Emperor Entertainment Hotel (296 HK):

A weighted coin

Brian Grosso
Junior Portfolio Manager
JBF Capital, Inc.
bgg@drakeslp.com
November 9, 2018 +1-845-670-4052
 Disclosure #1
• Please see disclosure #2 on the last slide.
• The investment organization JBF Capital manages owns shares
of Emperor Entertainment Hotel. This organization has not
purchased shares within the last few months, nor is it the
current intention of the fund manager to sell any of its
position within the next few months.
• This article is not investment advice.

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 Opportunity Overview
• Owns hotel, casino, and real estate in Macau
• Might be cheapest gaming stock on planet
– Negative enterprise value
– Recent transaction implies 75% stake in Grand Emperor Hotel alone
worth 2.3B HKD, vs. 296 HK market cap of 1.8B HKD, and they also have
another hotel, 450mm HKD of investment property, and 2.1B HKD cash
• Repurchasing shares, increased stake in casino last month at
good price, paying 6% dividend
• Concerns about governance and Macau are why
opportunity exists

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 Company Overview
• Assets:
– 75% of Grand Emperor Hotel “GEH”, opened 2006, 655k sqft, 307 rooms, 77 gaming tables, 172 slot machines
– 100% of Inn Hotel Macau “IHM”, acquired 2014, 287 rooms, 209k sqft
– 450mm HKD of Macau investment property
– 2.1B HKD net cash
• Does not own gaming license, unlike Big 6
– Sociedade de Jogos de Macau S.A. ("SJM"), Wynn Macau, Sands China, MGM China, Melco, Galaxy
– Sublicenses from SJM
– SJM patriarch and Emperor patriarch, Albert Yeung, are friends
– SJM owns 20% of GEH and receives rev share on gaming activities
– 296 HK reports sales net of rev share and 40% gaming tax
– Big 6 don’t pay rev share and report gross of tax, explaining margin differences
• Part of the Emperor Group
– Founding family owns 66% stake through 163 HK
– Controlled by Albert Yeung

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Ownership Structure

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 Listing Detail
• Listed in and based in Hong Kong • Average USD Daily Liquidity: $72k
• Bermuda domicile • Float / Shares Outstanding: 34%
• Price: 1.41 HKD/sh • Dividend Yield: 5.9%
• Shares Outstanding: 1.285B • Analyst Coverage: None
• Reporting & Pricing Currency: HKD • Reporting Frequency: Semi-annually
• Market Cap: 1.81B HKD / $231mm USD • Fiscal Year End: March 31
• Average Daily Volume: ~400k sh • Due to report H1 2019 results in 2
weeks 11/21, but no scheduled date

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 If the assets were liquidated tomorrow in an
arm’s length transaction: 300% upside

HKD millions
75% of Grand Emperor Hotel and 100% of Inn Hotel Macau at 15x LTM PE 5100
Investment Property 450
Net Cash 2100
Total 7650
Shares Outstanding 1285
Value Per Share 5.95
Current Share Price 1.41
Upside 322%

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Why it’s cheap

• Governance concerns
• Macau concerns

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Governance concerns seem overblown
• Major reason cheap is the controlling shareholder, Albert Yeung
• Google “Albert Yeung”, read articles, and draw your own conclusions
– admitted to insider trading to a tribunal 20 years ago
– sued Google in 2014
• If we focus on behavior and quantitative indicators; governance not that bad:
– Not seen any examples of family harming outside shareholders
– Pays a 6% dividend
– Buying back stock at very attractive prices
– Provide excellent IR – spoke to them 3 times; I know another investor who toured GEH and IHM
– Not worried by related party transactions
• Sharing of IR and some admin functions across the Emperor entities, but outflows only amount to 12.6mm HKD in FY18,
<1% of sales.
• I feel total executive and director comp is okay – 18.3mm HKD in 2018 ~1% of sales, across 8 people 2.3mm HKD / $290k
USD per person
– 296 HK has not diluted
– Building up of cash twice, but they’ve taken action – bought IHM in 2014 and just increased stake in GEH in October 2018
– Core assets are cash cows and money is flowing to shareholders
• FY18 Operating ROIC 20%
– 296 HK has competitive advantage in junkets through Yeung involvement
• Junkets = bring VIPs into the casino rooms and get them to spend $$$
• I’ve heard that Emperor has one of the best junket operations because of Yeung’s connections, being one of the most
powerful men in Hong Kong, and competing with foreigners like Steve Wynn
• 5% of GEH owned by world famous actor Jackie Chan

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 Signs of governance improvement
• Yeung is 75 years old and less involved
• Buying back stock
– Retired 1.4% since April 2018
– First ever repurchase
– Paying good prices
– Does not have big ambitions, might buy 1-2% per year
• Plans (tentative) to use some cash to buy another hotel or casino in Macau
• Paying good dividend
– Payout 28%
– 5.9% yield
• Bought out Francis Choi’s 15% stake in GEH last month (10/8/18) at an
attractive price
– 460mm HKD, 59% P/B of GEH entity, 10.7x PE
– Using cash!

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Macau concerns probably justified

• New casino openings in Cotai and other parts of Asia

• Recession risk underappreciated
• Macau is already huge:
– Macau gross gaming revenue 5x Las Vegas
– Asia is already largest gaming region
• Fixed costs and falling margins in a sales decline

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 Macau selloff
down more than the Hang Seng Index

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 Gross gaming revenue in Macau: 2003-Present

• Macau gaming activity

exploded until 2013 as
the new Crazy Rich Asians
spent their money like
crazy
• 50% decline 2014-15
amid currency controls
and anti-grafting
crackdown by Chinese
regulators
• Rebound recently, but
impact diluted by new
casino openings

Source: Bloomberg

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 New openings and cannabilization

Most casinos in Macau have traditionally been on

the peninsula, but in recent years new casinos
have been opened closer to the airport in Cotai,
which is cannibalizing the Peninsula. Casinos
have also been opened elsewhere in Asia such as
Korea, Japan, Singapore…. even Cambodia!

Source

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 Recession risk
• Casinos are regarded as being
recession resistant or even anti-
cyclical (people paradoxically drink
more soda, eat more sweets, and
gamble more of their life savings
away when times are tough. Oh, the
joys of being human!)
• I am not totally convinced Macau
would be unscathed by China/Asia
recession
• Vegas has generally done well in
recessions, and there are plenty of
other happy data points, but Vegas
GGR -20% 2008-09
• Many of the VIPs spending in Macau
are newly minted millionaires that
made their money from property
investment, and I am very wary of
property prices in HK/mainland China

Source: UNLV 15
 I expect further sales decline and margin compression

Emperor has steady client base, but as casino ages and peninsula becomes the older, uncool place compared
to Cotai, sales probably decline, which has already been happening
• Sales peaked 2.3B HKD in 2014, currently at 1.5B with a 7% decline in 2018, despite Macau-wide GGR
growth of 21% in 12M period ending 3/18
• Since 2014 peak, sales have cumulatively / annually declined 34% / 9.8% while Macau-wide GGR has
declined 26% / 7.3%
• Emperor has mildly underperformed Macau last 4 years, but dramatically underperformed in 2018
• I expect Macau GGR will be lower in 5 years (-10%) and Emperor’s sales down more than that (-20%)
Operating deleverage in past as Emperor’s sales decline while costs and capital investment largely fixed
• Declining op margin from 39.5% in 2014 to 25.6% in 2018
• Declining costs from 1.37B HKD to 1.11B or only 19% compared to the 34% decline in sales
• Using same deleverage factor, costs declining 11% next 5 years and op margin declines further to 17.5%

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Sellside far more optimistic on Macau than my assumptions
Goldman Sachs calling for Macau GGR to grow 6% and 8% in 2019 and 2020, and win/VIP table day to grow 2% per year
Source: Goldman Sachs, 9/21/18

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 Note: If concerned about Macau risks, could short any of Big 6 as
hedge. All short-able cheaply, but don’t look like great shorts alone

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 BUT, even if we assume:

• Governance discount to Emperor’s core assets (10x PE vs comps 17x)

• 5 years until workout even though signs of change
• Macau is a trainwreck
• Emperor underperforms Macau and margins compress

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 It is still super cheap
HKD millions
Time Today 2024
Core Assets (GEH and IHM) Sales 1498 1198
Core Net Margin 27.4% 17.5%
Net Income 410 210
Noncontrolling Interest Share in 25% GEH Net income 71 36
Core Net Income Attributable to 296 HK Shareholders 339 173
PE Ratio 15 10
Core Asset Value 5085 1733
Investment Property 450 450
Net Cash 2100 3725
Total 7635 5908
Shares Outstanding 1285 1285
Value Per Share 5.94 4.60
Current Share Price 1.41 1.41
Upside 321% 226%
Annualized 27%

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 Conclusion
I believe Emperor Entertainment Hotel is a weighted coin. If we
focus on how insiders have actually behaved, they’ve treated
investors well. The market concerns seem overblown. That
discount has been compounded recently by the bear market in
China and Hong Kong, and Macau gaming stocks have declined
more than the indices. Even if Macau gaming activity declines
and Emperor’s assets underperform competitors, unless
insiders behave unfairly, it’s hard to find downside in the stock
and the upside is multiples of the current price.

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 Resources
• David Webb’s Webb-Site links on 296 HK
• 10/22/18 investor presentation
• GGRAsia – Asia casino news
• Sellside reports on Macau and Big 6 Macau gaming companies
• IR contacts
– Anna Luk T: 852 2835 6783 E: annaluk@emperorgroup.com
– Winnie Kwong T: 852 2835 6791 E: winniekwong@emperorgroup.com
• Company website
• Value Investors Club article 2013
• Value Investors Club article 2007

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 Disclosure #2
The information contained in this article is not and should not be construed as investment advice, and does not purport to be and
does not express any opinion as to the price at which the securities of any company may trade at any time. The information and
opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make
their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly
available information and should not rely on the information contained herein. The information contained in this article has been
prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or
completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the
author and are subject to change without notice. Any projections, market outlooks or estimates herein are forward-looking
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securities discussed herein. Except where otherwise indicated, the information provided herein is based on matters as they exist
as of the date of preparation and not as of any future date, and the author undertakes no obligation to correct, update or revise
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