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Hello Macao!

Updated: Apr 12, 2023

Last week, the SJM team took a trip to Macau to perform channel checks and assess the impact of China's reopening. We like what we saw! And we were pleasantly surprised by the infrastructure developments and change in visitor mix.

Macau is a market we know fairly well and had been visiting at least once a year since 2012 until CV19 struck. Sands China is currently our 2nd largest position and Macau has been one of our largest performance contributors over the past 3yrs.

We think consensus expectations could be pulled forward 9~12mths during 2023, as gross gaming revenue (GGR) builds toward pre-CV19 levels. We look forward to Q1 results and upcoming Golden Week as potential sector catalysts.

Macau is not ex-growth and we have little doubt market net revenues will exceed the old cycle highs in the next 3~5yrs.

The biggest surprise going forward and in upcoming Q1 results will be profitability.

The mix has shifted to a higher quality mass player, with higher margins, and the casino operators have done a great job managing expenses (table capacity/dealers) to match demand.

Just-in-time management and operating at low capacity has been a CV19 benefit.

Image: Wynn Palace

The market was not as crazy as previous peak GGR cycle highs, but the much-needed infrastructure and room supply is now in place to support much higher levels of demand vs the past.

We were pleased to see table minimum bet size at least matching 2019 levels, and even higher during peak gaming periods (10pm to 3am). Open table capacity was mostly full ie. Profit per table will match 2019 levels.

Macau is the "City of Dreams" - Chinese gamblers go there to win big and have a much higher propensity to gamble. It's a go-for-broke mentality, where typical trip budgets are allocated 75% to gambling vs 25% for F&B and accommodation. The opposite of Vegas.

This aggressive gambling mentality and cultural gambling heritage contribute to higher margins, faster table churn, and higher revenue - with a seemingly unlimited supply of gamblers.

The biggest risks to Macau are new regulation (ie. Chinese cash withdrawal limits, travel restrictions, table caps etc.) and recession.

Image: City of Dreams, Cotai light rail transit line

Last year all six Macau operators were granted a 10yr license extension, on reasonably favourable terms. We feel the regulatory cycle peak is behind us, as the concession risk has passed and VIP/Junket play (the bad part) has largely disappeared.

China has an incentive to let Macau run - many of the casinos are heavily indebted post CV19 and need a 3-year period of normal profits to de-lever to adequate levels. The Macanese population and country GDP are still heavily reliant on the casinos. The most impactful way to support Macau is to let the gaming market recover fast if China wants to prove success with their "one country, two systems" policy.

Sands China is our preferred pick, as they dominate the mass market with their control over the heart of Cotai. Mass market is leading the recovery and visitors tend to gravitate to the newest properties (Lisboa Cotai, Sands Londoner, & MGM Cotai).

The new Sands Londoner property is more of a premium mass focused offering and had room rates (St Regis) well above peers - we were impressed by the quality of the product and can see this property performing well in the coming quarters.

Sands China trades at 13.5x consensus 2025 expected earnings vs its historical average price to earnings ratio of 20x - assuming the market recovers in line with our expectations we could see Sands appreciate by 50% over the next 12mths to a fair mid-cycle multiple of 20x earnings. They have a superior balance sheet vs most peers and the relative downside risk is limited ie. If Sands falters, most of the other operators are dead (Not in China's best interests).

Images: Venetian Macao (Left), Sands Londoner Big Ben (Above)

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