Macau Gaming Sector:4Q15preview,Galaxy the clear outperformer

We forecast sector EBITDA growth of 3% QoQ, down 23% YoY, for 4Q15

    Our 4Q15 sector EBITDA forecast is in line with consensus

    We reaffirm our Neutral stance on the sector; our top pick remains Galaxy (Buy [1])

    What’s new: The gross gaming revenue (GGR) for the Macau Gaming Sector fell by 27% YoY (up 1% QoQ) for 4Q15 to MOP54.8bn. After adjusting for table reclassifications in 4Q15, we estimate that VIP GGR fell by 40% YoY (+1% QoQ), while mass GGR declined by 11% YoY (flat QoQ).The Macau gaming operators are due to report their 4Q15 results between end-January and March. We look for aggregate 4Q15 EBITDA growth for our sector universe of 3% QoQ (down 23% YoY).

    What’s the impact: While we do not stray far from consensus forecasts in terms of sector EBITDA, we expect Galaxy (27 HK, HKD21.7, Buy [1]), our top sector pick, to be the clear outperformer, with its EDITDA rising by 12% QoQ for 4Q15. For the other operators, we expect them to report sequential EBITDA improvements of up to +3% QoQ and declines of up to -8% QoQ. We believe Galaxy’s better-than-peer sequential EBITDA was largely driven by the successful ramp-up of its mass market business resulting from the ongoing reallocation of resources, from VIP to mass market. A favourable win-rate at its VIP segment has also helped, and we estimate that it improved by nearly 50bps QoQ to 3.7% for 4Q15. Galaxy also beat the market in terms of 4Q15 GGR, which rose by 8% QoQ.

    We forecast Sands (1928 HK, HKD23.55, Hold (3) and Melco Crown (MPEL US, USD13.92, Outperform [2]) to post a moderate sequential improvement in EBITDA, both up 3% QoQ for 4Q15. Melco Crown saw mass GGR improve by 20% QoQ, which we largely attribute to the opening of Studio City in October 2015. The property achieved a healthy early ramp-up of its mass market business (capturing a 2.6% share of the mass market for 4Q, on our market research), and we expect this to drive the property to EBITDA breakeven in 4Q15. We also anticipate that MGM (2282 HK, HKD8.51, Underperform [4]) underperformed its peers in 4Q15, with its EBITDA declining by 8% QoQ,What we recommend: We remain Neutral on the sector and continue to prefer the Cotai-ready operators amid the market-share shift from the Peninsula to Cotai. Galaxy remains our top pick, while we also like Melco Crown. The key risks to our Neutral sector call would be either better/worse-than-expected swings in China’s macro environment.

    How we differ: Unlike the consensus, we do not subscribe to the “build it and they will come” mantra. Also, we have factored in the positive business implications of the Taipa Ferry Terminal’s opening, which we believe the consensus has not.