GAMING & LODGING: LAS VEGAS TRIP TAKEAWAYS: MOMENTUM INTACT

We came away from our recent trip to Vegas more positive on our Overweight MGM Strip recovery thesis as group bookings for the market appear to be ahead of budgets while investor RevPAR expectations remain in check. LV Locals top-line growth remains elusive, but we continue to see EBITDA upside for BYD in this segment as the competitive environment is better than 6 months ago and there continue to be cost refinements. Key takeaways (see inside for further thoughts): Las Vegas Strip. Sentiment around the Strip operating environment remained positive despite the noticeable weakness in February gaming results published by the state (appears driven by baccarat volatility). Operators said visitation strength in 1Q was at least inline with their expectations (MGM guided to +10% RevPAR growth). While no operator gave specific 2Q-4Q RevPAR guidance, commentary on forward bookings continues to be positive as few suggested that they had already surpassed their annual group booking budgets, which will help drive rate, and we believe consensus expectations of ~3-4% are reasonable. In addition, 2015 / 2016 bookings continue to strengthen, validating MGM’s commentary that 1Q13 strength can be a stepping stone. LV Locals. We met with a number of LV Locals operators and consensus remains that top-line growth will likely be hard to achieve in 2014 (we model +1% revenue growth for BYD). While leading indicators remain positive, they have yet to translate into gaming revenue growth. Suggestions for why this was were: i) While unemployment levels have improved, hours per week have declined (down ~20% from peak) resulting in lower levels of disposable income; ii) Companies have shifted employees from full-time to part-time to keep healthcare costs down as a result of new ACA guidelines; iii) Lack of interest income for retirees; iv) Negative impact from proliferation of Dotty’s (slot machine parlors that use cheap cigarettes as a marketing tool) which now have ~120 locations in the LV area. Macau. We heard much of the same as we did on our trip to Asia two weeks ago (see Casino Tale No. 31: Macau Gaming Trip Takeaways which we published with our Asia Gaming analyst, Praveen Choudhary). Operators continue to be bullish on the underlying strength of the Macau market. Union Pay scrutiny is in the press but not in the market. The market today continues to be underpenetrated and we think LVS / Sands China have an opportunity to better utilize room footprints for premium mass gaming customers as the depth of their databases increases. Operators are conscious of the risk around labor inflation / shortage, but we think they may be underestimating it. Online Gaming. While operators acknowledged that the NJ market is smaller than initially thought as a result of technology issues (detailed in our note US Online Gaming: “You Can’t Shut Down the Internet”), they still believe there will be a significant ramp (NJ can be a ~$500m market). Companies are hopeful they can use their online databases to grow on-ground business and are seeing positive customer behavior in terms of length of use, how quickly customers make deposits, and how long customers leave deposits on their sites. Company take-aways. We continue to recommend LVS and MGM as our favored ways to play the continued strength in Macau and for MGM, a levered option on the LV Strip recovery as well. We like BYD for the longer-term LV Locals recovery and US online gaming growth.