macau legend development limited - credit suisse

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12 August 2013

Asia Pacific/Hong Kong

Equity Research

Casinos & Gaming

Macau Legend Development Limited (1680.HK / 1680 HK)

INITIATION

Game changer of the Peninsula

■ Initiating coverage with OUTPERFORM and HK$3.13 TP. We set our target

price at HK$3.13/share, which is determined by applying 7x EV/ (FY17E

EBITDA discounted to 2014 by using WACC of 11.7%). Note that discounted

FY17E EBITDA is adopted to reflect the full potential of MFW. With 31%

potential upside, we initiate coverage on Macau Legend with OUTPERFORM.

■ MFW is the only site with new capacity in the Peninsula. MLD is

currently operating 146 gaming tables in two of SJM’s satellite casinos under

a gaming service agreement and redeveloping Macau Fisherman’s Wharf

(MFW), a large waterfront site located right beside the Macau-HK Ferry

Terminal, which plans to add 1,263 hotel rooms and ~350 additional gaming

tables by end-2016. In our view, on the back of its prime location and

improving infrastructure around the site, the new MFW is likely to see the

greatest growth potential among the Peninsula play in 3-5 years' horizon.

We project MLD to report EBITDA of HK$4.1 bn in FY17E, MFW's first full-

year of operations—implying 40% CAGR over the five-year period.

■ The first batch of new tables is on the way. According to our observation,

the redevelopment of MFW has already kicked off. We expect management to

start the discussion of new the tables grant with DICJ shortly, and the first batch

of tables is likely to come online within the next 12 months. While the market is

cautious about the timeline and actual number of new tables, the receipt of

some new tables could be a significant re-rating catalyst.

■ Investment risk. MFW’s redevelopment projects are a pre-condition for the

grant of 350 additional tables. Yet, there is no assurance from DICJ on the

number or the timing of new tables that MLD could receive.

Share price performance

92

97

102

2

2.5

3

3.5

4

Jul-13

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

HANG SENG INDEX which closed at 21807.56 on 09/08/13

On 09/08/13 the spot exchange rate was HK$7.75/US$1

Performance Over 1M 3M 12M Absolute (%) -0.42 — — Relative (%) -4.7 — —

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E Revenue (HK$ mn) 1,500.1 1,821.8 2,188.7 4,394.5 EBITDA (HK$ mn) 750.3 886.7 1,180.1 1,947.0 EBIT (HK$ mn) 603.4 717.7 951.9 1,539.5 Net profit (HK$ mn) 535.3 580.7 890.9 1,463.5 EPS (CS adj.) (HK$) 0.12 0.10 0.14 0.23 Change from previous EPS (%) n.a. Consensus EPS (HK$) n.a. — — — EPS growth (%) -38.4 -14.2 41.0 64.3 P/E (x) 20.2 23.6 16.7 10.2 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 22.0 17.3 13.7 8.3 P/B (x) 2.0 2.5 2.3 1.9 ROE (%) 16.2 10.6 14.8 20.3 Net debt/equity (%) 30.5 7.7 18.9 16.5

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM Price (09 Aug 13, HK$) 2.39 Target price (HK$) 3.13¹ Upside/downside (%) 31.0 Mkt cap (HK$ mn) 14,895 (US$ 1,921) Enterprise value (HK$ mn) 15,326 Number of shares (mn) 6,232.18 Free float (%) 19.0 52-week price range 2.43 - 2.33 ADTO - 6M (US$ mn) 2.0

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Isis Wong

852 2101 7109

[email protected]

Kenny Lau, CFA

852 2101 7914

[email protected]

12 August 2013

Macau Legend Development Limited (1680.HK / 1680 HK) 2

Focus charts and table Figure 1: Revenue sharing model—mass-market segment Figure 2: Revenue sharing model—VIP segment

Gross Gaming Revenue

SJM

$40

MLD

$55

SJM

$5

$100

Gaming tax, special

levies, table premium


SJM

$40

MLD

$2

SJM

$3

MLD’s income

$100

$2

$55

Gaming promoters

$55

Gaming tax, special


Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 3: MFW's redevelopment timeline—by construction period

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Yacht Club and Public Pier

Shopping, dining and entertainment Colonnade

The Prague Harbour View Hotel

The Palace Hotel

The Legendale Hotel Macau

General entertainment and cultural facility

Refurbishment of Babylon Casino and Rocks Hotel

Others

Construction period

2013 2014 2015 2016

Source: Company data

Figure 4: MLD's income projection Figure 5: MLD's EBITDA projection by properties

-

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Gaming service income Non-gaming revenue

HK$mn

2012-2017 CAGR = 47%

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Landmark Macau MFW

HK$mn


12 August 2013


Game changer of the Peninsula MLD: The second largest gaming service provider

In Macau, 19 of the 35 existing casinos operate under service agreements with three of the

six concessionaires/sub-concessionaires. MLD is the second largest gaming service

provider in Macau, and operates two of SJM’s 14 satellite casinos at its two main properties,

namely Pharaoh’s Palace Casino (Pharaoh) at The Landmark Macau and Babylon Casino

(Babylon) at Macau Fisherman’s Wharf (MFW). Under the service agreement, MLD operates

the casinos for SJM and shares 2% to 55% of gross gaming revenue (GGR) generated by the

high-roller tables and mass-market tables/slots, respectively. In 2012, we estimate that the

casinos operated by MLD contributed to 19% of SJM’s total revenue from satellite casinos.

The only site with new capacity in the Peninsula

Following the completion of its acquisition of MFW in May 2012, the company is planning

to redevelop the site to add 1,263 hotel rooms across three new hotels, 350 additional

gaming tables and a wide range of new facilities—including a yacht club and a canopied

open-air shopping, dining and entertainment colonnade, with a budget capex of HK$6.8

bn. MFW is likely to be the most scalable non-gaming properties and the only site with

new capacity in the Peninsula in the near term. Therefore, we believe: (1) the addition of

these new attractions, (2) MFW’s superior location (right beside the Macau-HK Ferry

Terminal), (3) improving transportation, including the Lotus Square light rail station due to

be completed by 2015 adjacent to MFW, and (4) the close proximity to the Hong Kong-

Zhuhai-Macau bridge to be completed around 2016, could provide a boost to the traffic to

MFW, as well as the Peninsula as a whole.

Attractive growth prospects on capacity expansion

As advised by DICJ, the current limit of 3% annual increase of tables would not be an

obstacle to MLD’s application of 350 additional tables, but it would depend on the progress of

redevelopment at MFW. Thus, we expect the additional gaming tables to be allocated across

the properties at MFW evenly over 2014-16, as the redevelopment is rolled out in phases.

According to our observation, the redevelopment of MFW has already kicked off. We expect

management will start the discussion of the new tables grant shortly, and the first batch of

tables is likely to come online within the next 12 months—even slightly ahead of Cotai peers

in the next casino opening cycle. We estimate the group EBITDA to rise from HK$750 mn in

FY12 to HK$4,055 mn in FY17E, the first year of full operation for MFW—implying 40%

CAGR over the five-year period.

Initiating with OUTPERFORM

While the market is cautious on the timeline of the new tables grant, we believe the

approval for new tables could be a significant re-rating catalyst. We set our target price at

HK$3.13/share, by applying 7x EV/(FY17E EBITDA discounted to 2014 by using WACC of

11.7%). Note that discounted FY17E EBITDA, which is the first year of full operation, is

adopted to reflect the full potential of MFW. With 30% potential upside, we initiate

coverage on MLD with an OUTPERFORM rating.

Investment risk

The 350 additional gaming tables are subject to MFW’s redevelopment projects but

approvals are entirely subject to the discretion of the DICJ. There is no assurance on the

number of new tables MLD could get or the timing of new tables. Also, given the reduction of

the size of the Global offerings in July 13, MLD may need to fund the redevelopment project

of MFW by further equity/debt financing in the future.

MLD is the second largest

satellite casino of SJM and

accounted for 19% of the

latter’s aggregate revenue

from satellite casinos in

2012

Adding 350 gaming tables

and 1,263 hotel rooms at

MFW over 2014-16

We project an EBITDA of

HK$4.1 bn in 2017E

We set our target price of

HK$3.12 based on

discounted FY17E EBITDA

No assurance that DICJ

would approve additional

tables.

12 August 2013


Financial summary Figure 6: Balance sheet

Year end Dec 31 (HK$ mn) 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Assets

Cash 31 72 112 974 1,178 1,095 2,468 6,188

Inventories 5 5 28 41 50 66 90 105

Accounts receivables 356 415 467 536 657 879 1,552 1,848

Other current assets 655 1,403 2,300 71 71 71 71 71

Net fixed assets 633 685 2,284 3,794 5,585 7,827 8,576 8,145

Other non-current assets 847 781 2,730 2,680 2,631 2,581 2,531 2,481

Total assets 2,528 3,362 7,921 8,096 10,171 12,517 15,287 18,837

Liabilities

Short term debt 171 272 334 356 356 356 356 356

Accounts payables 3,240 357 660 911 1,094 1,978 2,328 2,566

Long term debt 557 1,456 1,405 1,049 2,049 2,049 2,049 2,049

Other non current liability 0 0 198 198 198 198 198 198

Total liabilities 3,968 2,085 2,597 2,514 3,697 4,580 4,931 5,169

Shareholders' equities

Share capital 338 339 523 623 623 623 623 623

Reserves -1,815 885 1,406 -460 431 1,894 4,313 7,625

Share premium 36 52 3,396 5,420 5,420 5,420 5,420 5,420

Total equities -1,441 1,276 5,324 5,583 6,474 7,937 10,356 13,668

Source: Company data, Credit Suisse estimates

Figure 7: Cash flow statement


Pre-tax profit 497 648 531 581 891 1,464 2,419 3,312

Taxes paid 0 0 0 0 0 0 0 0

Depreciation and amortisation 51 52 104 119 178 357 591 637

Share base payment 0 35 8 0 0 0 0 0

Release of prepaid lease payments 12 12 35 50 50 50 50 50

Exceptional items and others 0 0 -6 123 0 0 0 0

Interest (income)/expense 18 50 61 61 61 76 77 57

Gross cash flow 578 798 733 811 1,180 1,947 3,137 4,055

Net capex -23 -17 -76 -1,629 -1,969 -2,599 -1,340 -205

Net change in working capital -373 -2,691 -608 -49 55 645 -346 -73

Free cash flow 183 -1,910 49 -867 -734 -7 1,450 3,777

Dividends paid 0 0 -5 0 0 0 0 0

Other fund raising 0 0 183 0 0 0 0 0

Others -18 951 -197 2,063 -61 -76 -77 -57

Net cash flow 165 -960 31 1,195 -796 -83 1,373 3,720


12 August 2013


MLD: The second-largest gaming service provider Established by David Chow, Co-Chairman, Executive Director and CEO, in 2006, Macau

Legend Development (MLD) is a gaming service provider for two of SJM's (0880.HK,

HK$19.92, OUTPERFORM, TP HK$22.6) 14 satellite casinos at its two main properties—

Pharaoh’s Palace Casino (Pharaoh) at the Landmark Macau and Babylon Casino

(Babylon) at Macau Fisherman’s Wharf (MFW). Under the service agreement, MLD

operates the casinos for SJM and subsequently shares 2% to 55% of gross gaming

revenue (GGR) generated by the high-roller tables and mass-market tables/ slots,

respectively.

Figure 8: Shareholder structure of MLD

Macau Legend Development

David Chow

(Co-chairman, CEO)

Lam Fong Ngo

(Vice-chairman)

Li Chi Keung

(former Director)

The Legend Club

Ina Chan

SJM (880.HK)

Pacbridge Capital

(Financial advisor)

Other stakeholders

(connected)

30.8% 18.7% 13.9% 1.1% 15% 3.4% 1.1% 0.4%

Other public

shareholders

15.6%


The Landmark Macau is a highly efficient property. Despite SJM’s sharing of 3-5% of GGR

unlike other gaming licence holders, each gaming table at The Landmark Macau

generates a similar level of EBITDA as Altira of Melco Crown (MPEL.OQ, US$26.4,

OUTPERFORM, TP US$27.4) and The Plaza of Sands China (1928.HK, HK$42.25,

OUTPERFORM, TP HK$42), suggesting strong customer relationship and execution.

Gaming service model in the Macau region

History

Gambling in Macau was legalised in 1847 under the Portuguese rule and was operated

under a monopoly franchise until 2002 after the Macau government initiated a bidding

process to grant three new gaming concession licences in late 2001.SJM was awarded

the first concession, followed by Wynn Macau (1128.HK, HK$21.0, NEUTRAL, TP

HK$22.3) and Galaxy (0027.HK, HK$41.25, OUTPERFORM, TP HK$42.6). A subsequent

process allowed each concessionaire to grant one sub-concession, which went to MGM

China (2282.HK, HK$22.3, OUTPERFORM, TP HK$19.8), Melco Crown and Sands

China, respectively.

There are six gaming

concession and sub-

concession licences in

Macau

12 August 2013


Figure 9: The concession regime in Macau

Concessionaires SJM Galaxy Wynn Macau

Committed investment MOP4.7bn MOP8.8bn* MOP4.0bn

Expiry 31 March 2020 26 June 2022 26 June 2022

Gaming taxes and levy

- Special gaming tax 35% 35% 35%

- Special levy 3% 4% 4%

Total 38% 39% 39%

Sub-concessionaires MGM Grand Paradise Venetian Macau (VML) Melco PBL

Committed investment MOP4.0bn MOP4.4bn * MOP4.0bn

Sub-concession premium US$200mn N/A * US$900mn

Expiry 31 March 2020 26 June 2022 26 June 2022

Gaming taxes and levy

- Special gaming tax 35% 35% 35%

- Special levy 4% 4% 4%

Total 39% 39% 39%

Source: Company data, DICJ,Credit Suisse estimates

* VML did not pay any sub-concession premium to Galaxy, instead VML is responsible for MOP4.4bn of

Galaxy's original investment commitment under the sub-concession contract

Most of the gaming tables in Macau are not actually operated by the concessionaires or

sub-concessionaires, but engage a third party, i.e., the gaming service provider, to provide

gaming services—including marketing, promotion, publicity, customer development and

introduction, and coordination of activities—at the casinos. These casinos are known as

“satellite casinos” in SJM.

Pursuant to the Service Agreement, MLD has the right to nominate a president to oversee the

daily operations at the casinos subject to SJM’s approval. Also, the employees responsible for

gaming operations are nominated by MLD and subsequently employed by SJM.

MLD is the second-largest gaming service providers in Macau

As of 31 December 2012, 19 of the 35 casinos in Macau, which contained 1,174 tables,

are operating under service agreements among the total of six concessionaires and sub-

concessionaires, and various providers. Among them, MLD is the second-largest service

provider in terms of the total number of gaming tables and operates two of SJM’s 14

satellite casinos.

However, most of the tables

are actually operated by a

gaming service provider

engaged by the

concessionaire and sub-

concessionaire

12 August 2013


Figure 10: Summary of casinos operating under service agreements

Concessionaire/ Number of gaming tables % of total

No. Property name Sub-concessionaire VIP Mass-market Total tables

1 Casino L’Arc Macau SJM 112 58 170 14%

2 Casino VIP Legend/Pharaoh SJM 63 60 123 10%

3 Casino Ponte 16 SJM 18 91 109 9%

4 Casino Golden Dragon SJM 21 65 86 7%

5 Casino Lan Kwai Fong SJM 30 54 84 7%

6 Casino Greek Mythology SJM 48 32 80 7%

7 Casino Emperor Palace SJM 13 64 77 7%

8 Rio Casino Galaxy 12 50 62 5%

9 Casino Fortuna SJM 18 40 58 5%

10 Casino Jimei SJM 27 20 47 4%

11 Casino Casa Real SJM 4 44 48 4%

12 Grand Waldo Casino Galaxy 15 23 38 3%

13 Waldo Casino Galaxy 15 22 37 3%

14 Casino Diamond SJM 6 27 33 3%

15 Taipa Square Casino MPEL 2 32 34 3%

16 Casino Kam Pek Paradise SJM 0 26 26 2%

17 Casino Grandview/MJC SJM 3 21 24 2%

18 Casino Babylon SJM 0 23 23 2%

19 President Casino Galaxy 0 15 15 1%

Total 407 767 1,174

Source: Company data, Union Gaming Research Macau

In 2012, the casinos operated by MLD contributed to 23% and 13% of SJM’s aggregate

GGR generated from high-roller and mass-market tables at satellite casinos, respectively.

Figure 11: MLD’s contribution to SJM’s GGR—VIP Figure 12: MLD’s contribution to SJM’s GGR—mass-

market

0%

20%

40%

60%

80%

100%

2010 2011 2012

Pharaoh (Landmark Macau) Other satelite casinos

0%

20%

40%

60%

80%

100%

2010 2011 2012

Pharaoh (Landmark Macau) Babylon (MFW) Other satelite casinos

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Economics of the gaming service model

Under the latest Service Agreement with SJM, MLD receives a monthly compensation,

from SJM equivalent to: (1) 55% of the GGR from mass-market tables; (2) 2% of the GGR

from high-roller tables and 55% of GGR received on behalf of gaming promoters ; and (3)

40% of GGR from slot machines. Note that Weike, the slot machine provider, has

guaranteed MLD a monthly minimum of HK$700,000 in gross slot wins at the Landmark

Macau. However, if the receipt generated by SJM’s slot machines exceeds HK$700,000,

70% of the gross slot wins would be paid to Weike.

SJM recognises 100% GGR

and rewards MLD with 55%

and 57% of GGR generated

from mass-market and VIP

tables, respectively.

12 August 2013


As the concession licence holder, SJM is responsible for the special gaming tax of 35%

and a special levy of 3% of GGR for public development and social responsibility related

contributions in Macau, as well as gaming premium payable to the Macau government,

aggregate accounting for around 40% of GGR.

Figure 13–Figure 16 demonstrate the revenue sharing of GGR of HK$100 under the

gaming service agreement with SJM.

Figure 13: Revenue sharing—mass market segment Figure 14: Revenue sharing—high-roller segment


SJM

Gaming tax, special


$40

MLD

$55

SJM

$5

$100


SJM

$40

MLD

$2

SJM

$3

MLD’s income

$100

$2

$55

Gaming promoters

$55

Gaming tax, special


Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 15: Sharing of slot win—Babylon Casino (MFW) Figure 16: Sharing of slot win—Pharaoh’s Palace Casino

(the Landmark Macau)

Gross slot win

SJM

$40

MLD’s income

$40

SJM

$20

$100

Gaming tax, special


Gross slot win

SJM

$40

MLD

$40

SJM

$20

Weike(if exceeded monthly guarantee net

slot win of HK$700,000)

MLD’s income

$28

$100

$12

Gaming tax, special



In the event of a gross gaming loss, MLD would share with SJM a monthly amount

equivalent to 55% of such gaming loss generated by the mass-market, and 57% of gaming

losses incurred by the VIP rooms (in which the gaming promoters will be liable for 55% of

the loss) and 40% of that generated from slot machine operations (in which Weike will be

responsible for such loss at the Landmark Macau, but not Babylon, as well).

MLD also shares the

gaming loss with SJM

12 August 2013


The Landmark Macau: Highly efficient property

The Landmark Macau, one of MLD’s two major properties, comprises Pharaoh’s Palace

Casino and offers 446 rooms and suites, recreational and dining space, retail shops,

commercial and office premises, and residential apartments. The Landmark Macau operated

60 mass market gaming tables, 63 VIP gaming tables and 212 slot machines as at 31

December 2012. Currently, there are eight junkets operating in Landmark Macau.

Relatively high daily net win per table

Despite the relatively second-tier properties, in our view, Pharaoh's daily net win per table

is among the highest within the industry in both the high-roller and mass-market segments,

suggesting a close customer relationship and highly efficient operations at the casino.

Figure 17: Comparison of daily net win/table across

casinos—high-roller segment

Figure 18: Comparison of daily net win/table across

casinos—mass-market segment

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2009 2010 2011 2012

SJM Galaxy MPEL MGM China

Sands China Wynn Macau Landmark Macau

HK$

-

15,000

30,000

45,000

60,000

75,000

90,000

2009 2010 2011 2012

SJM Galaxy MPEL

MGM China Sands China Wynn Macau

Landmark Macau MFW

HK$

Source: Company data, Union Gaming Research Macau Source: Company data, Union Gaming Research Macau

Note that the lower net win in 2012 was mainly due to the renovation of gaming areas,

which hindered the casino operating at full efficiency. The renovation work in the gaming

areas was completed in end-2012, and that of hotel rooms and other non-gaming areas is

expected to be completed by end-2013.

Figure 19: Landmark Macau—The lobby Figure 20: Landmark Macau—renovated room

Source: Company website Source: Company website

Casino at Landmark Macau

generates relatively high

daily net win per table

12 August 2013


Similar table efficiency as Altira and The Plaza

As gaming tables are deemed to be scarce resources in Macau, and more than 80% of

casino operators’ earnings are generated from the gaming business, we believe it is important

for a casino to maximise the profitability of each table. We compare the EBITDA generated by

each gaming table across casinos in Macau in assessing the efficiency of tables. Despite the

lower gaming margin than other gaming concession holders due to SJM’s sharing 3-5% of

GGR versus peers who do not have to pay, the property EBITDA of The Landmark Macau is

similar to that of Altira of MPEL and The Plaza (Four Seasons) of Sands China in 2012—

again suggesting the high efficiency of table utilisation within the property.

Figure 21: 2012 property EBITDA/tables across casinos

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Venetian

Sands Macao

Wynn Macau

Galaxy Macau

City of Dreams

StarWorld

MGM Macau

Grand Lisboa

The Plaza (Four Seasons)

Altira

The Landmark Macau

Cotai Central

US$mn)

Source: Credit Suisse estimates

12 August 2013


The only site with new capacity in the Peninsula Both the properties of MLD—The Landmark Macau and Macau Fisherman’s Wharf—are

located at the Macau Peninsula, which has been short of scalable non-gaming offerings to

compete with the integrated resorts at Cotai Strips. However, we believe the landscape is set

to change after the completion of MFW's redevelopment in 2016. Together with improving

infrastructure—including the Lotus Square light rail station due to be completed by 2015

adjacent to MFW and the close proximity to the HK-Zhuhai-Macau bridge to be completed

around 2016—the traffic to MFW and the Peninsula as a whole is set to get a boost.

The largest non-gaming offerings in the Peninsula

Macau Fisherman’s Wharf is the largest waterfront entertainment and leisure complex in

the Macau Peninsula in terms of site area—current site area of 109,495 sq m—and

features Babylon Casino with a gaming hall that consists of 23 mass market gaming tables

and 78 slot machines as at 31 December 2012.

Redevelopment projects to be rolled out in phases during 2014-16

Following the acquisition of MFW in May 2012, MLD is planning to renovate the site into

the largest entertainment, recreational and retail complex in the Macau Peninsula by

adding 1,263 hotel rooms across three new hotels (namely Prague Harbor View Hotel, the

Palace Hotel and the Legendale Hotel Macau), around 350 additional gaming tables and a

wide range of recreational and entertainment facilities—including a yacht club and a

canopied open-air shopping, dining and entertainment colonnade, with a budgeted capex

of HK$6.8 bn.

Figure 22: The blueprint of new Macau Fisherman's Whaft (to be completed by 2016)


The new MFW is set to

change the competitive

landscape of the Peninsula

12 August 2013


The project involves the redevelopment of existing facilities, including Babylon Casino and

Rocks Hotel, and the addition of new facilities, including three new hotels, a general

entertainment and cultural facility, a canopied open-air shopping, dining and entertainment

colonnade, a yacht club at the Marina and other attractions. The existing Tang Dynasty

complex and Vulcania will be demolished.

Figure 23: Redevelopment timeline—by construction period

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Yacht Club and Public Pier

Shopping, dining and entertainment Colonnade

The Prague Harbour View Hotel

The Palace Hotel

The Legendale Hotel Macau

General entertainment and cultural facility

Refurbishment of Babylon Casino and Rocks Hotel

Others

Construction period

2013 2014 2015 2016


Figure 24: Summary of expansion plan and related capex projection

Capacity Capex

Capex schedule Hotel rooms Gaming tables (HK$ mn)

MFW redevelopment:

Prague Harbour View Hotel (4Q14)–4-stars 444 n.a. 1,591

Palace Hotel (3Q15)–5-star deluxe 219 117 2,064

Legendale Hotel Macau (2Q16)–5-star deluxe 600 117 2,060

General (4Q15) 647

Yacht club (2Q14) 70

Canopied open-air colonnade 42

Refurbishment of existing facilities and other works 72 139 156

Land premium 135

Subtotal 1,335 373 6,765

Landmark Macau–renovation 446 123 430

Total 1,781 496 7,195


Given that there is no similar recreational offering within the Macau Peninsula or even in

Cotai, together with its strategic location along the outer harbour and beside the Macau

Ferry Terminal, we believe the redeveloped MFW will be able to attract more traffic.

The construction work has been kicked off

The redevelopment of MFW has been kicked off. In particular, the construction work for

the first of the three new hotels, The Prague Harbour View, has started, and the Tang

Dynasty is set to be demolished.

MLD plans to rejuvenate the

MFW site with three new

hotels and a variety of

entertainment and leisure

facilities

12 August 2013


Figure 25: Construction site of first hotel Figure 26: The Tang Dynasty set to be demolished

Source: Company data Source: Company data

Improving infrastructure to stimulate traffic to MFW

On the other hand, the infrastructure of Macau has been consistently improving. To

facilitate the connections to Macau, several transportation improvements to the city have

been recently completed, such as the Guangzhou-Zhuhai Intercity Railway, which reduces

the travel time between Guangzhou and Zhuhai from two hours to approximately 45

minutes. In fact, MFW’s location is superior, as it is close to the Macau-HK Ferry

Terminal—the entry point to Macau for 25% of the visitors who arrived in 2012.

Figure 27: Locations of MLD’s properties

Macau Fisherman’s

Wharf

The Landmark

Macau

Lotus Square station

(2014/15)

Macau-HK Ferry

Terminal

Taipa

Hengqin

Source: Google maps, Credit Suisse research

Connectivity to MFW is expected to increase further due to a number of infrastructure

projects in the pipeline, including the Macau Light Rail System and Hong Kong-Zhuhai-

Macau bridge, to be completed in 2015 and 2016, respectively. In particular, the Lotus

Square light rail station of the Macau Light Rail System is adjacent to the property and will

facilitate traffic to MFW upon completion.

MFW is close to the Macau-

HK Ferry Terminal, and the

Lotus Square station of the

light rail system to be

completed by 2014 is right

outside MFW

12 August 2013


Figure 28: Summary of infrastructure that will facilitate traffic to and within Macau

Infrastructure projects Completion date Main improvement

Guangzhou-Zhuhai Intercity Railway 2012 Reduces travel time between Guangzhou and Zhuhai from two hours to

approximately 45 minutes

Expansion of Border Gate in

Northern Macau

2012 Increases the capacity of the border from 300,000 people per day to > 500,000

people per day

Taipa Ferry Terminal 1H 2013* To have 16 piers for boats with a capacity of up to 400 passengers and three piers

for ships of 1,200 passenger berths

Macau Light Rail System. 2015* Will connect the Macau Peninsula, Taipa and Cotai via 21 different stations

Hong Kong-Zhuhai-Macau bridge 2016* Will link three areas with boundary crossing facilities, access roads and associated

works

* Estimated completion date.


As a result of the abovementioned transportation improvements, we believe the new

infrastructure will attract more traffic to Macau, and MFW is likely to be one of the major

beneficiaries due to its superior location.

12 August 2013


Attractive growth prospect on capacity expansion Looking back to the past few years, GGR growth re-accelerated after the opening of new

casinos in Macau, suggesting this is actually a supply-driven market. Therefore, we

believe MLD’s introduction of an additional 350 gaming tables and 1,263 hotel rooms in

phases during 2014-16 could stimulate GGR growth and allow MLD to capture the uptrend

of tourism and gaming market growth.

While the major development projects have been focused on the Cotai strip over the last

few years, in the coming years, the redevelopment of MFW into an integrated leisure and

entertainment complex is a unique offering in the Peninsula, as well as Macau as a whole.

Note that MFW would be the only operator to add hotel rooms and gaming capacity before

the next casino opening cycle that is due to be kicked off by Galaxy’s Galaxy Macau and

MPEL’s Studio City in 1H15 in Cotai. Therefore, we expect MLD to enjoy the first mover

advantage ahead of the Cotai players when some phases of the redeveloped MFW start

rolling out in 2014.

Figure 29: Cotai projects in the pipeline

Casinos Opening date Gaming capacity Hotels (no. of hotel rooms)

Galaxy Macau II Mid-2015 500 gaming tables Ritz-Carlton (1,100)

(Budget capex: HK$19.6 bn ) ~1,000 slot machines JW Marriott (250)

The Studio City Mid-2015 400-500 gaming tables ~1,650

(Budget capex: HK$16.5 bn) 1,500 slot machines

Wynn Cotai 1Q 2016 400 gaming tables ~2,000

(Budget capex : HK$31 bn) 1,500 slot machines

MGM Cotai Mid-2016 500 gaming tables ~1,600

(Budget capex: HK$20 bn) 2,500 slot machines

SJM Cotai North TBC (CS estimates: 2017) 700 gaming tables ~2,000

(Budget capex: HK$ 27-30 bn) 1,000 slot machines

SJM Cotai South TBC (CS estimates: 2017) n/a ~6,300

(Budget capex : HK$ 25 bn)

Galaxy Macau III & IV TBC (CS estimates: 2017) 1000 gaming tables ~5,500

(Budget capex: HK$50-60 bn) ~3,000 slot machines

The Parisian Macao TBC (CS estimates: 1Q 2016) 450 gaming tables ~3,000

(Budget capex: HK$21 bn) ~2,500 slot machines


Strong demand for gaming and entertainment…

Being the only legalised gambling destination in the Greater China region and offering

extensive entertainment and recreational facilities, Macau is a favourite travel destination

for tourists from Hong Kong and Mainland China. Thanks to the grant of six gaming

licences and the implementation of the Individual Visitor Scheme (IVS) in 2003 to the

Mainland Chinese, Macau has outpaced the Las Vegas strip and become the world’s

largest gaming market since 2006. In 2012, the GGR generated from Macau was six times

of that in Las Vegas Strips.

Major development projects

have been in Cotai in recent

years

Macau is the number one

gambling destination for the

Mainland Chinese

12 August 2013


Figure 30: Comparison of GGR at Macau and Las Vegas

Strips

Figure 31: Macau GGR projection 2007-15E

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Macau Las Vegas Strips

US$mn

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

High-roller Mass market Slot

GGR (US$mn)

2007-2012 CAGR = 30%

2012-2015E CAGR = 16%

Source: DICJ, Nevada Gaming Control Board Source: DICJ, Credit Suisse estimates

Under-penetration to Mainland China

Annual visitor arrivals from Mainland China have increased almost three times from 2003

to 17 mn in 2012, of which 46% came from the nearby Guangdong province (Figure 33).

Figure 32: Mainland Chinese visits up by almost three

times from 2003 to 2012

Figure 33: Place of residence of Mainland Chinese

visitors—1Q13

-30

-20

-10

0

10

20

30

40

50

60

70

80

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mainland Chinese visitations - LHS YoY % chg - RHS

Person th %

Guangdong46%

The rest of Mainland China

37%

Fujian4%

Hunan3%

Jiangsu3%

Beijing2%

Shanghai3%

Tianjin1%

Chongqing1%

Source: DSEC (Statistics and Census Service of Macau) Source: DSEC

However, Macau still looks under-penetrated as far as Mainland Chinese visitors are

concerned, given merely 3% of the IVS eligible citizens, approx. 270 mn Chinese citizens,

were IVS travellers to Macau in 2012 and the majority of Mainland Chinese were from the

nearby Guangdong province. We believe Macau could benefit from more visitor inflow on the

back of rising disposable incomes in Mainland China, which could help sustain and fuel its

development as a mass entertainment and leisure hub in the Pan Pearl River Delta.

Pursuing balance between gaming and non-gaming development

The landscape of Macau has been changing following the opening of Las-Vegas style

casinos over the last few years, where visitors are not simply looking to gamble but are also

looking for quality entertainment, and a recreational and retail experience. The Macau

government is also keen to expand the non-gaming offerings to strike a balanced economic

and social development. As such, we believe the non-gaming facilities expansion, together

We believe Macau is

pursuing a balance between

gaming and non-gaming

offerings

12 August 2013


with the infrastructure improvement in Macau, would help attract more traffic to Macau and

thus stimulate the growth of both the gaming and non-gaming business.

…but supply is rather limited

Introduction of hotel rooms and casinos stimulated GGR growth

Looking at Macau over the last few years, GGR growth re-accelerated after the opening of

new casinos, which introduced approximately 1,800 gaming tables in aggregate in the

Cotai Strip since the opening of Venetian in 2007 and around 400 gaming tables in the

Macau peninsula by MGM China, suggesting the capacity expansion is one of the drivers

for GGR growth.

Figure 34: GGR growth re-accelerated post casinos opening

(40)

(20)

0

20

40

60

80

100

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13

GGR (US$mn) YoY chg (%) - RHS

GGR (US$mn) %

City of Dreams opened in Jun 09Venetian opened in Aug 07Galaxy Macau opened in May 11

Cotai Central opened in Apr 12

Financial crisis

MGM Grand opened in Dec 07

Source: DICJ, Credit Suisse estimates

On the other hand, even with the addition of approximately 8,500 hotel rooms between

2008 and 2012, hotel room rates and the average occupancy rate in Macau continue to

trend up, suggesting strong demand for hotel rooms in Macau and that the introduction of

more hotel rooms could stimulate further growth.

12 August 2013


Figure 35: Total hotel guests and ADR trend Figure 36: Total available rooms at Macau and occupancy

100

110

120

130

140

150

160

170

180

190

0

2

4

6

8

10

12

2008 2009 2010 2011 2012

Total Hotel guests - LHS ADR (US$) - RHS

Millions US$

65

70

75

80

85

90

-

5,000

10,000

15,000

20,000

25,000

30,000

2008 2009 2010 2011 2012

Total available rooms - LHS Average occupacy rate - RHS

Total available rooms %

Source: Company data, DSEC Source: Company data, DSEC

Therefore, we believe the gaming market in Macau is supply-driven, and any subsequent

increase in gaming facilities and hotel rooms is likely to accelerate growth.

Limit of 3% annual increase of tables

Although the existing concessionaires and sub-concessionaires do not place a limit on the

number of gaming facilities or casinos that may be operated, casino operators can only

increase the number of gaming tables they operate upon authorisation from the DICJ.

Despite the continuous increase in table count from 4,610 in 3Q09 to 5,746 in 2Q13, the

annual GGR generated per table continues to trend up. On the one hand, this indicates

the increasing wealth of the Mainland Chinese, on the other, we see that table count is

actually in short-supply relative to gaming demand.

Figure 37: Quarterly gaming table count and GGR growth Figure 38: GGR generated per gaming table

-20

-10

0

10

20

30

40

50

60

70

80

90

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12

Table counts - LHS GGR YoY growth - RHS

Table counts %

-60

-40

-20

0

20

40

60

80

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12

GGR/table - LHS YoY%chg - RHS

Table counts %

Source: DICJ Source: DICJ, Credit Suisse estimates

Note that the Macau government announced in September 2011 that it would limit the

annual increase of gaming tables to 3% in Macau for 10 years from 2014 onward,

translating to less than 2,000 new tables from 2014-23, unless special authorisation is

granted. This further enhances the scarcity value of the table grant in Macau, especially

after the next casino opening cycle in Cotai kicks off in 2015, adding gaming capacity of

approximately 4,000 tables in aggregate.

Grant of new tables is highly

regulated and subject to

DICJ approval

12 August 2013


MFW: Potential addition of 350 tables

There are a total of six projects in the pipeline in Cotai, which are expected to open during

2015-17; they will combinedly provide gaming capacity of approximately 4,000 gaming

tables with more than 20,000 hotel rooms. We believe DICJ usually considers table grants

a few months before, or even after, the commencement of operations. That said, the

majority of these 4,000 gaming tables to be allocated to the new casinos in Cotai during

2015-17 would require exceptional approval from DICJ, given the current permissible 3%

limit of annual increase in table count.

The current 3% annual limit would not be an obstacle for MLD’s application of 350

additional tables

MLD is currently applying for around 350 additional gaming tables so that it would operate

approximately 500 gaming tables in total within its gaming premises. As advised by DICJ

in writing, the 3% limit in the annual increase of tables would not be an obstacle to MLD’s

application of 350 additional tables. Having said that, the grant of new gaming tables is

entirely at the discretion of the Macau government, in accordance with the investment plan

and market studies presented to the Macau government to support the application.

Therefore, we believe that the additional 350 tables might be approved by DICJ in phases

during 2014-16, according to the redevelopment progress, and allocated across Babylon

Casino and the gaming areas of Palace Hotel and Legendale Hotel in MFW upon project

completion in phases. As the redevelopment project has already kicked off, we believe

that management will start the discussion of new tables shortly. We expect the first batch

of tables to come in within the next 12 months.

Figure 39: MLD's table count projection as at year-end

As of 31 Dec, Nos 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

The Landmark Macau

Pharaoh (current) 108 116 123 127 127 127 127 127

Macau Fisherman's Wharf

Babylon (current) 23 23 101 140 140 140

Palace Hotel (to open in 3Q15) - - - 86 117 117

Legendale (to open in July 2016) - - - - 116 116

Total tables 108 116 146 150 228 352 500 500

Number of new tables 78 124 148 -


The only expansion before 2015 offers attractive

growth prospect

While there will be no new casino openings until 1H15 at the earliest by Galaxy and

MPEL, we believe the rolling out of redeveloped MFW in phases starting from 2H14

should allow MLD to enjoy the first-mover advantage and achieve better than peers’

earnings growth. Furthermore, we believe the completion of a wide variety of recreational

and entertainment facilities at MFW will increase the length of stay of visitors, in particular

inside the MFW, and increase their gaming and non-gaming spending.

The application of 350

additional tables is not

subject to the current limit of

table count in Macau

MLD is likely to enjoy the

first-mover advantage

ahead of Cotai players

12 August 2013


Initiating with OUTPERFORM In our view, the new MFW is likely to see the greatest growth potential among the

Peninsula play in 3-5 years' horizon.

Key assumptions and operation data

In projecting the EBITDA of MLD, we assume the 350 gaming tables would be granted in

three batches after the roll-out of the yacht club in 2Q14 (tables to house at the existing

Babylon Casino) and the completion of the gaming areas planned to house the tables, i.e.

the Palace hotel in 3Q15 and The Legendale Hotel in 1H16.

Figure 40: Average number of tables—based on existence period during the year of grant

As of 31 Dec, Nos 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Landmark Macau

Gaming tables

- High-roller 41 46 57 67 67 67 67 67

- Mass-market 66 66 63 60 60 60 60 60

Subtotal 120 127 127 127 127 127

Slot machines 280 304 258 205 205 205 205 205

Macau's Fisherman Wharf

Gaming tables

- High-roller n.a. n.a. - - 23 58 140 140

- Mass-market n.a. n.a. 23 23 58 105 198 233

Subtotal 23 23 42 163 338 373

Slot machines n.a. n.a. 78 78 200 550 1,000 1,200


Regarding the gross gaming revenue at casinos, we expect the daily net win per VIP table

at The Landmark Macau to resume at a similar level before renovation work in 2013 and

grow at 5% from 2014 onward, leading to overall GGR growth of 11-13% YoY for 2014-15

at the Landmark Macau, which is lower than our forecast of 15-18% 2014-15 GGR growth

of Macau, for the sake of being conservative. While MFW is relatively new, we assume the

new gaming tables could achieve 45-65% of the daily GGR per table as in the Landmark

Macau over the first to fourth year of operations.

Figure 41: Key operating statistics and assumptions—daily net win/table

As of 31 Dec, HK$ 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Landmark Macau

- High-roller 293,600 367,300 267,900 349,400 366,900 385,300 404,500 424,700

- Mass-market 56,900 69,300 71,200 81,900 91,700 100,900 111,000 116,500

- Slot 608 600 465 936 936 936 936 936

Macau's Fisherman Wharf

- High-roller n.a. n.a. - - - - 182,000 233,600

- Mass-market n.a. n.a. 33,900 39,000 42,400 52,700 68,300 77,700

- Slot n.a. n.a. 93 97 936 936 936 936

*numbers rounded to the nearest hundred


12 August 2013


Figure 42: Key operating statistics and assumptions—hotel rooms and occupancy rate

Non-gaming 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Landmark Macau

- Number of rooms 446 446 446 390 446 446 446 446

- Occupancy rate (%) 73.6 85.3 85.3 85 85 85 85 85

- ADR (HK$) 1,151 1,132 1,120 1,176 1,235 1,297 1,361 1,429

Rocks Hotel

- Number of rooms 72 72 72 72 72 72

- Occupancy rate (%) 85.3 90 90 90 90 90

- ADR (HK$) 1,392 1,462 1,535 1,612 1,692 1,777

Prague Harbour View Hotel (estimated completion in 4Q14)* 4-star

- Number of rooms 444 444 444 444

- Occupancy rate (%) 12.5 60 70 80

- ADR (HK$) 1,500 1,575 1,654 1,736

The Palace Hotel (estimated completion in 3Q15)* 5-star deluxe

- Number of rooms 219 219 219

- Occupancy rate (%) 25 60 70

- ADR (HK$) 2,500 2,625 2,756

The Legendale Hotel (estimated completion in July 16) * 5-star deluxe

- Number of rooms 600 600 600

- Occupancy rate (%) 25 60

- ADR (HK$) 2,750 2,888


Overall revenue to reach HK$10.3 bn in FY17E

As discussed previously, MLD is neither a concessionaire nor a sub-concessionaire. The

gross gaming revenue generated at the casinos is collected by SJM, which subsequently

rewards MLD with service income, on a monthly basis, based on 2%, 57% and 55% of

GGR generated by outsourced VIP, self-operated VIP and mass-market (both table and

slot), respectively. Based on the assumption in Figure 40–Figure 42, we project MLD to

report revenue of HK$10.3 bn in 2017E, the first year of full operation of MFW, implying

47% CAGR during 2012-17E.

Assuming 60% of new tables would be allocated to mass-market segment

We expect the additional 350 gaming tables to be granted by DICJ in phases upon the

completion of the yacht club and the three hotels. We assume that 60% of new tables will be

allocated to the mass-market segment and the remaining 40% to the high-roller segment.

Direct VIP business might start in 2015

Currently, VIP players are sourced by designated gaming promoters through direct

marketing efforts and relationships. In the long run, MLD intends to operate the direct VIP

segment. In a self-run VIP business, MLD could capture the gaming service income

currently paid to outsourced junkets, i.e. 55% of GGR generated by the high-roller

segment including operating expense, in addition to the existing 2% net sharing of GGR,

but at the same time bearing the operating expenses of the VIP business. We assume half

of new high-roller gaming tables at MFW would be self-operated from 2015 onward.

We expect 2013 daily GGR at Landmark Macau to resume to the level before renovation

Regarding the gross gaming revenue at casinos, we expect The Landmark Macau to

resume daily net wins at a similar level to 2011 (before renovation) in 2013 and then grow

steadily at 5% from 2014 onward. While MFW is relatively new, we assume the new

We expected around 80

new tables to come in by

end-2014

MLD may participate in the

gaming promotion business

indirectly in the future

12 August 2013


gaming areas could achieve 45-65% of the daily GGR per table as in The Landmark

Macau over the first to fourth year of operations.

Figure 43: GGR projections of MLD Figure 44: MLD’s reported revenue projection

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

High-roller Mass market Slot

HK$mn

0

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

High-roller Mass-market Slot Non-gaming revenue

HK$mn

2012-17 CAGR = 47%

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

Following the acquisition of MFW in May 2012, the scope of non-gaming offerings is

widening. We forecast non-gaming revenue—generated mainly from hotel rentals, food

and beverages and retail income—to grow at a 29% CAGR during 2012-17E to reach

HK$1,402 mn in 2017E after the completion of the MFW redevelopment project.

EBITDA to grow at 40% CAGR to HK$4,055 mn in

2017E

We estimate EBITDA margin of 30-36%/2% for mass-market/VIP

The cost structure of casino operations consists mostly of variable costs as the percentage

of GGR, including gaming taxes and special levies and table premium, is fixed at 39-40%

of GGR and junket commission capped at 1.25% of rolling chip turnover. In MLD’s case,

the gaming tax and junket commission are settled by SJM, the concessionaire.

We project the mass-market segment to generate EBITDA margin of 30-36% on GGR

basis, which is lower than the industry average of around 40% due to the SJM’s GGR

sharing of around 5%.

On the other hand, the operating cost of outsourced VIP rooms is borne by the junkets.

Given the minimal utilities and administrative cost for VIP operations borne by MLD, its

EBITDA margin for outsourced VIP business would be roughly equal to the receipt of 2%

sharing of VIP GGR. For the planned direct VIP business, we project the EBITDA margin

to be 6% after the sharing of commission to gaming agents and revenue rebate to

customers, which is lower than the industry average of 8-10% due to SJM’s sharing of

around 3% of VIP GGR.

MLD’s EBITDA margin is

likely to be lower than

industry average due to

SJM’s sharing of revenue

12 August 2013


Figure 45: EBITDA of outsourced VIP segment Figure 46: EBITDA of self-operated VIP segment


SJM

$40

MLD

$2

SJM

$3

MLD’s income

$100

$2

$55

Gaming promoters

$55

Gaming tax, special



SJM

$40

MLD

$57

SJM

$3

Operating cost of VIP

roomsEBITDA

$15

$100

$6

Gaming agents/

revenue rebate

$36

Gaming tax, special



We believe the non-gaming segment will account for less than 15% of group EBITDA and

generate an EBITDA margin of 30-35%.

EBITDA to grow at 40% CAGR to HK$4,055 mn in 2017E

The Landmark Macau is a relatively mature property. Therefore, we expect its EBITDA to

grow steadily from HK$767 mn in 2012 to HK$1,348 mn in FY17E, implying a CAGR of

12% on the back of the organic growth of the Macau market, and operating leverage after

the renovation work to be completed by 2014.

MFW was loss-making during the track record period and we expect it to turn around in

2014 after the rolling out of phases of the redevelopment project, and for some new tables

to come in. After the completion of MFW redevelopment and the addition of 350 tables to

the site, we expect MFW to contribute an EBITDA of HK$2,707 mn in FY17E, i.e., the first

year of full operation.

Overall, we expect MLD’s EBITDA to grow from HK$750 mn in 2012 to HK$4,055 mn in

2017E, implying a CAGR of 40% over the five-year period, upon the completion of MFW

redevelopment.

Figure 47: MLD’s EBITDA projections by properties Figure 48: We expect EBITDA/table to trend up

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Landmark MFW

HK$mn

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

EBITDA/table (HK$mn)

HK$mn

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

Group EBITDA to grow at

40% CAGR during FY12-

FY17E

12 August 2013


Figure 49: EBITDA mix—by segment Figure 50: EBITDA mix—by properties

88 123 111 171 189 331 553 732

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

High-roller - Mass-market -Slot Non-gaming EBITDA

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Landmark Macau MFW

Source: Credit Suisse estimates Source: Credit Suisse estimates

Net profits is set to grow at 44% CAGR to HK$3.3bn in FY17E

Below its EBITDA line, we mainly have depreciation and amortisation expenses. Note that

MLD’s gaming-related revenue is not subject to Complementary Tax in Macau during the

effective period of the service agreement, since the fees received under the Service

Agreement is derived from SJM’s gaming revenue, and SJM already pays special gaming

taxes, levies and gaming premiums to the Macau government out of its share of the gross

gaming income generated by the casinos.

Overall, we expect The Landmark Macau to continue generating profits going forward. On

the other hand, we project MFW will continue to be loss-making in 2013 and turn profitable

in 2014E with some new facilities and tables rolling out. Overall, we expect the group net

profit to increase from HK$535 mn in 2012 to HK$3,312 mn in 2017E, implying a CAGR of

44% during the five-year period, upon the completion of MFW redevelopment.

Figure 51: MLD’s net profit projection

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Net profits

HK$mn

2012-2017E CAGR = 44%


We expect MLD to generate negative free cash flow in 2014E and 2015E mainly due to

the capex funding for the redevelopment project. However, after the eventual rollout and

ramp-up of new tables, we expect net free cash inflow since 2016E.

The gaming-related profits

of MLD are exempt from

Macau Complementary Tax

MFW to turnaround in

2014E

12 August 2013


Initiating coverage with OUTPERFORM rating

Discounted 2017E EBITDA is adopted to better reflect the full potential of MFW

We expect MFW’s redevelopment project to be completed in 2016 and to operate at full

capacity only in 2017. For the first year of full operations of MFW in 2017, we expect MLD

to generate EBITDA of HK$4,055 mn, assuming the additional 350 gaming tables are

operational and the 1,263 hotel rooms at three new hotels are launched according to the

anticipated timeline. We believe the EBITDA generated in 2017E will better capture

MFW’s full potential post the redevelopment.

Therefore, for the purpose of determining the fair value range, we discounted 2017E

EBITDA to 2014E by using the weighted average cost of capital (WACC) of 11.7%, which,

in our view, captures the market and corporate risk as well as MLD’s debt structure.

Target multiple of 7x—based on 30% discount to SJM's FY14E EV/EBITDA

On the other hand, given the fact that MLD is operating the satellite casinos under SJM’s

concession licence, we believe SJM’s valuation would be an appropriate benchmark in

determining the valuation of MLD. A discount of 25% is applied on SJM’s 9.5x FY14E

EV/EBITDA in determining MLD’s target multiple of 7.1x to reflect the uncertainty

regarding the number and timing of the new tables.

We determined our target price at HK$3.13—implying 30% potential upside

Therefore, we set our target price at HK$3.13/share, which is determined by applying 7.1x

EV/ (FY17E EBITDA discounted to 2014 by using WACC of 11.7%). On actual EBITDA

basis, our target valuation implies 17.6x/10.7x/6.6x EV/EBITDA for 2014/15/16E.

Figure 52: We determined MLD's target price at HK$3.13

SJM 2014 EV/EBITDA (x) 9.5

Discount to SJM -25%

Target multiple (x) 7.1

Discounted FY2017 EBITDA to FY14 by using WACC of 11.7% (HK$mn) 2,911

Enterprise value (HK$mn) 20,738

Add: Net debt - FY2014E (HK$mn) -1,226

Equity value (HK$mn) 19,512

Outstanding shares (mn) 6,232.18

Target price (HK$/share) 3.13


The grant of first batch of new tables serves as a re-rating catalyst

According to our observation, the redevelopment of MFW has already kicked off. We

expect the management will start the discussion for new tables grant with DICJ shortly,

and the first batch of tables is likely to come online within the next 12 months. While the

market is cautious on the timeline of the new table grant, we believe the approval for new

tables could be a significant re-rating catalyst.

On the back of the attractive growth prospect of MLD and potential upside of 31%, we are

initiating coverage on MLD with an OUTPERFORM rating.

12 August 2013


Investment risks Reliance on SJM for all gaming-related revenue

MLD does not hold a concession or sub-concession to operate casino games in Macau,

and generates its gaming-related income largely from providing gaming services to SJM.

Therefore, a material dispute with SJM, any withdrawal of gaming tables allocated by SJM,

any material revision or early termination of the service agreements could materially and

adversely impact its business.

Gaming-related business may cease if SJM’s concession expires in 2020

SJM’s Concession Contract expires on 31 March 2020 and may not be renewed upon

expiry. Beginning April 2017, the Macau government may redeem SJM’s Concession

Contract by providing it with at least one year’s prior written notice. If the SJM Concession

is redeemed by the Macau government and SJM is unable to renew or extend its

concession, the service agreement will also terminate and MLD will cease to generate any

revenue from gaming services if it is unable to enter into a similar service agreement with

any of the other concessionaires or sub-concessionaires.

Even if the SJM Concession is renewed, there can be no assurance that SJM will renew

the service agreement on the same terms or at all. Further, there is no assurance that

MLD will be able to enter into a similar arrangement under the service agreement with any

of the other concessionaires or sub-concessionaires.

For the years ended 31 December 2010, 31 December 2011 and 31 December 2012, the

revenue generated from gaming services accounted for 71.2%, 70.2% and 66.7%,

respectively, of MLD’s total revenue for the same periods.

No assurance on DICJ approval regarding the application for additional 350 tables

The preliminary plans for expansion of the gaming-related business would require the

allotment of additional gaming tables across the properties, in particular the MFW

redevelopment project—bringing the total number of gaming tables to 500 from 146

gaming tables currently operating in Pharaoh’s Palace Casino and Babylon Casino.

DICJ has advised MLD and SJM in writing in December 2012 that the current limit of 3%

annual increase in table count as announced by Macau Government in September 2011

will not be an obstacle to the request for the application to operate up to 500 gaming

tables in total in the gaming premises located within The Landmark Macau and Macau

Fisherman’s Wharf, and DICJ may consider granting new gaming tables in stages in

accordance with the investment plan and market studies presented to the Macau

government in support of the application.

Having said that, there is no assurance that the DICJ will eventually approve the plans to

increase the number of gaming tables in the casinos. Without the new tables or if there is

a significant delay in the table grant as planned, MLD may not be able to generate

additional revenue from gaming services through new gaming tables as anticipated, and

may accordingly need to record an impairment loss in respect of the goodwill that arose

from the 2012 MFW Acquisition, the carrying amount of which was HK$682.0 mn as at 31

December 2012.

Moreover, various approvals, licences and permits would be required to operate the existing

hotel properties and those contemplated as part of the MFW Redevelopment Project, and the

loss of or failure to obtain or renew any or all of these approvals, licences and permits could

adversely affect the business, financial condition and results of operations.

Heavy reliance on SJM for

gaming-related income

SJM’s concession contract

is due to expire in 2020

If SJM’s concession is not

renewed, MLD may not be

able to continue the gaming-

related business

Getting the additional 350

tables is critical to the

gaming-related business

expansion

However, there is no

guarantee from DICJ

regarding the approval of

tables

12 August 2013


Indirect exposure to credit risk on credit extended to VIP patrons by gaming

promoters

Under the Macau laws, only the concessionaires, sub-concessionaires and licensed

gaming promoters engaged by concessionaires and sub-concessionaires are permitted to

extend gaming credit to, and collect gaming debt from, the gaming patrons. That said,

MLD does not extend credit to VIP patrons gambling on its premises. However, MLD

provides a guarantee to SJM against any amount outstanding to SJM and any other

losses incurred by SJM resulting from a breach of the gaming promotion agreements by

any of the designated gaming promoters.

Limited control over the actions of gaming promoters but dependent on them for a

material portion of the revenue from gaming services

MLD does not hold, and is not required to hold, a gaming promoter licence under the

Gaming Promoters Regulation for the promotion of games of fortune and chance or other

games. Instead, certain designated gaming promoters conduct and operate gaming

promotion activities for the VIP rooms in The Landmark Macau.

The reputation and integrity of the parties with whom MLD engages in business activities,

in particular the gaming promoters responsible for gaming promotion for the VIP rooms,

are important to MLD’s own reputation and the ability to continue to operate in compliance

with the Macau Gaming Law and related regulations. Serious breaches or repeated

misconduct by the designated gaming promoters could result in the termination of SJM’s

concession. Yet, MLD has limited control over the actions of the designated gaming

promoters to assure their compliance of regulations.

Further equity/debt financing may be necessary to fund the redevelopment project

Management expects to fund the aggregate capex of HK$7.2 bn for the redevelopment of

the Landmark Macau and MFW by cash generates from operating activities and the

proceeds from the Global offering. However, following the reduction of proceeds from the

Global offering in July 2013, MLD may consider to fund the balance of the estimated

capex by equity/debt financing in the future.

MFW may not fully realise anticipated benefits from redevelopment and expansion

MFW Investment was loss-making during the track-record period and its growth potential,

even after redevelopment and expansion, may not materialise. Macau Fisherman’s Wharf

may not be able to attract a sufficient number of customers, including mass market players

and other visitors, in order to achieve performance goals.

The redevelopment and expansion of MFW could encounter significant delays and

cost increases

The redevelopment and expansion of Macau Fisherman’s Wharf may not proceed

according to design, schedule or budget. Currently, the MFW Redevelopment Project is

expected to offer, among other things, a new museum, entertainment attractions,

additional gaming areas, hotel accommodation, food and beverage outlets, retail space

and marina services. However, the development of the MFW Redevelopment Project is

still at a preliminary stage without any final plans regarding design, construction schedule

or budget. The features of the MFW Redevelopment Project may be subject to change.

Intense competition in Macau and elsewhere in Asia

MLD currently competes with the concessionaires and sub-concessionaires, as well as

other hotel and resort operators operating under service agreements with them. We

expect competition in Macau to increase as new hotels, casinos and entertainment

complex projects are completed in Cotai. The number of hotel rooms in Cotai is expected

to increase from ~13,000 in 2012 to ~25,000 by 2020. Outside Macau, MLD also

competes to some extent with casinos located in other countries, such as Malaysia, South

Korea, the Philippines, Cambodia, Australia, New Zealand and elsewhere in the world,

MLD has indirect exposure

to credit risk by

guaranteeing the gaming

promoters on their amount

outstanding to SJM

Limited control over gaming

promoters but dependant on

their gaming services for

revenue generation

Potential needs for further

equity/debt financing

The MFW redevelopment

project is still at a

preliminary stage and the

plan may be subject to

change

The competition of gaming

and entertainment within

Macau and Asia is fierce

12 August 2013


including Las Vegas and Atlantic City in the United States. In addition, certain countries,

such as Singapore, have legalised casino gaming and others may do so in the future,

including Japan, Taiwan and Thailand.

12 August 2013


Appendix 1: Key financial data Figure 53: Profit and loss statement


Gaming service income

- High-roller 88 123 111 171 189 1,237 2,814 4,073

- Mass-market 755 918 984 1,166 1,429 2,360 3,815 4,741

-Slot 25 27 16 29 31 37 44 49

Sub-total 867 1,068 1,111 1,366 1,649 3,634 6,673 8,863

Non-gaming revenue 228 278 389 455 540 761 1,087 1,402

Total revenue 1,095 1,346 1,500 1,822 2,189 4,395 7,761 10,265

Gross profits 678 927 836 1,027 1,196 2,166 3,620 4,824

Other income 2 3 34 22 23 24 25 26

Marketing and promotional expenses -28 -31 -46 -55 -61 -132 -217 -267

Staff cost (admin) -83 -119 -118 -148 -178 -213 -256 -294

Others -54 -70 -103 -129 -28 -305 -676 -921

Operating profits 515 710 603 718 952 1,540 2,496 3,368

Net interest expenses/ income -18 -50 -61 -61 -61 -76 -77 -57

Exceptional 0 -12 -12 -76 0 0 0 0

Profits before tax 497 648 531 581 891 1,464 2,419 3,312

Taxation 0 0 4 0 0 0 0 0

Net profit 497 648 535 581 891 1,464 2,419 3,312


Figure 54: Reconciliation of adjusted EBITDA


Operating profits 515 710 603 718 952 1,540 2,496 3,368

Add:

Depreciation and Amortization 51 52 104 119 178 357 591 637

Share base payment - 35 8 - - - - -


Adjusted EBITDA 578 809 750 887 1,180 1,947 3,137 4,055


12 August 2013


Figure 55: Balance sheet


Assets

Cash 31 72 112 974 1,178 1,095 2,468 6,188

Inventories 5 5 28 41 50 66 90 105

Accounts receivables 356 415 467 536 657 879 1,552 1,848

Other current assets 655 1,403 2,300 71 71 71 71 71

Net fixed assets 633 685 2,284 3,794 5,585 7,827 8,576 8,145

Other non-current assets 847 781 2,730 2,680 2,631 2,581 2,531 2,481

Total assets 2,528 3,362 7,921 8,096 10,171 12,517 15,287 18,837

Liabilities

Short term debt 171 272 334 356 356 356 356 356

Accounts payables 3,240 357 660 911 1,094 1,978 2,328 2,566

Long term debt 557 1,456 1,405 1,049 2,049 2,049 2,049 2,049

Other non current liability 0 0 198 198 198 198 198 198

Total liabilities 3,968 2,085 2,597 2,514 3,697 4,580 4,931 5,169

Shareholders' equities

Share Capital 338 339 523 623 623 623 623 623

Reserves -1,815 885 1,406 -460 431 1,894 4,313 7,625

Share Premium 36 52 3,396 5,420 5,420 5,420 5,420 5,420

Total equities -1,441 1,276 5,324 5,583 6,474 7,937 10,356 13,668


Figure 56: Cash flow statement


Pre-tax profit 497 648 531 581 891 1,464 2,419 3,312

Taxes paid 0 0 0 0 0 0 0 0

Depreciation & amortisation 51 52 104 119 178 357 591 637

Share base payment 0 35 8 0 0 0 0 0


Exceptional items and others 0 0 -6 123 0 0 0 0

Interest (income)/expense 18 50 61 61 61 76 77 57

Gross cash flow 578 798 733 811 1,180 1,947 3,137 4,055

Net capex -23 -17 -76 -1,629 -1,969 -2,599 -1,340 -205

Net change in working capital -373 -2,691 -608 -49 55 645 -346 -73

Free cash flow 183 -1,910 49 -867 -734 -7 1,450 3,777

Dividends paid 0 0 -5 0 0 0 0 0

Other fund raising 0 0 183 0 0 0 0 0

Others -18 951 -197 2,063 -61 -76 -77 -57

Net cash flow 165 -960 31 1,195 -796 -83 1,373 3,720


12 August 2013


Appendix II: Management team As a gaming service provider in Macau, we believe MLD’s knowledge and relationship with

customers, junkets, the Macau government and SJM, the concession licence holder of

casinos at MLD’s properties, are important to the success and continuity of the business.

Most management team members have been working in Macau gaming markets for over ten

years and have established strong relationships with all the parties involved in the game.

With the redevelopment of MFW in the pipeline, we believe the execution of the project is

also critical to its success and eventually the grant of gaming tables from DICJ. MLD has

recently brought in several specialists to build and manage the projects as well as gain

access to financial resources to fund the projects.

David Chow, Co-Chairman and Chief Executive Officer

Mr Chow has more than 30 years of experience in the gaming, gaming promotion,

entertainment and hospitality industries prior to founding MLD. Mr Chow has been actively

involved in community service and has been appointed a member of various tourism-

related associations. Moreover, he has owned and managed the award-winning five-star

Legendale Hotel Beijing since 2007.

Furthermore, he was previously elected as a legislator of the Macau government and was

recently appointed a member of the 12th National Committee of Chinese People’s Political

Consultative Conference in February 2013.

Madam Lam Fong Ngo, Vice-chairman & Executive Director

Madam Lam has more than 30 years of experience in the Macau gaming industry and has

worked for STDM since the 1980s. She has served as a member of the Macau Chief

Executive Election Committee in 2004 and 2009 and was conferred the title of honorary

citizen of Guangzhou in 1996 by the Guangzhou People’s Congress.

Sheldon Trainor, Executive Director

Mr Trainor. has more than 20 years of experience in financial advisory services and

served a number of leading investment banks. He served as a managing director in the

investment banking division of Morgan Stanley Asia Pacific Holding Ltd. and worked at

Bank of America Merrill Lynch between 2005 and 2009 as a managing director. He

founded PacBridge Capital Partners (HK) Limited in 2009 which is primarily responsible for

the execution of both corporate advisory and principal investment transactions.

Carl Tong, Co-chairman & Non-executive Director

Mr Tong became an associate of the Hong Kong Institute of Certified Public Accountants

in 1981 and an associate of the Institute of Chartered Accountants in England and Wales

in 1980. He possesses extensive experience in strategy, planning, operations, finance

management, investment and risk management in Hong Kong, Singapore and US. He is a

former independence non-executive director of eSun Holdings and non-executive director

of Crocodile Garments. He is now a director of UNIR (HK) Management Limited, a family

office that oversees investments of Ms Ina Chan.

Peter Meacock, EVP, Head of Projects

Mr Meacock has been involved with MLD since 2002 and has over 40 years of

professional experience in architecture and engineering projects and construction

development in Europe, the Middle East and the Asian region. He was the founder of

Legend Tec International Project Management in 2006.

12 August 2013


Companies Mentioned (Price as of 09-Aug-2013)

Galaxy Entertainment Group Ltd (0027.HK, HK$41.25) MGM China (2282.HK, HK$22.3) Macau Legend Development Limited (1680.HK, HK$2.39, OUTPERFORM[V], TP HK$3.13) Melco Crown Entertainment-ADR (MPEL.OQ, $26.4) SJM Holdings Ltd. (0880.HK, HK$19.92) Sands China (1928.HK, HK$42.25) Wynn Macau (1128.HK, HK$21.0)

Disclosure Appendix

Important Global Disclosures

Isis Wong and Kenny Lau, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark .

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Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

12 August 2013


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Price Target: (12 months) for Macau Legend Development Limited (1680.HK)

Method: We determined our target price by applying 7x EV/EBITDA on the 2014's PV of the FY17E EBITDA, which is the first full year of operations, implying 10.7x FY15E EV/EBITDA, which is comparable to the peers valuation.

Risk: Key risk to our target price includes: 1) Headwinds to macro economy in Mainland China; 2) significant slowdown of visitation to Maca; 3) significant delay or reducing number of the table grant; and 4) significant delay in the redevelopment project of Macau's Fisherman Wharf

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12 August 2013


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Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the PRA and regulated by the FCA and the PRA or in respect of which the protections of the PRA and FCA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. 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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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