MACAU MEETINGS SUMMARY

Major Takeaways from meetings in Macau last week: 

1. We continue to believe that Macau could be under a bit of pressure relative to expectations in Q1.  While some of our contacts were not concerned about the smoking ban, a few were.  We tend to agree with the latter opinion although there is a chance that the government provides a grace period.  However, we don’t think the risk is necessarily factored into the stocks.  At least one astute market observer feels that ultimately, the restrictions will be forced on a table basis rather than square footage. 
2. A lot of the discussions related to the recent corruption crackdown.  We think that there may be another shoe to drop for Macau as the investigations continue and there is risk of further Macau connections.
3. As you know, Macau GGR increased 33% YoY in the first 10 days of December.  However, most of the growth was likely due to high hold.  Wynn is probably the only operator holding below normal.  Indeed, the numbers we received today moderated significantly from the first 10 days and were actually down 1% YoY.
4. MPEL and LVS look like the stocks that could hold up the best over the near-term:  LVS because of market share gains and MPEL due to a big Q4
5. Wynn, Galaxy, and MGM could be under pressure although MGM's December share is trending high

Please review the following detailed notes from our trip to Macau.

Smoking Restrictions

• Three concessionaires think this will have very limited impact
• One thinks a -3% GGR impact and another felt that a double-digit impact could be experienced for a few months
• LVS probably went all out for square footage split – department of health wasn’t happy
• WYNN probably went the other way and offered up more non-smoking tables
• Galaxy is somewhere in the middle
• Following submissions from each operator of their plans for compliance, it doesn't appear that the government has yet made a decision as to the exact specifications - the uncertainty is likely to create problems and could impact margins
• January 1 looking like the date for required implementation
• One operator thinks that the Government could give a last minute grace period of up to 6 months
• Mass hold is likely to be negatively impacted
• Good luck trying to enforce it in the VIP rooms
• Government banned the comping of cigarettes and cigars recently
• Smoking regulations are probably not done – it is an election year and the dealers have a lot of power – they have the most to gain with a full smoking ban
• Lower end more at risk because higher end players will always get a seat at a smoking table if they want it
• MGM – 28% of Mass players are smokers, MPEL – 30-40% are smokers

China Corruption Crackdown

• Given the early December results, it doesn’t look like it's having an impact
• The corruption crackdown not focused on Macau but rather an investigation into Bo Xilai, who is suspected of funneling money through Macau
• One astute contact thinks that there will be a delayed impact and there still is risk because investigations are ongoing and there may be more ties between some indicted individuals and Macau
• Government handover isn’t complete until March so investigations will go on
• Contacts in Beijing say big players are being monitored and will likely stay away from Macau
• David Star junket rep at Four Seasons was one of the ones arrested

December MTD

• GGR for the first 10 days was up 33% YoY but down 1% in the second week
• Hold played a huge role and volumes may have only been up single digits
• Wynn seems to be the only operator holding below normal here in December

WYNN and SJM at capacity but SJM still has a year of growth

• Wynn can’t do anything meaningful since they are running at a higher level of capacity
• Some operators believe the gap between what Wynn offers the junkets in terms of commissions and credit and the competition is just too high
• SJM added some VIP rooms which is growing their market share and should lead to YoY growth over the next 3 or 4 quarters 

Mass Marketing

• Galaxy Mass advertising program doing well - their recent market share struggles have been in the VIP 
• Mass business very competitive which is impacting margins – could be some relief next year if Galaxy or MPEL pull back

VIP

• Galaxy may have pulled back a little on junket comps
• City of Dreams will likely follow suit

MPEL and the Philippines

• MPEL can bring smaller Southern China and other Macau junkets to Philippines without hurting existing business
• Worst case scenario:  Belle Casino in Manila will do $150MM in EBITDA
• Philippines could ultimately be a US$5 billion market
• Just got 2 helicopters to bring VIPs from HK airport directly to Macau
• We remain comfortable with our Street high $255 million EBITDA estimate for MPEL