Event

The Macao SAR government conducted a 45-day public consultation on the revision of the legal system of Casino Lucky Gaming Operation from September 15 to October 29, 2021, and the consultation summary report on the revision of the legal system of Casino Lucky Gaming Operation was released on December 23.

Brief comment

The Macao SAR Government announced on September 14 that it would conduct a public consultation on the revision of the legal system for Lucky Gaming Operation in casinos (that is, the Gaming Law). The 45-day consultation ended on October 29, and the Gaming Regulatory Bureau compiled a summary report. The amendments to the Gaming Law include the number of gaming licences granted, and the proposed amendments include the end of the sub-licence system for gaming business licences, and the company has one of the three major licenses. Macau's six gaming licenses are expected to expire in June 2022, and the company is expected to renew its license. In addition, the proposed amendments include shortening the duration of the new licence compared with the current 20 years, strengthening supervision, employee protection, strengthening the vetting mechanism for gaming intermediaries and partners of companies, introducing government representatives, clarifying criminal responsibility and administrative punishment system, and so on. From the point of view of the advisory opinion, it is generally agreed that the number of grants should be retained, and it is suggested that the SAR Government should not only pay attention to the development of the gaming industry, but also consider the affordability of land and manpower in Macao. On the grant period, it is generally believed that it will not exceed 20 years, and at the same time, it is recognized to strengthen the review mechanism and supervision of all aspects of gambling. The final revised plan still needs to be formulated after comprehensive consideration by the Macao government, but it is more likely than the previous trend of strict supervision, and the leading pattern of the gaming industry represented by companies is expected to be relatively stable under strict supervision, and benefit from industry norms to a certain extent.

The company resumed its leading retail operation. The total net income of 2021H1, a comparative advantage group in incremental property and VIP business, totaled HK $10.661 billion, an increase of 71.3% over the same period last year. The net income of 2021Q1 2021Q2 was HK $5.6 billion, which was higher than that of HK $1.2 billion in the same period last year and HK $5.1 billion in VIP business compared with the same period last year. 2021H1's gaming revenue of HK $9.749 billion still dominates, returning to 31.88% in the same period in 2019, leading the industry in terms of recovery. In the first half of the year, the adjusted EBITDA was HK $1.991 billion, which was a turnround from HK $1.087 billion in the same period last year. Overall, the gaming revenue of the midfield business is 5.91 billion Hong Kong dollars, accounting for 60.62%. Compared with the same period in 2019, the increase in the proportion of the midfield business will also help to accept more tourists in the future. The business income of the VIP lounge accounts for 35.96% of the gaming revenue, which is still basically higher than that of other Macau gambling cards. Although the business of the Macau gaming VIP lounge has shrunk, it is expected that the demand side still has, and the company has a good ability to undertake. Galaxy Macau remains the largest contributor to revenue and profits, with an adjusted EBITDA of HK $1.688 billion and an adjusted EBITDA rate of 23% The company's incremental property section provides a good reserve for future tourists to undertake and non-gaming business development. it has core properties in Macau Peninsula and Coastal, and the company continues to promote the third and fourth phases of the project. phase 3 and Phase 4 will combine to provide about 3000 high-end rooms as well as other exhibition, catering, retail and entertainment venues, and Phase III will introduce the Raffles brand. Thanks to cooperation with Accor in March this year, it is expected to open in early 2022. The company's strong retail business performance in 2021 contributed to the performance of 2021Q2's non-gaming business, and it is expected that MICE and other businesses will be repaired as passenger flow recovers. At present, the penetration rate of tourists from mainland provinces to Macao is basically in small digits except Guangdong. With reference to the coverage of similar gaming cities in Europe and the United States, there is still much room for improvement in the domestic tourism penetration rate to Macao in the future. the ability to undertake high-quality hotel rooms, catering, transportation, entertainment and other supporting facilities will become the key, and companies with gaming licenses generally make efforts in non-gaming business. In addition to Lufu, the company also has projects to promote in Hengqin and overseas, and the scope of the project layout has a strong scarcity in Macau gaming licenses, and with the "General Plan for the Construction of Hengqin Guangdong-Macao Deep Cooperation Zone" issued at the beginning of September, Hengqin will be jointly managed and shared by Guangdong and Macao in the future, the company plans Hengqin Holiday and other projects are expected to have more space, and the company said that it is actively expanding to expand outside Hengqin and Macao. May include the rapidly developing Greater Bay area. The layout of projects and comprehensive projects outside Macao will also enhance the company's long-term development potential.

The comprehensive competitive advantage is outstanding, and it is expected to repair quickly after the epidemic.

The company has an outstanding comprehensive competitive advantage in the Macau gaming market, and it is expected that there will still be a sound competition pattern in the new cycle after the revision of the betting law and the expiration of the license next year. The company's VIP business takes the lead, and the midfield business develops rapidly. at the same time, the expected carrying capacity of incremental guest rooms and supporting facilities brought about by the new property promotion is also expected to further increase the market share. The company's projects are widely distributed, including Macau Peninsula and Road. And Hengqin and overseas, etc., long-term benefit from the domestic multi-provincial permeability improvement space, gambling and non-gaming business coordinated development, quality property and layout project promotion It is expected that the passenger flow from the mainland to Macao will also be quickly repaired after the epidemic is gradually brought under control.

Investment suggestion: the company is expected to achieve a net profit of HK $1.314 billion, HK $5.056 billion and HK $10.036 billion from 2021 to 2023. The current share price is rated as "overweight" corresponding to PE of 133x, 34X and 17X, respectively.

Risk hints: the impact of the trend of strict regulation brought about by the revision of the Gaming Law on the industry as a whole; the continued impact of the epidemic, the restriction of customs clearance between the mainland and Macao; incremental property construction is not as expected or other policy risks; the penetration rate of gambling from the mainland to Macau is not as high as expected.