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July 06, 2012

New Cotai project on track. Wynn Macau and Encore are well-known for excep-

tional service, and there is reason to believe Wynn Cotai will maintain this reputa-tion, equipped with 500 gaming tables and 1,000 slot machines. It is expected to open in 2016 and we estimate its net present value (NPV) at HK$6.00 per share.

High dividend payout ratio and good yield. Wynn Macau is trading at a higher

yield than the industry standard. It paid special dividends in 2010 and 2011, fol-lowed by the management’s guidance to maintain dividends in 2012E. We assume ~60% payout ratio in 2012E compared to 105.3% in 2011, implying a 4.8% yield in 2012.

Our target price is HK$23.90. Our target price implies 13.0x EV/EBITDA and 19.1x

PER for 2012E, in line with our industry target. It is at a 12% discount to its fair val-ue per share at HK$27.30, derived from our discounted cash flow (DCF) model. There is some concern about the possible loss of market share in the short term, due to the shift in the mix of visitor flows to Cotai, until the new project provides Wynn Macau with Cotai exposure. The discount is thus justified in our view.

Initiate with BUY. Wynn Macau is trading at 9.1x EV/EBITDA and 13.6x PER on

our 2012 forecast. We expect Wynn Macau’s top line to underperform the industry’s growth, due to the increasing competition from Galaxy Macau and Sands Cotai Central, but we still project a 19.1% EPS compound annual growth rate (CAGR) in FY2011-FY2014E, thanks to the margin improvement. We believe the main catalyst for the share price is the healthy progress of its Cotai project and we recommend that investors accumulate the stock to benefit from the potential re-rating.

Key Factors

Wynn Macau [1128.HK]

Wynn Macau is a leading gaming resort developer, owner and operator in Macau, holding one of the six gaming concession/ subconcessions in Macau. It currently owns and operates Wynn Macau on Macau Peninsula, which opened in 2006 and completed expansion with addition of Encore in 2010. The company obtained govern-ment approval in May 2012 to develop another integrated casino resort on Cotai Strip. Wynn Resorts of the US owns 72.29% of the Company, and it was listed on the main board of the Hong Kong Stock Exchange in October 2009.

BUY

Close: HK$17.06 (July 05, 2012)

Target Price: HK$23.90 (+41%)

INITIATE COVERAGE - Cotai exposure & yield support

Price Performance

Market Cap US$11,404.6m

Shares Outstanding 5,187.6m

Auditor Ernst & Young

Free Float 27.7%

52W range HK$14.81-27.48

3M average daily T/O US$27.9m

Major Shareholding Wynn Resorts

(72.3%)

Source: Company, Bloomberg

Angela Han Lee—Analyst

(852) 3698-6318

angelahanlee@chinastock.com.hk

John Mulcahy—Head of Re-

(852) 3698 6889

johnmul@chinastock.com.hk

2010 2011 2012E 2013E 2014E

Turnover (HK$m) 28,776 38,213 42,832 47,209 51,913

Net profit (HK$m) 4,422 5,921 6,488 8,429 10,002

Net margin (%) 15.4 15.5 15.1 17.9 19.3

EPS (HK$) 0.85 1.14 1.25 1.62 1.93

Change (%) 107.3 34.1 9.7 29.9 18.7

PER (x) 20.1 15.0 13.6 10.5 8.8

Yield (%) 4.5 7.0 4.8 5.9 7.0

Source: Company, CGIHK Research

Macau Gaming Sector

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Key financials

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We initiate coverage of Wynn Macau with a BUY rating and our 12-month target price is HK$23.90. It is equivalent to 13.0x EV/EBITDA and 19.1x PER based on our forecast for 2012E and the valuation is in line with our industry target.

We cross-checked our target price with our discounted cash flow (DCF) model, which implies a fair value of HK$27.30. We are convinced that Wynn Macau is trading at a deep discount at present and the market is not pricing in the value of its Cotai property. Our key base-case as-sumptions for DCF are:

5% growth during 2019E-2022E: It is in line with our industry as-sumption of 5%, but lower than a 14% CAGR during 2012E-2015E.

WACC of 7.3%: 5% risk premium, 2% risk-free rate, 1.0 beta and 4.4% cost of debt.

Wynn Macau’s Cotai project, estimated to open in 2016, contrib-utes HK$6.00 per share to our target price.

Wynn Macau is trading at 9.1x EV/EBITDA and 13.6x PER for 2012E, equivalent to the historical trough valuation level after its initial public offering (IPO) in 2009. The main negative factors are 1) no (current) presence in Cotai with only one casino in Macau Peninsula and 2) its relatively high exposure to the VIP segment which is depressed due to the gloomy economic outlook affecting China exporters’ gambling ap-petite.

The market is concerned about the profitability of the new casino three to four years down the road, and we predict the market will be willing to pay for it once confidence in the sector returns with an improved eco-nomic outlook. We expect the market to re-rate Wynn Macau at some point, especially to take into account the new Cotai project, and this will improve sentiment towards the stock. We recommend that investors accumulate Wynn Macau during this weak period, as we believe it will rally along with the improvement in overall sector sentiment, fundamen-tally supported by a long-term driver, its Cotai project.

Valuation

Our HK$23.90 target price implies 13.0x EV/EBITDA for 2012E—discount of 12% to fair value, which….

...based on DCF analysis is HK$27.30, with HK$6.00 per share contributed by Wynn Cotai

Market is not yet pricing in the val-ue of new Cotai property

Figure 1: Sensitivity analysis

4.0% 4.5% 5.0% 5.5% 6.0%

5.3% 30.5 30.9 31.3 31.6 32.0

6.3% 28.5 28.9 29.2 29.6 29.9

7.3% 26.7 27.0 27.3 27.7 28.0

8.3% 25.0 25.3 25.6 25.9 26.2

9.3% 23.5 23.8 24.0 24.3 24.6

FY19E-FY22E growth rate

WACC

Source: CGIHK Research

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With the confirmation from the government on the land grant in May 2012, Wynn Macau plans to open its Cotai project by 2016, as con-struction is scheduled to take three years. The new property will have 500 gaming tables and 1,000 slot machines, similar to its Macau Penin-sula property with 500 tables and 1,000 slot machines. It will thus dou-ble capacity.

The Cotai project is estimated to cost US$4.0bn, and Wynn Macau is raising US$2.5bn in bank loans to finance its project. With HK$5.16bn cash and HK$4.8bn in bank loans at the end of 2011, we expect the company to comfortably service additional debt of US$2.5bn through operating cashflow.

We assume Wynn Cotai will contribute as much revenue as Wynn Ma-cau, given the similar capacity. However, we expect the contribution of Wynn Cotai to outpace Wynn Macau in the long term because 1) the centre of gravity of the Macau gaming industry is shifting from the Ma-cau peninsula to Cotai with its younger casinos, and 2) new property in Cotai will be more mass gaming-centric, which we see as a long-term driver for the industry.

Second property in Macau SAR - Cotai project

Cotai project will double overall gaming capacity

Wynn Macau’s US$2.5bn new loan arrangement will be comfortably serviced

Figure 2: Wynn Macau’s properties

Wynn Macau Encore Wynn Cotai Opening September 2006 April 2010 2015 or 2016 (planned)

Land size 64,000 m2 in Macau Peninsula 206,000 m

2 in Cotai

Gaming facilities 500 tables, 1,000 slots 500 tables, 1,000 slots

No. of hotel rooms 595 rooms 410 rooms and suits 4 villas

2,000 rooms

Retail space 4,800 m2

11,000 m2

Source: Company, Macau Business, CGIHK Research

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Wynn Macau has its niche. With more casinos to be built, we expect the competition among casino operators to heat up, given that they share similar business models. However, Wynn Macau has differentiat-ed itself with its unique premium quality service, essential to retain VIP patrons and premium mass gamblers. Its service is recognised by jun-ket operators and VIP punters, and junket operators are willing to ac-cept lower commission rates to take their clients to the property.

Wynn Macau’s market share was relatively stable after the opening of Galaxy Macau, when SJM and Sands China lost market share. We at-tribute this to its luxury service to clients, which has protected client loyalty. As the Macau gaming market matures we see this as a critical factor in maintaining Wynn Macau’s profitability in the future.

Clear market positioning upholds revenue growth

Wynn Macau’s market niche en-sures its long-term profitability

Figure 3: 3-year monthly market share per operator

Source: Macau Business, CGIHK Research

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We do not rule out the possibility that Wynn Macau may lose some market share in the short term, and we expect its revenue to increase by 12.1% YoY in 2012, backed by the following assumptions.

We keep our forecast of a 20% YoY increase in Macau’s gross gaming revenue in 2012E, after a 19.8% YoY growth to MOP148.7bn in the first six months of 2012.

We expect Wynn Macau’s mass gaming to continue outperforming its VIP segment. We forecast 6.3% YoY growth in VIP gaming rev-enue and 33.4% growth in mass gaming revenue in 2012E.

Our assumption is that Wynn Macau will lose some market share in 2012E, due mainly to the opening of Sands Cotai Central, from 14% in 2011 to 12%. The opening of Galaxy Macau led to a 2ppts decline in Wynn’s market share, so a further 2ppts decline seems reasonable. However, we expect Wynn Macau’s top line to grow in line with the industry level again from 2013E to 2015E, during which no new properties will be opened.

Clear market positioning upholds revenue growth

Revenue should grow at 12.1% YoY in 2012

Market share may erode short term—we assume a 2ppts decrease to 12% in 2012

Figure 4: Monthly gross gaming revenue and YoY growth in Macau (01/09-06/2012)

Source: Macau Business, CGIHK Research

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It is possible that Wynn Macau will suffer from capacity constraints in the medium term, before the opening of its new property in Cotai. As illustrated below, Wynn Macau’s daily gaming revenue per table and per slot are higher than the industry average. Wynn Macau has ~9% of gaming tables available in Macau, while the property has a market share of ~12-14% by gross gaming revenue. With the table cap set by the Macau government, it will be difficult for Wynn Ma-cau to add gaming tables to its old property.

Clear market positioning upholds revenue growth

Wynn Macau’s daily gross gaming revenue per table/slot far outpaced industry level in 2011

Figure 5: 2011 Daily gaming revenue per table/slot Figure 6: Total gaming tables in Macau per operator

Source: Company, CGIHK Research Source: Company, CGIHK Research

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Wynn Macau is the most profitable property in Macau, with a 12% market share, while there are 35 casinos. Wynn Macau has demonstrated its good operating efficiency through consistently high EBITDA margin, de-spite its large exposure to the VIP segment, which has lower EBITDA margin.

As we highlighted in the previous section, Wynn Macau generates high daily gaming revenue per table/slot compared to its peers, demonstrating its efficient facility management. One of its possible challenges is capacity constraint in the medium term, due to the table cap of 5,500 by 2013 and a 3% CAGR increase in tables from then until the current concession/ sub-concessions expire. However, we believe it will be mitigated by Wynn Macau’s consistently high operating efficiency.

The key positive is Wynn Macau’s operating efficiency, which caps operat-ing costs. Since the property is running at a high utilization rate, Wynn Macau has limited exposure to variable costs, including staff numbers. Therefore, we project further improvement in its EBITDA margin in the future, from 18.3% in 2011 to 22.7% in 2014E. We believe this is achieva-ble because MGM China has already recorded 24.1% EBITDA margin in 2011 - MGM also runs only one casino in Macau Peninsula, targeting the mass market.

Second, the management has demonstrated that it is capable of maximis-ing the utility of gaming tables and slot machines and we expect Wynn Macau to apply this expertise to its new property in Cotai. For these rea-sons we believe Wynn Macau will comfortably achieve our projected 19.1% EPS CAGR in the coming three years.

Its parent company, Wynn Resorts, is well known as a successful casino operator with prudent management execution in developing casinos with superior returns. This is another reason Wynn Macau trades at premium to its peers, i.e. that the market believes management is able to deliver robust returns over the long term.

Solid management backs profitability

We expect high operating efficiency will mitigate the capacity con-

straints...

...and we assume EBITDA margin will expand by 4.4ppts to 22.7% in the next three years

Figure 7: 2011 gross gaming revenue breakdown Figure 8: Trend of EBITDA margin

Source: Company, CGIHK Research Source: Company, CGIHK Research

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Wynn Macau had a strong balance sheet by 2011, operating in net cash even after paying a substantial dividend.

An illustration of its credit rating is Wynn Macau’s recent proposal to raise US$1.5bn syndicated loans, which attracted demand up to US$2.7bn. Wynn Macau is now considering an increase in the loan package to US$2.5bn. The over-subscription to the proposed loan syn-dication is a strong endorsement of Wynn Macau’s perceived financial stability. Therefore, we believe the downside impact from highly lever-aged asset is limited provided its business is still growing steadily.

On the other hand, we see high leverage as a contributing factor to the exceptionally high return on equity (ROE): in 2011, Wynn Macau’s ROE was 147.0% compared with the 51.3% industry average. The net mar-gin in 2011 was 15.5% while borrowing cost remained at 4.4%, directly translating into positive ROE. It is difficult to argue with the financing logic, provided cashflow remains strong.

Regarding its dividend policy, the management said its expansion pro-gram would not impact on its payout ratio, suggesting Wynn Macau will use debt for capital expenditure and allow it to maintain a high payout ratio in the coming years. Wynn Macau has been paying special divi-dends with a high payout ratio (89.4% and 105.3% in 2010 and 2011), and its financial position was strong with net cash of HK$353.3m at the end of 2011.Wynn Macau is generating strong cash flow (we forecast over HK$10bn operating cash inflow in 2012E). However, we anticipate a cut in the dividend payout ratio in 2012E from 2011’s 105%, to pro-vide for working capital. The reduced payout ratio should not raise in-vestors’ concerns, as 2011’s level is not sustainable and a 60% payout ratio still implies a prospective 4.8% dividend yield, above the industry standard.

Financial stability supports generous dividends policy

US$1.5bn loan syndication pro-posal generated US$2.7bn demand, underscoring lenders’ confidence in new project

147.0% ROE in 2011 is much higher than the 52.3% industry average

High yield is another differentiator of Wynn Macau from its Macau gaming peers

1) No dilution in market share after the opening of Sands Cotai Central Phase 2; and 2) Accelerated VIP gaming revenue growth in 2H12 with the possible recovery of global economy motivating VIP patrons to gamble in Macau.

Catalyst

1) More scandals related to mainland VIP gamblers in Macau (such as the case of Agricultural Bank of China executive Yang Kun) discourag-ing VIP gamblers traveling to Macau, 2) Sudden hike in interest rate might push up financing cost of the company (for LIBOR+ or HIBOR+ credit facilities), 3) On-going dispute involving its parent company, in-cluding Steve Wynn, his former wife Elaine Wynn and partner Kazuo Okada; and 4) Delay in construction of its Cotai project.

Risks

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Key valuation metrics

Figure 9: Revenue/Operating profit/Net profit Figure 10: Revenue Breakdown

Source: Company, CGIHK Research Source: Company, CGIHK Research Figure 11: Margins Figure 12: ROE/ROA

Source: Company, CGIHK Research Source: Company, CGIHK Research Figure 13: PER band Figure 14: PBR band

Source: Company, Bloomberg, CGIHK Research Source: Company, Bloomberg, CGIHK Research

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Explanation on Equity Ratings

BUY: We expect the total return on the stock to exceed 20% over a 12 to 18 month horizon.

HOLD: We expect the total return on the stock will be between 0% to 20% over a 12 to 18 month horizon.

SELL: We expect the total return on the stock will be less than 0% over a 12 to 18 month horizon.