Macau Gaming:July review: favourable policy not reflected in numbers yet

July GGR down 34.5% YoY to MOP18,615mn. DailyGGR was MOP600mn, up 3.8% MoM fromMOP579mn in June. July GGR’s 3.8% MoM increasewas higher than 1.0% MoM improvement in July 2014.YoY decline continued narrowing from June’s 36.2%YoY drop. July GGR’s decline was in line with themarket expectation (35% YoY decline), but worse thanthe expectation in early July (25%-33% YoY decline).During Jan-Jul 2015, GGR was down 36.7% YoY andwe think GGR YoY decline will narrow down inAugust to c.33% YoY decline thanks to base effect.We expect full-year 2015E GGR to drop 32% YoY dueto 26% YoY decline in 2H15E.

    Policy turned positive. Stocks reflectedearlier than fundamentals

    We estimate GGR in VIP segment dropped c.45% YoYin July. Meanwhile, mass GGR declined by c.20% YoY,due to continued weakness in premium mass segmentin our view. However, with policy environment turningpositive since early July (returning of relaxed transitvisa policy), Macau names went through a rebound inJuly along with easing tone about complete smokingban. However, July GGR’s MoM improvement was not significant since it still needs time to have meaningfulimpact on fundamentals.

    Results season is an overhang

    The sector currently trades at 32x P/E and 17xEV/EBITDA on our FY15E forecast, vs. the historicalaverage of 18.5x 1-yr forward P/E and 13.5x 1-yrforward EV/EBITDA. After the recent rebound,valuation looks challenging ahead of four Macau casinooperators who will report 2Q15E results in earlyAugust. After a short-term correction from weak results(SJM/Galaxy is expected to report 56%/50% YoYEBITDA drop), we believe market sentiment on thesector will continue improving when GGR begins toreflect the impact of positive policies. We expect2H15E visibility to improve gradually with GGR YoYdecline continuing to narrow. Among the casinooperators, we prefer Galaxy which could deliveroutperforming QoQ earnings improvement in 3Q15Ewith the ramp-up of Galaxy Macau 2, after the sectorcorrection with weak 2Q15E results.

    Key risks for the sector are: 1) decline in grind massgaming, 2) slower-than-expected ramp-up of newcasino properties.