20100824 - Wynn Macau JPM

Asia Pacific Equity Research 24 August 2010

Wynn Macau Ltd Initiation

Overweight 1128.HK, 1128 HK

High earnings quality justifies premium valuation

Price: HK$14.28

Price Target: HK$17.50

Hong Kong Gaming

Kenneth Fong , CFAAC

(852) 2800-8597 [email protected]

Benjamin Lo, CFA (852) 2800-8598 [email protected]

Sylvia Chan (852) 2800-8593 [email protected]

Joseph Greff (1-212) 622-0548 [email protected]

J.P. Morgan Securities (Asia Pacific) Limited

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Aug-09 Nov-09 Feb-10 May-10 Aug-10

Price Performance

1128.HK share price (HK$HSI (rebased)

YTD 1m 3m 12mAbs 45.5% 3.4% 25.9% 37.9%Rel 50.0% 3.0% 19.0% 36.2%

See page 29 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

• Initiating coverage with OW rating and Jun-11 PT of HK$17.5: Wynn Macau’s effective market positioning, premium brand and prime located properties are competitive advantages that have allowed it to become the most profitable casino in Macau. We think the niche best-in-class market positioning also allows WM to be customer-captive, earn superior returns and maintain its profitability, even in challenging conditions such as when industry supply doubled and concessionaries started a commission war in 2008.

• Misplaced concerns on WM: WM’s share price has been held back by several market concerns, among which lack of growth potential (WM’s next opening on Cotai would be in 2014, at the earliest) and perceived rich valuation (WM trades at industry-average multiple). Growth potential: By table productivity, WM’s peak performance was in 2Q08. If WM can achieve this level again, it has already increased its revenues by 40% without adding new capacity. We believe WM has plenty of room for growth by improving efficiency. Valuation: WM is trading in line with peers on JPMe 2011 EV/EBITDA. However, we argue that WM’s EBITDA quality is superior, as it has: (1) lower debt (i.e. higher cashflow); and (2) strong market positioning and a sticky customer base. We believe WM deserves a premium valuation owing to its earnings quality, strong balance sheet, good management track record and high free cashflow.

• Catalysts and share price drivers: Continued ramp up of Wynn Encore and any updates or further progress on its Cotai project could both help drive the share price higher, in our view.

• Price target, valuation and key risks: We value WM on 14.5x FY11E EBITDA. Key risks to our PT include: (1) slower-than-expected ramping up of Wynn Encore; and (2) regulatory risks from China such as visa restrictions.

Reuters: 1128.HK; Bloomberg: 1128 HK) HK$MM, Y/E Dec FY08 FY09 FY10E FY11E FY12E Revenue 14,711 14,077 21,592 24,412 26,614 52-week range (HK$) 8.67 - 14.52EBITDA 3,138 3,209 5,587 6,105 6,785 Market cap (HK$MM) 74,078 Net profit 2,040 2,069 4,295 4,771 5,496 Market cap (US$MM) 9,529 EPS (HK$) 0.39 0.40 0.83 0.92 1.06 Shares outstanding (MM) 5,188 DPS (HK$) 0.00 0.00 0.00 0.00 0.00 Avg daily value (HK$MM) 120 ROE (%) 52.9% 91.8% 72.6% 45.6% 35.3% Avg daily value (US$MM) 15.4 P/E (x) 36.3 35.8 17.2 15.5 13.5 Avg daily volume (MM shares) 9.4 Div yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% Exchange rate 7.77 EV/EBITDA (x) 25.3 24.0 13.1 11.0 8.9 Index (HSI) 20,981.82 EBITDA margin (%) 21.3% 22.8% 25.9% 25.0% 25.5% Source: Company reports, Bloomberg, J.P. Morgan estimates. Share price as at 20 August, 2010

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Kenneth Fong (852) 2800-8597 [email protected]

Company description NAV sensitivity metrics

FY11E industry growth

assumption (%) PT

(HK$) Bear case 0% 15.2 5% 16.0 10% 16.7 Base case 14% 17.5 20% 18.0 25% 18.5 Bull case 30% 19.2 Source: J.P. Morgan estimates. Price target and valuation analysis

WM, led by CEO Mr Stephen A. Wynn, is one of the concessionaries in Macau. The company was listed in Hong Kong in October 2009. WM currently owns one casino property in Macau, Wynn Macau, which was opened on September 6, 2006. Wynn Encore, an extension of WM’s property, was opened in 2Q10. Mr Wynn has been involved in casino development and operations for over 40 years, and has been responsible for developing, building and operating some of the world’s most recognized resorts and hotels, including The Mirage, Treasure Island, Bellagio, and affiliates Wynn Las Vegas and Encore at Wynn Las Vegas. Wynn Resorts owns 72.3% of Wynn Macau.

EBITDA breakdown for FY10E

VIP53%Mass

35%

gaming12%

Source: J.P. Morgan estimates. EPS: J.P. Morgan vs consensus HK$ J. P. Morgan Consensus FY10E 0.83 0.75 FY11E 0.92 0.84 Source: BEST, J.P. Morgan estimates.

Our PT for WM is based on 14.5x FY11E EBITDA, the high-end of the industry range, as we believe its high earnings quality (high free cashflow with sticky customers), future growth potential on Wynn Encore ramp-up, solid management track record and optimally leveraged balance sheet deserve a premium compared to its peers. Key risks to our PT include: (1) slower-than-expected ramping up of Wynn Encore; and (2) regulatory risks from China such as visa restrictions.

Table 1: Valuation summary Bloomberg Rating Mkt Cap Share price PT Potential EV/EBITDA (x) P/E (X) code (US$m) (HK$) (HK$) upside 09 10E 11E 09 10E 11E

SJM 880 HK OW 4,871 7.38 11.0 49% 15.1 7.6 5.9 40.7 12.9 10.1 Wynn Macau 1128 HK OW 9,529 14.28 17.5 23% 24.0 13.1 11.0 35.8 17.2 15.5 Shun Tak 242 HK OW 1,260 4.84 6.3 30% 7.5 11.9 8.7 3.6 12.1 10.5 Sands China Ltd 1928 HK N 12,837 12.40 13.0 5% 18.5 13.8 13.2 60.2 28.9 26.4 Galaxy 27 HK N 3,101 6.11 5.8 -5% 25.8 17.4 11.6 21.0 24.0 18.3 Melco 200 HK N 529 3.34 3.4 2% NM NM NM NM NM NM

Source: Bloomberg, J.P. Morgan estimates. Share price data as at 20 August, 2010

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Investment summary We initiate coverage on Wynn Macau (1128.HK) with an Overweight rating and Jun-11 price target of HK$17.5, implying 23% upside potential from the current level.

Competitive advantage drives superior return Wynn Macau (WM) is the most profitable casino in Macau, even when assessed based on multiple operating matrixes—win/table/day, property EBITDA margin, profit per unit area and RoIC. WM tops each of these scales because WM’s branding, market positioning and location advantage have enabled it to defend its market share and to generate and maintain what we view as remarkable returns in this highly competitive market.

Since its opening, WM has been focused on building up its best-in-class casino brand and image in Macau. WM’s effective positioning and premium branding have helped instill loyalty among its customers and in turn maintain high margins amid an intense competitive environment. A good example was in 2008, when other VIP operators entered into a commission war, WM did not get dragged in as it opted to differentiate itself using customer service; this did not stop WM from gaining market share. Till today, though paying less commission than other properties, WM has the highest market share in the VIP market by single property.

Not only virtual market positioning, but its physical location also helps set WM apart; situated right across from the 40-year old Lisboa, WM is ideally located to capture time-pressured, hard-core gamblers on the Peninsula.

Refuting six market concerns 1. WM lacks growth opportunities as they have no Cotai exposure Market worries that further growth is deterred by capacity constraint as WM’s Cotai project is not scheduled to open until 2014. We disagree.

By table productivity, 2Q08 was WM’s peak performance. If WM can achieve this level again, it has already increased its revenues by 40% without adding new capacity. Wynn Encore has opened with additional 400 hotel rooms, or a 67% increase in hotel capacity and a 44% rise in VIP table capacity, and we think this gives WM the necessary additional capacity to outgrow what it achieved in 2Q08. WM can grow through better productivity management which includes changing table limits, re-arranging VIP and mass table mix, being more selective in giving out complimentary rooms, and better dealer efficiency, etc. A casino does not necessary need new openings for growth.

2. WM is a VIP-centric play In fact, it has the second-highest mass market share, with 40% of its EBITDA being derived from the mass market in 2009.

3. WM’s margin could see gradual erosion post Encore opening As Wynn Encore opens with more VIP revenue, its margin could decrease. But this is not related to costs, but just a shift in business mix. WM is focused on what it does

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the best now—strengthening its footprint among high-worth customers in the VIP market, which we believe is a sensible strategy.

4. WM is not growing its higher-margin direct VIP The controlled growth of relatively higher-margin direct VIP (vs. junket VIP) can be seen as conservative to some investors but we think it is good for WM for it implies good credit management. In fact, WM’s casino receivables in 2009 was less than 5% of its EBITDA, this compared with 30% for Sands China.

5. Wynn Encore did not contribute much business volume in 2Q Lastly, investors were worried to see only a 7% growth in rolling chips volume after WE’s opening and its revenue seems to be driven solely by a high win rate. But we think investors overlooked that the rolling volume is not only a function of the gambling budget but also the win rate. A high win rate can depress the turn of the rolling chips, and therefore the net rolling volume. WM’s 2Q10 rolling chips are depressed by the high win rate, but this is not a representation of the low business volume. Rolling chips cannot be evaluated on a standalone basis. We have a detailed illustration on page 12 of the report.

6. WM’s valuation is rich Since WM’s listing, the market has been concerned about WM’s relatively richer valuation. Yet, the stock continues to be re-rated by the market with a 29% earnings upgrade (second-highest among the sector) since the beginning of the year. Year-to-date, the share price of WM has gained 50% and it has been the third best performer in the sector.

On an EV/EBITDA basis, WM’s is trading at the industry average. However, we argue that WM’s EBITDA quality is comparatively better than its peers as WM has: (1) lower debt burden, i.e. a higher free cashflow; (2) strong market positioning and sticky customers; and (3) its EBITDA is generated from an existing casino and not an expected EBITDA for the new project.

Besides, we believe that investors should not focus solely on EV/EBITDA as this could overstate the free cashflow and overlook the company’s debt burden. In addition, there are many “non-recurring” items below the EBITDA line, the classification of which is somewhat subject to management’s discretion.

WM is trading at 11x FY11E EBITDA, in line with the industry average. We argue that WM’s combination of earnings quality, strong balance sheet, good management track record and high free cashflow justifies a premium valuation.

Catalysts: More detail on Cotai and Wynn Encore ramp-up On our estimates, the market has not priced in the value of WM’s future project in Cotai. As management provides more concrete details (e.g. capex, timeline and table) over the next two quarters, the market should start to assign this growth option to the company which could trigger a share re-rating. Based on our expected 20% RoIC on a USD1.6bn investment, we estimate it will add HK$2.5/share to Wynn Macau.

Wynn Encore has been opened since April 10 and is still in the ramp-up stage. Its gradual operational pick-up could lead to earnings upgrades.

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Investment positives Competitive advantage drives superior returns Apart from researching the quantitative factors in evaluating potential investments, we believe it is important to review the company’s business as a whole. As investors are buying a stock to get exposure to its multi-year earnings, it is vital to assess how sustainable this income stream is. This is especially true for the Macau gaming sector—a highly competitive, and to a certain extent, a commoditized industry.

All successful companies have some significant competitive advantages. A firm’s competitive advantage allows it to earn superior return and determines how sticky customers are and how secure their future earnings are amid intense competition.

Wynn Macau opened its flagship casino Wynn Macau Casino in 4Q06. Since then, seven Macau flagship casinos have opened, and the number of gaming tables doubled to 4,900 by mid-10. Competition intensified further in 2008 when operators hiked junkets’ commissions to compete for the VIP business. Besides, over the past two years, properties targeting WM’s customers including Four Seasons (a luxury VIP casino) have entered the market.

Figure 1: WM’s VIP revenue and market share

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Figure 2: WM’s mass market revenue and share

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Despite all these challenges, WM was able to maintain a stable market share, with a mass market share of 10% and a VIP share of 17% in 2Q10 (vs. 13% and 15% in 1Q07, respectively). At 1H 10 by different operating matrix (win/table/day, property EBITDA margin, profit per unit area and RoIC), Wynn Macau is the most profitable casino in Macau. We believe WM’s branding, market positioning and location advantage have enabled it to generate and maintain remarkable returns in this highly competitive market.

Strong WYNN branding and niche best-in-class positioning Market positioning is about carving out a niche and in turn capitalizing on the opportunities to secure a higher than its fair share of the market or to introduce new products and services in a market area that was not served or was underserved.

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Since its opening, WM has successfully positioned itself to be the best-in-class casino brand in Macau. Being best-in-class is not only about building a luxurious hotel, but setting up a well-balanced mix of good selection of food, top-end luxurious retail space (by sales revenue WM has several leading luxury brand shops including Cartier, Piaget and Vertu), and more importantly great service that requires attention to detail. We believe its success is a combination of the strong WYNN branding as well as management experience (WM’s president Mr. Ian Coughlan has experience in managing a luxurious hotel like the Peninsula for more than three decades). As a result, the property is able to attract more high-end customers and create an atmosphere that further strengthens its market positioning.

This may sound abstract, but WM’s luxury positioning and strong branding have enabled it to become a “customer captive” casino that can maintain high margins amid an intense competitive environment. In 2008, when other VIP operators increased junkets’ commissions to 1.33%-1.35% over the rolling chips turnover, WM chose to keep its commission at 40% of win (or an equivalent 1.14% of rolling chips turnover). Instead, it opted to use differentiated customer service to gain further market share. Even today, when all other properties in Macau are paying much higher junket commission (based on 1H 2010 numbers) WM has the highest market share among VIP customers, based on single property share.

While customers may get 0.1%-0.15% more rebates from other casinos, the rebate is just one of the many factors that visitors consider when choosing which casinos to go to. At the end of the day, the win/lose of one individual’s hands is more than enough to offset the slight difference in rebates. To these high net worth customers, the whole gaming experience is more important. Hence, we believe Wynn’s strong luxurious market positioning and branding help it differentiate itself among its competitors and allow it to maintain its pricing discipline in this highly competitive market.

Figure 3: WM’s EBITDA vs. EBITDA margin performance

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Source: Company reports, J.P. Morgan

The advantage of luxury positioning also allows WM to attract higher-yielding customers—higher net worth individuals. In 2009, WM’s per table win/table/day was 30% higher than the industry average. Assuming a similar cost structure, higher table productivity translates to a higher profitability. We think this is made possible only by WM’s premium brand.

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In our opinion, WM is able to retain its VIP patrons, strong pricing discipline and profitability because of its strong market positioning.

Central location in the casino hub Another positive is WM’s property location—it is situated within the central casino hub, where it sits right across the symbolic 40-year old Lisboa and is surrounded by Grand Lisboa, StarWorld and L’Arc, which are all within five-minute walking distance from WM.

Location is a key factor in determining success in Macau, in our view. Macau Peninsula has an advantage over Cotai as: (1) it has a group of densely located medium-sized casinos, which facilitate traveling among different casinos, an important factor for gamblers; and (2) it is a major immigration hub (80% of tourist arrivals) for time-conscious day-trippers, which account for more than 50% of Macau visitors, according to government statistics.

Besides, in terms of customer mix, we believe Peninsula serves those frequent and hard-core gamblers, while Cotai has more family/entertainment-type of customers. We believe those hard-core customers will yield higher on a per customer basis. Hence, casino location plays a role in customer-targeting.

We believe it is unlikely that WM will lose its competitive advantage in the future, given its strong branding, market positioning and location advantage, which are all hard to replicate altogether.

Market concerns on WM’s: (1) growth potential; (2) VIP-centric business; (3) margin contraction; (4) low direct VIP and (5) the performance of Encore are misplaced 1. WM can grow even without new opening There is a concern that WM may lack growth potential—after Encore opened, the next project from Cotai will come only in 2014 at the earliest. However, we believe that a company does not necessarily need to have new openings to generate growth; in fact, we believe WM still has plenty of ways to grow earnings even before its next new openings.

For a casino operator, we usually look at win/table/day as a productivity indicator. In 2Q10, WM generated approximately HK$287,000 daily per table win for its VIP operation, compared with the highest per table win of HK$398,000 achieved in 2Q08. If we consider 2Q08 as a benchmark, WM is only achieving 72% of its best yield in the past. So, we think even without a new opening, WM can deliver 40% growth in its VIP business just by boosting its productivity back to its 2Q08 peak.

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Figure 4: WM’s quarterly win/day/table

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(HK$ '000)

Source: Company data, J.P. Morgan

A good example in our view would be Galaxy; the company has not opened any new capacity or added any hotel rooms in the past year, but still, through better table management and introduction of new junkets into its existing capacity, its business volume doubled over the past three years versus what was achieved last year.

Figure 5: Galaxy VIP rolling chips volume and market share

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Wynn Encore has opened with 400 more hotel rooms, or a 67% increase in hotel capacity and a 44% increase in VIP table capacity, in our view giving WM the necessary capacity to outgrow what it achieved in 2Q08.

A casino does not necessarily need to spend billions or to open a new casino to grow. Better productivity management, which includes changing table limit, re-arranging VIP and mass table mix, being more selective in giving out complimentary rooms, better dealer efficiency etc. can also generate better results.

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The opening of new casinos over the past few years has raised the bar for new attractions, as evidenced by low visitor traffic and return for properties opened in the past two years (The Plaza and City of Dreams). In addition, concessionaries have been introducing various loyalty programs to retain customers. Thus, it is becoming more difficult and costlier for new properties to gain market share, hence leading to lower returns. As such, an attempt to deliver profitable growth through new openings is getting riskier.

2. WM is not VIP-centric; WM has the second-highest mass market share in Macau WM’s high-end market positioning has often caused it to be misinterpreted as a VIP-focused casino. In fact, based on 2009 data WM not only has the second-highest mass market share and highest slot market share by property, it also has one of the most profitable mass gaming businesses. In 2009, WM’s mass table win/table/day was HK$46,000, or 50% higher than the industry average. Assuming a similar cost structure, higher table productivity translates into a higher profitability. We believe this was made possible only by WM’s premium brand.

Table 2: Flagship properties’ market share ranking in 2009 Overall VIP Mass Slot

#1 Venetian Macao 15% Wynn Macau 16% Venetian Macao 19% Wynn Macau 22% #2 Wynn Macau 14% Venetian Macao 13% Wynn Macau 11% Venetian Macao 22% #3 Grand Lisboa 9% StarWorld 11% Grand Lisboa 11% Altira/ Mocha club 12% #4 MGM Grand Macau 9% Altira 10% Sands 10% MGM Grand Macau 10% #5 Starworld 8% MGM Grand Macau 9% MGM 8% City of Dreams 5%

Source: Company reports.

While WM generated 71% (vs. industry average of 67%) of its FY09 gaming revenue from its VIP segment, given junket commission, the EBTIDA margin of VIP is only one-third that of the mass market business. Thus, a higher VIP revenue contribution does not imply a higher share of EBITDA. Even after Encore’s opening, we estimate that WM’s mass and slot segment contributes 35% of the group EBITDA, compared with Sands China’s 50%.

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Figure 6: WM's mass market share was steady at 10-12% despite all new casino openings

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3. Margin decreased due to the change in business mix and not cost There is another market concern that WM’s margin could be eroded with Wynn Encore opening with higher operating cost and more focus on low margin VIP business. We take a different view. If a company’s margin contracts with flat revenue, the company is not managing its costs. However, if the margin decline is a result of the change in business mix, rather than a cost issue, it is a different story. We believe this is the case for WM.

WM’s margin decline is driven by a change in the business mix (more percentage of earnings coming from VIP) as Encore introduced more VIP facilities (hotel and VIP gaming tables). Instead of spending billions to build a mega resort now to attract mass market which may not be successful in the end, WM focused on what it does best—strengthening its footprint among luxurious customers in the VIP market.

Although its margin may decline in the end, the increase in business volume and earnings can more than offset that impact. Besides, now that Wynn Encore has opened, WM can gain some economies of scale and cost improvement in operating leverage; in short, we think the margin decline can be more than offset by the growth in VIP business volume.

4. WM chose not to grow direct VIP, which we see as a positive Under the Macau Law, concessionaries are permitted to extend credit to players. And the credits are typically unsecured. As direct VIP business does not involve junkets, its EBITDA margin may be 2.5x greater. To improve margin and market share, casino operators, especially foreign ones, are increasingly extending credit directly to customers (also known as direct VIP). This is also one of the driving forces for VIP gaming revenue since 3Q09. In 2Q10, Sands China had 25% of its total VIP revenue coming from direct VIP.

While an increase in the direct VIP business is good for headline growth and slightly improves margins, we are cautious on the potential credit risks involved. Unlike in

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the US, Macau gaming players mainly come from China, where gaming debt collection is not enforceable based on local jurisdictions. We estimate that given that more than 60% of gaming revenue comes from mainland Chinese, these direct VIPs probably include some mainlanders. So, gambling debt to Mainlanders could see higher bad debt risks.

It takes time to build relationship and understand the credit risk of a customer one by one. We therefore don’t think it is right to compare the pace of junket VIP with that of the direct VIP, which will always be slower.

Besides, aggressiveness in building a direct VIP program could also create tension between the casino and junkets operators. First, they could be chasing the same group of customers. Second, direct VIPs normally involve a customer rebate of 0.8-1%. This indirectly puts pressure on the junkets to at least match the rebate in order to maintain competitiveness, thus narrowing junkets’ profit margin. The fact that we saw Sands China’s (SC) market share of junket rolling chips decreasing from ~20% in 1Q09 to currently only 12% in 2Q10 could be a result of SC’s intentional change in business focus, but we believe to a certain extent, the drop could represent the departure of junkets.

Hence, we consider that WM’s prudence in developing direct VIP business is a plus as it properly manages the credit risks of the company and fosters a harmonious partnership with junkets.

Figure 7: Casinos’ direct VIP exposure

Source: Company data, J.P. Morgan estimates.

5. Wynn Encore’s 2Q performance distorted by high win rate Some investors were disappointed with the performance of Wynn Encore (opened on April 10) for having generated what some see as a low 7% increase in VIP rolling chips volume, just in line with the market growth. Some worried that the strong revenue growth of WM in 2Q10 was merely because of luck, but the actual gambling volume is lower than expected. We don’t think this is the case. We believe that some investors could have misinterpreted the numbers and the inter-link between luck factor (win rate) and volume (rolling chips).

020,00040,00060,00080,000

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Note: 3Q & 4Q of 2009; 1Q & 2Q of 2010

3Q 4Q 1Q 2Q

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Rolling chips are a casino revenue measurement as the gross sum of the chips bet by VIP players. The win rate/hold rate is the amount casino wins from the player divided by total rolling chips turnover (i.e. the total betting amount). For example, if a customer plays four rounds with an equal bet of HK$1,000. In the end, he wins 1 game and loses 3. Net-net, he would have lost HK$2,000 to the casino out of the HK$4,000 bet he places on the gaming table. The win rate for the casino will therefore be 50% (HK$2,000/HK$4,000).

Table 3: Rolling chips vs. win rate example Bet amount

(HK$) Net win/loses

(HK$) 1st Hand: Player wins 1,000 1,000 2nd Hand: Player loses 1,000 0 3rd Hand: Player loses 1,000 -1,000 4th Hand: Player loses 1,000 -2,000

Total rolling chips 4,000 <Sum of the total amount bets>

Casino win rate 50% <2,000/4,000 = 50%>

Source: J.P. Morgan.

For Macau, the baccarat win rate on dead chips is 2.85% based on historical average. In other words, if a customer begins with HK$1 million and plays until he loses every penny, he would have generated on an average HK$35 billion (HK$1 million/2.85%) of rolling chips turnover. That said, it is important to understand that 2.85% win rate is just an historical average, and it tends to fluctuate month over month based on the luck of customers vs casinos.

The tricky part is that the win rate and the rolling chips will also affect each other. A customer can lose his entire gambling budget in just one round (low roll and high win rate) or he can lose everything in multiple rounds (high roll and low win).

To put that in context, we can re-visit the example above: Scenario 1: Win rate at 2.7% - a customer who starts with HK$1 million would generate a total rolling volume of HK$37 billion (HK$1 million/2.7%) given the win rate; Scenario 2: Bump win rate up to 3.2%—a customer will still start with HK$1 million, but the rolling volume will drop sharply to HK$31 billion (HK$1 million/3.2%) as a higher win rate implies that he is losing to the house at a much faster rate. Hence, even though we are looking at the same customer with the same amount of gaming budget, based on a different win rate, he would have generated a vastly different amount of rolling chips for the casino.

This was what happened for Wynn Macau in 1Q10 and 2Q10. In 1Q10, WM reported a VIP rolling chip volume of HK$157 billion at a 2.70% win rate; in 2Q10, it reported a rolling chip volume of HK$169 billion at a 3.22% win rate. Some investors were disappointed with the performance of Wynn Encore (opened on April 10) for having “only” generated 7% more in VIP volume. However, we caution that the two quarter rolling chips volume should not be considered for a apples-to-apples comparison as 1Q has a win rate that is “below” theoretical, while that of 2Q is “above”. Therefore, to say that Wynn Encore disappointed as its rolling chips were tracking behind expectation is in our view not totally correct nor fair.

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Instead, we believe the overall trend, instead of considering a single/month revenue would be a more reasonable indicator. Since the opening of WM’s extension (Dec-09) and Wynn Encore (Apr-10), WM’s both market share and VIP volume are consistently on the upward trend. In 2Q, we estimate that Wynn Encore has already delivered 70% of occupancy rate which we think is pretty impressive considering that it was only opened for two months.

Figure 8: WM’s VIP revenue and market share trend

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Source: J.P. Morgan calculations.

Valuation undemanding at 11x FY11E EBITDA or 16x FY11E P/E Since WM was listed, the market has been concerned about WM’s relatively richer valuation. Yet, the stock continues to be re-rated by the market with a 30% earnings upgrade (second-highest among the sector) since the beginning of the year. Year-to-day, the share price of WM has gained 50% and is the third performer within the sector.

Is WM’s valuation rich? It depends on how you look at it. On an EV/EBITDA front, WM’s valuation is at first glance trading at the high-end compared with the industry average. However, we argue that WM’s EBITDA quality is comparatively better than its peers as WM has: (1) lower debt burden, i.e. a higher free cashflow; (2) strong market positioning and sticky customer base; and (3) its EBITDA is generated from an existing casino and not from an expected EBITDA for new project.

Besides, we believe that investors should not focus solely on EV/EBITDA as this can overstate the free cashflow and overlook a company’s debt burden. Besides, there are always lots of “non-recurring” items below the EBITDA line, of which its classification is somewhat subject to management’s discretion.

Look passed EBITDA, also at P/E and cash flow While it is a common practice for the Street to value casinos operators using EV/EBITDA multiple, we believe the market may overlook the importance of earnings and cashflow. By focusing on EBITDA alone, investors could overstate the

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free cashflow and overlook the company’s debt burden. In this low interest rate environment, interest expenses may be low in coming few years; hence, a bigger portion of the company’s EBITDA will be accrued to the equity holder. However, once interest rates gradually normalize going forward, the free cashflow available to investors could be much lower.

After all, we think earnings should be what drives shareholder value and dividend payment (if any) in the end. From a P/E prospective, WM’s 16x 2010F P/E is the second-lowest in the sector based on our estimates, and is also in line with the average for China consumer stocks.

WM’s EBITDA quality is higher Some may argue that WM does not deserve to trade at a premium as it lacks growth potential from the Cotai angle. However, we believe that earning multiples should not be driven purely by the growth of new openings but by a combination of: (1) earnings quality; and (2) whether there is profitable growth.

In terms of earnings quality, as we have argued before, we believe WM’s strong competitive advantage has enabled it to generate income from a group of sticky customers. History has demonstrated that WM is able to maintain its margin and profitability despite the irrational commission war in 2008. We think this track record should reassure investors that WM should be able to fend off potential competition when new competitors enter the market.

Second, investors not only look for top line growth, but more importantly bottom line growth—i.e. profitable growth. As we have argued, Cotai still lacks the location and casino inter-connectivity which are both essential to pull customers from the Macau Peninsula. So, having Cotai exposure does not necessarily mean profitable growth.

We observe that WM is able to demonstrate organic growth after increased capacity of Wynn Encore and gradual productivity improvement. And we believe that WM’s higher quality stream, when coupled with organic growth potential, should allow it to command a premium.

Consensus earnings has not recognized Wynn Encore’s potential It is true that based on market consensus 2010 EV/EBITDA multiple, WM is currently trading at 15x, the higher end of the sector. However, we believe that the Street’s earnings estimate needs to be revised. The current consensus 2010E EBITDA for WM approximately equals the annualized 1H10 number. However, 1H10 EBITDA only includes two months’ operation of Wynn Encore which has increased the casino capacity by ~30% after it opened. Besides, 2H is historically stronger than the first half. Hence, we see upside in consensus earnings, and believe that the earnings multiple based on consensus earnings have overstated WM’s valuation.

WM’s valuation does not contain option value, in our view When comparing relative valuations, the market is increasingly using forward, i.e. 2011E or 2012E earnings multiples. However, we caution that many of the 2011E/2012E market earnings estimates for other companies in this sector also include the projected earnings of new projects to be opened. First, the projected earnings are based on market expectations without the backing of any track record. Second, the project openings are also subject to potential delay risk—for example, if we assume that their Cotai projects to be opened on time, Galaxy’s and Sand China’s

15



2011E EBITDA multiples may look undemanding at 12x and 13x, respectively. However, if the projects are delayed for just one quarter (which is often very likely given the tight labor market in Macau), the forward multiples will look less attractive at 14x and 13.5x, respectively.

So, when comparing forward multiples, WM’s valuation is based on the projection of its existing operations with a track record but some of its peers could include the expected earnings to be generated by its new project. Hence, we think earnings certainty for WM is higher and should therefore command a valuation premium than its peers.

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Investment risks 1. Slower-than-expected ramp-up of Wynn Encore Wynn Macau opened Wynn Encore on April 2010. A new casino normally takes three-six months to ramp up operation. A slower-than-expect ramping-up of the operation could pose a downside risk to the share price.

2. Regulatory risks from China Visa restriction is a source of China regulatory risk which Macau faces. If China restricts the number of people or visits each person can make over a period, that could have implications on the velocity at which money can be gambled on Macau soil and in turn impact the overall gaming revenue.

Among others, credit tightening measures are another regulatory risk. It could affect Macau’s VIP business as that might dictate the gambling pattern of VIP customers as well as lengthen their repaying reschedule. Again, this would slow down the gaming revenue growth in Macau.

3. Unpredictable event that affects willingness and ability for customers to travel As majority of the revenue is generated from overseas tourist, and more importantly, Chinese tourists, the gaming business may be affected by events that hamper customers ability or willingness to travel. Events such as the regional political events, outbreaks of infectious diseases such as swine flu, SARS could pose downside risk to the business.

4. Dependent upon gaming promoters for a significant portion of gaming business A substantial portion of the total gaming revenue (65%) is derived from rolling chips or VIP revenue which is highly relied on the gaming promoters to bring in business. So, the business is contingent upon the company's ability to foster good relationship with the gaming promoters. A loss of one or more key gaming promoters could have a material adverse effect on the business, financial condition, results of operation and cashflow.

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Valuation and share price analysis EV/EBITDA-based price target of HK$17.50 Casinos are asset-heavy with typically high depreciation charges. They require multi-year development and relatively stable cash flows after initial investment. Variations in financial gearing (high for those with project pipelines) among different operators also makes industry comparisons difficult. Hence, we normally use EV/EBITDA multiples for valuing the companies and pegging price targets.

The long-term average for the US casino operators is around 9.5x forward EBITDA. As Macau operators have higher growth, the concessionaries are exempted from paying corporate tax on gaming income; Macau operators pay a gaming tax of 40% which is incorporated in the EBITDA. So, the free cash flow of Macau operators is higher and we believe a range of 12x-14.5x is a fair range for Macau operators.

We value WM based on 14.5x FY11E EBITDA, the high-end of the industry range, as we believe its high earnings quality (high free cash flow with sticky customers), future growth potential on Wynn Encore ramp-up, solid management track record and optimally-leveraged balance sheet deserve a premium compared to its peers. Table 4: WM’s target valuation computation

Valuation methodology 2011E NAV

Per share Comp

HK$MM HK$ in %

Wynn Macau 14.5x 2011E EBITDA 88,520 17.1 93% less net debt/(cash) 2011E year-end forecast 6,722 1.3 7% Price target by Dec-2011E 81,753 18.4 100%

Price target by June-2011E Discount 1/2 year by 10% 77,949 17.5

Source: J.P. Morgan estimates.

We also provide a valuation sensitivity analysis using different mass and VIP revenue growth assumption for 2011 to our price target:

Table 5: WM’s valuation sensitivity

17.50 5% 10% 15% 20% 22% 25% 30%0% 15.2 15.5 15.8 16.1 16.3 16.4 16.7 5% 15.7 16.0 16.3 16.6 16.7 16.9 17.2

10% 16.1 16.4 16.7 17.0 17.2 17.3 17.7 15% 16.6 16.9 17.2 17.5 17.6 17.8 18.1 20% 17.0 17.3 17.6 17.9 18.1 18.3 18.6 25% 17.5 17.8 18.1 18.4 18.5 18.7 19.0 30% 17.9 18.2 18.6 18.9 19.0 19.2 19.5

Mass market growth

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grow

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We have not factored in WM’s potential development in Cotai until management provides a clear time-line and details of the new project. But we have performed a

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sensitivity valuation on the potential value accretion per share based on different Return on invested capital assumption and size of investment. Table 6: WM’s Cotai project valuation accretion analysis in HKD/share

2.53 14% 15% 18% 20% 22% 25% 30%1.00 0.1 0.2 0.6 0.9 1.2 1.6 2.3 1.20 0.5 0.6 1.1 1.4 1.8 2.3 3.1 1.40 0.8 1.0 1.6 2.0 2.4 2.9 3.9 1.60 1.2 1.4 2.1 2.5 3.0 3.6 4.7 1.80 1.6 1.9 2.6 3.1 3.6 4.3 5.5 2.00 2.0 2.3 3.1 3.6 4.2 5.0 6.3 2.20 2.4 2.7 3.6 4.2 4.8 5.6 7.1 C

apex

(US$

bn)

RoIC


Figure 9: WM’s one-year rolling forward P/E

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Figure 10: WM’s one-year rolling forward EV/EBITDA

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Source: Bloomberg, J.P. Morgan estimates.

Table 7: Gaming companies’ valuation comparison Bloomberg Market Share price Price Potential NAVDiscount to P/B

Stock Ticker Rating Cap (USDm) (Loc) Target (Loc) upside (Loc) NAV (%) 10E 09A 10E 11EMacau ConglomerateShun Tak 242 HK OW 1,260 4.84 6.30 30% 11.0 (56.03) 0.7 3.6 12.1 10.5

Bloomberg Market Share price Price Potential Stock Ticker Rating Cap (USDm) (Loc) Target (Loc) upside 09A 10E 11E 09A 10E 11EMacau Casino Operators (HK-listed)SJM 880 HK OW 4,871 7.38 11.0 49% 15.1 7.6 5.9 40.7 12.9 10.1 Wynn Macau 1128 HK OW 9,529 14.28 17.5 23% 24.0 13.1 11.0 35.8 17.2 15.5 Sands China Ltd 1928 HK N 12,837 12.40 13.0 5% 18.5 13.8 13.2 60.2 28.9 26.4 Galaxy 27 HK N 3,101 6.11 5.8 -5% 25.8 17.4 11.6 21.0 24.0 18.3 Melco 200 HK N 529 3.34 3.4 2% NM NM NM NM NM NMMacau Casino Operators (HK-listed) Average 20.8 13.0 10.4 32.3 19.0 16.2

Macau Casino Operators (US-listed)Las Vegas Sands LVS US OW 19,578 29.63 32.0 8% 26.8 15.3 12.2 330.7 42.1 33.3 Melco-Crown MPEL US OW 2,223 4.18 5.0 20% 37.2 9.7 8.6 NM NM NMMGM Resorts MGM US OW 4,378 9.92 14.0 41% 13.2 13.7 10.9 NM NM NMWynn Resorts WYNN US N 10,819 87.60 90.0 3% 16.7 11.5 9.9 369.9 52.9 36.3 Macau Casino Operators (US-listed) 23.5 12.5 10.4 347.1 47.5 34.8 Macau Casino Operators 22.2 12.8 10.4 122.2 27.2 21.5

P/E

P/E (x)EV/EBITDA (x)

Source: Bloomberg, J.P. Morgan estimates. Share prices are as of 20 August, 2010.

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Company overview Company background WM, led by CEO Mr Stephen A. Wynn, is one of the concessionaries in Macau. The company was listed in Hong Kong in October 2009. The company currently owns one casino property in Macau, Wynn Macau, which was opened on September 6, 2006. Wynn Encore, an extension of WM’s property, was opened in 2Q10. Mr Wynn has been involved in casino development and operations for over 40 years and has been responsible for developing, building and operating some of the world’s most recognized resorts and hotels, including The Mirage, Treasure Island, Bellagio, and affiliates Wynn Las Vegas and Encore at Wynn Las Vegas.

Figure 11: SJM group structure

Wynn Macau Wynn Encore Wynn Cotai

WYNN RESORTS LTD (WYNN US)(72.3%)

WYNN MACAU LTD (1128 HK)

Free float(27.7%)

Source: Company reports.

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SWOT analysis Strength - Clear market positioning and a strong brand breed

customer loyalty - Wynn Macau and Wynn Encore are located in the Macau

Peninsula casino hub with strong traffic - One-property market share maintained over 13% since

inception despite growing supply and competition - 45% of EBITDA is derived from sticky VIP mass

customer base. - Strong balance sheet, which we forecast will be in net

cash by the end of 2010

Weakness - Lack of Cotai exposure in the short-run may hinder

growth potential if the Cotai market (customers looking for all-round entertainment) grows faster than expected.

- If market continues to perceive valuation as rich based on EV/EBITDA, which could prevent the stock from significantly outperform.

Opportunities - Materialization of the Cotai project could present new

opportunity for the company to expand and further tap into the high-end mass market

- Further ramping up of Wynn Encore

Threats - Market share from Wynn Encore ramps up slower-than-

expected may put the share price under pressure - Mass market demand ramps up faster-than-expected in

Cotai - Cotai project takes longer to come through - Chinese government’s policy restrictions

Financial analysis Revenue assumptions We apply a top-down approach to forecast WM’s financial performance, based on WM’s market revenue and market share, and cross checking it with reasonable win/unit/day data. We estimate that Macau’s gaming industry is likely to grow 44% in 2010E and normalize into a still strong 14% growth in 2011.

We estimate that WM’s VIP market share in FY10E will increase to 16.9% from 15.7% in FY09 after the opening of Wynn Encore in 2Q10 and the addition of 44% VIP gaming capacity. In 2Q10, WM had already achieved 17.4% share in the VIP segment, and with limited supply in FY10, we believe a 17.6% share in 2H10 is achievable. Looking into 2011E, when Galaxy Macau opens, we expect WM’s market share to come down to 16.8% on a larger base. We believe the target market for Galaxy Macau (mid-end mass Chinese) is very different from WM (high-end high net worth individuals); hence, the opening of Galaxy Macau should have limited impact on the property.

We expect its mass market share to dip 1% to 10% in FY10 from 11% in FY09 as City of Dreams gradually ramps up its mass market option. It should gradually decrease to 9.5% in 2011E when Galaxy Macau opens.

On the gaming revenue front, we expect the VIP segment (~75% of revenue) to be the main contributor.

EBITDA/earnings We expect WM’s EBITDA to improve from HK$3.3 billion in FY09 to HK$5.6 billion in FY10E, due to: (1) an expected 53% gross gaming revenue increase after

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adding 44% VIP gaming tables and strong industry growth; (2) an increase in non-gaming revenue after the opening of Wynn Encore in 2Q10; and (3) slight operating leverage improvement gained by the opening of Wynn Encore which allows economies of scale.

Our full-year forecast is 6% higher than the 1H10 run rate of HK2.6 billion. As Wynn Encore was opened on April 10, we believe the gradual ramp-up of the operation together with the full earnings contribution in 2H will help it achieve our EBITDA forecast.

Balance sheet and cashflow WM’s balance sheet is the second-strongest among the six operators based on our 2010 estimates. With an annual EBITDA of HK$6 billion and minimal capex (no more projects scheduled after Wynn Encore), we expect WM to turn into net cash by FY10E of HK$0.13/share. That said, instead of paying dividend out of the excess cash, we expect WM to preserve the cash for potential development of property in Cotai which management has said will open at the earliest by 2014. We expect Wynn Cotai project would cost around HKD12 to 20 billion (or USD1.5 to 2billion) to build, with an expected net cash balance of HK$13 billion in 2012E and an annual EBITDA run rate of HK$6 billion, we see that WM should be able to self-finance the project from its own cashflow.

Another positive for WM is its conservativeness in managing its account receivables. In 2009, WM's account receivables balance is only 10% of its EBITDA, this compared with the 40% of Sands China and close to 100% of Melco Crown.

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Table 8: Profit and loss and forecast statement Year to December (HK$m) 2008A 2009A 2010E 2011E 2012E

Profit & Loss Revenue Casino 17,663 16,991 26,476 29,757 32,636 Less: Promotional allowances (3,779) (3,806) (6,426) (7,182) (7,819) Net gaming revenue 13,883 13,186 20,050 22,575 24,817 Rooms 453 437 565 790 802 Food & beverage 413 392 509 553 561 Other 537 663 1,278 1,421 1,443 Less: Promotional allowances (575) (601) (810) (927) (1,009) Net non-gaming revenue 827 891 1,542 1,837 1,797 Total Revenue 14,711 14,077 21,592 24,412 26,614

EBITDA 3,138 3,209 5,587 6,105 6,785

Depreciation (697) (718) (996) (1,167) (1,192)

EBIT 2,442 2,490 4,591 4,938 5,593

Interest income 94 6 7 42 57 Interest expense (320) (317) (194) (109) (63) Net Interest Income/(Expense) (226) (312) (187) (67) (6)

Non-recurring items 0 0 0 0 0 Pre-opening costs 0 (11) 0 0 0 Property charges and other (78) (19) (20) (20) (20) Share based payment (32) (45) (45) (40) (40) Other non-recurring items (123) (29) (30) (20) (10) Pre-tax Profits 1,982 2,074 4,310 4,791 5,516

Tax 57 (6) (15) (20) (20) Net Profit 2,040 2,069 4,295 4,771 5,496

Non recurring items (120) (29) (30) (20) (10) Recurring Net Profit 2,159 2,097 4,325 4,791 5,506

Source: Company data, J.P. Morgan estimates

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Table 9: Balance sheet and forecast statement Year to December (HK$m) 2008A 2009A 2010E 2011E 2012E

Balance Sheet Non Current Assets Property and equipment 7,047 8,528 9,658 8,789 7,895 Leasehold interest in land 372 464 446 428 410 Goodwill 398 398 398 398 398 Other non-current assets 255 283 277 272 266 Total Non Current Assets 8,072 9,674 10,780 9,887 8,970

Current Assets Cash and restricted cash 2,544 5,229 5,636 9,092 14,741 Account receivable 208 325 342 359 377 Inventories 199 203 205 207 209 Prepaid exp and other current assets 166 161 162 164 166 Total Current Assets 3,118 5,918 6,345 9,822 15,492

Current Liabilities Accounts payable 487 727 749 771 794 Other payables - incl gaming tax & chips 1,573 2,621 2,936 3,229 3,552 Other current liabilities 158 205 215 226 237 Total Current Liabilities 2,218 3,553 3,899 4,226 4,583

Non Current Liabilities Interest bearing debts 7,973 8,017 4,896 2,370 1,255 Other long-term liabilities 262 251 263 276 290 Total Non Current Liabilities 8,235 8,268 5,160 2,646 1,546

Shareholders Equity Share Capital 0 5 5 5 5 Share reserves 709 1,924 1,924 1,924 1,924 Retained earnings 29 1,842 6,137 10,908 16,404 Other reserves 0 0 0 0 0 Total Shareholders Equity 738 3,771 8,066 12,836 18,332


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Table 10: Cash flow and forecast statement Year to December (HK$m) 2008A 2009A 2010E 2011E 2012E Cashflow Statement Net income 2,040 2,069 4,295 4,771 5,496 Depreciation & amortization 697 718 996 1,167 1,192 Interest income (94) (6) (7) (42) (57) Interest expenses 320 317 194 109 63 Working capital adjustment (114) 1,309 345 325 355 Others 322 110 0 0 0 Cashflow from Operating Activities 3,170 4,517 5,822 6,330 7,050

Investing cashflows Purhase of fixed assets (1,546) (2,167) (2,108) (280) (280) Interest received 94 6 7 42 57 Restricted cash 0 - - - - Others (68) (12,797) 0 0 0 Net Investing Cashflows (1,520) (14,958) (2,101) (238) (223)

Financing Cashflows Proceed from borrowings 3,900 3,894 - - - Repayment of borrowings - (3,893) (3,120) (2,527) (1,114) Share issuance - 14,490 - - - Interest paid (320) (355) (194) (109) (63) Dividend (8,320) (1,009) 0 0 0 Others 101 (0) 0 0 0 Net Financing Cashflows (4,639) 13,126 (3,314) (2,636) (1,178)

Net Cashflow (2,989) 2,685 407 3,456 5,649


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Table 11: WM operating statistics and assumptions 2006A 2007A 2008A 2009F 1Q10 2Q10 3Q10E 4Q10E 2010E 2011E 2012E

REVENUE VIP segment Market share 0.0% 16.4% 18.0% 15.7% 15.1% 17.1% 17.3% 17.8% 16.9% 16.8% 15.5% Rolling chips volume (HK$m) 63,180 292,500 432,120 423,540 157,560 169,260 180,937 205,844 713,601 812,943 885,044 Win rate 2.5% 3.1% 3.0% 2.9% 2.7% 3.2% 2.9% 2.9% 2.9% 2.9% 2.9% Win/table/day (HK$) 78,433 300,336 286,573 212,121 241,163 287,022 260,703 296,591 272,146 295,239 321,424 VIP revenue (HK$m) 1,546 9,126 12,953 12,207 4,254 5,450 5,157 5,867 20,728 23,169 25,224 Mass segment Market share 0.0% 12.5% 12.4% 11.0% 9.5% 9.8% 10.0% 10.0% 9.8% 9.5% 9.0% Win/table/day (HK$) 14,146 36,943 41,750 46,393 52,448 51,460 50,631 56,675 52,852 56,208 63,771 Mass revenue (HK$m) 862 2,954 3,484 3,480 935 999 1,029 1,152 4,115 4,780 5,423 Slot machine Slot market share 7% 19% 22% 20% 18% 19% 22% 21% 20% 19% 19% Win/slot/day (HK$) 3,151 3,682 2,697 3,005 3,518 3,565 3,496 3,671 3,567 3,670 4,037 Slot revenue (HK$m) 138 697 1,225 1,304 355 388 434 456 1,633 1,808 1,989 Less: Allowance (HK$m) (476) (2,579) (3,779) (3,806) (1,319) (1,690) (1,599) (1,819) (6,426) (7,182) (7,819) Gaming revenue (HK$m) 2,070 10,198 13,883 13,186 4,225 5,147 5,022 5,656 20,050 22,575 24,817 Non gaming revenue (HK$m) 223 660 827 891 345 353 414 430 1,542 1,837 1,797 Group Total revenue (HK$m) 2,293 10,858 14,711 14,077 4,570 5,500 5,436 6,086 21,592 24,412 26,614 EBITDA (HK$m) 339 2,449 3,138 3,209 1,192 1,421 1,385 1,589 5,587 6,105 6,785 Group EBITDA margin 14.8% 22.6% 21.3% 22.8% 26.1% 25.8% 25.5% 26.1% 25.9% 25.0% 25.5%

Source: Company reports and J.P. Morgan estimates.

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All Data As Of 23-Aug-10

Quant Return Drivers (a Score >50% indicates company ranks 'above average') J.P. Morgan Composite Q-ScoreScore 0% (worst) to 100% (best) vs Industry Raw ValueValueP/E Vs Market (12mth fwd EPS) 55% 1.3xP/E Vs Sector (12mth fwd EPS) 88% 0.8xEPS Growth (forecast) 70% 31.2%Value Score 84%Price Momentum12 Month Price Momentum 0.0%1 Month Price Reversion 22% 9.8%Momentum ScoreQualityReturn On Equity (forecast) 98% 54.4%Earnings Risk (Variation in Consensus) 57% 0.10 Quant Return Drivers Summary (vs Country)Quality Score 99%Earnings & SentimentEarnings Momentum 3mth (risk adjusted) 95% 204.31 Mth Change in Avg Recom. 34% -0.02Net Revisions FY2 EPS 80% 78%Earnings & Sentiment Score 93%COMPOSITE Q-SCORE* (0% To 100%) 99%

Targets & Recommendations** EPS Revisions** Historical Total Return (%)

Consensus Growth Outlook (%)

Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths)Code Industry ADV PE FY1 Q-Score*763-HK 22.36 20.8 34%293-HK 13.05 7.2 96%1109-HK 31.50 18.0 12%1766-HK 6.29 25.9 52%291-HK 14.59 35.6 5%1128-HK 17.12 19.7 99%1618-HK 4.91 10.6 62%1038-HK 5.22 15.1 56%1099-HK 23.99 46.1 11%83-HK 12.57 19.3 7%144-HK 18.77 19.4 43%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.'Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

Trucks/Construction/Farm MachineryFood RetailCasinos/Gaming

30%

Name

China Resources Enterprise Ltd.

vs Country

70%27%

61%

33%

73%

Other Transportation

97%

Cathay Pacific Airways Ltd.China Resources Land Ltd.

Metallurgical Corp. of China Ltd.Cheung Kong Infrastructure Holdings Ltd.

China South Locomotive & Rolling Stock Corp. Lt

Real Estate DevelopmentChina Merchants Holdings (International) Co. Ltd

9,744

9,001

8,7148,761

8,5828,297

Construction MaterialsEngineering & Construction

9,533

Sinopharm Group Co. Ltd.Sino Land Co. Ltd.

ZTE CORP H

99%

Wynn Macau Ltd.

99%

98%66%

9,840

97%

80%

Telecommunications EquipmentAirlinesReal Estate Development

USD MCAP

Medical Distributors

Q-Snapshot: Wynn Macau Ltd.

EPS Momentum (%)

I N D U S T R Y

9,752

9,8889,842

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101520253035

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EPS Actual To FY1 EPS FY1 To FY2 EPS FY2 To FY3 Cash Flow FY1 To FY2 Sales FY1ToFY2

0%25%50%75%

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VALUE PRICE QUALITY EARNINGS

27



JPM Q-ProfileWynn Macau Ltd. (MACAU / Consumer Discretionary)As Of: 20-Aug-2010 [email protected]

Local Share Price Current: 14.28 12 Mth Forward EPS Current: 0.79

Earnings Yield (& local bond Yield) Current: 5% Implied Value Of Growth* Current: 27.22%

PE (1Yr Forward) Current: 18.2x Price/Book Value Current: 67.3x

ROE (Trailing) Current: Dividend Yield (Trailing) Current: 0.00

Summary

Wynn Macau Ltd. 9440.01 As Of:MACAU 16.50303 SEDOL B4JSTL6 Local Price: 14.28Consumer Discretionary Hotels Restaurants & Leisure EPS: 0.79

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 18.19x 17.94 22.07 19.71 19.77 22.49 17.06 -1% 21% 8% 9%P/BV (Trailing) 67.28x 45.00 67.28 52.77 53.65 70.01 37.30 -33% 0% -22% -20%Dividend Yield (Trailing) 0.00 0.00 0.00 0.00 0.00 0.00 0.00ROE (Trailing) 21.93 52.93 52.93 40.53 71.42 9.63Implied Value of Growth 27.2% 0.27 0.47 0.39 0.39 0.52 0.25 0% 72% 44% 43%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

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28



Wynn Macau Ltd: Summary of financials Year to December (HK$m) 2008A 2009A 2010E 2011E 2012E Year to December (HK$m) 2008A 2009A 2010E 2011E 2012E

Profit & Loss Balance SheetRevenue Non Current Assets

Casino 17,663 16,991 26,476 29,757 32,636 Property and equipment 7,047 8,528 9,658 8,789 7,895Less: Promotional allowances (3,779) (3,806) (6,426) (7,182) (7,819) Leasehold interest in land 372 464 446 428 410

Net gaming revenue 13,883 13,186 20,050 22,575 24,817 Goodwill 398 398 398 398 398Other non-current assets 255 283 277 272 266

Rooms 453 437 565 790 802 Total Non Current Assets 8,072 9,674 10,780 9,887 8,970Food & beverage 413 392 509 553 561 Other 537 663 1,278 1,421 1,443 Current AssetsLess: Promotional allowances (575) (601) (810) (927) (1,009) Cash and restricted cash 2,544 5,229 5,636 9,092 14,741

Net non-gaming revenue 827 891 1,542 1,837 1,797 Account receivable 208 325 342 359 377Total Revenue 14,711 14,077 21,592 24,412 26,614 Inventories 199 203 205 207 209

Prepaid exp and other current assets 166 161 162 164 166EBITDA 3,138 3,209 5,587 6,105 6,785 Total Current Assets 3,118 5,918 6,345 9,822 15,492

Depreciation (697) (718) (996) (1,167) (1,192) Current LiabilitiesAccounts payable 487 727 749 771 794

EBIT 2,442 2,490 4,591 4,938 5,593 Other payables - incl gaming tax & chips 1,573 2,621 2,936 3,229 3,552Other current liabilities 158 205 215 226 237

Interest income 94 6 7 42 57 Total Current Liabilities 2,218 3,553 3,899 4,226 4,583Interest expense (320) (317) (194) (109) (63)Net Interest Income/(Expense) (226) (312) (187) (67) (6) Non Current Liabilities

Interest bearing debts 7,973 8,017 4,896 2,370 1,255Non-recurring items 0 0 0 0 0 Other long-term liabilities 262 251 263 276 290Pre-opening costs 0 (11) 0 0 0 Total Non Current Liabilities 8,235 8,268 5,160 2,646 1,546Property charges and other (78) (19) (20) (20) (20)Share based payment (32) (45) (45) (40) (40) Shareholders EquityOther non-recurring items (123) (29) (30) (20) (10) Share Capital 0 5 5 5 5Pre-tax Profits 1,982 2,074 4,310 4,791 5,516 Share reserves 709 1,924 1,924 1,924 1,924

Retained earnings 29 1,842 6,137 10,908 16,404Tax 57 (6) (15) (20) (20) Other reserves 0 0 0 0 0Net Profit 2,040 2,069 4,295 4,771 5,496 Total Shareholders Equity 738 3,771 8,066 12,836 18,332

Non recurring items (120) (29) (30) (20) (10)Recurring Net Profit 2,159 2,097 4,325 4,791 5,506

2008A 2009A 2010E 2011E 2012E Year to December (HK$m) 2008A 2009A 2010E 2011E 2012EPer Share and key ratios Cashflow StatementShares issued at year end (m) 5,188 5,188 5,188 5,188 5,188 Net income 2,040 2,069 4,295 4,771 5,496EPS 0.39 0.40 0.83 0.92 1.06 Depreciation & amortization 697 718 996 1,167 1,192

yoy change 47% 1% 108% 11% 15% Interest income (94) (6) (7) (42) (57)Recurring EPS 0.42 0.40 0.83 0.92 1.06 Interest expenses 320 317 194 109 63

yoy change 56% -3% 106% 11% 15% Working capital adjustment (114) 1,309 345 325 355BVPS 0.14 0.73 1.55 2.47 3.53 Others 322 110 - - -

yoy change -89% 411% 114% 59% 43% Cashflow from Operating Activities 3,170 4,517 5,822 6,330 7,050 DPS 0.00 0.00 0.00 0.00 0.00

Investing cashflowsP/E 36.3 35.8 17.2 15.5 13.5 Purhase of fixed assets (1,546) (2,167) (2,108) (280) (280)Recurring P/E 34.3 35.3 17.1 15.5 13.5 Interest received 94 6 7 42 57P/BV 100.4 19.6 9.2 5.8 4.0 Restricted cash 0 - - - - Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% Others (68) (12,797) 0 0 0EV/EBITDA 25.3 24.0 13.1 11.0 8.9 Net Investing Cashflows (1,520) (14,958) (2,101) (238) (223)

RoE 52.9% 91.8% 72.6% 45.6% 35.3% Financing CashflowsNet debt/(cash) 5,429 2,788 (740) (6,722) (13,485) Proceed from borrowings 3,900 3,894 - - - Group EBITDA 3,138 3,209 5,587 6,105 6,785 Repayment of borrowings - (3,893) (3,120) (2,527) (1,114) Net debt /EBITDA 1.7 0.9 (0.1) (1.1) (2.0) Share issuance - 14,490 - - -

Interest paid (320) (355) (194) (109) (63) Capex breakdown Dividend (8,320) (1,009) 0 0 0Wynn Macau 347 250 200 200 200 Others 101 (0) 0 0 0Wynn Encore 1,199 1,931 1,908 80 80 Net Financing Cashflows (4,639) 13,126 (3,314) (2,636) (1,178)Wynn Cotai - - - - - Total capex 1,546 2,181 2,108 280 280 Net Cashflow (2,989) 2,685 407 3,456 5,649

Source: Company reports, J.P. Morgan estimates.

29



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for Wynn Macau Ltd within the past 12 months.

• Client of the Firm: Wynn Macau Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services.

• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Wynn Macau Ltd.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Wynn Macau Ltd.

0

6

12

18

24

Price(HK$)

Oct09

Nov09

Jan10

Mar10

May10

Jul10

Aug10

Wynn Macau Ltd (1128.HK) Price Chart

OW

OW HK$12 OW HK$12.2

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Nov 10, 2009. Break in coverage May 12, 2010 - Aug 23, 2010. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (HK$)

Price Target (HK$)

10-Nov-09 OW 10.30 12.00 27-Feb-10 OW 9.75 12.20 12-May-10 OW 11.30 --

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

30



J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

JPM Global Equity Research Coverage 46% 42% 12% IB clients* 49% 46% 31% JPMSI Equity Research Coverage 44% 48% 9% IB clients* 68% 61% 53%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

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31



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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised March 1, 2010.

Copyright 2010 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.

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