MACAU：3Q WRAP：MARGIN SURPRISE BODES WELL FOR 2018
Key insights from 3Q17 earnings season
VIP sharply outgrew mass. After adjusted for smoking premium massre-classification, adj VIP GGR grew 10% qoq （36% yoy）， much strongerthan adj mass GGR growth of 4% qoq （9% yoy）。 In fact, given summeris a strong season for mass, the muted mass GGR growth of 4% qoq isslightly disappointing.
Promotional environment remained disciplined . Comps as a % of masstable GGR were flat qoq at 12.0%. Cotai saw a 30bps increase to 12.7%in 3Q （12.4% in 2Q） but this was offset by Peninsula down 100bps qoq to9.8%。 Wynn Palace's comps ratio declined for 5 consecutivequarterly from 31% at opening in 3Q16 to 20% by 3Q17, suggestingthe property are reaping benefits from customer re-investments in priorquarters.
Margins surprised on the upside . Industry EBITDA margin improvedfrom 21.9% in 2Q to 22.8% in 3Q, beating our flattish forecast. BothSands Parisian and Wynn Palace scored well. Parisian EBITDA margin+90bps qoq to 32% and Wynn Palace +380bps qoq to 25%. Labour costsremained stable across all operators.
Galaxy gained market share the most; SJM lost. Galaxy grew the mostGGR market share sequentially in 3Q to 23.0% （2Q: 21.9%）， thanks tostrong VIP GGR in Cotai, which added two new junkets. SJM's GGRmarket share continued to slide from 16.5% in 2Q to 15.5% in 3Q.
Wynn & Galaxy have the most potential for a consensus upgrade. Wesee consensus 2018 GGR growth of 9% too conservative （vs DBe +13%yoy）。 Surprises will likely come from VIP, which we think will likely grow
15% yoy, much higher than consensus expectation of 8% yoy VIP GGR for2018. This translates to consensus upside for Wynn Macau and Galaxy.
Wynn Macau 2018 consensus is only 9% above annualized 3Q17 EBITDA,suggesting the Street has only factored in a mild ramp-up.
Free cash flow yields attractive for Wynn Macau & MGM China; key risks
Macau stocks are trading at 14.1x DB 12m fwd EV/EBITDA, at +1 standarddeviation over historical average. We view current valuation as reasonable in anupcycle. We see valuation for our top pick Wynn Macau particularly attractive,given its 7% 2018 FCF yield. We value Macau stocks on SOTP. Downside risksinclude a sharp slowdown in GGR momentum and regulatory changes. Upsiderisks include faster-than-expected GGR growth in 2018.
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