Crown also stands out as a big capex spender as we forecast the company to spend on the construction of Belle Grande Manila and also Macau Studio City.

Figure 41 Figure 42

Capex, 2012-13 avg Capex as % of operating cashflow, 2012-13 avg

Source: CLSA Asia-Pacific Markets

Top scorers: SJM, MGM China, MGM Resorts

7. Rational with managing capital As detailed in our Still raining cash report, casino operators generate high free cashflow, with reasonable revenue growth, limited cost pressure, low working capital and capex requirements. From 2009, most casino operators have turned FCF positive and in 2011, Las Vegas Sands, Wynn Resorts and Wynn Macau generated FCF in excess of US$1bn.

Figure 43

Free cashflow

(US$m) 2006 2007 2008 2009 2010 2011 12CL 13CL MGM Resorts (551) (1,923) (43) 465 297 212 340 (284)

Las Vegas Sands (2,122) (3,433) (3,664) (1,454) (154) 1,154 923 1,993

Wynn Resorts (403) (348) (810) 53 773 1,332 840 393

Sands China (679) (1,443) (1,717) 318 1,016 709 618 1,064

Wynn Macau (328) 19 204 283 756 1,095 755 466

Melco Crown na (517) (1,136) (1,070) 109 933 894 15

Galaxy na (57) (307) (99) (51) (147) 577 805

SJM na (413) (199) 347 957 976 1,031 995

MGM China na na (55) 99 400 667 580 386 Source: CLSA Asia-Pacific Markets

0 500 1,000 1,500

MGM China

SJM

MGM Resorts

Wynn Macau

Melco Crown

Galaxy

Wynn Resorts

Sands China

Las Vegas Sands

(US$m)

0 10 20 30 40 50 60 70

SJM

MGM Resorts

MGM China

Las Vegas Sands

Wynn Resorts

Wynn Macau

Galaxy

Melco Crown

Sands China

(%)

Maintenance capex requirement is minimal

In 2011, LVS, Wynn Resorts and Wynn Macau generated free cashflow in excess of US$1bn . . .

Casino operators are very strong in free-cashflow

generation

Page 28: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

28 [email protected] 15 November 2012

Figure 44

Free cashflow yield (%) 2006 2007 2008 2009 2010 2011 12CL 13CL MGM Resorts (11.2) (38.9) (0.9) 9.4 6.0 4.3 6.9 (5.8) Las Vegas Sands (5.8) (9.4) (10.0) (4.0) (0.4) 3.2 2.5 5.6 Wynn Resorts (3.6) (3.1) (7.2) 0.5 6.9 11.9 7.5 3.6 Sands China (2.1) (4.5) (5.3) 1.0 3.1 2.2 1.9 3.4 Wynn Macau (2.1) 0.1 1.3 1.8 4.9 7.1 4.9 3.1 Melco Crown na (6.3) (13.9) (13.1) 1.3 11.4 10.9 0.2 Galaxy na (0.4) (2.0) (0.6) (0.3) (0.9) 3.7 5.4 SJM na (3.3) (1.6) 2.7 7.6 7.7 8.1 7.7 MGM China na na (0.8) 1.5 5.9 9.8 8.5 5.8 Source: CLSA Asia-Pacific Markets

With the strong free-cashflow generation and rising cash balance, we praise companies that actively return excess cash to shareholders in the form of dividends. SJM, Wynn Resorts and MGM China have been most generous in returning cash to investors, and we expect them to deliver 6-7% average dividend yield in 2012-13. Galaxy and Melco Crown do not pay dividends, but that is a result of them having a better growth prospects, and we are not disappointed by the lack of dividend in the next 12 months.

Figure 45

Dividend (US$m) 2006 2007 2008 2009 2010 2011 12CL 13CL MGM Resorts 0 0 0 0 0 0 0 0 Las Vegas Sands 0 0 0 0 0 0 823 1,154 Wynn Resorts 593 0 0 395 840 642 939 810 Sands China 0 0 0 0 0 1,207 1,188 1,512 Wynn Macau 0 0 0 0 509 803 663 690 Melco Crown na 0 0 0 0 0 0 0 Galaxy na 0 0 0 0 0 0 0 SJM na 0 5 65 250 520 671 737 MGM China na na 0 0 0 400 361 406

Figure 46

Dividend yield (%) 2006 2007 2008 2009 2010 2011 12CL 13CL MGM Resorts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Las Vegas Sands 0.0 0.0 0.0 0.0 0.0 0.0 2.3 3.2 Wynn Resorts 5.3 0.0 0.0 3.5 7.5 5.7 8.4 7.4 Sands China 0.0 0.0 0.0 0.0 0.0 3.7 3.7 4.9 Wynn Macau 0.0 0.0 0.0 0.0 3.3 5.2 4.3 4.6 Melco Crown na 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Galaxy na 0.0 0.0 0.0 0.0 0.0 0.0 0.0 SJM na 0.0 0.0 0.5 2.0 4.1 5.3 5.7 MGM China na na 0.0 0.0 0.0 5.9 5.3 6.1 Source: CLSA Asia-Pacific Markets

Top scorers: Wynn Resorts, SJM and MGM China

8. Generates high return on equity Return on equity (ROE) is one of the better financial metrics to assess a company’s ability to create value for shareholders. The key differentiator is whether the company was a buyer or seller of the gaming concessions. While this occurred back in 2002, we still find the situation unusual. The brief

. . . representing FCF yield of 3-11%

Expect Sands China to distribute US$1.2bn of

dividend in 2012

In 2012, we expect Macau to generate 33% ROE -

the highest among all Asian sectors

Page 29: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

15 November 2012 [email protected] 29

background is that the government issued three gaming concessions at zero cost to SJM, Wynn and a joint venture between Las Vegas Sands and Galaxy. Soon after, there was some disagreement between Las Vegas Sands and Galaxy so the government allowed this concession to be effectively split into two. The government then allowed SJM and Wynn to sell a subconcession to another party - SJM selling to MGM for US$200m and Wynn selling to Melco Crown for US$900m.

As a result, Wynn Macau stands out as the company with the highest ROE of 137% in 2012. Wynn Macau’s high ROE is in also due to the highly successful ‘Wynn Macau’ casino, which we estimate to generate an ROIC of 65% in 2012. Melco Crown generates the lowest ROE. That is also partly due to the high capex for City of Dreams of US$2.7bn (vs. Venetian Macao of US$2.4bn, Galaxy Macau of US$2.0bn and Wynn Macau of US$1.8bn).

Return on equity of Sands China is relatively low among the peer group as the company asset base is largely composed of Cotai projects, which contains more non-gaming elements that yield low invest return. Another key reason to the low ROE is because the assets of Sands Cotai Central has already been recorded in the company’s balance sheet, while the earnings from the casino is not reflected in the company’s 2012 net profit as the property is still yet to ramp up.

Figure 47

Return on equity, 2012

Source: CLSA Asia-Pacific Markets

Macau subsidiaries also tend to generate higher return on equity (versus the US parentco) as the investment return generated by a Macau casino is much higher than those in Las Vegas and in Singapore. Construction cost of an integrated resort in Las Vegas and Macau are quite similar, but property Ebitda is much higher in Macau due to a bigger gaming market size. Property Ebitda in Singapore are high, helped by the low gaming tax, but construction cost is also much higher with the two Singapore IRs costing US$5.5-6.5bn each, while Macau casinos generally only cost US$2-3bn. The lower investment return from the Singapore and Las Vegas Sands is the key reason why the ROE of the Macau subsidiary is significantly higher than that of the parent company.

(20) 0 20 40 60 80 100 120 140

MGM Resorts

Melco Crown

Las Vegas Sands

Sands China

SJM

Galaxy

Wynn Resorts

MGM China

Wynn Macau

(%)

Wynn Macau generate the highest ROE

Investment return generated by a Macau casino is much higher

Wynn Macau stands out as the company with the

highest ROE of 137%

Page 30: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

30 [email protected] 15 November 2012

Figure 48

Casinos: ROIC, 2012

Note: Casinos in Macau are highlighted in yellow, while casinos in Singapore and Las Vegas are highlighted in Blue; Source: CLSA Asia-Pacific Markets

Figure 49

Casinos: Property cost and Ebitda, 2012

Cost (US$m) Ebitda (US$m) ROIC (%)

Wynn Las Vegas 2,700 365 14

Resorts World Sentosa 5,500 1,183 22

Venetian Las Vegas 1,530 355 23

Mariana Bay Sands 6,500 1,645 25

Altira 580 150 26

Four Seasons 974 266 27

City of Dreams 2,700 769 28

Galaxy Macau 1,987 716 36

Venetian Macau 2,400 1,099 46

MGM Macau 1,200 723 60

Wynn Macau 1,800 1,178 65

Grand Lisboa 625 604 97

Starworld 411 436 106

Sands Macao 265 357 135

Source: CLSA Asia-Pacific Markets

Top scorers: Wynn Macau, MGM China, Wynn Resorts

9. Avoids excess debt Generally, gearing at the parent level is higher, with MGM Resorts and Las Vegas Sands being more highly levered than their Macau subsidiaries. Wynn Resorts’ net gearing is less comparable to that of other gaming companies as Wynn has issued a 10-year bond to redeem the 20% stakes owned by Kazuo Okada, which moved the company’s net asset balance to negative territory. SJM and MGM China are the companies with the lowest gearing, with net cash accounting for 25-52% of shareholder equity.

0 20 40 60 80 100 120 140 160

Wynn Las VegasResorts World Sentosa

Venetian Las Vegas (including Palazzo)Mariana Bay Sands

AltiraFour Seasons

City of DreamsGalaxy Macau

Venetian MacauMGM Macau

Wynn MacauGrand Lisboa

StarworldSands Macao

(%)

The Macau gaming sector is highly rich in cash

Sands Macao and Starworld generates

over 100% ROIC

Page 31: Buffet's Checklist on Macau Gaming

Section 2: Top performers Macau gaming

15 November 2012 [email protected] 31

Figure 50

Net debt to equity (2012)

Source: CLSA Asia-Pacific Markets

Top scorers: SJM, MGM China, Wynn Macau

10. Current valuation offers margin of safety Buffett also stresses the importance of a margin of safety, which is the discount to fair value that the stock is currently offering. We derive the fair value of the Macau operators by using 10-15x 2013 EV/Ebitda to our earnings estimate. Based on our fair-value estimates, the sector is now trading at 73-88% of its fair value, offering 12-27% margin of safety, which should be wide enough for investors to maintain positive on the sector. Among the nine gaming companies, MGM China, MGM Resorts and SJM are the companies offering the widest margin of safety of 26-27%.

Figure 51

Margin of safety

Source: CLSA Asia-Pacific Markets

Top scorers: MGM China, MGM Resorts, SJM and Melco Crown

(100) (50) 0 50 100 150

SJM

MGM China

Wynn Macau

Galaxy

Melco Crown

Sands China

Las Vegas Sands

MGM Resorts

Wynn Resorts

(%)

na

0 5 10 15 20 25 30

Wynn Resorts

Sands China

Wynn Macau

Galaxy

Las Vegas Sands

Melco Crown

SJM

MGM Resorts

MGM China

(%)

Macau offers a wide margin of safety

SJM, MGM China and Wynn Macau are expected

to be net cash in 2012

Page 32: Buffet's Checklist on Macau Gaming

Section 3: Annualised average return of 20% to 2016 Macau gaming

32 [email protected] 15 November 2012

Annualised average return of 20% to 2016 We value Macau stocks on sum of the parts - like the street - applying an EV/Ebitda multiple to earnings from existing operations and adding a DCF-derived fair value for future projects. However, we believe the industry should now be valued based on dividend yields and we are slowly seeing some growth investors leaving the sector, with yield seekers taking their place. It takes time for the market to view the sector in a different light but it will occur once investors fully believe in the sustainability of the dividends - we are not there yet. Using this alternative methodology, we value the stocks on yield which results in an average four-year annualised return of 12-23% from now until 2016.

Highest yield in Asia We believe the sector is currently undervalued, offering free-cashflow yields of 4-5% (versus Asia consumer’s 2-3%) and dividend yields of 4-5% (versus Asia consumer’s 3%).

Figure 52

Valuation comparison PE (x) FCF yield (%) Dividend yield (%) 2012 2013 2012 2013 2012 2013 Macau gaming 19.4 16.3 4.8 4.1 4.3 4.9 China consumer 25.7 19.9 0.7 3.0 1.8 2.1 Asia consumer 19.2 16.9 1.8 3.3 2.9 3.3 Source: CLSA Asia-Pacific Markets

Supported by strong free-cashflow generation, we expect the Macau gaming companies to deliver a 2013 dividend yield of 5%, the highest among all sectors in Asia and significantly better than the market average of 3%.

Figure 53

Asia: Dividend yield by sector (13CL)

Source: CLSA Asia-Pacific Markets

0 1 2 3 4 5 6

InternetHealthcare

AutosTechnology

InsuranceConglomerates

Capital goodsPetro/Chems

ConsumerPower

MaterialsHotels & Leisure

PropertyInfrastructure

TransportMedia

Financial servicesTelecoms

Macau gaming

(%)

Macau gaming offers best dividend yields

Trading at discount to the consumer sector

Macau: Increasingly a yield sector

Page 33: Buffet's Checklist on Macau Gaming

Section 3: Annualised average return of 20% to 2016 Macau gaming

15 November 2012 [email protected] 33

Gradual pricing in of Cotai In addition to the attractive dividend yield, the Macau gaming operators also benefit from the gradual pricing in of the Cotai projects. Wynn Cotai, Galaxy Macau Phase 2, and Macau Studio City have already commenced construction, while the others are still pending the construction permit to start. With most of the casino properties running at high capacity utilisation, we expect the upcoming Cotai projects to drive substantial earnings growth.

We estimate the Cotai projects account for 6-24% of the fair value, despite assuming low return on investment (ROIC) of 14-19% (compared to 27-46% ROIC for existing Cotai properties) to factor in potential risk of delay.

Figure 54

Cotai: Value computation assumptions

Wynn SJM MGM Melco Galaxy Sands

Project capex (US$m) 3,500 2,000 2,500 2,000 2,000 3,000

WACC (%) 12.0 12.0 12.0 12.0 12.0 12.0

Terminal growth rate (%) 2.0 2.0 2.0 2.0 2.0 2.0

Project ROIC (%) 19.0 17.0 14.0 17.0 17.0 15.0

Maintenance capex as % of project capex 6.0 5.0 5.0 5.0 5.0 5.0

Project stakes owned (%) 100 100 100 60 100 100

Cotai value as % of target price 24.0 12.9 17.0 12.4 12.1 6.5

Figure 55

Cotai casinos ROIC (12CL)

Source: CLSA Asia-Pacific Markets

Alternative valuation: Yield to completion With macro uncertainty, we expect investors to increasingly appreciate the dividend-generation capability of the Macau gaming operators. Our microstrategy team highlights in its recent Dividend wave 2012 report that there has been consistent weekly inflow into dividend-focused equity fund since 2011, adding up to an impressive US$70bn inflow from 2011 to 2012 YTD. The strong inflow into dividend funds could also mean that investors are starting to value the sector based on dividend yields instead of growth.

27

28

36

46

0 10 20 30 40 50

Four Seasons

City of Dreams

Galaxy Macau

Venetian Macao

(%)

DCF model

Dividends and also gradual pricing in of Cotai

Existing Cotai properties generate 27-46% ROIC

Page 34: Buffet's Checklist on Macau Gaming

Section 3: Annualised average return of 20% to 2016 Macau gaming

34 [email protected] 15 November 2012

Figure 56

Global dividend equity funds - Monthly flows, 2011-YTD12

Source: EPFR global, CLSA Asia-Pacific Markets

To combine the strong dividends yields and the potential capital gain from the upcoming Cotai projects, we look at “yield to completion”, which shows the average total return (dividends + capital return) that the Macau gaming companies can offer between 2013 and 2016, before the opening of the next Cotai property.

We calculate our 2016 target price by applying 10-15x EV/Ebitda to our 2016 Ebitda estimate. The 2016 Ebitda is composed of two components, Ebitda from existing operations and Ebitda from the new Cotai projects. We calculate the 2016 Ebitda on existing operations by applying 5% p.a. growth to our 2014 estimate. While for the Cotai projects, to simplify, we assume all of the six companies to open in 2016 and to generate US$340-665m Ebitda (calculated based on US$2.0-3.5bn construction capex and return on investment of 14-19%).

Figure 57

Macau gaming: 2016 target price Sands

China Wynn

Macau MGM

China Melco

Crown SJM Galaxy

2014 adj. Ebitda (US$m) - Existing operations 2,833 1,178 726 1,016 1,174 1,485 2016 adj. Ebitda (US$m) - Existing operations 3,123 1,299 800 1,120 1,295 1,637 Cotai capex (US$m) 3,000 3,500 2,500 2,000 2,000 2,000 Cotai ROIC (%) 15 19 14 17 17 17 2016 Cotai Ebitda (US$m) 450 665 350 340 340 340 2016 Total Ebitda (US$m) 3,573 1,964 1,150 1,460 1,635 1,977 EV/Ebitda multiple 15 13 11 10 11 11 Enteprise value (US$m) 53,592 25,528 12,652 14,604 17,982 21,747 Net debt (US$m) 2,328 813 5 15 (2,695) (1,577) Equity value (US$m) 51,265 24,715 12,646 14,589 20,677 23,325 No. of shares 8,050 5,188 3,800 552 5,523 4,180 Target price (LC$) 49.4 36.9 25.8 26.4 29.0 43.2 Note: Assume 5% Ebitda growth on existing operations in 2015-16 for the six gaming companies; Source: CLSA Asia-Pacific Markets

Our 2016 target price implies an annualised capital return of 12-17% over the next four years. The 12-17% capital return, combined with the forecasted 5-6% dividend yield implies that the Macau gaming firms are set to offer investors an average four-year annualised return of 12-23% from now until 2016.

(1,000)

(500)

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(US$m)

Global dividend funds witnessed inflows in91 weeks out of 96 since 2011

US$70bn inflow from 2011 to 2012YTD

Use “yield to completion” as an alternative

valuation method

Apply 10-15x multiple to 2016 Ebitda to derive our

2016 price target

Page 35: Buffet's Checklist on Macau Gaming

Section 3: Annualised average return of 20% to 2016 Macau gaming

15 November 2012 [email protected] 35

Figure 58

Macau gaming: Yield to completion Company Price

(lcy) Target

(lcy) Dividend yield

(%) Annualised

capital return (%) Annualised

dividend return (%) Annualised

total return (%) 2016 13CL 14CL 15CL 16CL 13-16CL 13-16CL 13-16CL Galaxy 27.4 43.2 0.0 0.0 0.0 0.0 12.1 0.0 12.1 Melco Crown 15.0 26.4 0.0 0.0 0.0 0.0 15.2 0.0 15.2 MGM China 13.7 25.8 5.8 6.3 6.3 6.3 17.1 6.2 23.3 Sands China 30.5 49.4 4.7 5.7 5.7 5.7 12.8 5.4 18.2 SJM 17.2 29.0 5.9 6.6 6.6 6.6 14.0 6.4 20.4 Wynn Macau 22.7 36.9 4.6 5.0 5.0 5.0 13.0 4.9 17.9 Source: CLSA Asia-Pacific Markets

Still raining cash; Maintain BUY As detailed in our Still raining cash report, we favour the sector for its strong free cashflow generation, high dividend yield and gradual pricing in of Cotai. We believe the Macau gaming sector is the best way to gain exposure to the rising Chinese middle class. Despite the strong share-price performance in the past few months, we still like the sector and have nine BUYs in our global gaming coverage.

Figure 59

Global gaming: Three-month share-price performance

Source: CLSA Asia-Pacific Markets

We recently lifted Galaxy’s target EV/Ebitda multiple from 10x to 11x and upgraded the stock from Outperform to BUY on the company’s strong performance in further improving Galaxy Macau. We highlight Melco Crown, SJM, Wynn Macau and Las Vegas Sands as our top sector picks.

Figure 60

Valuations Company Code Ctry Price

(lcy) Target

(lcy) Upside

(%) Rec Mkt cap

(US$m) PE (x)

EV/Ebitda (x)

Cashflow yield (%)

Div yield (%)

2012 2013 2012 2013 2012 2013 2012 2013 Galaxy 27 HK HK 27.4 33.0 20.7 BUY 14,812 15.7 14.6 11.9 10.6 3.9 5.4 - - Las Vegas Sands LVS US USA 42.8 58.0 35.5 BUY 36,571 22.2 14.4 11.1 9.3 0.3 0.7 3.3 4.2 Melco Crown MPEL US US 14.2 19.4 36.7 BUY 8,080 18.9 15.8 9.5 8.7 10.8 0.2 - - MGM China 2282 HK HK 13.7 18.8 37.2 BUY 6,716 12.3 13.7 9.8 9.6 8.4 5.6 5.4 5.8 MGM Resorts MGM US USA 9.8 14.0 42.9 BUY 4,782 nm nm 11.1 10.3 0.4 (0.7) - - Sands China 1928 HK HK 30.5 35.3 15.7 BUY 31,686 26.6 16.8 18.0 13.8 1.8 3.3 3.7 4.7 SJM 880 HK HK 17.2 23.2 34.9 BUY 12,309 14.8 13.5 11.5 10.2 8.1 7.8 5.4 5.9 Wynn Macau 1128 HK HK 22.7 27.1 19.6 BUY 15,159 18.3 17.6 15.1 12.5 4.9 3.0 4.4 4.6 Wynn Resorts WYNN US USA 109.3 127.0 16.2 BUY 10,982 22.1 18.2 10.7 10.2 1.0 0.5 8.7 7.3 Source: CLSA Asia-Pacific Markets

(5) 0 5 10 15 20 25 30 35 40

MGM Resorts

Wynn Resorts

Las Vegas Sands

MGM China

SJM

Sands China

Wynn Macau

Melco Crown

Galaxy

(%)

We recently upgraded Galaxy from Outperform

to BUY

Page 36: Buffet's Checklist on Macau Gaming

Section 4: Best way to play Chinese consumption Macau gaming

36 [email protected] 15 November 2012

Best way to play Chinese consumption Our recent Still raining cash report highlighted the Macau gaming sector as the best way to gain exposure to the rising Chinese middle class due to the industry’s ability to convert consumer spending into a company’s free cashflow and dividends. In 2011, Macau gaming companies converted US$35bn of casino revenue into US$4.2bn of free cashflow (11.9% of revenue) and US$3.0bn of dividends (8.4%). The conversion ratio of Macau gaming firms has been significantly higher than that of other consumer companies, which were able to convert less than 1% of industry revenue.

We carried out our analysis by collating industry revenue from Euromonitor estimates and various industry sources. Next, we aggregate the revenue, net profit, free cashflow and dividend of the various listed consumer companies to calculate their key financial metrics. By comparing the listed-company financials with industry revenue, we can determine how much of mainland Chinese consumer spending has been converted into free cashflow and dividends.

Figure 61

China consumer/gaming: Listco revenue and dividend (2011)

Source: CLSA Asia-Pacific Markets

Figure 62

China consumer/gaming: Key financials, 2011

Sector Industry revenue (US$bn)

Listco revenue (US$bn)

Listco net profit (US$bn)

Listco FCF

(US$bn)

Listco dividend (US$bn)

As % of industry revenue

Listco revenue

Listco net profit

Listco FCF

Listco dividend

Macau gaming 35.0 35.0 3.7 4.2 3.0 100.0 10.5 11.9 8.4

Department stores 35.1 2.1 0.6 0.3 0.2 5.9 1.7 0.8 0.6

Jewellery 39.9 13.2 1.3 (1.0) 0.2 33.1 3.3 (2.5) 0.5

Daily use goods 42.7 3.5 0.5 0.1 0.3 8.2 1.1 0.3 0.6

Apparel (incl sportswear) 128.4 6.5 1.0 0.3 0.4 8.7 1.2 0.4 0.5

Food, beverage and tobacco 159.5 27.7 1.8 (0.8) 0.7 17.4 1.1 (0.5) 0.5

Autos 321.3 96.3 6.5 2.4 1.1 30.0 2.0 0.8 0.3

Supermarket 543.9 14.8 0.3 0.1 0.2 2.7 0.1 - - Note: Industry revenue of department stores is based on gross department store sales from Euromonitor multiplied by average concession rate of listed department store operators (26.4%); industry supermarket revenue is based on Euromonitor estimates; while industry revenue of daily use goods, apparel, food, beverages and tobacco and autos are based on China retail sales figure prepared by the National Bureau of Statistics of China; Industry revenue of jewellery is an aggregate of jewellery retail sales in Hong Kong and Mainland China; Source: CLSA Asia-Pacific Markets, CEIC, Euromonitor, company data

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The research thesis

Macau casinos distributed US$3bn in dividends

in 2011

Page 37: Buffet's Checklist on Macau Gaming

Section 4: Best way to play Chinese consumption Macau gaming

15 November 2012 [email protected] 37

Key drivers of better dividends for Macau versus peers include:

Shifting budgets in favour of discretionary spending

Less-competitive industry landscape - externally (very few jurisdictions have legalised gaming) and internally (only six licensed operators)

High earnings visibility

Strong cashflow conversion due to lower capex requirement

Appetite to pay dividends (especially US companies)

Macau gaming. The Macau gaming companies offer good exposure to mainland Chinese spending as the six licensed casino operators account for 100% of the market. The low capex requirement enables them to generate strong free cashflow. The companies also have a strong appetite to pay dividends, with Sands China, Wynn Macau, SJM and MGM China estimated to deliver 80% dividend payouts.

Jewellery. Investors enjoys good exposure to the jewellery sector from the listed watch and jewellery retailers (including Chow Tai Fook, Luk Fook, Emperor Watch & Jewellery, Oriental Watch, Hengdeli and Chow Sang Sang), as they in aggregate account for 33% of total industry retail sales. However, they have failed to generate positive free cashflow, as the companies have been aggressively expanding store network with most of the operating profits reinvested back into the business for inventory purchases and new store openings. The weak free-cashflow generation has therefore limited their capacity to distribute dividends, with 2011 payouts at 30-40%.

Daily use goods. Listed daily use goods manufacturers (like Hengan, Vinda, Shanghai Jahwa and Magic) tend to enjoy high market share in their respective product segments. But there are various daily use goods manufacturers like Guangzhou Liby (largest player in dishwashing products, laundry care and home care in China according to Euromonitor) which are not listed. Free cashflow generation of daily use goods companies is not very high as most are spending sizeable capex to expand their production capacity. This resulted in a lower dividend payout of 30-60% in 2011.

Apparel. Listed apparel companies (including Belle Intl, Trinity, Li Lang, Daphne, Evergreen Intl and the various sportswear manufacturers) are aggressively pursuing growth by expanding their store networks. Capex requirements are not as high as the daily use goods or food and beverages companies as a large portion of the “point-of-sales” are third-party operated. Free cashflow generation of the apparel companies are generally strong (except sportswear manufacturers which have been building up inventory and accounts receivables as a result of wholesale channel stuffing). In 2011, the limited capex requirement enabled the apparel firms to maintain high dividend payouts of 30-80%.

Food, beverages and tobacco (FBT). Listed food and beverages manufacturers (including Tingyi, Want Want, Tsingtao, Uni-President, Mengniu Dairy, China Foods, Dynasty Wine, Changyu Wine and China Huiyuan Juice) offer strong exposure to mainland Chinese’s FBT spending with their dominant industry position. They are still trying to pursue growth by taking over small players or construct new production facilities, which imply higher capex investment and lower free cashflow generation. The sizeable expansionary capex resulted in a lower dividend payout of 20-60% in 2011.

Most operating profits reinvested into the

business for inventory and store openings

Capex spent on expanding production capacity

Apparel (ex-sportswear) are strong in cashflow

generation

Acquisitions and production capacity

expansion led to high capex spending

Macau can convert rising revenue into free

cashflow and dividends

Minimal capex requirement allows high

dividend payout

Page 38: Buffet's Checklist on Macau Gaming

Section 4: Best way to play Chinese consumption Macau gaming

38 [email protected] 15 November 2012

Autos. Investors can gain high exposure to mainland Chinese automobiles spending from listed manufacturers (including Shanghai Auto, Dongfeng, Great Wall Motor, Brilliance Auto, GAC and Geely), with these companies accounting for 30% of total industry retail sales. Profit margin of auto manufacturers is much lower than consumables companies due to the high overhead, raw materials and distribution cost. Capex intensity of the automakers is also high to maintain the production facility and expand capacity to drive earnings growth. The weak free-cashflow generation has limited capacity to distribute dividend, with the companies maintaining a dividend payout of 10-30% in 2011.

Department stores. The listed department stores (like Golden Eagle, Parkson Retail Group, Intime and New World Department Store) do not offer strong exposure to the Chinese department-store industry, as their aggregate market share is rather low. Department-store operators generate wide profit margins but companies are also aggressively expanding their store network to tap onto the consumption growth in inland China. In 2011, the department-store operators maintained a dividend payout of 30-50%.

Supermarkets. Listed supermarket operators, like Sun Art and Lianhua Supermarket, offer investors minimal exposure to mainland Chinese’s supermarket spending, as there are still a large number of non-modern grocery retailers in the country. Supermarket operations carry thin margins. Capex requirement is also high as expanding store network is the key to future earnings growth. With sizeable expansionary capex, the supermarket operators maintained a dividend payout of 30-50% in 2011.

Varying returns despite structural tailwind Most investors are well aware of the rising consumer spending in China underpinned by disposable income growth and low penetration in many consumer-product categories. The growing consumer spending is a structural tailwind for most of the consumer sub-segments, but over the past years, it has not benefitted all of them equally in terms of share-price return. Out of them all, Macau gaming companies were the biggest beneficiaries in terms of share-price performance as the market rewards the high cashflow generation.

Figure 63

China consumer companies: Share-price performance by subsegments

Source: CLSA Asia-Pacific Markets

0100200300400500600700800900

1,0001,1001,200

Jan

09

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FBT Daily use goods

Apparel Sportswear

Jewellery Autos

Macau gaming

(Rebased to 100)

Low dividend payouts due to thin margin and high

capex requirement

Aggressive store expansion plan results in

high capex spending

Sourcing growth by rolling out new

supermarkets

Macau casinos are the biggest beneficiaries

(in terms of share-price performance)

Macau delivered +620% share-price return

since 2009

Page 39: Buffet's Checklist on Macau Gaming

Section 4: Best way to play Chinese consumption Macau gaming

15 November 2012 [email protected] 39

Overlaying share-price performance with net-profit growth highlights that the laggards have underperformed due to their weak capability in converting the robust spending by Chinese into earnings growth. From 2009 to 2012 YTD, Macau gaming companies grew their earnings by 1,148%, underpinning strong share-price growth of 620%.

Figure 64

China consumer: Share-price changes, 2009-12 to date

Source: Bloomberg, CLSA Asia-Pacific Markets

Please refer to our Still raining cash report for more details

(100) 0 100 200 300 400 500 600 700

Sportswear

Department store

Food, beverages & tobacco

Supermarket

Daily use goods

Apparel

Jewellery

Autos

Macau gaming

Net profit growth (2009-12)

Share-price performance

(%)

1,148

Strong profit growth underpins share-price

performance

Page 40: Buffet's Checklist on Macau Gaming

Macau gaming

40 [email protected] 15 November 2012

Notes

Page 41: Buffet's Checklist on Macau Gaming

Macau gaming

15 November 2012 [email protected] 41

Company profiles

Galaxy .............................................................................................. 43

Las Vegas Sands¹ ............................................................................. 47

Melco Crown ..................................................................................... 51

MGM China ....................................................................................... 55

MGM Resorts¹ ................................................................................... 59

Sands China ..................................................................................... 63

SJM .................................................................................................. 67

Wynn Macau ..................................................................................... 71

Wynn Resorts¹ ................................................................................. 75

¹ Covered by Credit Agricole Securities (USA) Inc. All prices quoted herein are as at close of business 8 November 2012, unless otherwise stated

Page 42: Buffet's Checklist on Macau Gaming

Macau gaming

42 [email protected] 15 November 2012

Notes

Page 43: Buffet's Checklist on Macau Gaming

Galaxy HK$27.35 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (HK$m) 19,262 41,186 56,137 58,434 62,409 Net profit (HK$m) 1,806 3,004 7,286 7,806 8,797 EPS (HK¢) 45.3 71.9 174.3 186.8 210.5 CL/consensus (23) (EPS%) - - 101 96 93 EPS growth (% YoY) 237.1 58.5 142.5 7.1 12.7 PE (x) 60.3 38.1 15.7 14.6 13.0 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 FCF yield (%) (0.4) (1.0) 3.9 5.5 6.0 PB (x) 11.8 8.0 5.3 3.9 3.0 ROE (%) 20.2 25.0 40.3 30.7 26.1 Net debt/equity (%) 52.8 38.7 5.6 (14.3) (26.9) Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Aaron Fischer, CFA [email protected] (852) 26008256

Richard Huang (852) 26008455

Mariana Kou, CFA (852) 26008190

15 November 2012

Hong Kong Hotels & Leisure Reuters 0027.HK Bloomberg 27 HK

Priced on 8 November 2012 HK HSI @ 21,566.9 12M hi/lo HK$29.45/13.20 12M price target HK$33.00 ±% potential +21% Shares in issue 4,179.7m Free float (est.) 31.3% Market cap US$14,812m 3M average daily volume HK$554.0m (US$71.5m) Major shareholders City Lion 31.8%

Stock performance (%) 1M 3M 12M

Absolute 8.7 36.9 65.4 Relative 5.0 27.4 50.9

Source: Bloomberg

www.clsa.com

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Galaxy (LHS)Rel to HSI

(HK$) (%)

Awaiting next phase The addition of Galaxy Macau in May 2011 drove a strong 117% Ebitda gain in 2011 and will help it to another 102% hike in 2012. The property should continue to boost earnings, but given the high 2012 base we see less scope for further improvement: we expect Ebitda growth to slow to 7% in 2013 pending the opening of Galaxy Macau Phase 2. We recently lifted our target EV/Ebitda multiple to 11x and upgraded the stock from Outperform to BUY. Our new HK$33.0 target implies 21% upside.

Investment thesis The strong market-share expansion after the addition of Galaxy Macau was the key driver of Galaxy’s 117% Ebitda jump in 2011 and will help it to a 102% Ebitda increase in 2012. This is likely to slow in 2013, as there is less scope for further improvement in performance at the property. In the longer term, the company is likely to resume rapid earnings growth with the opening of Galaxy Macau Phase 2 in mid-2015.

Catalysts The company’s continued efforts to ramp up Galaxy Macau and to improve operational efficiencies should be the key earnings drivers. In the longer term, the market’s gradual pricing in of Galaxy Macau Phase 2 will be an additional share-price catalyst.

Growth estimate We expect Galaxy’s revenue to increase 36% in 2012 (to HK$56bn) and 4% in 2013 (to HK$58bn). The strong topline gains should translate into a significant 102% jump in Ebitda in 2012 (to HK$9.8bn) and a further 7% rise (to HK$10.5bn) in 2013. In 3Q12, the property Ebitda of Galaxy Macau came in at US$227m, which is largely in line with City of Dreams’ US$204m, Wynn Macau’s US$292m and Venetian Macao’s US$299m. This suggests less room for the property to ramp up further.

Valuation We recently raised our target multiple from 10x to 11x to reflect Galaxy’s growing mass-market exposure and improved visibility on its Cotai development. We value the stock using an 11x 13CL EV/Ebitda for existing operations and HK$4.00 per share for Galaxy Macau Phase 2. Our HK$33.0 target (previously HK$30.5) implies an 18x 13CL PE, which we believe is fair given that it is still at a discount to our 20-25x target PEs for other Chinese consumer-discretionary names.

Page 44: Buffet's Checklist on Macau Gaming

Galaxy - BUY Macau gaming

44 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets

0

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2010 2011 12CL 13CL 14CL

Galaxy Industry average(%)

na na na na na(20)

(10)

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(88)

(3)

(2)

(1)

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(200)

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(US$m) (%)

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Galaxy Industry average(%)

(40)

(20)

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Galaxy Industry average(%)

We expect Galaxy to turn net cash in 2013

Page 45: Buffet's Checklist on Macau Gaming

Galaxy - BUY Macau gaming

15 November 2012 [email protected] 45

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (HK$m) Revenue 19,262 41,186 56,137 58,434 62,409 Op Ebitda 2,231 4,848 9,794 10,498 11,507 Op Ebit 1,720 3,600 7,983 8,686 9,696 Interest income 25 62 108 108 108 Interest expense (59) (400) (616) (780) (760) Other items 180 (201) (19) 101 101 Profit before tax 1,866 3,061 7,456 8,115 9,145 Taxation (45) (32) (51) (81) (91) Minorities/Pref divs (16) (26) (119) (228) (256) Net profit 1,806 3,004 7,286 7,806 8,797 Summary cashflow forecast (HK$m) Operating profit 1,720 3,600 7,983 8,686 9,696 Operating adjustments - - - - - Depreciation/amortisation 511 1,248 1,811 1,811 1,811 Working capital changes - - - - - Net interest/taxes/other (125) (984) (2,069) (9) 351 Net operating cashflow 2,106 3,864 7,725 10,488 11,859 Capital expenditure (2,500) (5,000) (3,250) (4,250) (5,000) Free cashflow (394) (1,136) 4,475 6,238 6,859 Acq/inv/disposals - - - - - Int, invt & associate div (2,247) (1,503) 108 108 108 Net investing cashflow (4,747) (6,503) (3,142) (4,142) (4,892) Increase in loans 7,004 2,246 3,929 (3,162) 4,374 Dividends (9) 0 0 0 0 Net equity raised/other (3,503) 2,032 (164) (780) (760) Net financing cashflow 3,492 4,278 3,764 (3,942) 3,614 Incr/(decr) in net cash 851 1,639 8,348 2,404 10,581 Exch rate movements 2 4 0 0 0 Opening cash 3,516 4,369 6,013 14,361 16,765 Closing cash 4,370 6,013 14,361 16,765 27,346 Summary balance sheet forecast (HK$m) Cash & equivalents 4,369 6,013 14,361 16,765 27,346 Debtors 363 595 686 737 787 Inventories 87 138 84 82 87 Other current assets 716 2,537 2,567 2,646 2,725 Fixed assets 12,471 17,469 18,631 21,070 24,259 Intangible assets - - - - - Other term assets 7,179 9,012 8,935 8,935 8,935 Total assets 25,186 35,764 45,263 50,234 64,138 Short-term debt 2,283 1,142 2,036 1,126 - Creditors 5,244 8,829 6,859 6,958 7,434 Other current liabs 481 22 38 38 38 Long-term debt/CBs 7,144 10,531 13,565 11,313 16,813 Provisions/other LT liabs 460 597 631 631 631 Minorities/other equity 378 421 557 784 1,041 Shareholder funds 9,197 14,222 21,578 29,384 38,181 Total liabs & equity 25,186 35,764 45,263 50,234 64,138 Ratio analysis Revenue growth (% YoY) 57.5 113.8 36.3 4.1 6.8 Ebitda growth (% YoY) 92.2 117.3 102.0 7.2 9.6 Ebitda margin (%) 11.6 11.8 17.4 18.0 18.4 Net profit margin (%) 9.4 7.3 13.0 13.4 14.1 Dividend payout (%) 0.0 0.0 0.0 0.0 0.0 Effective tax rate (%) 2.4 1.0 0.7 1.0 1.0 Ebitda/net int exp (x) 66.2 14.4 19.3 15.6 17.7 Net debt/equity (%) 52.8 38.7 5.6 (14.3) (26.9) ROE (%) 20.2 25.0 40.3 30.7 26.1 ROIC (%) 12.7 19.8 35.3 34.1 34.4 EVA®/IC (%) 5.5 12.5 28.0 26.8 27.1 Source: CLSA Asia-Pacific Markets

We expect net margin to expand from 13% in 2012

to 14% in 2014

We expect cash balance to reach HK$27bn in 2014

We estimate HK$6-7bn free-cashflow in 2013-14

Revenue growth of 4-7% in 2013-14

Page 46: Buffet's Checklist on Macau Gaming

Galaxy - BUY Macau gaming

46 [email protected] 15 November 2012

Recommendation history of Galaxy Entertainment Group Ltd (27 HK)

Date Rec Target Date Rec Target

14 November 2012 BUY 33.00 26 April 2012 BUY 30.80

25 October 2012 O-PF 30.50 16 April 2012 BUY 29.00

17 October 2012 O-PF 28.10 20 February 2012 BUY 25.00

10 September 2012 BUY 28.70 16 November 2011 BUY 23.30

27 August 2012 BUY 27.00 20 October 2011 BUY 26.40

15 August 2012 BUY 25.80 20 September 2011 BUY 25.40

11 June 2012 BUY 24.00 01 September 2011 O-PF 24.50

10 May 2012 BUY 31.30 23 June 2011 O-PF 17.70 Source: CLSA Asia-Pacific Markets

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(HK

$)

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Aaron Fischer, CFAOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 47: Buffet's Checklist on Macau Gaming

Las Vegas Sands US$42.73 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (US$m) 6,853 9,411 10,917 12,882 13,813 Net income (US$m) 407 1,270 1,587 2,449 2,731 EPS (US$) 0.51 1.56 1.93 2.97 3.31 CL/consensus (26) (EPS%) - - 82 110 109 EPS growth (% YoY) nm 203.9 23.2 54.0 11.5 PE (x) 83.0 27.3 22.2 14.4 12.9 Dividend yield (%) 0.0 0.0 2.3 3.3 4.2 FCF yield (%) (0.5) 3.3 2.6 5.6 6.1 PB (x) 4.4 4.0 3.9 3.6 3.4 ROE (%) 9.9 21.1 18.7 25.7 26.0 Net debt/equity (%) 84.2 64.9 55.0 45.7 40.4 Source: Credit Agricole Securities (USA); FactSet for consensus data. CL = estimate

The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc. For important disclosure information please refer to page 80.

Produced byProduced byProduced by

Jon Oh [email protected] (1) 212 549 8818

Clifford Kurz, CFA (1) 212 549 8819

15 November 2012

USA Hotels & Leisure Reuters LVS.N Bloomberg LVS US

Priced on 8 November 2012 S&P 500 @ 1,377.5 12M hi/lo US$62.08/34.72 12M price target US$58.00 ±% potential +36% Shares in issue 826.1m Free float (est.) 47.6% Market cap US$36,571m 3M average daily volume US$321.7m (US$321.7m) Major shareholders Sheldon Adelson 52.4%

Stock performance (%) 1M 3M 12M

Absolute (4.4) 6.8 (11.1) Relative 1.0 8.7 (17.6)

Source: Bloomberg

www.clsa.com

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Nov 10 Jul 11 Mar 12 Nov 12

Las Vegas SandsRel to 500 (RHS)

(US$) (%)

Boosting its cashflow Despite Macau and Singapore’s slowing growth in gaming revenue, we expect Las Vegas Sands to increase cashflow meaningfully as it continues to optimise Sands Cotai Central’s (SCC) premium mass segment offering and adds 200 tables to the property. Its 6% FCF 13CL yield and 9x EV/Ebitda multiple should continue to attract a new investor base, from growth to income and value. Las Vegas Sands remains the top pick in our US gaming universe. We reiterate our BUY call and US$58 target.

Investment thesis With SCC contributing to growth in Macau and capital spending falling next year on the property’s completion, we expect FCF to increase from US$0.9bn in 2012 to US$2bn in 2013. Its 6% FCF yield tells us there is more headroom to the recently raised US$1.4/share dividend and 3% dividend yield.

Catalysts There are several positives on the horizon, including market-share gains in Macau as Sands China adds another 4,000 hotel rooms and 200 tables to the property. In addition, The Macau property continues to improve its VIP product, which grew rolling-chip volumes by 35% YoY in 1H12 versus 12% for the market. In Singapore, adding junkets to Marina Bay Sands could help stabilise and increase VIP rolling-chip volumes, a segment that has been volatile and lacking in growth. Given its significant cashflow, the company could also raise dividends or announce a share buyback.

Earnings growth Sands China is the key growth driver for Las Vegas Sands, representing the majority of the parentco’s 22% consolidated Ebitda increase in 13CL (US$4.66bn). We expect Ebitda in Singapore to fall 5% in 2012 (to US$1.45bn) due to 3Q12’s abnormally low hold rate, but despite this we expect growth to remain in the low-single digits as the property operates at near full capacity.

Valuation Our SOTP-derived target price of US$58 ascribes an EV/Ebitda of 9-12x for the US properties, a HK$35.30 fair value for Sands China (covered by CLSA's Aaron Fischer) and an EV/Ebitda of 15x for the Singapore properties (implying a net cap rate of 5%).

Page 48: Buffet's Checklist on Macau Gaming

Las Vegas Sands - BUY Macau gaming

48 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets, Credit Agricole Securities (USA)

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(12)

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(3,000)

(2,000)

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(US$m) (%)

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(40)

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We expect net gearing to decline from 84% in 2010

to 40% in 2014

Page 49: Buffet's Checklist on Macau Gaming

Las Vegas Sands - BUY Macau gaming

15 November 2012 [email protected] 49

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (US$m) Revenue 6,853 9,411 10,917 12,882 13,813 Op Ebitda 2,229 3,532 3,819 4,663 5,095 Op Ebit 1,534 2,738 2,955 3,767 4,150 Interest income 9 14 20 25 39 Interest expense (307) (283) (252) (218) (251) Other items (380) (374) (650) (344) (297) Profit before tax 856 2,095 2,073 3,230 3,641 Taxation (74) (212) (197) (323) (364) Minorities/pref divs/affils (374) (614) (289) (458) (545) Net income 407 1,270 1,587 2,449 2,731 Summary cashflow forecast (US$m) Net income 407 1,270 1,587 2,449 2,731 Operating adjustments 192 291 0 0 0 Depreciation/amortisation 695 794 864 897 945 Working capital changes (326) (788) (184) (261) (126) Non-operating adjustments 901 1,096 232 358 445 Net operating cashflow 1,870 2,662 2,499 3,443 3,996 Capital expenditure (2,024) (1,508) (1,600) (1,450) (1,850) Free cashflow (154) 1,154 899 1,993 2,146 Acq/inv/disposals (684) 810 - - - Net investing cashflow (2,708) (698) (1,600) (1,450) (1,850) Increase in loans (1,204) (99) (552) (124) (272) Dividends 0 (899) (637) (1,601) (2,016) Net equity raised/other 76 (95) - - - Net financing cashflow (1,128) (1,093) (1,190) (1,725) (2,288) Incr/(decr) in net cash (1,965) 871 (291) 268 (143) Exch rate movements 47 (5) 0 0 0 Opening cash 4,955 3,037 3,903 3,612 3,880 Closing cash 3,037 3,903 3,612 3,880 3,737 Summary balance sheet forecast (US$m) Cash & equivalents 3,037 3,903 3,612 3,880 3,737 Debtors 717 1,337 1,551 1,830 1,962 Inventories 32 35 45 51 55 Other current assets 108 118 118 118 118 Fixed assets 14,502 15,031 15,767 16,320 17,225 Intangible assets - - - - - Other term assets 1,249 430 428 428 428 Total assets 21,044 22,244 22,912 24,017 24,915 Short-term debt 767 456 89 871 - Creditors 630 464 445 369 279 Other current liabs 1,203 1,579 1,579 1,579 1,579 Long-term debt/CBs 9,374 9,577 9,392 8,485 9,085 Provisions/other LT liabs 636 729 729 729 729 Minorities/other equity 1,979 1,588 1,878 2,336 2,881 Shareholder funds 6,456 7,851 8,800 9,648 10,363 Total liabs & equity 21,044 22,244 22,912 24,017 24,915 Ratio analysis Revenue growth (% YoY) 50.2 37.3 16.0 18.0 7.2 Ebitda growth (% YoY) 105.2 58.5 8.1 22.1 9.3 Ebitda margin (%) 32.5 37.5 35.0 36.2 36.9 Net income margin (%) 5.9 13.5 14.5 19.0 19.8 Dividend payout (%) 0.0 0.0 51.9 47.2 54.4 Effective tax rate (%) 8.7 10.1 9.5 10.0 10.0 Ebitda/net int exp (x) 7.5 13.2 16.5 24.2 24.1 Net debt/equity (%) 84.2 64.9 55.0 45.7 40.4 ROE (%) 9.9 21.1 18.7 25.7 26.0 ROIC (%) 10.2 16.6 17.4 20.7 21.5 EVA®/IC (%) (8.5) (2.1) (1.3) 2.0 2.8 Source: Credit Agricole Securities (USA)

We forecast net margin to improve from 15% in 2012 to 20% in 2014

Cash balance of US$3.6-3.9bn in 2012-14

We estimate US$0.9-2.1bn of free cashflow in 2012-14

Forecast 7-18% revenue growth in 2013-14

Page 50: Buffet's Checklist on Macau Gaming

Las Vegas Sands - BUY Macau gaming

50 [email protected] 15 November 2012

Recommendation history of Las Vegas Sands Corp (LVS US)

Date Rec Target Date Rec Target

26 July 2012 BUY 58.00 19 September 2011 BUY 73.00

12 June 2012 BUY 68.00 04 May 2011 BUY 67.00

17 April 2012 BUY 72.00 02 February 2011 BUY 70.00

16 November 2011 BUY 70.00 05 November 2010 BUY 62.50 Source: Credit Agricole Securities (USA)

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BUYU-PF

O-PFSELL

Page 51: Buffet's Checklist on Macau Gaming

Melco Crown US$14.19 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (US$m) 2,642 3,769 3,911 4,124 4,604 Net income (US$m) (11) 292 395 473 552 EPS (US¢) (2.0) 55.4 74.9 89.6 104.5 CL/consensus (19) (EPS%) - - 107 109 101 EPS growth (% YoY) nm nm 35.2 19.7 16.7 PE (x) nm 25.6 18.9 15.8 13.6 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 FCF yield (%) 1.5 12.5 11.9 0.2 1.8 PB (x) 3.0 2.3 2.1 1.8 1.6 ROE (%) (0.4) 10.2 11.6 12.2 12.6 Net debt/equity (%) 55.4 36.6 11.3 11.0 8.0 Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Aaron Fischer, CFA [email protected] (852) 26008256

Richard Huang (852) 26008455

Mariana Kou, CFA (852) 26008190

15 November 2012

USA Hotels & Leisure Reuters MPEL.OQ Bloomberg MPEL US ADR MPEL.OQ

Priced on 8 November 2012 S&P 500 @ 1,377.5 12M hi/lo US$16.02/8.19 12M price target US$19.40 ±% potential +37% Shares in issue 552.4m Free float (est.) 63.4% Market cap US$8,080m 3M average daily volume US$57.6m (US$57.6m) Major shareholders Melco Joint Venture 33.4% Capital Research Global Investor 3.3%

Stock performance (%) 1M 3M 12M

Absolute 10.3 35.5 22.4 Relative 16.5 38.0 13.4

Source: Bloomberg

www.clsa.com

80

100

120

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160

180

200

220

240

260

4

6

8

10

12

14

16

18

Nov 10 Jul 11 Mar 12 Nov 12

Melco CrownRel to 500 (RHS)

(US$) (%)

Visible growth prospects We expect Melco Crown to deliver an 8% Ebitda Cagr over the next two years. In the near term, the opening of a new VIP area opening at City of Dreams should underpin growth. In the longer term, the startup of Belle Grande Manila and Macau Studio City will drive earnings increases. We maintain our BUY recommendation, with our US$19.40 target implying 37% upside. Melco Crown is our top pick in the gaming space.

Investment thesis Melco Crown is our top sector pick due to its high mass-market exposure and strong growth pipeline. In the near term, we expect its continuous optimisation of gaming tables (by moving lower-yielding tables at Altira to City of Dreams) to drive its earnings expansion. In the longer run, its collaboration with the Philippines’ SM Group and Belle Corp to develop Belle Grande Manila will be another profit driver. Macau Studio City (which recently received final government approval) and the development of City of Dreams Phase 3 should also be key positives.

Catalysts The further ramp up of the City of Dreams property after opening the new VIP area, and ground-breaking in the Macau Studio City project, will boost the stock. Belle Grande Manila, opening in 2014, is an additional share-price catalyst.

Growth estimate We expect Melco Crown to deliver US$3,911m net revenue in 2012 (up 4%) and US$4,124m in 2013 (up 5%). The company’s high operating leverage should translate this into 6-10% YoY Ebitda increases in the next two years, reaching US$861m in 2012 and US$943m in 2013.

Valuation We value Melco Crown by applying a 10x 13CL EV/Ebitda to existing operations, and adding HK$2.40 per share for Macau Studio City. Our US$19.40 target price implies a 22x 13CL PE, which we believe is fair given that this still represents a discount to our 20-25x target PEs for other Chinese consumer-discretionary names. Melco Crown is our top pick in the gaming space.

Page 52: Buffet's Checklist on Macau Gaming

Melco Crown - BUY Macau gaming

52 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets

0

1

2

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5

6

2010 2011 12CL 13CL 14CL

Melco Crown Industry average(%)

na na na na na(30)

(20)

(10)

0

10

20

30

40

50

2008 2009 2010 2011 12CL 13CL 14CL

Melco Crown Industry average(%)

(20)

(15)

(10)

(5)

0

5

10

15

(1,500)

(1,000)

(500)

0

500

1,000

1,500

2008 2009 2010 2011 12CL 13CL 14CL

Free cashflowFCF yield (RHS)

(US$m) (%)

0

20

40

60

80

100

2010 2011 12CL 13CL 14CL

Melco Crown Industry average(%)

(40)

(20)

0

20

40

60

80

100

2008 2009 2010 2011 12CL 13CL 14CL

Melco Crown Industry average(%)

We expect gearing to be 8-11% in 2012-14

Page 53: Buffet's Checklist on Macau Gaming

Melco Crown - BUY Macau gaming

15 November 2012 [email protected] 53

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (US$m) Revenue 2,642 3,769 3,911 4,124 4,604 Op Ebitda 430 810 861 943 1,016 Op Ebit 93 448 464 563 636 Interest income (93) (122) (98) (90) (84) Interest expense 0 0 - - 0 Other items (9) (36) 29 0 0 Profit before tax (10) 290 394 473 552 Taxation (1) 2 1 - - Minorities/pref divs/affils - - - - - Net income (11) 292 395 473 552 Summary cashflow forecast (US$m) Net income (11) 292 395 473 552 Operating adjustments - - - - - Depreciation/amortisation 338 362 397 380 380 Working capital changes - - - - - Non-operating adjustments (105) 347 202 28 63 Net operating cashflow 223 1,001 995 881 995 Capital expenditure (113) (68) (100) (867) (863) Free cashflow 109 933 895 15 132 Acq/inv/disposals 69 (186) (361) - - Net investing cashflow (44) (253) (461) (867) (863) Increase in loans 41 716 40 560 - Dividends 0 0 0 0 0 Net equity raised/other 0 (747) 223 (56) (56) Net financing cashflow 41 (31) 263 504 (56) Incr/(decr) in net cash 219 716 797 519 76 Exch rate movements 10 0 0 0 - Opening cash 213 442 1,158 1,955 2,473 Closing cash 442 1,158 1,955 2,473 2,549 Summary balance sheet forecast (US$m) Cash & equivalents 442 1,158 1,955 2,473 2,549 Debtors 260 307 268 282 315 Inventories 10 15 11 11 13 Other current assets 187 26 394 394 394 Fixed assets 2,813 2,728 2,675 3,282 3,885 Intangible assets 86 86 86 86 86 Other term assets 1,085 1,950 1,600 1,543 1,486 Total assets 4,883 6,270 6,989 8,073 8,729 Short-term debt 203 - 720 360 360 Creditors 9 12 11 11 13 Other current liabs 464 591 785 828 924 Long-term debt/CBs 1,637 2,326 1,646 2,566 2,566 Provisions/other LT liabs 49 153 191 191 191 Minorities/other equity 0 (1) 0 0 (2) Shareholder funds 2,521 3,189 3,636 4,116 4,678 Total liabs & equity 4,883 6,270 6,989 8,073 8,729 Ratio analysis Revenue growth (% YoY) 98.2 42.7 3.8 5.4 11.6 Ebitda growth (% YoY) 671.9 88.1 6.4 9.6 7.7 Ebitda margin (%) 16.3 21.5 22.0 22.9 22.1 Net income margin (%) (0.4) 7.8 10.1 11.5 12.0 Dividend payout (%) - 0.0 0.0 0.0 0.0 Effective tax rate (%) (9.6) (0.7) (0.2) 0.0 0.0 Ebitda/net int exp (x) 4.6 6.6 8.8 10.5 12.1 Net debt/equity (%) 55.4 36.6 11.3 11.0 8.0 ROE (%) (0.4) 10.2 11.6 12.2 12.6 ROIC (%) 2.5 10.6 10.6 12.5 12.7 EVA®/IC (%) (7.7) 0.5 0.5 2.4 2.6 Source: CLSA Asia-Pacific Markets

Expect gearing to stay at healthy 8-11%

Cash balance to still grow from US$2.0bn to

US$2.5bn - with help from project loan

Free cashflow to fall in 2013-14 on investments

in Manila and Macau Studio City

Revenue growth of 5-12% in 2013-14

Page 54: Buffet's Checklist on Macau Gaming

Melco Crown - BUY Macau gaming

54 [email protected] 15 November 2012

Recommendation history of Melco Crown Entertainment Ltd (MPEL US)

Date Rec Target Date Rec Target

17 October 2012 BUY 19.40 17 June 2011 BUY 15.40

08 August 2012 BUY 18.30 06 May 2011 BUY 13.00

11 June 2012 BUY 20.00 19 January 2011 BUY 12.20

09 May 2012 BUY 23.20 03 January 2011 BUY 8.80

16 April 2012 BUY 22.90 02 November 2010 BUY 8.50

10 February 2012 BUY 19.10 01 November 2010 BUY 8.00

16 November 2011 BUY 19.90 26 July 2010 BUY 4.90

20 September 2011 BUY 24.00 24 March 2010 O-PF 6.30

24 August 2011 BUY 17.20 Source: CLSA Asia-Pacific Markets

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25

Stoc

k pr

ice

(US$

)

Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12

Aaron Fischer, CFAOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 55: Buffet's Checklist on Macau Gaming

MGM China HK$13.70 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (HK$m) 12,435 20,263 21,022 21,361 23,036 Net profit (HK$m) 1,566 3,280 4,243 3,795 4,107 EPS (HK¢) 41.2 86.3 111.6 99.9 108.1 CL/consensus (20) (EPS%) - - 94 83 77 EPS growth (% YoY) nm 109.4 29.4 (10.6) 8.2 PE (x) 33.2 15.9 12.3 13.7 12.7 Dividend yield (%) 0.0 6.0 5.4 5.8 6.3 FCF yield (%) 6.0 9.9 8.6 5.8 3.5 PB (x) 35.2 10.7 9.4 8.0 6.9 ROE (%) 180.8 103.2 81.6 63.1 58.3 Net debt/equity (%) 267.7 (29.8) (31.6) (24.9) (0.6) Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Aaron Fischer, CFA [email protected] (852) 26008256

Richard Huang (852) 26008455

Mariana Kou, CFA (852) 26008190

15 November 2012

Hong Kong Hotels & Leisure Reuters 2282.HK Bloomberg 2282 HK

Priced on 8 November 2012 HK HSI @ 21,566.9 12M hi/lo HK$14.76/9.90 12M price target HK$18.80 ±% potential +37% Shares in issue 3,800.0m Free float (est.) 20.0% Market cap US$6,716m 3M average daily volume HK$33.1m (US$4.3m) Major shareholders MGM Resorts International 51.0%

Stock performance (%) 1M 3M 12M

Absolute 3.8 12.1 18.7 Relative 0.2 4.3 8.3

Source: Bloomberg

www.clsa.com

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18

20

Jun 11 Nov 11 May 12 Nov 12

MGM ChinaRel to HSI (RHS)

(HK$) (%)

Dividend-payout support MGM China’s earnings growth has been slowing, with the MGM Macau property running at high capacity utilisation. We forecast efforts to optimise gaming tables by adding a new VIP area to MGM Macau to underpin a 5% Ebitda Cagr over 2011-13. We also expect its healthy cash balance and strong free cashflow to drive a high dividend payout. We maintain our BUY rating on MGM China, with our EV/Ebitda-based HK$18.80 target implying 37% upside.

Investment thesis MGM China’s earnings growth has been slowing, but we should still see further gains as it adds a new VIP area on the second floor of MGM Macau. We also expect the company’s net-cash balance and robust free cashflow to underpin a sustainable high dividend payout. We forecast a 5-6% dividend yield over 12-14CL.

Catalysts The ongoing effort to improve table productivity at MGM Macau should be the key near-term earnings driver. The increase in dividend payout from its high cash balance should also be positive for the share price. Finally, the market gradually pricing in the MGM Cotai project will give the stock added impetus.

Earnings growth We expect MGM China to deliver HK$21.0bn of revenue in 2012 and HK$21.4bn in 2013, representing 2-4% 12-13CL annual increases. This slow topline growth is due to the high capacity utilisation at MGM Macau limiting its expansion potential. We estimate Ebitda of HK$5.1bn in 2012 (up 9% YoY) and HK$5.2bn in 2013 (up 2%).

Valuation We value MGM China by applying 11x 13CL EV/Ebitda to existing operations and assuming HK$3.20 per share for MGM Cotai. Our HK$18.80 target implies a 19x 13CL PE, which we believe is fair given this is still a discount to our 20-25x target PEs for other Chinese consumer-discretionary names.

Page 56: Buffet's Checklist on Macau Gaming

MGM China - BUY Macau gaming

56 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets

0

1

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7

2010 2011 12CL 13CL 14CL

MGM China Industry average(%)

na(100)

(50)

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2008 2009 2010 2011 12CL 13CL 14CL

MGM China Industry average(%)

(2)

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12

(100)

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800

2008 2009 2010 2011 12CL 13CL 14CL

Free cashflow

FCF yield (RHS)(US$m) (%)

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40

60

80

100

2008 2009 2010 2011 12CL 13CL 14CL

MGM China Industry average(%) 512

(40)

(20)

0

20

40

60

80

100

2008 2009 2010 2011 12CL 13CL 14CL

MGM China

Industry average

(%) 267.71,199.4 1,888.1

Expect MGM China to remain net cash

over 2012-14

Page 57: Buffet's Checklist on Macau Gaming

MGM China - BUY Macau gaming

15 November 2012 [email protected] 57

Summary financials Year to 31 December 010A 11A 12CL 13CL 14CL Summary P&L forecast (HK$m) Revenue 12,435 20,263 21,022 21,361 23,036 Op Ebitda 2,798 4,734 5,137 5,216 5,625 Op Ebit 2,021 3,928 4,361 4,439 4,848 Interest income 1 12 37 37 37 Interest expense (451) (240) (244) (317) (383) Other items (5) 35 (1) - 0 Profit before tax 1,566 3,734 4,154 4,159 4,501 Taxation 0 (455) 89 (364) (394) Minorities/Pref divs - - - - - Net profit 1,566 3,280 4,243 3,795 4,107 Summary cashflow forecast (HK$m) Operating profit 2,021 3,928 4,361 4,439 4,848 Operating adjustments 128 (98) (162) (47) (40) Depreciation/amortisation 778 806 776 777 777 Working capital changes 432 1,400 (541) 90 102 Net interest/taxes/other 1 (448) 646 (328) (358) Net operating cashflow 3,360 5,588 5,080 4,931 5,329 Capital expenditure (258) (422) (603) (1,938) (3,488) Free cashflow 3,102 5,166 4,477 2,994 1,842 Acq/inv/disposals 3 0 1 - - Int, invt & associate div - - - - - Net investing cashflow (255) (422) (603) (1,938) (3,488) Increase in loans (2,667) (1,490) 0 5,425 0 Dividends 0 (476) (3,101) (2,800) (3,035) Net equity raised/other (491) 467 (1,064) (317) (383) Net financing cashflow (3,157) (1,498) (4,165) 2,308 (3,419) Incr/(decr) in net cash (53) 3,668 313 5,302 (1,577) Exch rate movements - - - - - Opening cash 1,976 1,923 5,591 5,903 11,206 Closing cash 1,923 5,591 5,904 11,206 9,629 Summary balance sheet forecast (HK$m) Cash & equivalents 1,923 5,590 5,903 11,206 9,629 Debtors 1,137 549 503 545 590 Inventories 64 79 101 109 118 Other current assets 169 66 120 128 138 Fixed assets 5,380 4,998 4,968 6,274 9,130 Intangible assets 1,551 1,406 1,347 1,347 1,347 Other term assets - - - - 0 Total assets 10,224 12,689 12,943 19,609 20,951 Short-term debt - 207 416 416 416 Creditors 2,706 3,466 3,020 3,267 3,540 Other current liabs 150 214 240 240 240 Long-term debt/CBs 5,887 3,929 3,745 9,170 9,170 Provisions/other LT liabs 0 0 0 - - Minorities/other equity 0 0 0 0 0 Shareholder funds 1,481 4,873 5,521 6,515 7,585 Total liabs & equity 10,224 12,689 12,943 19,609 20,951 Ratio analysis Revenue growth (% YoY) 60.9 63.0 3.7 1.6 7.8 Ebitda growth (% YoY) 141.8 69.2 8.5 1.5 7.8 Ebitda margin (%) 22.5 23.4 24.4 24.4 24.4 Net profit margin (%) 12.6 16.2 20.2 17.8 17.8 Dividend payout (%) 0.0 94.5 66.0 80.0 80.0 Effective tax rate (%) 0.0 12.2 (2.1) 8.8 8.8 Ebitda/net int exp (x) 6.2 20.7 24.8 18.6 16.2 Net debt/equity (%) 267.7 (29.8) (31.6) (24.9) (0.6) ROE (%) 180.8 103.2 81.6 63.1 58.3 ROIC (%) 33.7 77.8 123.8 93.4 71.1 EVA®/IC (%) 26.4 70.7 116.4 86.2 63.9 Source: CLSA Asia-Pacific Markets

Net cash out to 2014

Cash balance of HK$10-11bn in 2013-14

We forecast HK$2-3bn free cashflow in 2013-14

Revenue to grow 2-8% in 2013-14

Page 58: Buffet's Checklist on Macau Gaming

MGM China - BUY Macau gaming

58 [email protected] 15 November 2012

Recommendation history of MGM China Holdings Ltd (2282 HK)

Date Rec Target Date Rec Target

17 October 2012 BUY 18.80 23 February 2012 BUY 15.20

10 September 2012 BUY 19.20 16 November 2011 BUY 16.50

08 August 2012 BUY 19.10 31 October 2011 BUY 18.90

11 June 2012 BUY 18.80 20 September 2011 BUY 21.40

16 April 2012 BUY 22.00 08 July 2011 O-PF 18.70

01 March 2012 BUY 17.60 Source: CLSA Asia-Pacific Markets

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(HK

$)

Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12

Aaron Fischer, CFAOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 59: Buffet's Checklist on Macau Gaming

MGM Resorts US$9.78 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (US$m) 6,019 7,849 9,082 9,220 9,515 Net income (US$m) (1,437) 3,115 (753) (379) (356) EPS (US$) (3.19) 5.50 (1.54) (0.78) (0.73) CL/consensus (22) (EPS%) - - 239 162 442 EPS growth (% YoY) nm nm (128.0) nm nm PE (x) nm 1.8 nm nm nm Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 FCF yield (%) 6.7 6.7 2.8 (5.1) (7.7) PB (x) 1.0 0.7 0.8 0.9 0.9 ROE (%) (39.1) 52.3 (4.7) (0.9) (0.4) Net debt/equity (%) 413.3 125.8 137.0 151.4 169.4 Source: Credit Agricole Securities (USA); FactSet for consensus data. CL = estimate

The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc. For important disclosure information please refer to page 80.

Produced byProduced byProduced by

Jon Oh [email protected] (1) 212 549 8818

Clifford Kurz, CFA (1) 212 549 8819

15 November 2012

USA Hotels & Leisure Reuters MGM.N Bloomberg MGM US

Priced on 8 November 2012 S&P 500 @ 1,377.5 12M hi/lo US$14.94/8.84 12M price target US$14.00 ±% potential +43% Shares in issue 488.5m Free float (est.) 81.4% Market cap US$4,782m 3M average daily volume US$96.2m (US$96.2m) Major shareholders Tracinda Corp 18.7%

Stock performance (%) 1M 3M 12M

Absolute (6.1) (0.4) (9.6) Relative (0.8) 1.4 (16.3)

Source: Bloomberg

www.clsa.com

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101112131415161718

Nov 10 Jul 11 Mar 12 Nov 12

MGM ResortsRel to 500 (RHS)

(US$) (%)

Rejuvenated Growth in Macau has slowed and the USA has seen patches of softness during its recovery, but MGM’s operations in both regions continue to see improvements. In Las Vegas, the number of visitors grew 2% YoY in 1H12, on track for a new record. This should drive Revpar and Ebitda growth. Meanwhile its Macau subsidiary, MGM China, has improved mass-table yields and expanded its VIP operations. The 6% forecast dividend yield from MGM China should help contain MGM’s debt burden. BUY.

Investment thesis Las Vegas Strip Revpar fell 3% during 3Q12, the first negative comp in 10 quarters. However, it has since improved, starting in September. Meanwhile, MGM China continues to make adjustments to its mass-table configurations, improving table yields across the segment and expanding its VIP footprint. While MGM China is only a third of Ebitda, it accounts for the bulk of MGM’s valuation: the 51%-stake in MGM China represents 70% of MGM’s current market cap.

Catalysts MGM China should undergo incremental earnings improvement as the company optimises table productivity and expands its casino floor space. Meanwhile, a high dividend payout from MGM China should help contain the c.US$13bn debt burden at the parent company. Approval for the construction of MGM Cotai should also help to drive share-price performance.

Earnings growth We expect marginal improvements at MGM’s wholly owned properties, with Ebitda increases of 1-2% for 12CL (US$1.31bn) and 13CL (US$1.34bn). MGM China’s expansion will slow to 2% for 2013 (US$673m) as the property becomes fully utilised, with little capacity for further growth.

Valuation We base our US$14 target on a SOTP approach that ascribes a 7-12x EV/Ebitda multiple for MGM’s wholly owned and unconsolidated properties, an HK$18.80 fair value for MGM China (covered by CLSA’s Aaron Fischer) and a 60% discount to book value for City Center, MGM’s latest Las Vegas development.

Page 60: Buffet's Checklist on Macau Gaming

MGM Resorts - BUY Macau gaming

60 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets, Credit Agricole Securities (USA)

0

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3

4

5

6

2010 2011 12CL 13CL 14CL

MGM Resorts Industry average(%)

na na na na na(40)

(30)

(20)

(10)

0

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60

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MGM ResortsIndustry average

(%)

(2)

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8

10

(100)

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2008 2009 2010 2011 12CL 13CL 14CL

Free cashflow

FCF yield (RHS)

(US$m) (%)

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2008 2009 2010 2011 12CL 13CL 14CL

MGM Resorts

Industry average

(%)

(50)

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450

2008 2009 2010 2011 12CL 13CL 14CL

MGM Resorts

Industry average

(%)

Expect net debt to remain steady in 2012-14

Page 61: Buffet's Checklist on Macau Gaming

MGM Resorts - BUY Macau gaming

15 November 2012 [email protected] 61

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (US$m) Revenue 6,019 7,849 9,082 9,220 9,515 Op Ebitda 930 1,557 1,702 1,832 1,919 Op Ebit 297 739 765 909 984 Interest income 0 0 0 0 0 Interest expense (1,114) (1,087) (1,118) (1,011) (1,036) Other items (1,291) 3,298 (153) - - Profit before tax (2,107) 2,951 (506) (102) (52) Taxation 779 403 60 25 17 Minorities/pref divs/affils (109) (239) (307) (301) (321) Net income (1,437) 3,115 (753) (379) (356) Summary cashflow forecast (US$m) Net income (1,437) 3,115 (753) (379) (356) Operating adjustments - - - - - Depreciation/amortisation 633 817 936 923 935 Working capital changes 199 69 68 (8) (13) Non-operating adjustments 542 (3,503) (356) (287) (283) Net operating cashflow 504 675 584 366 374 Capital expenditure (207) (301) (430) (650) (800) Free cashflow 297 374 154 (284) (426) Acq/inv/disposals (95) 369 363 8 46 Net investing cashflow (586) (21) (412) (700) (800) Increase in loans (1,873) 718 (543) 47 3 Dividends 0 0 0 0 0 Net equity raised/other 398 (7) 0 0 0 Net financing cashflow (1,475) 712 (543) 47 3 Incr/(decr) in net cash (1,557) 1,366 (370) (287) (423) Exch rate movements - 1 - - - Opening cash 2,056 499 1,866 1,496 1,209 Closing cash 499 1,866 1,496 1,209 786 Summary balance sheet forecast (US$m) Cash & equivalents 499 1,866 1,496 1,209 786 Debtors 322 492 484 493 508 Inventories 96 113 112 114 118 Other current assets 538 342 281 281 281 Fixed assets 14,554 14,867 14,263 13,990 13,855 Intangible assets 420 7,945 7,877 7,877 7,877 Other term assets 599 507 507 507 507 Total assets 18,952 27,766 26,360 25,803 25,220 Short-term debt 371 659 660 672 694 Creditors 167 171 176 179 186 Other current liabs 708 915 1,065 1,065 1,065 Long-term debt/CBs 12,247 13,637 13,045 13,092 13,095 Provisions/other LT liabs 2,527 2,502 2,502 2,502 2,502 Minorities/other equity 0 3,802 3,584 3,344 3,085 Shareholder funds 2,932 6,081 5,327 4,949 4,592 Total liabs & equity 18,952 27,766 26,360 25,803 25,220 Ratio analysis Revenue growth (% YoY) 0.7 30.4 15.7 1.5 3.2 Ebitda growth (% YoY) (16.0) 67.3 9.3 7.7 4.7 Ebitda margin (%) 15.5 19.8 18.7 19.9 20.2 Net income margin (%) (23.9) 39.7 (8.3) (4.1) (3.7) Dividend payout (%) - 0.0 - - - Effective tax rate (%) 36.9 (13.7) 11.8 24.0 32.7 Ebitda/net int exp (x) 0.8 1.4 1.5 1.8 1.9 Net debt/equity (%) 413.3 125.8 137.0 151.4 169.4 ROE (%) (39.1) 52.3 (4.7) (0.9) (0.4) ROIC (%) 1.2 4.3 3.0 3.1 3.0 EVA®/IC (%) (8.7) (8.1) (8.2) (7.4) (7.1) Source: Credit Agricole Securities (USA)

Net gearing to edge up from 137% in 2012 to

169% in 2014

We expect US$0.8-1.5bn cash balances in 2012-14

We estimate US$370-580m of 2012-14

operating cashflow

Revenue growth of 2-3% in 2013-14

Page 62: Buffet's Checklist on Macau Gaming

MGM Resorts - BUY Macau gaming

62 [email protected] 15 November 2012

Recommendation history of MGM Resorts International (MGM US)

Date Rec Target Date Rec Target

01 November 2012 BUY 14.00 01 February 2012 BUY 16.00

08 August 2012 BUY 15.00 16 November 2011 BUY 15.00

12 June 2012 BUY 16.00 19 September 2011 BUY 16.00

17 April 2012 BUY 17.00 08 July 2011 O-PF 16.00 Source: Credit Agricole Securities (USA)

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)

Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12

Jon OhOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 63: Buffet's Checklist on Macau Gaming

Sands China HK$30.50 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (US$m) 4,142 4,896 6,295 7,961 8,727 Net profit (US$m) 678 1,119 1,189 1,880 2,240 EPS (US¢) 8.4 13.9 14.8 23.4 27.8 CL/consensus (24) (EPS%) - - 93 104 99 EPS growth (% YoY) 214.3 64.9 6.3 58.1 19.1 PE (x) 46.6 28.2 26.6 16.8 14.1 Dividend yield (%) 0.0 3.8 3.7 4.7 5.7 FCF yield (%) 3.2 2.2 1.9 3.4 6.1 PB (x) 7.2 5.7 5.7 5.7 5.2 ROE (%) 16.9 22.7 21.5 34.0 38.5 Net debt/equity (%) 48.0 16.6 29.4 45.4 38.2 Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Aaron Fischer, CFA [email protected] (852) 26008256

Richard Huang (852) 26008455

Mariana Kou, CFA (852) 26008190

15 November 2012

Hong Kong Hotels & Leisure Reuters 1928.HK Bloomberg 1928 HK

Priced on 8 November 2012 HK HSI @ 21,566.9 12M hi/lo HK$33.05/19.96 12M price target HK$35.30 ±% potential +16% Shares in issue 8,050.4m Free float (est.) 29.7% Market cap US$31,686m 3M average daily volume HK$340.5m (US$43.9m) Major shareholders Las Vegas Sands 70.3%

Stock performance (%) 1M 3M 12M

Absolute 11.1 22.0 26.8 Relative 7.3 13.5 15.7

Source: Bloomberg

www.clsa.com

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Sands ChinaRel to HSI (RHS)

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Shining star Sands China offers investors both growth and dividends. We expect the opening of Sands Cotai Central and an improvement in the junket VIP segment to help it deliver a 26% Ebitda Cagr over 2012-13. We forecast improving free cashflow and a 4-6% dividend yield in 2012-14. Resolution of the standstill at the Four Seasons apartment hotel would be a near-term catalyst. We maintain our BUY recommendation, with our HK$35.30 target implying 16% absolute upside or a 20% total return.

Investment thesis Sands China offers investors both growth and dividends. We expect the company to deliver the strongest earnings growth in our coverage in the next two years, thanks to the phased opening of Sands Cotai Central (SCC) in 2012. Following this, we estimate Sands will control 58% of Macau’s hotel rooms and 27% of its gaming tables. Free cashflow will also improve with SCC’s completion, supporting generous dividend payments. We forecast Sands to deliver 4-6% dividend yields in 2012-14: this is one of the highest rates in the Asian big-cap universe.

Catalysts The successful opening of SCC and the ramping up of market share in the junket VIP segment will boost the stock. Resolution of the Four Seasons apartment hotel standstill is a further potential near-term share-price catalyst. Finally, the market gradually pricing in The Parisian (Sands Site 3), where the company has recently received government approval, is also positive.

Growth estimate We expect Sands China to increase net revenue by 29% to US$6,295m in 2012 and by a further 26% to US$7,961m in 2013. This strong topline growth should translate into a significant 20% jump in Ebitda in 2012 (to US$1,850m) and a 34% rise (to US$2,471m) in 2013.

Valuation We value Sands China by applying 15x 13CL EV/Ebitda to existing operations, and HK$2.20 per share for the Parisian (Sands Site 3). Our HK$35.30 target price implies a 19x 13CL, which we believe is fair given that this is still a discount to our 20-25x target PEs for other Chinese consumer-discretionary names.

Page 64: Buffet's Checklist on Macau Gaming

Sands China - BUY Macau gaming

64 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets

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2010 2011 12CL 13CL 14CL

Sands China Industry average(%)

na(10)

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30

40

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2008 2009 2010 2011 12CL 13CL 14CL

Sands China Industry average(%)

(8)

(6)

(4)

(2)

0

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4

6

8

(2,000)

(1,500)

(1,000)

(500)

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500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 12CL 13CL 14CL

Free cashflow FCF yield (RHS)

(US$m) (%)

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2008 2009 2010 2011 12CL 13CL 14CL

Sands China Industry average3,009

(%)

(40)

(20)

0

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2008 2009 2010 2011 12CL 13CL 14CL

Sands China Industry average(%) 258.1

Expect net gearing to remain healthy at 30-45% in 2012-14

Page 65: Buffet's Checklist on Macau Gaming

Sands China - BUY Macau gaming

15 November 2012 [email protected] 65

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (US$m) Revenue 4,142 4,896 6,295 7,961 8,727 Op Ebitda 1,189 1,548 1,850 2,471 2,831 Op Ebit 875 1,276 1,527 2,019 2,359 Interest income 3 8 19 19 19 Interest expense (119) (53) (58) (98) (128) Other items (78) (110) (299) (60) (10) Profit before tax 682 1,121 1,189 1,880 2,240 Taxation (4) (2) - - - Minorities/Pref divs - - - - - Net profit 678 1,119 1,189 1,880 2,240 Summary cashflow forecast (US$m) Operating profit 875 1,276 1,527 2,019 2,359 Operating adjustments - - - - - Depreciation/amortisation 314 273 323 452 472 Working capital changes 133 30 (155) (228) (168) Net interest/taxes/other 41 (169) (69) 26 83 Net operating cashflow 1,363 1,409 1,626 2,269 2,746 Capital expenditure (346) (700) (1,036) (1,205) (800) Free cashflow 1,016 709 590 1,064 1,946 Acq/inv/disposals 4 - (9) - - Int, invt & associate div (756) 450 18 19 19 Net investing cashflow (1,099) (250) (1,027) (1,186) (781) Increase in loans 69 (335) (165) 0 1,000 Dividends 0 0 (1,201) (1,872) (1,661) Net equity raised/other (198) 624 (75) (98) (128) Net financing cashflow (129) 289 (1,442) (1,970) (789) Incr/(decr) in net cash 136 1,448 (842) (887) 1,176 Exch rate movements (3) 2 - - - Opening cash 909 1,041 2,491 1,649 762 Closing cash 1,041 2,491 1,649 762 1,938 Summary balance sheet forecast (US$m) Cash & equivalents 1,041 2,491 1,649 762 1,938 Debtors 292 557 635 775 849 Inventories 9 10 13 16 17 Other current assets 137 3 4 4 4 Fixed assets 5,503 6,250 6,869 7,622 7,950 Intangible assets 35 32 15 15 15 Other term assets 698 36 43 43 43 Total assets 8,475 10,128 9,999 10,007 11,586 Short-term debt 387 80 48 48 48 Creditors 960 1,180 1,180 1,180 1,180 Other current liabs 4 2 1 1 1 Long-term debt/CBs 2,746 3,329 3,222 3,222 4,222 Provisions/other LT liabs 15 21 28 28 28 Minorities/other equity 0 0 0 0 0 Shareholder funds 4,362 5,516 5,520 5,528 6,107 Total liabs & equity 8,475 10,128 9,999 10,007 11,586 Ratio analysis Revenue growth (% YoY) 25.5 18.2 28.6 26.5 9.6 Ebitda growth (% YoY) 49.1 30.2 19.5 33.6 14.6 Ebitda margin (%) 28.7 31.6 29.4 31.0 32.4 Net profit margin (%) 16.4 22.9 18.9 23.6 25.7 Dividend payout (%) 0.0 107.4 99.9 80.0 80.0 Effective tax rate (%) 0.6 0.2 0.0 0.0 0.0 Ebitda/net int exp (x) 10.3 34.5 47.2 31.1 25.9 Net debt/equity (%) 48.0 16.6 29.4 45.4 38.2 ROE (%) 16.9 22.7 21.5 34.0 38.5 ROIC (%) 16.4 22.3 25.2 29.5 31.5 EVA®/IC (%) 9.9 15.8 18.7 23.0 25.0 Source: CLSA Asia-Pacific Markets

We expect 10-27% revenue growth in

2013-14

We forecast 19-58% net profit growth in 2013-14

Free cashflow to increase from US$590m in 2012 to

US$1.9bn in 2014

We expect net margin to improve from 19% in 2012 to 26% in 2014

Page 66: Buffet's Checklist on Macau Gaming

Sands China - BUY Macau gaming

66 [email protected] 15 November 2012

Recommendation history of Sands China Ltd (1928 HK)

Date Rec Target Date Rec Target

17 October 2012 BUY 35.30 20 September 2011 BUY 36.10

10 September 2012 BUY 35.70 06 May 2011 BUY 27.80

26 July 2012 BUY 33.30 02 March 2011 BUY 26.60

22 June 2012 BUY 35.70 19 January 2011 BUY 28.80

11 June 2012 BUY 34.00 02 January 2011 BUY 22.00

16 April 2012 BUY 37.60 28 October 2010 BUY 21.20

20 February 2012 O-PF 35.50 26 July 2010 BUY 19.00

02 February 2012 BUY 35.50 24 March 2010 BUY 17.00

16 November 2011 BUY 29.30 20 January 2010 BUY 14.00

28 October 2011 BUY 36.40 Source: CLSA Asia-Pacific Markets

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Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12

Aaron Fischer, CFAOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 67: Buffet's Checklist on Macau Gaming

SJM HK$17.20 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (HK$m) 57,728 76,093 78,282 84,668 91,152 Net profit (HK$m) 3,557 5,308 6,453 7,084 7,858 EPS (HK¢) 65.2 96.1 116.4 127.8 141.7 CL/consensus (24) (EPS%) - - 99 98 99 EPS growth (% YoY) 202.4 47.4 21.1 9.8 10.9 PE (x) 26.4 17.9 14.8 13.5 12.1 Dividend yield (%) 2.0 4.2 5.4 5.9 6.6 FCF yield (%) 7.9 8.0 8.4 8.1 7.1 PB (x) 7.0 5.5 5.5 4.9 4.5 ROE (%) 32.4 34.9 37.1 38.1 38.3 Net debt/equity (%) (34.4) (61.0) (51.9) (56.7) (52.1) Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Aaron Fischer, CFA [email protected] (852) 26008256

Richard Huang (852) 26008455

Mariana Kou, CFA (852) 26008190

15 November 2012

Hong Kong Hotels & Leisure Reuters 0880.HK Bloomberg 880 HK

Priced on 8 November 2012 HK HSI @ 21,566.9 12M hi/lo HK$18.18/11.68 12M price target HK$23.20 ±% potential +35% Shares in issue 5,522.7m Free float (est.) 39.0% Market cap US$12,309m 3M average daily volume HK$98.5m (US$12.7m) Major shareholders STDM 61.0%

Stock performance (%) 1M 3M 12M

Absolute 5.1 13.9 21.5 Relative 1.5 6.0 10.8

Source: Bloomberg

www.clsa.com

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Nov 10 Jul 11 Mar 12 Nov 12

SJM (LHS)Rel to HSI

(HK$) (%)

Our yield play SJM is our preferred yield play in the Macau gaming industry. We expect the company to enjoy a 12% Ebitda Cagr over 2012-13, with efforts to optimise gaming tables by moving them from satellite casinos to the Grand Lisboa the key driver. Its high cash balance and strong free cashflow will also ensure a defensive dividend stream. We maintain our BUY call on SJM with our HK$23.20 target - based on 11x 13CL EV/Ebitda and HK$3.00 for SJM Cotai - implying 35% upside.

Investment thesis SJM’s long operating track record in Macau and its renowned Lisboa brand continue to drive arrivals at its properties. Earnings growth has been slowing, but we should still see a further increase in visitors to the Grand Lisboa as the company adds more gaming tables. We also expect the company’s high cash balance (HK$22bn as of June 2012, or HK$4.0 per share) and robust free cashflow to underpin a sustainable high dividend payout. We forecast 5-7% 2012-14 dividend yields.

Catalysts The continuing effort to optimise gaming tables by moving them from satellite casinos to the Grand Lisboa should be the key earnings driver. Raising the dividend payout with its elevated cash balance will also be positive for the share price. Finally, the market gradually pricing in the SJM Cotai project is also a key catalyst.

Growth estimate We expect SJM to increase revenue by 3% to HK$78bn in 2012 and by a further 8% to HK$85bn in 2013, with the limited topline increases in 2012-13 due to the minimal growth potential at the satellite casinos. We forecast HK$7.5bn Ebitda in 2012 (up 14% YoY) and HK$8.2bn in 2013 (up 10%) despite market-share shifts to Cotai-dominant operators.

Valuation We value SJM by applying 11x 13CL EV/Ebitda to existing operations and HK$3.00 for SJM Cotai. Our HK$23.20 target implies an 18x 13CL PE, which we believe is fair given that this is still a discount to our 20-25x target PEs for other Chinese consumer-discretionary names.

Page 68: Buffet's Checklist on Macau Gaming

SJM - BUY Macau gaming

68 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets

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2010 2011 12CL 13CL 14CL

SJM Industry average(%)

(30)

(20)

(10)

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2008 2009 2010 2011 12CL 13CL 14CL

SJM Industry average(%)

(4)

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(400)

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2008 2009 2010 2011 12CL 13CL 14CL

Free cashflow FCF yield (RHS)(US$m) (%)

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SJM Industry average(%)368

(80)

(60)

(40)

(20)

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40

60

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100

2008 2009 2010 2011 12CL 13CL 14CL

SJM Industry average(%)

SJM to remain net cash in 2012-14

Page 69: Buffet's Checklist on Macau Gaming

SJM - BUY Macau gaming

15 November 2012 [email protected] 69

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (HK$m) Revenue 57,728 76,093 78,282 84,668 91,152 Op Ebitda 4,838 6,615 7,481 8,244 9,101 Op Ebit 3,661 5,494 6,355 7,106 7,976 Interest income 74 170 270 154 197 Interest expense (215) (123) (125) (142) (282) Other items 10 (202) (24) (38) (38) Profit before tax 3,530 5,340 6,476 7,080 7,853 Taxation (18) (35) (37) (55) (61) Minorities/Pref divs 45 3 15 59 65 Net profit 3,557 5,308 6,453 7,084 7,858 Summary cashflow forecast (HK$m) Operating profit 3,661 5,494 6,355 7,106 7,976 Operating adjustments - - - - - Depreciation/amortization 1,177 1,121 1,126 1,138 1,125 Working capital changes 3,087 832 (1,456) 1,221 982 Net interest/taxes/other 341 961 2,780 593 587 Net operating cashflow 8,266 8,408 8,805 10,058 10,670 Capital expenditure (846) (846) (811) (2,350) (3,900) Free cashflow 7,420 7,562 7,993 7,708 6,770 Acq/inv/disposals - - - - - Int, invt & associate div (3,856) 35 (2,407) 116 159 Net investing cashflow (4,702) (811) (3,218) (2,234) (3,741) Increase in loans (1,040) (1,040) 883 0 3,875 Dividends (716) (2,093) (6,299) (5,186) (5,961) Net equity raised/other 393 (43) (732) (731) (864) Net financing cashflow (1,363) (3,175) (6,148) (5,917) (2,950) Incr/(decr) in net cash 2,202 4,421 (561) 1,907 3,979 Exch rate movements 0 0 0 0 0 Opening cash 7,937 10,139 14,560 13,999 15,906 Closing cash 10,139 14,560 13,999 15,906 19,885 Summary balance sheet forecast (HK$m) Cash & equivalents 10,139 14,560 13,999 15,906 19,885 Debtors 1,258 1,318 1,026 1,148 1,204 Inventories 56 69 66 66 66 Other current assets 5,946 6,333 8,413 8,413 8,413 Fixed assets 9,609 8,930 8,712 9,930 12,711 Intangible assets 40 33 30 30 30 Other term assets 1,690 1,663 2,108 2,102 2,096 Total assets 28,889 33,020 34,460 37,700 44,510 Short-term debt 1,040 3,072 2,347 2,347 2,347 Creditors 10,021 11,339 12,001 13,343 14,381 Other current liabs 91 388 56 56 56 Long-term debt/CBs 4,562 974 2,584 2,584 6,459 Provisions/other LT liabs - 0 0 - - Minorities/other equity 38 38 43 43 43 Shareholder funds 13,138 17,208 17,430 19,328 21,225 Total liabs & equity 28,889 33,020 34,460 37,700 44,510 Ratio analysis Revenue growth (% YoY) 67.6 31.8 2.9 8.2 7.7 Ebitda growth (% YoY) 113.2 36.7 13.1 10.2 10.4 Ebitda margin (%) 8.4 8.7 9.6 9.7 10.0 Net profit margin (%) 6.2 7.0 8.2 8.4 8.6 Dividend payout (%) 53.6 75.5 80.5 80.0 80.0 Effective tax rate (%) 0.5 0.7 0.6 0.8 0.8 Ebitda/net int exp (x) 34.1 - - - 107.2 Net debt/equity (%) (34.4) (61.0) (51.9) (56.7) (52.1) ROE (%) 32.4 34.9 37.1 38.1 38.3 ROIC (%) 43.4 72.3 84.7 85.0 86.2 EVA®/IC (%) 36.1 65.0 77.4 77.7 78.9 Source: CLSA Asia-Pacific Markets

Net margin to be largely flat

We expect cash balance to increase from

HK$14bn to HK$20bn

We forecast HK$7-8bn free cashflow in 2012-14

Revenue to grow 8% pa in 2013-14

Page 70: Buffet's Checklist on Macau Gaming

SJM - BUY Macau gaming

70 [email protected] 15 November 2012

Recommendation history of SJM Holdings Ltd (880 HK)

Date Rec Target Date Rec Target

17 October 2012 BUY 23.20 06 May 2011 BUY 25.00

10 September 2012 BUY 23.50 16 March 2011 BUY 18.50

08 August 2012 BUY 22.70 19 January 2011 BUY 18.40

11 June 2012 BUY 22.50 03 January 2011 O-PF 13.70

07 May 2012 BUY 25.50 08 November 2010 O-PF 13.00

16 April 2012 BUY 25.00 26 July 2010 BUY 9.30

29 February 2012 BUY 22.30 29 March 2010 BUY 7.00

16 November 2011 BUY 19.80 24 March 2010 BUY 7.10

08 November 2011 BUY 26.20 13 December 2009 BUY 6.30

20 September 2011 BUY 27.00 Source: CLSA Asia-Pacific Markets

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Aaron Fischer, CFAOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 71: Buffet's Checklist on Macau Gaming

Wynn Macau HK$22.65 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (HK$m) 22,439 29,371 28,480 30,299 32,580 Net profit (HK$m) 4,422 5,891 6,421 6,688 7,320 EPS (HK¢) 85.2 113.6 123.8 128.9 141.1 CL/consensus (24) (EPS%) - - 97 90 89 EPS growth (% YoY) 113.8 33.2 9.0 4.2 9.5 PE (x) 26.6 19.9 18.3 17.6 16.1 Dividend yield (%) 3.4 5.3 4.4 4.6 5.0 FCF yield (%) 5.0 7.2 5.0 3.1 1.0 PB (x) 27.3 29.2 22.1 17.7 14.5 ROE (%) 109.6 141.5 137.0 111.2 98.7 Net debt/equity (%) 26.3 (11.4) (22.3) 15.2 77.3 Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Aaron Fischer, CFA [email protected] (852) 26008256

Richard Huang (852) 26008455

Mariana Kou, CFA (852) 26008190

15 November 2012

Hong Kong Hotels & Leisure Reuters 1128.HK Bloomberg 1128 HK

Priced on 8 November 2012 HK HSI @ 21,566.9 12M hi/lo HK$25.50/14.62 12M price target HK$27.10 ±% potential +20% Shares in issue 5,187.5m Free float (est.) 27.7% Market cap US$15,159m 3M average daily volume HK$117.9m (US$15.2m) Major shareholders Wynn Resorts 72.3%

Stock performance (%) 1M 3M 12M

Absolute 10.5 25.3 0.7 Relative 6.7 16.6 (8.1)

Source: Bloomberg

www.clsa.com

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Wynn MacauRel to HSI (RHS)

(HK$) (%)

Defensive player Wynn Macau continues to benefit from its premium positioning and loyal customer base, which should protect the company during recessions. Its property Ebitda has flattened out, but its defensive earnings stream and strong free cashflow make it an attractive dividend play. The market gradually pricing in Wynn Cotai should drive further share-price outperformance. We maintain our BUY recommendation, with our HK$27.10 target suggesting 20% upside on top of a 4-5% dividend yield.

Investment thesis The Wynn Macau property continues to benefit from its premium positioning and its pool of loyal gamblers, insulating it from recessions. Wynn Macau’s earnings have flattened out over the past few quarters and we see limited growth from the current level. Despite that, we believe the company’s profits are highly defensive, making it an attractive yield play.

Catalysts The market gradually pricing in the Wynn Cotai project will be the key share-price catalyst. The company recently received final government approval and is planning to build out the US$3.5bn property in the next 46 months. In the shorter term, the company also benefits from various upgrades at the Wynn Macau property, with the expansion of the retail and VIP gaming area.

Earnings growth We expect net revenue to fall 3% in 2012 before rebounding by 6% in 2013. Slower growth in 2012-13 reflects market-share losses to Cotai players (like Sands China) and the fact that the Wynn Macau property is already running at high capacity utilisation. We forecast adjusted Ebitda to drop 3% in 2012 and increase 8% in 2013.

Valuation We value Wynn Macau by applying a 13x 13CL EV/Ebitda multiple to existing operations and adding HK$6.50 for Wynn Cotai. Our HK$27.10 target price implies a 21x 13CL PE, which we believe is fair given that it is still a discount to our 20-25x target PEs for other Chinese consumer-discretionary names.

Page 72: Buffet's Checklist on Macau Gaming

Wynn Macau - BUY Macau gaming

72 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets

0

1

2

3

4

5

6

2010 2011 12CL 13CL 14CL

Wynn Macau Industry average(%)

(40)

(20)

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2008 2009 2010 2011 12CL 13CL 14CL

Wynn Macau Industry average(%)

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40

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2008 2009 2010 2011 12CL 13CL 14CL

Wynn Macau Industry average(%)

(40)

(20)

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20

40

60

80

100

2008 2009 2010 2011 12CL 13CL 14CL

Wynn Macau Industry average(%) 736

Net gearing to increase to 77% in 2014 as the company spends on

Wynn Cotai

Page 73: Buffet's Checklist on Macau Gaming

Wynn Macau - BUY Macau gaming

15 November 2012 [email protected] 73

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (HK$m) Revenue 22,439 29,371 28,480 30,299 32,580 Op Ebitda 5,876 7,885 7,681 8,310 9,129 Op Ebit 4,887 6,868 6,715 7,300 8,110 Interest income 2 49 64 78 78 Interest expense (255) (259) (222) (544) (719) Other items (167) (793) (128) (147) (149) Profit before tax 4,466 5,865 6,428 6,688 7,320 Taxation (44) 27 (8) 0 0 Minorities/Pref divs - - - - - Net profit 4,422 5,891 6,421 6,688 7,320 Summary cashflow forecast (HK$m) Operating profit 4,887 6,868 6,715 7,300 8,110 Operating adjustments 47 1,512 0 0 0 Depreciation/amortization 990 1,016 966 1,010 1,019 Working capital changes 922 (238) 294 619 40 Net interest/taxes/other 33 259 (1) (169) 292 Net operating cashflow 6,878 9,417 7,973 8,761 9,461 Capital expenditure (1,016) (931) (2,123) (5,150) (8,250) Free cashflow 5,862 8,486 5,850 3,611 1,211 Acq/inv/disposals - (575) 0 - - Int, invt & associate div - - 63 78 78 Net investing cashflow (1,016) (1,506) (2,060) (5,072) (8,172) Increase in loans (3,117) (187) (1,745) 8,913 0 Dividends (3,900) (6,225) (5,137) (5,350) (5,856) Net equity raised/other (255) (58) 80 (248) (423) Net financing cashflow (7,272) (6,470) (6,802) 3,314 (6,279) Incr/(decr) in net cash (1,410) 1,441 (889) 7,004 (4,990) Exch rate movements - - - - - Opening cash 5,229 3,819 5,157 3,972 10,679 Closing cash 3,819 5,261 4,268 10,975 5,689 Summary balance sheet forecast (HK$m) Cash & equivalents 3,819 5,261 4,268 10,975 5,689 Debtors 485 750 451 498 535 Inventories 174 180 157 173 186 Other current assets 431 111 298 305 310 Fixed assets 8,377 7,725 8,536 12,698 19,952 Intangible assets 398 398 398 398 398 Other term assets 188 691 508 508 508 Total assets 14,348 17,360 16,832 27,771 29,794 Short-term debt - 2,303 1,114 1,114 1,114 Creditors 1,018 1,050 1,087 1,199 1,289 Other current liabs 3,963 5,972 6,000 6,577 7,046 Long-term debt/CBs 4,950 2,501 1,963 10,876 10,876 Provisions/other LT liabs 121 1,505 1,320 1,320 1,320 Minorities/other equity 0 0 30 30 30 Shareholder funds 4,297 4,028 5,317 6,654 8,118 Total liabs & equity 14,348 17,360 16,832 27,771 29,794 Ratio analysis Revenue growth (% YoY) 59.4 30.9 (3.0) 6.4 7.5 Ebitda growth (% YoY) 81.2 34.2 (2.6) 8.2 9.9 Ebitda margin (%) 26.2 26.8 27.0 27.4 28.0 Net profit margin (%) 19.7 20.1 22.5 22.1 22.5 Dividend payout (%) 89.2 105.7 80.0 80.0 80.0 Effective tax rate (%) 1.0 (0.5) 0.1 0.0 0.0 Ebitda/net int exp (x) 23.2 37.5 48.5 17.8 14.2 Net debt/equity (%) 26.3 (11.4) (22.3) 15.2 77.3 ROE (%) 109.6 141.5 137.0 111.2 98.7 ROIC (%) 84.7 174.5 220.1 145.0 79.7 EVA®/IC (%) 77.4 167.2 212.8 137.7 72.4 Source: CLSA Asia-Pacific Markets

Revenue to grow 6-7% in 2013-14

We forecast 4-10% net profit growth in 2013-14

We expect HK$1-4bn free cashflow in 2013-14

Net margin to be flat at around 22%

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74 [email protected] 15 November 2012

Recommendation history of Wynn Macau Ltd (1128 HK)

Date Rec Target Date Rec Target

17 October 2012 BUY 27.10 20 September 2011 BUY 38.40

10 September 2012 BUY 26.90 06 May 2011 BUY 34.50

18 July 2012 BUY 26.60 11 February 2011 BUY 31.00

11 June 2012 BUY 27.20 19 January 2011 BUY 29.30

08 May 2012 BUY 30.50 02 January 2011 BUY 22.70

16 April 2012 BUY 31.10 03 November 2010 BUY 22.00

01 March 2012 BUY 28.40 01 November 2010 BUY 19.30

03 February 2012 BUY 27.00 26 July 2010 BUY 16.30

18 November 2011 BUY 28.30 24 March 2010 BUY 13.80

16 November 2011 BUY 29.00 10 November 2009 BUY 12.00

20 October 2011 BUY 36.20 Source: CLSA Asia-Pacific Markets

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Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12

Aaron Fischer, CFAOther analystsNo coverage

BUYU-PF

O-PFSELL

Page 75: Buffet's Checklist on Macau Gaming

Wynn Resorts US$109.25 - BUY

Financials Year to 31 December 10A 11A 12CL 13CL 14CL Revenue (US$m) 4,185 5,270 5,115 5,384 5,719 Net income (US$m) 160 613 528 607 663 EPS (US$) 1.29 4.88 5.06 6.00 6.57 CL/consensus (24) (EPS%) - - 93 97 96 EPS growth (% YoY) 660.0 277.8 3.7 18.6 9.4 PE (x) 84.6 22.4 21.6 18.2 16.6 Dividend yield (%) 7.8 5.9 8.7 7.3 6.8 FCF yield (%) 5.7 9.7 7.4 3.6 1.6 PB (x) 6.0 6.5 nm nm nm ROE (%) 11.4 35.8 70.8 nm Nm Net debt/equity (%) 102.6 119.6 nm nm nm Source: Credit Agricole Securities (USA); FactSet for consensus data. CL = estimate

The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc. For important disclosure information please refer to page 80.

Produced byProduced byProduced by

Jon Oh [email protected] (1) 212 549 8818

Clifford Kurz, CFA (1) 212 549 8819

15 November 2012

USA Hotels & Leisure Reuters WYNN.OQ Bloomberg WYNN US

Priced on 8 November 2012 S&P 500 @ 1,377.5 12M hi/lo US$138.28/90.11 12M price target US$127.00 ±% potential +16% Shares in issue 100.5m Free float (est.) 73.9% Market cap US$10,982m 3M average daily volume US$179.5m (US$179.5m) Major shareholders Waddell & Reed 16.4% Stephen Wynn 10.0%

Stock performance (%) 1M 3M 12M

Absolute (3.0) 6.4 (15.3) Relative 2.5 8.3 (21.6)

Source: Bloomberg

www.clsa.com

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Income appeal Macau revenue has slowed with more cautious junket financing. While this has hit growth at Wynn Resorts’ 72%-owned subsidiary, Wynn Macau, the Asian property continues to enjoy occupancy above 90%, with Ebitda margins of 30-32%. Wynn continues to solidify its position as the best steward of capital in the industry, declaring a US$7.50 special dividend for 2012. Wynn’s operating FCF implies a sustainable dividend of US$7-8 for 2013-14. We are BUYers and maintain our US$127 target.

Investment thesis Given slowing credit in Macau, future growth at Wynn Macau will be mundane until the completion of Wynn Cotai sometime in early 2016. However, with US$1.2-1.3bn in operating FCF and 70% of Wynn Cotai’s capital spending funded by debt, Wynn Resorts should be able to sustain dividends of US$7-8 per share.

Catalysts The key share-price catalyst remains the valuation for its US$3.5-4bn Wynn Cotai project, which we believe the share price does not yet fully reflect. We value the project at US$31/share at the parent level, assuming a 23% ROIC. However, this could be conservative, as existing casinos have achieved ROICs of 25-40%. Meanwhile, the company should also benefit from Wynn Macau’s expansion of its VIP segment, adding another junket room this Christmas, and the growth of its retail space.

Earnings growth Wynn Macau’s 2012 Ebitda of US$1.17bn represents a 2% decline from 2011 due to a low hold rate during 1H12. We maintain our 2013 Macau Ebitda of US$1.27bn, which implies 9% growth. Wynn Las Vegas’s Ebitda growth will fluctuate from -17% in 12CL (US$375m) to +5% in 13CL (US$393m) as the property experiences volatility in its table-win percentages.

Valuation Our US$127 SOTP-derived target applies a 10x EV/Ebitda to the Las Vegas property, a HK$27.10 fair value to Wynn Macau (covered by CLSA’s Aaron Fischer), which includes HK$6.50 for Wynn Cotai, a 12x EV/Ebitda to royalties received from Wynn Macau, and a US$5 discount for risks associated with the current dispute with Japanese businessman, Kazuo Okada.

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76 [email protected] 15 November 2012

Dividend yield Return on equity

Free cashflow Capex as % of operating cashflow

Net debt/(cash) as a % of equity

Source: CLSA Asia-Pacific Markets, Credit Agricole Securities (USA)

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Wynn Resorts Industry average(%)

nm nm

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(500)

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(%)

Shareholders equity goes negative as the company

issued a 10-year bond to buy back shares

from Okada

Page 77: Buffet's Checklist on Macau Gaming

Wynn Resorts - BUY Macau gaming

15 November 2012 [email protected] 77

Summary financials Year to 31 December 10A 11A 12CL 13CL 14CL Summary P&L forecast (US$m) Revenue 4,185 5,270 5,115 5,384 5,719 Op Ebitda 1,162 1,650 1,547 1,656 1,789 Op Ebit 757 1,252 1,172 1,277 1,405 Interest income 2 8 10 10 9 Interest expense (223) (230) (284) (305) (351) Other items (200) (225) (147) (127) (127) Profit before tax 336 804 751 855 936 Taxation (20) 20 8 (9) (9) Minorities/pref divs/affils (156) (210) (230) (240) (263) Net income 160 613 528 607 663 Summary cashflow forecast (US$m) Net income 160 613 528 607 663 Operating adjustments - - - - - Depreciation/amortisation 406 398 375 379 385 Working capital changes 173 147 (17) 25 33 Non-operating adjustments 319 357 218 236 255 Net operating cashflow 1,057 1,516 1,104 1,247 1,336 Capital expenditure (284) (184) (263) (855) (1,155) Free cashflow 773 1,332 840 393 181 Acq/inv/disposals (12) (275) - - - Net investing cashflow (296) (459) (263) (855) (1,155) Increase in loans (239) (28) 3,700 0 1,299 Dividends (1,192) (1,041) (3,064) (989) (955) Net equity raised/other (61) 11 - - - Net financing cashflow (1,493) (1,058) 635 (990) 344 Incr/(decr) in net cash (731) (1) 1,476 (597) 526 Exch rate movements (2) 5 0 0 0 Opening cash 1,992 1,258 1,263 2,738 2,141 Closing cash 1,258 1,263 2,738 2,141 2,667 Summary balance sheet forecast (US$m) Cash & equivalents 1,258 1,263 2,738 2,141 2,667 Debtors 187 238 224 236 251 Inventories 87 72 89 92 96 Other current assets 28 31 31 31 31 Fixed assets 4,921 4,865 4,754 5,229 5,999 Intangible assets 40 36 34 32 31 Other term assets 148 390 395 393 394 Total assets 6,674 6,899 8,270 8,158 9,473 Short-term debt 3 408 - - - Creditors 168 172 177 183 193 Other current liabs 348 424 414 404 394 Long-term debt/CBs 3,698 3,514 7,601 7,635 8,977 Provisions/other LT liabs 77 158 158 158 158 Minorities/other equity 143 134 181 229 282 Shareholder funds 2,238 2,089 (262) (451) (531) Total liabs & equity 6,674 6,899 8,270 8,158 9,473 Ratio analysis Revenue growth (% YoY) 37.4 25.9 (2.9) 5.3 6.2 Ebitda growth (% YoY) 55.8 42.0 (6.2) 7.1 8.0 Ebitda margin (%) 27.8 31.3 30.2 30.8 31.3 Net income margin (%) 3.8 11.6 10.3 11.3 11.6 Dividend payout (%) 657.9 133.2 187.7 133.1 113.6 Effective tax rate (%) 6.1 (2.4) (1.0) 1.0 1.0 Ebitda/net int exp (x) 5.3 7.4 5.6 5.6 5.2 Net debt/equity (%) 102.6 119.6 nm nm nm ROE (%) 11.4 35.8 70.8 nm nm ROIC (%) 14.1 25.8 23.7 24.4 23.9 EVA®/IC (%) (0.4) 11.4 9.3 9.9 9.4 Source: Credit Agricole Securities (USA)

Net margin to expand from 10.3% to 11.6%

We forecast US$2-3bn cash balances in 2012-14

We estimate US$180-840m free

cashflow in 2012-14

Revenue to grow 5-6% pa in 2013-14

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78 [email protected] 15 November 2012

Recommendation history of Wynn Resorts Ltd (WYNN US)

Date Rec Target Date Rec Target

25 October 2012 BUY 127.00 19 July 2011 O-PF 183.00

18 July 2012 BUY 125.00 20 April 2011 O-PF 153.00

12 June 2012 BUY 135.00 11 February 2011 O-PF 150.00

22 February 2012 BUY 150.00 02 February 2011 O-PF 143.00

31 January 2012 BUY 140.00 11 January 2011 O-PF 127.00

16 November 2011 O-PF 160.00 20 November 2010 O-PF 120.00

20 October 2011 O-PF 173.00 05 November 2010 O-PF 128.00

19 September 2011 O-PF 185.00 Source: Credit Agricole Securities (USA)

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BUYU-PF

O-PFSELL

Page 79: Buffet's Checklist on Macau Gaming

Macau gaming

15 November 2012 [email protected] 79

Notes

Page 80: Buffet's Checklist on Macau Gaming

Important disclosures Macau gaming

80 [email protected] 15 November 2012

Companies mentioned Galaxy (27 - HK$27.45 - BUY) Las Vegas Sands (LVS - US$43.46 - BUY) Melco Crown (MPEL - US$14.49 - BUY) MGM China (2282 - HK$13.20 - BUY) MGM Resorts (MGM - US$9.59 - BUY) Sands China (1928 - HK$29.75 - BUY) SJM (880 - HK$17.82 - BUY) Wynn Macau (1128 - HK$22.55 - BUY) Wynn Resorts (WYNN - US$107.42 - BUY)

Analyst certification The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures CLSA (which for the purpose of this disclosure includes subsidiaries of CLSA B.V. and Credit Agricole Securities Asia B.V., Tokyo Branch)/Credit Agricole Securities (USA) Inc ("Credit Agricole Securities (USA)")'s policy is to only publish research that is impartial, independent, clear, fair, and not misleading. Analysts may not receive compensation from the companies they cover.

Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to a research report as below. This research disclosure should be read in conjunction with the research disclaimer as set out at www.clsa.com/disclaimer.html and the applicable regulation of the concerned market where the analyst is stationed and hence subject to. This research disclosure is for your information only and does not constitute any recommendation, representation or warranty. Absence of a discloseable position should not be taken as endorsement on the validity or quality of the research report or recommendation.

Neither analysts nor their household members/associates may have a financial interest in, or be an officer, director or advisory board member of companies covered by the analyst unless disclosed herein. Unless specified otherwise, CLSA/Credit Agricole Securities (USA)'s did not receive investment banking/non-investment banking income from, and did not manage/co-manage public offering for, the listed company during the past 12 months, and it does not expect to receive investment banking relationship from the listed company within the coming three months. Unless mentioned otherwise, CLSA/Credit Agricole Securities (USA) does not own discloseable position, and does not make market, in the securities.

The analysts included herein hereby certify that the views expressed in this research report accurately reflect their own personal views about the securities and/or the issuers and that unless disclosure otherwise, no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report or revenue from investment banking revenues. The analyst/s also states/s and confirm/s that he has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling this research report. In addition, the analysts included herein attest that they were not in possession of any material, non-public information regarding the subject company at the time of publication of the report. Save from the disclosure below (if any), the analyst(s) is/are not aware of any material conflict of interest.

Key to CLSA/Credit Agricole Securities (USA) investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-

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Important disclosures Macau gaming

15 November 2012 [email protected] 81

month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded. For example, in the case of US stock, the recommendation is relative to the expected return for S&P of 10%. Exceptions may be made depending upon prevailing market condition.

Prior to 1 Jan 2012, our investment rankings were: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%.

Overall rating distribution for Credit Agricole Securities (USA) Equity Universe: Buy / Outperform: 67%; Underperform / Sell: 33%; Restricted: 0%; data as of 30 September 2012. Investment banking clients as a % of rating category: Buy / Outperform: 77%; Underperform / Sell: 23%; Restricted: 0%; data for 12-month period ending 30 September 2012. For a history of the recommendations and price targets for companies mentioned in this report, as well as company specific disclosures, please write to: (a) Credit Agricole Securities (USA), Compliance Department, 1301 Avenue of the Americas, 15th Floor, New York, New York 10019-6022; and/or (b) CLSA, Group Compliance, 18/F, One Pacific Place, 88 Queensway, Hong Kong.

© 2012 CLSA Asia-Pacific Markets ("CLSA") and/or Credit Agricole Securities (USA) Inc (“CAS”).

This publication/communication is subject to and incorporates the terms and conditions of use set out on the www.clsa.com website. Neither the publication/ communication nor any portion hereof may be reprinted, sold or redistributed without the written consent of CLSA and/or CAS, a broker-dealer registered with the Securities and Exchange Commission of US and an affiliate of CLSA.

CLSA and/or CAS has/have produced this publication/communication for private circulation to professional, institutional and/or wholesale clients only. The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject CLSA and/or CAS to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of CLSA and/or CAS at the date of this publication/communication and are subject to change at any time without notice. Where any part of the information, opinions or estimates contained herein reflects the views and opinions of a sales person or a non-analyst, such views and opinions may not correspond to the published view of CLSA and/or CAS. This is not a solicitation or any offer to buy or sell. This publication/communication is for information purposes only and does not constitute any recommendation, representation, warranty or guarantee of performance. Any price target given in the report may be projected from 1 or more valuation models and hence any price target may be subject to the inherent risk of the selected model as well as other external risk factors. This is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/ communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice, including tax advice. CLSA and/or CAS do/does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. To the extent permitted by applicable securities laws and regulations, CLSA and/or CAS accept(s) no liability whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents. Where the publication does not contain rating, the material should not be construed as research but is offered as factual commentary. It is not intended to, nor should it be used to form an investment opinion about the not rated companies.

Subject to any applicable laws and regulations at any given time CLSA, CAS, their respective affiliates or companies or individuals connected with CLSA/CAS may have used the information contained herein before publication and may have positions in, may from time to time purchase or sell or have a material interest in any of the securities mentioned or related securities or may currently or in future have or have had a business or financial relationship with, or may provide or have provided investment banking, capital markets

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Important disclosures Macau gaming

82 [email protected] 15 November 2012

and/or other services to, the entities referred to herein, their advisors and/or any other connected parties. As a result, investors should be aware that CLSA, CAS and/or their respective affiliates or companies or such individuals may have one or more conflicts of interest.

Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research report. Details of the disclosable interest can be found in certain reports as required by the relevant rules and regulation and the full details are available at http://www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSA Group only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this website, please contact [email protected] on (852) 2600 8111. If you require disclosure information on previous dates, please contact [email protected].

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Singapore: This publication/communication is distributed for and on behalf of CLSA Limited (for research compiled by non-US analyst(s)) and /or CAS (for research compiled by US analyst(s)) in Singapore through CLSA Singapore Pte Ltd solely to persons who qualify as Institutional, Accredited and Expert Investors only, as defined in s.4A(1) of the Securities and Futures Act. Pursuant to Paragraphs 33, 34, 35 and 36 of the Financial Advisers (Amendment) Regulations 2005 with regards to an Accredited Investor, Expert Investor or Overseas Investor, sections 25, 27 and 36 of the Financial Adviser Act shall not apply to CLSA Singapore Pte Ltd. Please contact CLSA Singapore Pte Ltd in connection with queries on the report. MICA (P) 162/12/2011.

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15 November 2012 [email protected] 83

The analysts/contributors to this publication/communication may be employed by a Credit Agricole or a CLSA company which is different from the entity that distributes the publication/communication in the respective jurisdictions.

MSCI-sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by CLSA Asia-Pacific Markets.

EVA® is a registered trademark of Stern, Stewart & Co. "CL" in charts and tables stands for CAS estimates unless otherwise noted in the source.

Page 84: Buffet's Checklist on Macau Gaming

Research & sales offices www.clsa.com

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Indonesia PT CLSA Indonesia WISMA GKBI Suite 901 Jl Jendral Sudirman No.28 Jakarta 10210 Tel: (62) 21 2554 8888 Fax: (62) 21 574 6920

Singapore CLSA Singapore Pte Ltd 80 Raffles Place, No.18-01 UOB Plaza 1 Singapore 048624 Tel: (65) 6416 7888 Fax: (65) 6533 8922

USA - Chicago Credit Agricole Securities (USA) Inc 227 W. Monroe Street Suite 3800 Chicago, IL 60606 Tel: (1) 312 278 3604

China - Shanghai CLSA Limited - Shanghai Rep Office Room 910, 9/F 100 Century Avenue Pudong New Area Shanghai 200120 Tel: (86) 21 2020 5888 Fax: (86) 21 2020 5666

Japan Credit Agricole Securities Asia BV Tokyo Branch 16/F, Shiodome Sumitomo Building 1-9-2, Higashi-Shimbashi Minato-ku, Tokyo 105-0021 Tel: (81) 3 4580 5533 (General) (81) 3 4580 5171 (Trading) Fax: (81) 3 4580 5896

Taiwan CLSA Limited Taiwan Branch 27/F, 95 Dunhua South Road Section 2 Taipei 10682 Tel: (886) 2 2326 8188 Fax: (886) 2 2326 8166

USA - New York Credit Agricole Securities (USA) Inc 15/F, Credit Agricole Building 1301 Avenue of The Americas New York 10019 Tel: (1) 212 408 5888 Fax: (1) 212 261 2502

China - Shenzhen CLSA Limited - Shenzhen Rep Office Room 3111, Shun Hing Square Di Wang Commercial Centre 5002 Shennan Road East Shenzhen 518008 Tel: (86) 755 8246 1755 Fax: (86) 755 8246 1754

Korea CLSA Securities Korea Ltd 30/F, One IFC 10 Gukjegeumyung-ro Yeongdeungpo-gu, Seoul, 150-712 Tel: (82) 2 397 8400 Fax: (82) 2 771 8583

Thailand CLSA Securities (Thailand) Ltd 16/F, M Thai Tower All Seasons Place 87 Wireless Road, Lumpini Pathumwan, Bangkok 10330 Tel: (66) 2 257 4600 Fax: (66) 2 253 0532

USA - San Francisco Credit Agricole Securities (USA) Inc Suite 850 50 California Street San Francisco, CA 94111 Tel: (1) 415 544 6100 Fax: (1) 415 434 6140

Hong Kong CLSA Limited 18/F, One Pacific Place 88 Queensway Hong Kong Tel: (852) 2600 8888 Fax: (852) 2868 0189

Malaysia CLSA Securities Malaysia Sdn Bhd Suite 20-01, Level 20 Menara Dion 27 Jalan Sultan Ismail 50250 Kuala Lumpur Tel: (60) 3 2056 7888 Fax: (60) 3 2056 7988

United Kingdom CLSA (UK) 12/F, Moor House 120 London Wall London EC2Y 5ET Tel: (44) 207 614 7000 Fax: (44) 207 614 7070

CLSA Sales Trading Team Australia (61) 2 8571 4201 China (Shanghai) (86) 21 2020 5810 Hong Kong (852) 2600 7003 India (91) 22 6622 5000 Indonesia (62) 21 573 9460 Japan (81) 3 4580 5169 Korea (82) 2 397 8512

Malaysia (60) 3 2056 7852 Philippines (63) 2 860 4030 Singapore (65) 6416 7878 Taiwan (886) 2 2326 8124 Thailand (66) 2 257 4611 UK (44) 207 614 7260 US (1) 212 408 5800

© 2012 CLSA Asia-Pacific Markets ("CLSA"). Key to CLSA/Credit Agricole Securities investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded. 16/10/2012

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