sands china: drawing a new line in the...

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29 May 2015

Sands China: Drawing a new line in the sand? Why now might be the right time for a REIT spin-off of Sands’ non-gaming assets

Sands China 29 May 2015

Contributing Daiwa Analysts:

Jamie Soo (852) 2773 8529 [email protected]

Jonas Kan, CFA (852) 2848 4339 [email protected]

Kevin Lai (852) 2848 4926 [email protected]

Adrian Chan, CFA (852) 2848 4427 [email protected]

Jennifer Wu (852) 2532 4308 [email protected]

“We believe our Asian retail mall assets are among the most valuable retail assets of their type in the world ... monetisation of those assets, which is an important component of our fundamental business strategy, will fill our coffers and allow us to greatly increase the return of capital to shareholders in the future.”

Sheldon Adelson Chairman and CEO Las Vegas Sands Corporation 4Q12 earnings call


If we were Mr. Adelson, what would we do?

In this special report, we pick up on Mr. Adelson’s comment first made 2 years ago that he would consider a monetisation strategy. We look at a scenario whereby Sands China Limited (SCL) spins off its mall and lodging assets into a REIT, and assess the implications of such a move. In our view, a REIT spin-off would make sense and now would be a good time to act given: 1) SCL is the only operator in Macau with the necessary operational footprint and diversified income

streams to contemplate such a move.

2) A REIT spin-off would limit share-price downside by crystallising the value of SCL’s assets at a time of increasing political and regulatory uncertainties in Macau and China.

3) The move would be sensible from an estate-planning perspective for Mr. Adelson, as a spin-off would provide stable rental income for his children.

4) Interest rates are at record lows, which is a good time to issue a REIT.

5) A REIT spin-off would attract interest from new investors and could capitalise on the structural changes we believe are taking place in Hong Kong’s stock market, which could see an SCL-REIT trading at valuations more like those of a US REIT than a Hong Kong REIT.

In addition, such a reorganisation would be logical, in our view, given that SCL’s final project in Macau, The Parisian, is due to open in 2H16. The next phase for SCL would be less about expanding capacity and more about realising the value of the businesses it has built. A REIT spin-off would thus crystallise the business value of the assets SCL has built over the years, and would create a low-risk investment vehicle for Mr. Adelson’s estate that produced regular dividend cash flow and would be completely separate from the risky casino operations. We estimate the value of the REIT spin-off would be upwards of HKD102bn, making it among the 3 largest in Asia. For Mr. Adelson, we believe the move would make particular sense as it would reduce the risks to his holdings and serve the interests of SCL’s majority and minority shareholders alike. The share prices of Macau gaming operators have been increasingly volatile over the past 6 months. Be that as it may, we believe sentiment towards SCL and its share price would react positively if a spin-off took place. Once the dust settled, attention would likely revert to SCL’s fundamentals, in our view. Our SOTP-based fair value is based on what we believe is a conservative cap rate of 5-6% and a 9-10x 1-year forward EV/EBITDA multiple for SCL’s gaming operations. This implies a fair value for the stock of HKD26-31.We advise hedge funds that agree with our assessment to cover their short positions on SCL. From our on-the-ground checks, we remain cautious on SCL and the industry as a whole. This concern is especially true when examining the Cotai-centric operators, given the increasingly aggressive competition they are facing. We expect to see further cost pressures emerging with the next round of new openings. Jamie Soo, Head of HK/China Gaming Research


Chapter 1 Why now? 1

Chapter 2 What would a REIT spin-off look like? 13

Chapter 3 What would be the fair value of a REIT spin-off? 17

Appendix 25

Company section: Sands China 29

Contents


- 1 -

Chapter 1

Why now?


- 2 -

“The only question in my mind right now is whether or not we see a change in the cap rates coming up in front of us, because that would motivate us to move quicker.”

– Sheldon Adelson, 4Q12 conference call

“The good news is that we're doing so well, so you don't want to sell it. When the growth curve ends up at,

give or take, single digits up to 10%, then we would seriously consider selling.”

– Sheldon Adelson, 1Q14 earnings call

SCL: 5 reasons Daiwa believes it should issue a REIT today 1. SCL is the only casino operator with the necessary scale and diversified income streams to contemplate this

move. 2. Such a move would crystallise the value of the non-gaming assets against rising uncertainties in the gaming

industry. 3. Mr. Adelson is 81 years old and a spin-off would provide stable and predictable rental income for his children. This

would be sensible from an estate planning perspective given Macau’s volatile gaming environment. 4. The prevailing macro environment, with interest rates at record lows, would be a good time to sell a REIT. Longer

term, rates will likely only go up. 5. We think an SCL REIT would be well received by income funds and dedicated property funds -- investors that to

date have been left out of the sector. A REIT spin-off could also capitalise on what we see as the structural changes now taking place in the Hong Kong stock market, which could lead to the SCL-REIT trading more like a US REIT than a Hong Kong REIT.

Source: Daiwa

To us, a potential reorganisation by SCL would be logical, after the company’s massive business building and capex investments over the past 15 years, which have yielded visible results in terms of cash flow and business performance. With SCL’s final major capex investment, The Parisian, scheduled to be completed in 2H16, we believe the next phase for SCL will be less about building new businesses than realising the value of the businesses it has already built. A potential spin-off would also allow several objectives to be achieved at the same time: 1) the crystallisation of the existing value of assets in a structure conducive to producing stable income streams for Mr. Sheldon and his family, 2) the mitigation of current and future risks related to Macau’s gaming industry, and 3) the potential unlocking of valuation gains for existing SCL shareholders (as discussed on page 18).

SCL’s operational footprint is monolithic; it holds more Meetings, Incentives, Conferences and Exhibitions (MICE) facilities and retail space than the other 5 Macau casino concessionaires combined (even after the 2015-17 capex cycle). Also, it has the highest number of hotel rooms and gaming space among its competitors. As a result, SCL generates much more diverse income streams than its peers, with more than a quarter of its EBITDA derived directly from non-gaming activities (versus ~15% for the other 5 major operators in Macau).

Why now?

Scale and diversified income streams


- 3 -

SCL: departmental EBITDA contribution by segment vs. peers (1Q15)

Source: Company, Daiwa estimates based on 1Q15 figures

Hence, as we see it, SCL is the only candidate among the 6 major casino operators in Macau with the requisite non-gaming operational scale to consider issuing a REIT today.

SCL: operational footprint versus peers (in brief, see Appendix for details) Capacity Market Share Existing By 2017 Existing By 2017Hotel capacity (rooms) 9,365 12,804 34% 31%Retail Space 2.6m 2.9m 91% 66%MICE 1.8m 2.4m 81% 63%Gaming Space 1.1m 1.6m 31% 24%Source: Company, Daiwa

We believe investor sentiment toward Macau is becoming increasingly uncertain, driven by the changes in both the regulatory environment in Macau and the political landscape in China. China’s anti-graft drive continues to intensify, with adverse effects for Macau’s consumer sentiment, customer mix, and gaming behaviour. As a result, Macau’s gaming revenue and earnings have declined for 5 straight quarters (1Q14 to 1Q15). Nevertheless, some argue that the drivers of such declines are structural in nature and will be positive for Macau in the long run (eg, the tightening of the illegal use of transit visas, the restructuring of the VIP segment, and increasing scrutiny of liquidity channels from China). Regardless, the industry’s earnings outlook is becoming ever more opaque, and is arguably even more so now than it was just 6 months ago. Furthermore, and for SCL specifically, the recent hearing in Nevada in the lawsuit filed by ex-CEO Steven Jacobs alleging unfair dismissal has put renewed emphasis on SCL’s business dealings in Macau. While we have no view on the court case itself, we believe the potential repercussions have created an overhang on SCL’s gaming business. Despite the challenges in gaming, we believe the income streams from SCL’s non-gaming segments continue to perform well and are relatively insulated from the gaming downturn. SCL’s retail tenant sales hit a record high in 4Q14, at USD800m, and continued to grow YoY for 1Q15. Its hotel occupancy has been robust (90% for 1Q15), and it has a relatively stable RevPAR. In our view, issuing a REIT would crystallise the value of these performing non-gaming assets and insulate their valuations from the risks and volatilities of the gaming business. As discussed in Chapter 3 (page 18) of this report, we conservatively estimate the value of a potential SCL REIT at HKD102bn (including St. Regis and The Parisian), which would effectively crystallise more than 40% of SCL’s market cap today.

Mass52%

VIP13%

Slots8%

Hotel14%

Mall10%

Other3%

SCL

Gaming: 73%

Non-gaming: 27%

Mass59%VIP

18%

Slots9%

Hotel6%

Mall3%

Other5%

Peers

Gaming: 86%

Non-gaming: 14%

Would crystallise value at a time of increasing industry uncertainty


- 4 -

Overview of the potential spin-off (HKDm) EBITDA Contribution Valuation

SCL (pre-spin-off)

SCL OpCo

SCL REIT Valuation Methodology SCL OpCo SCL REIT Total Value

Hotel 1,891 1,891 35% haircut on RevPar; 6% cap rate on EBITDA 31,514 31,514 F&B 1,398 1,398 6x EBITDA multiple 8,390 8,390 Retail 2,445 2,445 6% cap rate on gross rental income 52,515 52,515 Mice 698 698 6% cap rate on MICE EBITDA 11,638 11,638 Gaming 13,152 13,152 9x EV/EBITDA 111,086 111,086 Lease of gaming space - -809 809 "50% discount off SCL's average retail 13,489 13,489

gross rent/ sq ft" Net debt (15,787) (15,787) EBITDA (2016E) 19,584 12,343 7,241 111,086 101,759 212,845 Net interest expense (1,163) 0 (1,163) Shares outstanding (#m) 8,073 Tax (1) (66) 0 (66) Implied floor value(HKD/share) 26.4

Implied DPU yield 5.9% Distributable Income (2) 18,356 12,343 6,013 CRYSTALLISATION OF VALUE, PROTECTED FROM FURTHER GAMING INDUSTRY DOWNTURN

Note 1: assuming 2014 effective tax payment

Note 2: assuming 100% distribution which is the case for several H-REITs

Source: Company, Daiwa

SCL: retail sales volume YoY growth vs. industry SCL: hotel operating trends


*Note: SCL retail sales is calculated based on trailing-12-months average tenant sales per square foot and average leasable area for the period.


Political uncertainties. We believe pressures on Macau from China’s anti-corruption and reform drives will intensify in the future. Consider the following excerpts the from National People’s Congress “Report on the Work of the Government” on 5 March 2015 by Li Keqiang, Premier of the State Council.

“Our tough stance on corruption is here to stay; our tolerance for corruption is zero, and anyone guilty of corruption will be dealt with seriously. We will see to it that every instance of corruption, should it be committed higher up or lower down, is severely punished.” “Efforts have been stepped up to improve party conduct, build a clean government, and fight corruption; and we have investigated and prosecuted violations of the law and discipline, bringing many offenders to justice.” “We will uphold law and order in China; improve the multidimensional system for crime prevention and control; and punish violent terrorism, pornography, gambling, drug abuse and trafficking, cult activity, smuggling, and other crimes.”

(20%)

(10%)

0%

10%

20%

30%

40%

50%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

Macau retail sales YoY growth SCL retail sales YoY growth*

(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

020406080

100120140160180

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

SCL hotel revenue (LHS) SCL hotel revenue YoY growth (RHS)

(USDm)

Industry uncertainties increasing


- 5 -

Macau’s Chief Executive Fernando Chiu echoed similar sentiments in his annual policy address on 23 March 2015, where he indicated that the industry is undergoing a period of “adjustment”, lowered the government’s gross monthly GGR forecast to MOP20bn for 2015 (implying a 30%-plus YoY drop in GGR), and continued to emphasise the acceleration of efforts to diversify the economy. Licence renewals. The gaming licences for Macau’s 6 casino concessionaire/sub-concessionaires are set to expire from 2020-22, and the market expects negotiations between the government and gaming operators to begin in 2H15. It is too early to speculate on what the terms of the renewals will look like (ie, tax rates, one-off payments, etc). As we see it, however, the terms for renewals are likely to be incrementally less favourable to the existing licence holders, especially foreign-owned operators, considering the following factors:

1) Since 2006, when the last sub-concessionaire licence was granted, to Melco Crown, Macau’s annual GGR base has grown by more than 6x to MOP350bn as at end-2014. The EBITDA cumulatively generated was vast, at USD39.4bn from 2006-14. To put this in perspective, USD39.4bn is equivalent to more than one-fifth of the EBITDA generated by all the casino operators globally over the same period.

2) Substantially all of this EBITDA was generated by the gaming businesses via Chinese nationals visiting Macau. Some USD9.4bn, or 35%, of the total net profit generated in Macau from 2006-14, was repatriated to the US as dividends by the 3 licence holders with US parent companies (MGM, Las Vegas Sands and Wynn). Of the USD9.4bn, Las Vegas Sands accounted for USD5.1bn, equivalent to 19% of the net profit generated during this period.

3) By the time licences expire, the operators will have fully deployed all of their capex in Macau. This removes

a big part of the leverage the operators would otherwise have in the licence negotiations.

4) There are emerging new contenders for a gaming licence, all of which have roots in Macau.

Against such policy uncertainty (and the consequent uncertainty of the industry’s future earnings outlook), we believe a spin-off becomes increasingly sensible, both as a means to unlock the value of existing assets and to create more stable income streams for shareholders. On a more positive note, the Macau/Beijing administration continues to see the diversification of Macau’s economy as a priority. US operators have proven to be strong leaders in spearheading this diversification through the execution of various initiatives over the years (eg, SCL’s shopping mall at The Venetian). However, we believe the real question remains: what price is the Macau/Beijing administration willing to pay foreign operators for economic diversification away from gaming?


- 6 -

Macau: licence renewals and concessionaire structure

Source: Companies, Daiwa

Gaming table allocations. In March 2010, the Macau Government introduced a cap on live dealer gaming table numbers at a maximum of 5,500 tables by 2013. In September 2011, the Macau Government further clarified that it expected the market to record a table CAGR of 3% from 2013-23. Assuming a 3% CAGR, it is now well established that: 1) the cumulative designed gaming-table capacities of properties opening between 2015 and 2017 would exceed the 3% annual table cap off from the base of 5,500 by 4-fold, and 2) operators would not get their entire designed-table allocation. The way we look at it, a base of 5,500 compounded at 3% annually would imply 6,010 tables by the end of 2015. The total number of tables granted by Macau’s Gaming Inspection and Coordination Bureau (DICJ) was up to at least 5,750 in 2013 and 35 tables were granted to Macau Legend Development in 2014, which brings the total number of tables granted to 5,785 by end of 2014. This would mean that a maximum of 225 tables could be granted in 2015 without the cap being exceeded, which would translate into an average of 113 tables for both Galaxy and Melco. With Galaxy officially granted 150 new gaming tables for Phase 2 (for details, see Galaxy Entertainment Group: Lionel Leong confirmed 150 new tables granted for Galaxy Macau Phase 2), this would imply that future property openings are likely to exceed the government’s previously guided annual caps. The magnitude of this, however, remains uncertain. All in all, there is still a lot of uncertainty surrounding gaming-table allocations in Macau, which will directly impact the future ROICs of new projects. We believe that the perceived ambiguities in gaming-table grants will remain a big threat to new property openings in Macau in the years to come.

Concessionaire Sub-concessionaire

SJM (880 HK)Licence expiry: 2020Existing casinos:

- Lisboa (2001)- Grand Lisboa (2007)

-Oceanus (2009)- 14 satellite casinosUpcoming casinos:

- Lisboa Palace (2H17)

MGM China (2282 HK)Existing Casino:

- MGM Macau (2007)Upcoming casino:- MGM Cotai (3Q16)

Galaxy (27 HK)Licence expiry: 2022Existing casinos:- StarWorld (2006)

- Galaxy Macau Ph1 (2011)- Grand Waldo (2013)- 4 CityClub casinosUpcoming casinos:

- Galaxy Macau Ph2 (May-2015)- Galaxy Macau Ph3-4 (2016-2018)

Sands China (1928 HK)Existing casinos:

- Sands Macau (2004)- Venetian Macau (2007)

- The Plaza (2008)- Sands Cotai Central (2012-13)

Upcoming casinos:- Parisian (1Q16)

Wynn Macau (1128 HK)Licence expiry: 2022Existing casinos:

- Wynn Macau (2009)- Encore expansion (2010)

Upcoming casino:- Wynn Palace (1H16)

- Wynn Diamond (Early-2018)

Melco Crown (6993 HK / MPEL QQ)Existing casinos:

- Altira (2007)- City of Dreams (2009)

Upcoming casinos:-City of Dreams Manila (Mid-2014)

Studio City (3Q15)

SJM sold a sub-concession to MGM China for MOP1.6bn in 2005

Galaxy gave a sub-concession to Sands China at no cost

Wynn Macau sold asub-concession to Melco

Crown for MOP7.2bn in 2006

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20150522_GalaxyEntertainmentGroup_Lionel.pdf#page=1


- 7 -

Table allocation comparison of consensus view against 3% CAGR

Source: Daiwa, DICJ

Regional competition. We believe the anti-corruption sentiment in China and policies in Macau have contributed to the softness in Macau’s VIP segment over the past 12 months. As a result, many junket operators have begun developing their businesses abroad, eg, Suncity and David Group’s expansion into jurisdictions such as Vietnam, Philippines, Australia and Cambodia. Casino patrons are also looking to divert their gaming activities to jurisdictions a little further from China’s watchful eye, which is likely to draw market share away from Macau’s gaming market. At the same time, new products are being introduced by the Macau gaming operators, among others, in order to compete for market share, including casino openings in Russia, Korea, and the Philippines. The disparity of market sizes between Macau and other regional gaming markets makes it difficult to quantify the magnitude of the business being drawn away from Macau. However, this spillover risk is real and will likely become more pronounced over time, in our view. VIP business. We preface this section by stating that SCL has already made its strategy very public by saying it plans to focus on growing the mass business segment, adjusting its resources (table allocations, hotel rooms, etc) in alignment with this strategy. Despite having the lowest exposure to the junket mix of gaming operators, VIP still represented a significant 47% of SCL’s gaming revenue in 1Q15, so it is by no means immaterial. We have seen a progressive weakening of VIP segment GGR and operating dynamics in Macau, due to a pullback in demand amidst the challenging liquidity and policy environment. Against this backdrop, we have seen successive record-low monthly run rates for the past 7 months, which effectively wiped out more than 4 years of segmental GGR growth. Over the past 12 months, we have had many conversations with industry participants (ie, junket operators, agents, side-betting affiliates). Many take the view that what we are seeing today is a “healthy contraction” that effectively removes from the table business what was the result of an over-extension of credit pre-1Q14. Today, industry participants are increasingly prudent in terms of how they manage their capital bases and how they conduct business, which is healthy, in our view. A view that is shared by many on the ground is that this period of adjustment to a new norm, however long it may last, will likely set the foundation for an eventual period of rational expansion thereafter. Meanwhile, for SCL, not only did it suffer from the segment’s weakness in 2014, it is facing increasing difficulty in defending its VIP market share as its competitors have been solidifying junket relationships, improving junket commission structures, and upgrading their product offerings. We think these pressures are likely to intensify as every operator is expected to introduce new products to the market over the next 3 years.

5,935 6,160 6,235

6,085

6,535 6,685

6,385

7,285 7,585

5,485 5,750 5,785

5,000

5,500

6,000

6,500

7,000

7,500

8,000

2012 2013 2014 2015E 2016E 2017E

75 new tables/property 150 new tables/property 300 new tables/property

Table count per DICJ Government 3% cap guidance


- 8 -

SCL: monthly VIP rolling daily rates SCL: VIP rolling market share trend

Source: APG Source: APG

Mass market. Over the past 6 months, the Cotai operators have demonstrated an overall inability to capture and defend market share, with the most recent Lunar New Year marking the 3rd consecutive peak season when they lost mass market share. These market-share losses may have been partly driven by an increasing mix of lower-budget day-trippers and casino-hoppers, who are more likely to stay in the Peninsula. As far as we are concerned, this is an especially worrisome trend, especially for the Cotai operators, as overnight visitors are its key customers: 1) same-day tourists are unlikely to afford the time to travel further to Cotai, and 2) Cotai has the necessary hotel room inventory to support these visitors. Macau saw its first-ever peak season of absolute decline in overnight visitors during the Lunar New Year this year (February 2015). This decline was also reflected in the hotel numbers, where the number of hotel guests in Macau declined YoY for a third consecutive month in February to 756,200, down 9.9% YoY.

Macau: number of hotel guests

Source: DSEC, Daiwa

These factors are obviously influencing market share; both peak and trough seasons have seen mass GGR market share shift from Cotai in the past 6 months. This shift in both visitor mix and mass revenue market share is not encouraging when juxtaposed against the successive new property openings beginning 2H15, which will effectively increase Cotai’s hotel room capacity by 13,750 rooms and by 49% of the existing base between 2014 and 2017.

1.1

1.6

2.1

2.6

3.1

3.6

4.1

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5VIP rolling daily rates

(HKDbn)

11%

12%

13%

14%

15%

16%

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

SCL VIP rolling market share

(20%)(15%)(10%)(5%)0%5%10%15%20%25%

250,000

350,000

450,000

550,000

650,000

750,000

850,000

950,000

1,050,000

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Number of hotel guests in Macau (LHS) YoY growth (RHS)

(# of hotel guests)


- 9 -

Macau: mass market average daily revenue

Source: DICJ, Daiwa

Peninsula/Cotai mass market share – peak season

Same-day/overnight visitor growth trend – peak season

Source: APG, Daiwa Source: APG, Daiwa

Peninsula/Cotai: mass market share – trough season

Peninsula/Cotai: same-day/overnight visitor growth trend – trough season

Source: APG, Daiwa Source: APG, Daiwa

Heading into 2H15 and beyond, we foresee competition becoming even more fierce, especially among the Cotai operators. Indeed, SCL and Galaxy have already introduced promotional campaigns, including aggressive cuts in hotel room rates. For SCL, this visitor trend is particularly worrying given its mass-centric market position when compared with its other peers currently operating in Cotai. Furthermore, we expect 2015 to be a very challenging year for SCL as its 2 neighbouring operators (Galaxy and Melco) plan to introduce new products to the market (Galaxy Macau Phase 2 and Studio City, respectively) and are likely to compete aggressively for Cotai market share.

(40%)(30%)(20%)(10%)0%10%20%30%40%50%60%

0

50

100

150

200

250

300

350

400

450

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15

Mass revenue ADR (LHS) YoY Change (RHS)

(HKDm)

46%

47%

48%

49%

50%

51%

52%

53%

54%

May-14 Oct-14 Feb-15

Peninsula Cotai

(10%)

(5%)

0%

5%

10%

15%

20%

May-14 Oct-14 Feb-15

Same day Overnight

(YoY)

42%

44%

46%

48%

50%

52%

54%

56%

Jul-14 Aug-14 Sep-14 Nov-14 Dec-14 Jan-15 Mar-15 Apr-15

Peninsula Cotai

(20%)(15%)(10%)

(5%)0%5%

10%

15%20%25%

Jul-14 Aug-14 Sep-14 Nov-14 Dec-14 Jan-15 Mar-15 Apr-15

Same day Overnight

(YoY)


- 10 -

In all, we think it will be increasingly difficult for the mass market business, SCL’s forte, to capture and maintain market share in the next few years. Cotai: new properties, new competition in 2015

Source: Google Earth, Daiwa

As things stand, Mr. Adelson is 81 years of age and his holdings are vast: Las Vegas Sands is worth USD40.8bn (of which he owns 52%) and his effective stake in SCL alone is worth USD11.5bn. Cash flow from the holdings is primarily generated through dividends from Las Vegas Sands (LVS), of which around 60% is funded by earnings derived from SCL in Macau in 2014. Given Macau’s current operating environment, this dividend stream can be patchy and volatile, as indicated by Wynn’s recent dividend cuts (the 1Q15 quarterly dividend was cut by two-thirds from 4Q14 levels by the US parent). For Mr. Adelson, we believe a REIT spin-off makes increasing sense from an estate-planning point of view, and would provide his offspring with a stable and predictable income stream. Mr. Adelson has 4 surviving children, 2 adult children with his ex-wife Sandra, and 2 teenage children (ages 18 and 16) with his current wife, Miriam Ochsorn. The spin-off we envisage would create 2 revenue streams: 1) a stable, predictable, and recurring rental income stream from SCL REIT, and 2) a patchy and volatile income stream from the gaming operations.

Succession risk


- 11 -

Sheldon Adelson’s family tree

Source: News flow, Wikipedia, Daiwa

SCL: existing income streams for Mr. Adelson and family

SCL: income streams for Mr. Adelson and familypost REIT spin-off

Source: Company, Daiwa Source: Daiwa

According to Daiwa economists Kevin Lai and Michael Moran, the US Fed’s policy normalisation will have a continued impact on money flows, credit conditions, and growth dynamics in Asia. They contend that the continued strength of the USD and looming interest-rate rises would be followed by a pullback in previously low-cost USD liquidity. The FOMC appears on track to begin hiking interest rates in 2015, and September seems to represent a reasonable balance between the preferences of the hawks and doves. Daiwa looks for the Fed Funds rate to reach 0.5-0.75% by end-2015 and 1.45% by end-2016, roughly in line with the latest FOMC median forecasts. Strictly from an interest-rate standpoint, the ideal time to issue a REIT would perhaps have been 6 months ago. That said, interest rates are still near trough levels notwithstanding the looming hike, which we think makes now the time to consider such a move.

Sandra(ex-wife)

Gary Adelson(adult, living)

Michell Adelson(deceased)

Miriam Adelson(current wife)

Ariel Oschorn(ex-husband)

Matan Adelson(born 1999)

Adam Adelson(born 1997)

Yasmin Lukatz(adult, living)

Sheldon Adelson

Shelley Adelson(adult, living)

Sivan Ochshorn (adult, living)

Dividends

Sheldon Adelson & Family

LVS US

SCL (1928 HK)

Volatile & difficult to predict dividend income subject to volatilities of Macau's gaming environment

Dividends

Sheldon Adelson & Family

LVS US

SCL REITSCL OpCo

Volatile & patchy gamingrevenue stream

Stable & predictablerental income stream

Macro environment – looming interest-rate hikes


- 12 -

Federal Funds rate – actual and expected*

* The data on implied futures rates shows closing quotes for 30 April 2015 (the day after the FOMC announcement).

Source: Federal Reserve Board; Federal Open Market Committee; Bloomberg

While having no direct and immediate impact on our spin-off discussion, it is worth mentioning that in most Asian economies, disinflation has set in, seemingly providing room for central banks to cut interest rates. However, we believe the room is limited. If Asian central banks keep easing while the Fed tightens, there would be natural additional pressure on Asian currency depreciation. The loss of yield advantages could lead to even more money outflows. In the case of more serious money outflows, like the latest episode in Russia or the 2013 incidents in India and Indonesia, central banks would have no choice but to raise interest rates substantially.

A REIT spin-off could capitalise on the structural changes that we are believe are now taking place in the Hong Kong stock market, which could result in, among other things, the SCL-REIT trading at valuations more like those of a US REIT than a Hong Kong REIT. We think Hong Kong’s stock market is in the process of transforming into an integral part of the Greater China equity market, from being one of the major markets in Asia, and as such, believe Hong Kong could become a much more important equity market for global investors than it is today. If we were to combine the Shanghai, Hong Kong and Shenzhen stock markets, the market capitalisation of the Greater China equity market would already be larger than that of the NASDAQ and the second-largest in the world (see Jonas Kan’s report on Hong Kong Exchanges & Clearing: A bold new world, published on 5 May 2015)

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Fed funds effective rate Implied futures rate

(%)

FOMC median forecast (2015)

0.625%

FOMC median forecast

(2016) 1.875%

Hong Kong: a much more important equity market in the making?

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Hong_Kong_Exchanges___Clearing_150505.pdf#page=1


- 13 -

Chapter 2

What would a REIT spin-off look like?


- 14 -

If a spin-off were to take place, we envisage that SCL would distribute its non-gaming assets to a new entity (which we call SCL REIT) through dividend in-specie, and would then apply for a new listing. Under the new structure, the existing listco, which we refer to as SCL OpCo from SCL, would: 1) hold the gaming licence, 2) lease the gaming floor from SCL REIT, and 3) operate the gaming operations. SCL REIT would own, acquire, and lease the real-estate assets. This structure would provide shareholders with a stable cash flow (rental income) through SCL REIT and a more volatile cash flow (the nature of the gaming industry) though SCL OpCo. (Keep in mind, though, that we don’t know for sure what the exact mechanics of such a spin-off would be as we have never seen a REIT spin-off in Macau.)

Suggested transaction overview

Source: Daiwa

SCL: current shareholding structure SCL: structure after potential spin-off

Currently: 70% of SCL is held indirectly by Mr. Adelson through LVS and the remaining 30% is free float.

After the spin-off: existing shareholders would receive shares in SCL OpCo (renamed from the existing listco, SCL), which would hold the gaming licence and all of the gaming-related cash flows, and SCL REIT (the new entity), which would own all of SCL’s current non-gaming operations.

Source: Bloomberg, HKEx, Daiwa Source: Daiwa

_______52% _______30%

_______70%

_______70%

GamingAssets

SCL REIT(new entity)

LVS US

Sheldon Adelson

Non-gaming assets

Issue of new shares to existing shareholders

Public Float

Injection of non-gaming assets to new entity via dividend in specie

1

2

_____52%

_____70% 30%

Sheldon Adelson

LVS US

SCL

Public Float

_____52%

70% 70%

_____30% 30%____

Sheldon Adelson

LVS US

SCL REIT(new entity)

SCL OpCo (renamed from SCL)

Public Float

How might a spin-off be structured?


- 15 -

Allocation of assets and income streams following the spin-off

Source: Daiwa

From a licensing point of view SCL’s current sub-concession gaming licence is set to expire in 2022 and renewal is largely at the discretion of the Macau Government. The Macau Government has the right to redeem SCL’s gaming sub-concession agreement with Galaxy with a 1-year notice period after December 2017. Following the official liberalisation of Macau’s gaming industry in 2002, the Macau Government granted 3 concessions in March 2002, to Galaxy, SJM and Wynn Macau. It also subsequently granted 3 other sub-concessions licensees, permitting each of the 3 original concession holders to enter into sub-concession contracts. LVS was Galaxy’s sub-concession, and a tripartite contract was signed among Galaxy, the Macau Government, and Venetian Macau Limited (a subsidiary of Sands China Limited) in December 2002. Meanwhile, the structure of SCL’s land concessions is much less convoluted – it leases 6 parcels of land from the Macau Government that will expire in 2028. These land concessions have an initial term of 25 years that began in 2003, and can be renewed by SCL. As far as we can tell, no restrictive renewal clauses exist for SCL’s land concessions, which is not the case for its gaming licence. As such, the structure we envisage following a potential spin-off would make legal sense, with 2 entities holding 2 separate and independent concessions – one for the land lease, the other for the gaming business – that would have different expiry dates.

From SCL

Hotel ◄

F&B ◄

Retail ◄

MICE ◄

Gaming Licence/Operations ►

Gaming Lease ◄

Income Streams

to SCL REIT to SCL OpCo


- 16 -

SCL: licence facts Gaming sub-concession Land concession

Term duration 20 years 25 years Term start date December 2002 December 2003 Term expiry date June 2022 December 2028 Lessor Sub-concession agreement with Galaxy Macau Government

Obligations

- Ensure the proper operation and conduct of casino games

- Employ people with appropriate qualifications - Operate and conduct casino games of chance in a fair

and honest manner without the influence of criminal activities, and

- Safeguard and ensure Macau’s interests regarding tax revenue from the operation of casinos and other gaming areas

- Maintain a certain minimum level of insurance

- Under the land concession for the Parisian Macao and Sands Cotai Central, SCL was required to complete these property developments by May 2014 and April 2016, respectively

Options upon expiration

- From 26 December 2017, the Macau Government could terminate the sub-concession agreement by giving the company at least one year’s notice.

- New terms and conditions of gaming license renewal subject to the government's discretion when the sub-concession officially expires in 2022.

- SCL has an option to renew its land concession upon expiration in 2028



- 17 -

Chapter 3

What would be the fair value of a REIT spin-off?


- 18 -

“When we add on more space at The Parisian, we will be bigger than any of the REITs in Asia.”

-Sheldon Adelson, 3Q14 earnings call We have worked with Daiwa’s Hong Kong and China property team to derive some conservative valuation metrics for the mooted spin-off, at a cap rate of 6%, which would peg SCL’s existing portfolio in Macau at around HKD95bn. This would increase to HKD102bn if we were to include the St. Regis and The Parisian (see Appendix on page 25 for a detailed analysis).

Simplified look at the value of a potential REIT spin-off

Source: Daiwa

Our base-case scenario in this report values SCL REIT at HKD102bn, which includes the St. Regis and The Parisian, with a cap rate of 6%. This is at the low end of the valuation range for Hong Kong REITs today. Assuming a slightly more bullish cap rate of 4% would push SCL REIT’s valuation close to HKD160bn. This is not entirely inconceivable, in our view, as this value is in the range of where the better-performing HK REITs are valued today.

Sensitivity analysis: impact of changes in our cap rate assumptions on the valueof SCL REIT (HKDm)

Cap Rate 8% 7% 6% 5% 4%

Existing Properties 72,252 82,412 95,959 114,925 143,374Incl. Parisian & St. Regis 74,470 86,165 101,759 123,590 156,337

Bear Case <--- Base Case ---> Bull CaseSource: Daiwa estimates

This spin-off, if it happened, would place SCL REIT among the top-3 largest REITs in Asia ex-Japan, in terms of market cap (potentially bigger than The Link REIT, based on its market cap of HKD106bn as at 26 May 2015). Even if we were to include Japan, the spin-off would still place SCL REIT among the top-3 in terms of market cap. We believe such a move would be well received by income funds and dedicated property funds looking for opportunities to buy into Macau.

Valuation

(HKDm)

Hotel + 31,514 35% haircut on RevPar; 6% cap rate on EBITDA

F&B + 8,390 6x EBITDA multiple

Retail + 52,515 6% cap rate on gross retail income

MICE + 11,638 6% cap rate on MICE EBITDA

Gaming Lease + 13,489

6% cap rate; 50% discount off SCL's average

retail gross rent/ sq ft

Net Debt - 15,787

NAV of REIT 101,759

SCL REIT

St. Regis +

Parisian

Potential NAV of a REIT spin-off


- 19 -

Note that the US REIT sector is much larger, and REITs in the US and many other global markets trade at a higher valuations than the H-REITs. Given that the LVS is a US business group under professional management and that its retail property assets are the most prime and largest in Macau, we see a possibility that SCL REIT might draw the attention of investors who mainly invest in the US and global REITs, and hence SCL REIT could trade at a higher valuation than the H-REITs.

Top-20 REITs in Asia

Top Asia REITs (ex-Japan) Stock code Region Market cap

(USDbn) Implied cap

rate (%)SCL REIT NA NA 13-14 6.0Link REIT 823 HK Hong Kong 13.6 4.4 CapitaMall Trust CT SP Singapore 5.7 4.6 Ascendas Real Estate Investment Trust AREIT SP Singapore 4.5 4.9 CapitaCommercial Trust CCT SP Singapore 3.6 3.5 Suntec REIT – (Singapore T82U) SUN SP Singapore 3.4 2.3 Champion REIT 2778 HK Hong Kong 3.3 4.0 Hui Xian REIT 87001 HK Hong Kong 3.0 6.4 Mapletree Commercial Trust / MCT – (Singapore N2IU) MCT SP Singapore 2.4 4.1 Mapletree Industrial Trust / MIT – (Singapore ME8U) MINT SP Singapore 2.1 5.5 Yuexiu REIT 405 HK Hong Kong 1.6 4.6 Ascott Residential Trust Management ART SP Singapore 1.5 6.5 Frasers CentrePoint Trust FCT SP Singapore 1.4 4.4 Sunway REIT – (Malaysia Retail SUNWAY / 5176.KL) SREIT MK Malaysia 1.3 6.0 Pavilion REIT - (Malaysia 5212.KL) PREIT MK Malaysia 1.3 3.9 CDL Hospitality Trust CDREIT SP Singapore 1.2 5.3 CapitaRetail China Trust CRCT SP Singapore 1.1 7.1 Far East Hospitality REIT FEHT SP Singapore 1.0 4.5 Parkway Life – (Singapore - C2PU) PREIT SP Singapore 1.0 4.3 Regal REIT 1881 HK Hong Kong 1.0 5.1 OUE Hospitality – (Singapore Hospitality SK7) OUEHT SP Singapore 0.9 4.6 Top Japan REITs Nippon Building Fund / NBF – (Japan 8951) 8951 JP Japan 6.9 3.3 Japan Real Estate Investment Corp – (Japan 8952) 8952 JP Japan 6.2 3.2 Japan Retail Fund (JRF) Investment Corp / LJR – (Japan 8953) 8953 JP Japan 5.1 3.8 United Urban Investment Corp / UUIC – (Japan 8960) 8960 JP Japan 4.1 3.2 Nippon ProLogis / NPR - (Japan Industrial 3283) 3283 JP Japan 3.5 3.2 Orix / OJR – (Japan 8954) 8954 JP Japan 3.3 3.5 Japan Prime Realty Investment Corp / JPR – (Japan 8955) 8955 JP Japan 2.9 3.2 MORI TRUST Sogo REIT – (Japan 8961) 8961 JP Japan 2.5 2.7 Global Logistics Properties / GLP - (Japan Industrial 3281) 3281 JP Japan 2.4 2.8 Frontier Real Estate Investment Corp / F-REIT– (Japan 8964) 8964 JP Japan 2.4 4.1

Source: REITinfo.com, Bloomberg, Daiwa, pricing as at 26 May 2015


- 20 -

DPU yield vs. global peers

Name Ticker Market Cap Dividend yield (%)

(USDbn) (last reported, FY0) (FY1E) (FY2E)

Simon Property SPG US 56.68 2.8 3.2 3.4Unibail-Rodamco UL NA 25.47 4.5 4.1 4.3General Growth Prop GGP US 25.06 2.2 2.5 2.7

Scentre Group SCG AU 16.41 2.9 5.5 5.6Westfield WFD AU 15.30 4.3 3.5 3.6The Link REIT* 823 HK 13.55 3.6 4 4.6

Riocan REIT REI-U CN 7.00 4 4.9 5Intu Properties INTU LN 6.84 4.1 4.1 4.1Nippon Building Fund 8951 JP 6.87 2.6 2.8 2.8

Japan Real Estate Inv 8952 JP 6.16 3 2.8 2.9Novion Property NVN AU 6.03 6.7 5.6 5.7Japan Retail Fund Inv 8953 JP 5.15 3.8 3.3 3.4Source: Daiwa, Bloomberg

*Daiwa estimates; pricing as at 26 May 2015

The Link REIT: PBR bands

Source: Daiwa

A note on valuing SCL REIT’s gaming floor lease, which we assume would be paid by SCL OpCo Granted, we do not have a precedent or a fair benchmark for a REIT in Macau with which to value the rental income that would be received by SCL REIT (from SCL OpCo leasing the casino floor space if the REIT were to go ahead). The value of this income, however, would be very important for SCL REIT as SCL OpCo would represent its largest tenant by far. In our analysis, we have assumed that all of SCL REIT’s gaming space would be leased out at a 50% discount to SCL’s current average gross retail rent, at around HKD94/sq ft. If we apply our base-case 6% cap rate, this lease would be valued at around HKD13.5bn, representing about 13% of our projected value for SCL REIT. Our assumption implies that the casino floor rent would represent around 1.5% of SCL OpCo’s annual GGR, which we see as reasonable.

Average since IPO: 1.21x

+1 SD: 1.40x

-1 SD: 1.02x

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Current PBR: 0.95x


- 21 -

Valuation of SCL REIT’s lease of gaming space to SCL OpCo Bear Case <--- Base Case ---> Bull Case

SCL avg gross retail rent/ sq ft* 12 12 12 12 12 Discount 70% 60% 50% 40% 30% Effective gaming floor rental/ sq ft* 8 7 6 5 4 Estimated rent paid by SCL OpCo per year 486 647 809 971 1,133 Implied % of GGR** 0.9% 1.2% 1.5% 1.9% 2.2% Value of lease (6% cap rate) 8,093 10,791 13,489 16,187 18,884 Incremental contribution to the potential value of REIT***

-5% -3% 0% 3% 5%

Source: Daiwa estimates

* HKD per sq ft per month

** based on our 2015E GGR forecast

*** based on our base-case assumption for total REIT value of HKD102bn

Looking at it another way, SCL’s gross monthly retail rent (its properties are among the most prestigious in Macau) is still lower than that commanded by leading retail space in Hong Kong. The way we see it, using a 50% discount to the current retail lease rate for SCL’s gaming space (which is much more productive, on a per sq ft basis, than SCL’s retail space) is not bullish.

Hong Kong: highest rental costs v. SCL’s retail space

Source: Daiwa, based on gross floor area

In the US, far more aggressive mechanisms are used by the REITs to determine the rent levels for their properties, including a base rent component with annual escalators and established monthly rents equivalent to a percentage of gaming revenue (upwards of 20%). We do not think using these mechanisms is fair in the context of Macau, given the jurisdiction’s high gaming tax rate at 39%. In our view, the ceiling for the SCL OpCo-SCL REIT revenue split would be 5%, which is what SJM takes from its satellite casino partners.

Based on the SOTP methodology we use to value SCL under a spin-off scenario, we would assign a 9-10x EV/EBITDA multiple to SCL’s gaming operations (SCL OpCO post spin-off). Assuming a base-case cap rate of 5-6% for SCL REIT, this would imply a fair value for SCL shares of HKD26-31/share.

(200)

300

800

1,300

1,800

2,300

High st shop inRussell St

High st shop inmajor st inCWB/TST

Harbour City Wharf Pacific Place Landmark SCL

(HKD/sq ft)*

What is SCL’s current fair value?


- 22 -

SCL REIT/OpCo: SOTP valuation sensitivity (cap rate vs. EV/EBITDA)* SCL REIT cap rate

8% 7% 6% 5% 4% 3%

SCL

OpC

o

EV/E

BIT

DA

7x $19.9 $21.4 $23.3 $26.0 $30.0 $36.8 8x $21.4 $22.9 $24.8 $27.5 $31.6 $38.3 9x $23.0 $24.4 $26.3 $29.0 $33.1 $39.9

10x $24.5 $25.9 $27.9 $30.6 $34.6 $41.4 11x $26.0 $27.5 $29.4 $32.1 $36.1 $42.9 12x $27.5 $29.0 $30.9 $33.6 $37.7 $44.4


* Includes St. Regis and The Parisian

SCL REIT/OpCo: SOTP market cap sensitivity* (cap rate v. EV/EBITDA) (HKDm)

SCL REIT cap rate8% 7% 6% 5% 4% 3%

SCL

OpC

o

EV/E

BIT

DA

7x 160,674 172,370 187,963 209,794 242,541 297,119 8x 172,989 184,684 200,278 222,109 254,856 309,434 9x 185,304 196,999 212,593 234,424 267,171 321,749

10x 197,619 209,314 224,908 246,739 279,486 334,064 11x 209,934 221,629 237,223 259,054 291,801 346,379 12x 222,249 233,944 249,538 271,369 304,116 358,694


* Includes St. Regis and The Parisian

We forecast a Macau Gaming Sector EBITDA CAGR of 8% over the 2015-17 period, similar to the Bloomberg consensus forecasts for other sectors in Hong Kong/China, like consumer, energy and conglomerates. The blue-chip names in these sectors are trading currently at an average EV/EBITDA multiple of only around 9x, versus the consensus’ 11-12x for the Macau Gaming Sector. The consensus justifies this valuation as it assumes a V-shaped recovery in EBITDA for the Macau Gaming Sector for 2016E – a view that we believe is not supported by fundamentals. Our base case in this analysis assumes a fair value EV/EBITDA multiple for SCL’s gaming business of 9x. Valuations for Hong Kong’s main sectors vs. their earnings growth profiles

Note: size denotes relative sizes of sectors based on total market capitalisation

Source: Bloomberg

Macau gaming

Automobiles & components

Construction & engineering

Consumer durables & apparel

Electrical equipment

Machinery

Commercial services & supplies

Household durables

Textile, apparel & luxury goods

Industrial conglomerates

Energyequipment &

services

Oil, gas & fuels

Food & staples Healthcare equipment & services

Chemicals

Cosntruction materialContainers, pakaging & paper

Media

Pharmaceuticals

Real estate

Retailing

Information technology

Telecommunications

Transportation

Utilities

1.5x

6.5x

11.5x

16.5x

21.5x

26.5x

0% 5% 10% 15% 20% 25% 30% 35%2015E-17E EPS CAGR

2015

E EV

/EBI

TDA


- 23 -

An SCL REIT could create value SCL’s current market cap of HKD245bn suggests to us that the NAV for its non-gaming assets (including St. Regis and The Parisian) accounts for close to 45% of its present market cap. And the valuations for other REITs globally suggest that it is not inconceivable that SCL REIT would trade above its book value should a spin-off occur. Admittedly, according to our property analyst, Jonas Kan, most of the major family-owned property stocks in Hong Kong suffer from the “Hong Kong discount” and have been trading below their book values in recent years. However, The Link REIT, one of the largest REITs in Hong Kong in terms of market cap, has managed to move away from the “Hong Kong discount”, and we believe an SCL REIT would have the structural ingredients needed to do the same.

1. It would appeal to global investors looking at Macau plays that have existing track records in both the US and Macau.

2. In our opinion, it would have a solid management team with high transparency and good corporate governance.

3. It would have management support for a high sustainable dividend payout (as Mr. Adelson often quips:

“Yay dividends!”). According to Daiwa’s Jonas Kan, The Link REIT is trading currently at a premium to book of 1.09x in 2015 YTD, versus 0.81x for the other property developers that Daiwa covers. Since The Link REIT’s IPO in November 2005, its average P/NAV has been 1.22x (it has traded at 1.4x PBR during certain periods), among the highest valuations achieved by a Hong Kong property company in the past 10 years. If the SCL REIT were to replicate this record and trade at a similar premium, this would add at least HKD10-11bn to its value, equivalent to 4% to 5% of SCL’s total market cap today. Furthermore, if SCL REIT were to trade in the same way as a premier US REIT, such as Simon Properties (NYSE: SPG), which trades at only 3% yield, this would imply that SCL REIT could add at least HKD110bn to its value, adding over 40% to its current market cap. We have not included any of these potential valuation gains in our base-case scenario.

From our on-the-ground research, we think the outlook for Macau in 2015 remains uninspiring, and we are still cautious on both SCL and the Macau Gaming Sector as a whole. As we see it, a REIT spin-off would be sensible for SCL, given the prevailing global macro, industry and company-specific backdrop in Chapter 1. Still, the lawsuit brought by ex-CEO Steven Jacobs alleging unfair dismissal adds a layer of uncertainty for SCL specifically. The potential for an SCL REIT spin-off provides support to the current share price, on our analysis, but we think it may be too early to chase a long position on this stock premised solely on a possible REIT spin-off. That said, hedge funds that agree with our assessment might be advised to cover their short positions with SCL specifically.

But don’t get too excited just yet…


- 24 -


- 25 -

Appendix


- 26 -

Sands The Venetian Plaza SCC Total (existing) Parisian St Regis Total (incl new)

Hotel Average no. of rooms* 281 2,841 375 5,634 9,131 3,000 439 12,570Occupancy rate* 98.6% 91.3% 87.0% 88.5% 89.6% 80.0% 80.0% 87.0%Official room rate (USD)* 238 270 400 176 216.8 176 400 213.7RevPAR (USD)* 235 247 348 156 194 141 320 186Adjustment factor % 35% 35% 35% 35% 35% 35% 35% 35%Effective RevPAR (USD) 153 160 226 101 126 92 208 121

EBITDA margin %** 44% 44% 44% 44% 44% 44% 44% 44%

Hotel EBITDA per room 67.1 70.5 99.5 44.5 55.6 40.3 91.5 53.2 Cap rate on hotel EBITDA % 6% 6% 6% 6% 6% 6% 6% 6%

Valuation per room (USDm) 0.41 0.43 0.61 0.27 0.34 0.24 0.56 0.32Valuation per room (HKDm) 3.18 3.35 4.72 2.11 2.64 1.91 4.34 2.52

Valuation - Hotel (USDm) 115 1,218 227 1,527 3,087 735 244 4,066

F&B F&B revenue* 40 103 31 130 304 69 37 410F&B EBITDA 17.6 45.3 13.8 57.2 134 30.5 16.1 180EBITDA margin (%)** 44% 44% 44% 44% 44% 44% 44% 44%F&B revenue per room per day (USD) 389 99 229 63 91 63 229 89

EBITDA multiple on F&B (x) 6x 6x 6x 6x 6x 6x 6x 6x

Valuation - F&B (USDm) 105 272 83 343 803 183 97 1,083

MICE MICE revenue* 10 112.6 3.9 30 157 13.5 170MICE EBITDA 5.3 59.7 2.1 15.9 83 7.2 90EBITDA margin (%)** 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0%MICE revenue per room per day (USD) 97.5 108.6 28.5 14.6 47.0 12.3 37.1MICE area (sq ft) 107,000 1,200,000 27,000 500,000 1,834,000 250,000 2,084,000Valuation (sq f) 6,439 6,465 9,952 4,134 5,879 3,721 5,620

Cap rate on hotel EBITDA % 6% 6% 6% 6% 6% 6% 6%

Valuation - MICE (USDm) 88 995 34 265 1,382 119 1,502

Retail Retail mall GFA (sq ft) 5,900 1,600,000 257,963 775000 2,638,863 400,000 3,038,863Retail mall (lettable area)* 771,345 257,963 330258 1,359,566 NA 1,359,566Sales per sq ft (USD/sq ft)* 1,673 4,838 1450 17,311 1450 17,311Gross rental income* 192 132 56 380 26 407Tenant sales (USDm) 1,290 1,248 479 3,017 NA 3,017Occupancy cost (%) 14.8% 10.6% 11.8% 12.6% NA 13.5%Cap rate (%) 6% 6% 6% 6% 6% 6%Valuation (p sq ft) 1,996 8,549 1,213 2,402 1,092 11,759Valuation - retail (USDm) 3,194 2,205 940 6,339 437 6,776

Gaming Gaming area 229,000 550,000 70,000 300,000 1,149,000 300,000 1,449,000Rent/sq feet (USD/sq ft/month) 10 43 6 12 5 134Rent/sq feet (HKD/sq ft/month) 78 333 47 93 42 1,041Discount 50% 50% 50% 50% 50% 50% 50%

Gross rental income from gaming spaces 17 40 5 22 83 22 104Cap rate on rental 6% 6% 6% 6% 6% 6% 6%

Valuation - gaming (USDm) 275 661 84 360 1,380 360 1,740

Totals Hotel 115 1,218 227 1,527 3,087 735 244 4,066F&B 105 272 83 343 803 183 97 1083Retail - 3,194 2,205 940 6,339 437 - 6,776MICE 88 995 34 265 1382 119 - 1502Total Valuation (USDm) 308 5,679 2,550 3,075 11,612 1,474 341 13,427

Rental on gaming area 275 661 84 360 1,380 360 - 1,740Net Debt (658) (2,037)Total Value (USDm) 583 6,340 2,634 3,435 12,334 1,834 341 13,130Total Value (HKDm) 4,539 49,321 20,490 26,728 95,959 14,268 2,654 101,759


*Denotes official 2014 figures; **Implied EBITDA margin derived from EBITDA split based on Sands 2014 Annual Report presentation

Valuation model


- 27 -

SCL: operational footprint versus peers (in detail)

Hotel roomsRetail GFA

(sq. ft.)MICE GFA

(sq. ft.)Casino space

(sq. ft.) GGR mkt sh

(%)- 1Q15Sands 290 5,900 107,000 229,000 3.0%Venetian 2,900 1,600,000 1,200,000 550,000 9.3%Plaza 375 211,000 27,000 70,000 2.1%SCC 5,800 775,000 500,000 300,000 6.8%SCL total existing (end-2014) 9,365 2,591,900 1,834,000 1,149,000 21.2%Parisian 3,000 300,000 500,000 500,000(i) N.A.St. Regis 439 - (i) 45,000(i) - N.A.SCL total (end-2017E) 12,804 2,891,900 2,379,000 1,649,000 Galaxy 3,459 35,000 296,000 680,000 21.8%SJM** 1,356 - 18,000 730,000 23.3%Melco 1,600 175,000 85,000 603,000 14.0%MGM 600 - 17,000 284,000 9.7%Wynn 1,008 46,000 22,000 280,000 10.0%Total existing (end-2014) 27,904^ 2,847,900 2,272,000 3,726,000(ii) 100%Total (end-2017E) 41,650 4,369,900(i) 3,748,000(i) 6,913,000(i) SCL mkt sh (%)- existing (end-2014) 34% 91% 81% 31% SCL mkt sh (%)- (end-2017E) 31% 66% 63% 24% Source: Companies, Daiwa forecasts, APG, DSEC

*Excludes Galaxy Macau phase 2 and 3

^Total number of hotel rooms as of end of 2014 according to DSEC, including hotel rooms not operated by the 6 concessionaires

(i) Estimated figures

(ii) Assuming each satellite casino has an average gaming space of 60,000 sq. ft.


- 28 -

See important disclosures, including any required research certifications, beginning on page 34

■ What's new In this report, we propose another way to value SCL, the largest operator in Macau: we assume its non-gaming assets will be spun off into a REIT. ■ What's the impact Why now? In the past, Sheldon Adelson has publicly considered monetising SCL’s non-gaming assets. We think a REIT spin-off makes sense as we believe: 1) SCL has the necessary operational footprint, 2) a spin-off would crystallise the value of its non-gaming assets at a time of rising industry and political uncertainty, 3) today’s low interest-rate environment is ideal to issue a REIT, 4) a spin-off vehicle would provide a stable rental income stream for Mr. Adelson’s succession planning, and 5) such a move would attract investor interest. Implied spin-off value. We have worked with Daiwa’s property team to

derive conservative valuation metrics that value SCL’s portfolio at HKD102bn (including the St. Regis and The Parisian). Uninspiring outlook for Cotai, especially for SCL. We are still cautious on the Macau Gaming Sector and especially watchful of SCL, which will face competition from 2 new openings in Cotai (mass market share is shifting back to Macau Peninsula). Heading into 2H15, the impact of operational deleveraging is likely to intensify as competition heats up. ■ What we recommend REIT spin-off would provide share-price support. We calculate an SOTP valuation, based on a 5-6% cap rate for a SCL REIT and a 9-10x EV/EBITDA multiple for SCL’s gaming operation. The valuation yields a fair value of HKD26-31/share. In our view, this valuation would provide share-price support, but it is too early to chase SCL into the rally given the sector fundamentals. We advise hedge funds to cover their short positions. Our SOTP-based 12-month TP for SCL is now HKD30 (from HKD36), on the back of lower EV/EBITDA multiples (from 9-11x to 7-10x) assigned to SCL’s properties. We fine-tune our 2015-16E core EPS by 1-2% to reflect the 2014 results. We also introduce our 2017 forecasts.

Key risks: earlier/later-than-expected opening of The Parisian and faster-than-expected market-share declines/gains for Sands’ properties.

Consumer Discretionary / Macau1928 HK

29 May 2015

Sands China

Potential spin-off would provide share-price support

• The spin-off of SCL’s non-gaming assets into a REIT would be prudent

given the global macro conditions

• SOTP valuation implies share-price support at HKD26-31 levels • Too early to chase a long position on a possible spin-off; cutting target

price to HKD30 and maintaining Hold (3) rating

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Consumer Discretionary / Macau

Sands China1928 HK

Target (HKD): 36.00 30.00Downside: 1.6%28 May price (HKD): 30.50

BuyOutperformHold (unchanged)

UnderperformSell

1

2

3

4

5

40

58

75

93

110

25

35

45

55

65

May-14 Aug-14 Nov-14 Feb-15

Share price performance

Sands Chn (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 29.95-61.15Market cap (USDbn) 31.723m avg daily turnover (USDm) 81.74Shares outstanding (m) 8,065Major shareholder Las Vegas Sands (70.3%)

Financial summary (USD)Year to 31 Dec 15E 16E 17ERevenue (m) 7,639 8,450 9,013Operating profit (m) 1,991 2,024 2,306Net profit (m) 1,708 1,783 2,009Core EPS (fully-diluted) 0.212 0.221 0.249EPS change (%) (32.9) 4.4 12.7Daiwa vs Cons. EPS (%) (2.5) (0.5) (1.2)PER (x) 18.6 17.8 15.8Dividend yield (%) 4.3 4.5 5.1DPS 0.169 0.177 0.199PBR (x) 4.9 4.6 4.3EV/EBITDA (x) 13.4 13.4 11.8ROE (%) 26.5 26.7 28.0

Jamie Soo(852) 2773 [email protected]

Adrian Chan, CFA(852) 2848 [email protected]

Forecast revisions (%) Year to 31 Dec 15E 16E 17ERevenue change 0.2 (0.1) n.a.Net profit change (0.6) (5.5) .n.a.Core EPS (FD) change (0.7) (5.5) n.a.

How do we justify our view?How do we justify our view?

Consumer Discretionary / Macau 1928 HK

29 May 2015

- 30 -

Key assumptions

Profit and loss (USDm)

Cash flow (USDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EVenetian Macao EBITDA (USDm) 810 1,023 1,144 1,501 1,548 1,348 1,383 1,425Sands Macao EBITDA (USDm) 318 351 350 362 337 131 184 254Plaza Macao EBITDA (USDm) 114 218 288 305 375 266 224 234Sands Cotai Central EBITDA (USDm) n.a. n.a. 213 738 999 889 787 748Parisian EBITDA (USDm) n.a. n.a. n.a. n.a. n.a. n.a. (53) 165

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EGaming 3,664 4,232 5,739 7,905 8,362 6,254 6,772 7,251Non-gaming 479 649 773 1,003 1,144 1,386 1,678 1,762Other Revenue 0 0 0 0 0 0 0 (0)Total Revenue 4,142 4,881 6,511 8,908 9,505 7,639 8,450 9,013Other income 0 0 0 0 0 0 0 0COGS (1,848) (2,119) (2,928) (3,936) (4,053) (2,910) (2,930) (2,851)SG&A (1,195) (1,287) (1,948) (2,182) (2,305) (2,539) (3,151) (3,484)Other op.expenses (197) (172) (12) (388) (410) (200) (345) (373)Operating profit 902 1,303 1,624 2,401 2,738 1,991 2,024 2,306Net-interest inc./(exp.) (115) (45) (42) (73) (50) 19 (71) (133)Assoc/forex/extraord./others (117) (123) (344) (111) (131) (291) (158) (150)Pre-tax profit 670 1,135 1,238 2,217 2,556 1,719 1,796 2,022Tax (4) (2) (2) (2) (8) (10) (12) (13)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 666 1,133 1,236 2,215 2,548 1,708 1,783 2,009Net profit (adjusted) 666 1,133 1,236 2,215 2,548 1,708 1,783 2,009EPS (reported)(USD) 0.083 0.141 0.153 0.275 0.316 0.212 0.221 0.249EPS (adjusted)(USD) 0.083 0.141 0.153 0.275 0.316 0.212 0.221 0.249EPS (adjusted fully-diluted)(USD) 0.083 0.141 0.153 0.275 0.316 0.212 0.221 0.249DPS (USD) 0.000 0.149 0.172 0.223 0.257 0.169 0.177 0.199EBIT 902 1,303 1,624 2,401 2,738 1,991 2,024 2,306EBITDA 1,216 1,576 1,978 2,900 3,261 2,482 2,527 2,828

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EProfit before tax 670 1,135 1,238 2,217 2,556 1,719 1,796 2,022Depreciation and amortisation 359 324 390 534 554 491 503 523Tax paid (0) (4) (2) (2) (2) (10) (12) (13)Change in working capital 133 (174) 48 189 23 620 (372) (114)Other operational CF items 200 94 227 141 93 73 158 216Cash flow from operations 1,363 1,376 1,901 3,079 3,224 2,892 2,072 2,634Capex (346) (781) (989) (601) (931) (2,120) (1,050) (610)Net (acquisitions)/disposals 4 2 (11) (9) (6) 0 0 0Other investing CF items (756) 782 14 12 19 20 11 8Cash flow from investing (1,099) 3 (986) (598) (917) (2,100) (1,039) (602)Change in debt 131 356 (140) 0 0 (200) 0 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid 0 0 (1,201) (1,382) (2,601) (1,724) (1,397) (1,517)Other financing CF items (260) (289) (125) (100) (112) (1) (82) (141)Cash flow from financing (129) 67 (1,467) (1,481) (2,713) (1,926) (1,479) (1,658)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 136 1,447 (552) 1,000 (406) (1,133) (445) 373Free cash flow 1,016 595 911 2,478 2,293 772 1,022 2,024

Financial summary

Consumer Discretionary / Macau 1928 HK

29 May 2015

- 31 -

Balance sheet (USDm)

Key ratios (%)


Company profile

Sands China is one of the 6 gaming operators in Macau and operates the Sands Macau, The Venetian Macau, Plaza Macau and Sands Cotai Central. Its new Cotai development, The Parisian, which is opposite Sands Cotai Central, is scheduled to open in 2H16.

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & short-term investment 1,178 2,495 1,953 2,949 2,542 1,409 963 1,336Inventory 9 10 15 13 14 32 16 26Accounts receivable 292 557 785 821 639 555 443 329Other current assets 0 0 0 0 0 0 0 0Total current assets 1,479 3,063 2,753 3,783 3,195 1,996 1,422 1,692Fixed assets 5,503 6,250 6,657 6,723 6,913 8,542 9,089 9,177Goodwill & intangibles 35 32 16 20 21 21 21 21Other non-current assets 1,458 784 962 939 1,219 1,219 1,219 1,219Total assets 8,475 10,128 10,387 11,466 11,348 11,777 11,751 12,108Short-term debt 387 80 49 207 6 100 100 100Accounts payable 960 1,180 1,503 1,724 1,608 2,204 1,741 1,556Other current liabilities 4 2 2 2 6 6 6 6Total current liabilities 1,351 1,262 1,554 1,933 1,620 2,310 1,847 1,662Long-term debt 2,746 3,329 3,212 3,023 3,194 2,900 2,900 2,900Other non-current liabilities 15 21 36 60 104 104 104 104Total liabilities 4,112 4,612 4,801 5,016 4,918 5,314 4,851 4,666Share capital 80 80 81 81 81 81 81 81Reserves/R.E./others 4,282 5,435 5,506 6,369 6,349 6,383 6,819 7,361Shareholders' equity 4,362 5,516 5,586 6,450 6,429 6,463 6,900 7,442Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 8,475 10,128 10,387 11,466 11,348 11,777 11,751 12,108EV 33,680 32,639 33,032 32,005 32,383 33,316 33,761 33,388Net debt/(cash) 1,955 914 1,308 281 658 1,591 2,037 1,664BVPS (USD) 0.542 0.685 0.694 0.800 0.797 0.801 0.856 0.923

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ESales (YoY) 25.5 17.8 33.4 36.8 6.7 (19.6) 10.6 6.7EBITDA (YoY) 50.3 29.6 25.5 46.7 12.4 (23.9) 1.8 11.9Operating profit (YoY) 87.7 44.4 24.6 47.9 14.0 (27.3) 1.7 13.9Net profit (YoY) 210.0 70.0 9.1 79.2 15.0 (32.9) 4.4 12.7Core EPS (fully-diluted) (YoY) 147.8 69.9 9.0 79.0 14.9 (32.9) 4.4 12.7Gross-profit margin 55.4 56.6 55.0 55.8 57.4 61.9 65.3 68.4EBITDA margin 29.4 32.3 30.4 32.6 34.3 32.5 29.9 31.4Operating-profit margin 21.8 26.7 24.9 27.0 28.8 26.1 24.0 25.6Net profit margin 16.1 23.2 19.0 24.9 26.8 22.4 21.1 22.3ROAE 16.5 22.9 22.3 36.8 39.6 26.5 26.7 28.0ROAA 8.3 12.2 12.0 20.3 22.3 14.8 15.2 16.8ROCE 12.6 15.9 18.3 25.9 28.4 20.9 20.9 22.7ROIC 14.7 20.4 24.3 35.2 39.5 26.1 23.7 25.4Net debt to equity 44.8 16.6 23.4 4.4 10.2 24.6 29.5 22.4Effective tax rate 0.6 0.2 0.1 0.1 0.3 0.6 0.7 0.6Accounts receivable (days) 25.9 31.7 37.6 32.9 28.0 28.5 21.6 15.6Current ratio (x) 1.1 2.4 1.8 2.0 2.0 0.9 0.8 1.0Net interest cover (x) 7.8 29.0 38.8 32.7 54.7 n.a. 28.6 17.3Net dividend payout 0.0 106.0 111.8 81.2 81.3 80.0 80.0 80.0Free cash flow yield 3.2 1.9 2.9 7.8 7.2 2.4 3.2 6.4

Financial summary continued …

Sands China 1928 HK

29 May 2015

- 32 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected] Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Becky HAN (852) 2848 4464 [email protected] Small/Mid Cap (Regional)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected] Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

Sands China 1928 HK

29 May 2015

- 33 -

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Sands China 1928 HK

29 May 2015

- 34 -

Disclaimer

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This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any

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direct or consequential loss arising from any use of this research or its contents.

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Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

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This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 61.0% Hold** 26.1% Sell*** 12.9%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2015. * comprised of Daiwa’s Buy and Outperform ratings.

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** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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