Galaxy Entertainment Group Limited Global Gaming Operators 27-HKG HKSE HK$27.05 Company Update

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1 8 March 2016 Asia Research Rating: Buy Price Target: HK$33.00 Price 52wk Range HK$27.05 HK$ HK $43.00 Shares Outstanding (MM) 4,260.8 Market Capitalization (MM) Enterprise Value (MM) HK$115,254.0 HK$109, D Avg Volume (000s) 20,288,100.0 Short Interest/Float 0.0% Dividend Yield 0.5% YTD % Chg 10.5% YTD % Chg Relative to Index 12.1% Total Implied Return to PT 30.2% Pricing Date March 7, HKG 27-HKG 15 03/15 06/15 09/15 12/15 03/16 Galaxy Entertainment Group Limited Global Gaming Operators 27-HKG HKSE HK$27.05 Company Update Next phase of Macau development includes theme park; here's why it makes sense Bloomberg is reporting, via an interview with Galaxy Chairman Lui Che-Woo, that the company will build a theme park at Galaxy Macau. We expect this could cover much of the remaining developable land (Phases 3 and 4), and expect more details over the coming months. Based on the proprietary research we've done on theme park visitors in China our initial reaction is enthusiastic from a couple points of view: 1) there seems to be an insatiable demand for theme parks (and themed entertainment) in China, which should ultimately result in significantly increased mass market foot traffic for Galaxy; and 2) without a doubt the development of a theme park checks more boxes as it relates to uniquely diversifying Macau relative to its peers, which will be viewed very positively from the government's perspective. Geographical dividing the west side of Cotai for themed-mass The development of a theme park at Galaxy Macau will further serve to geographically differentiate the west side of Cotai (Galaxy Macau, Parisian, Studio City, Venetian) forming a mass market powerhouse that relies heavily on themed attractions vs. the east side (COD, Grand Lisboa Palace, MGM Cotai, Sands Cotai Central, Wynn Palace) having a greater focus on higher-end consumers. While the development of Galaxy's theme park (and related hotel rooms, etc.) will take several years, it reinforces our belief that has made both Sands China (1928.HK, Buy rated, HKD 31 PT) and Galaxy Entertainment (27.HK, Buy rated, HKD 33 PT) our top picks given our belief that the best way to play Macau is via mass market exposure. The development of a theme park will, in our view, create a cluster effect on the west side of Cotai that should result in increased mass market wallet share for these properties. We note that Galaxy has government-mandated deadlines of 2019 and 2020 for Phases 3 and 4, respectively. Capex (dollars and timing) are currently unknown although the company previously estimated costs of HKD50bn to 60bn (USD6.3bn to 7.5bn), which was in all likelihood related to an entirely different development plan. Admittedly Galaxy's bank of developable land (Phases 3 and 4 are ~156,000 square meters) is significantly smaller than Chimelong's Hengqin theme park, although if done right should still result in notably increased visitation. Surveying Chimelong visitors As we argued in the latest version of our Macau Almanac published last year, Macau's casino operators need to jettison the old way of thinking as it relates to the next wave of development's diversity mandate while also coming up with something to attract new customers and retain existing customers (e.g. the answer isn't to throw more retail at the problem). We remain big believers in themed attractions even though that ship has sailed in Las Vegas, it still works here in Macau and China. Herein we include data derived from our survey of visitors to Chimelong Ocean Kingdom in Hengqin that supports Galaxy's development thesis, and we also present data on theme park visitation in Asia that highlight growing regional demand. Analysts Grant Govertsen Tel: grant.govertsen@uniongaming.com Year to Dec Net Revenue Adjusted EBITDA EPS 2016E 49,889 9, E 50,038 9, *Please see analyst certification and required disclosures starting on page 7 of this report Union Gaming. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying or by any information storage and retrieval system, without permission in writing from Union Gaming.

2 Survey of Chimelong visitors We had previously conducted a proprietary survey of visitors to Chimelong Ocean Kingdom, the theme park on Hengqin Island. Based on these findings, as well as regional theme park visitation data, the development of a boutique theme park at Galaxy Macau makes sense to us. Clearly Galaxy is throwing down the proverbial gauntlet as it looks to stake its claim to not only an increased share of existing mass market visitation to Macau but to try something new and unique to drive a new type of customer to Macau. The following are some of the findings of our survey. Highlights of the survey: 18% of all theme park visitors surveyed noted their current trip includes a visit to Macau 78% of all theme park visitors surveyed have previously been to Macau 59% of visitors from outside of Guangdong have previously been to Macau Trip length (day trippers vs. overnight visitors) Of the Mainland Chines visitors surveyed who expressed that they would also visit Macau on their current trip, we also asked them about their expected length of stay in Macau. Only 16% of respondents were day trippers, while 81% were expecting to stay one or two nights (two or three days). This compares favorably to the typical very short length of stay in Macau. The takeaway here is that given a reason to stay longer customers will, indeed, stay longer Figure 1: Intended length of stay How long do you intend to stay? 4 days + 3% Day trip 16% 2-3 days 81% Source: Union Gaming 78% of visitors surveyed had previously been to Macau We also found that a total of 78% of respondents had previously been to Macau, resulting in a high level of awareness of Macau. This helps reinforce our belief that over time the Hengqin theme parks are likely to become notable drivers of future visitation to Macau, while a Galaxy theme park in Macau gives these customers a reason to do a joint trip. Of the mainland Chinese visitors surveyed have who had previously been to Macau, 79% of visitors from Guangdong and 52% of visitors from outside of Guangdong have been to Macau. This is not surprising given the proximity and numerous infrastructure connections (i.e. the Guangzhou-Zhuhai Intercity Railway) enjoyed by Guangdong residents 2

3 Figure 2: Visitors who have been to Macau previously Have you been to Macau before? No 22% Yes 78% Source: Union Gaming High interest in theme parks We have also asked all our Mainland Chinese respondents if they have been to Disneyland or Ocean Park in Hong Kong, of which 47% expressed that they have been to these theme parks before. This indicates to us a high level of interest from the Mainland Chinese population to patronize theme park facilities, which again argues in favor of Galaxy's plan to develop a theme park in Macau. Figure 3: Respondents who have been to HK Disneyland or Ocean Park Have you been to HK Disneyland or Ocean Park? No 47% Yes 53% Source: Union Gaming 3

4 Asian theme park attendance trends Figure 4: Top 20 theme parks in Asia, by attendance, 2011 to 2014 Source: Themed Entertainment Association, Union Gaming The top 20 theme parks in Asia drew nearly 123mm visitors in 2014 on growth in excess of 9%, or 4% y/y growth on a same-store basis when excluding Chimelong Ocean Kingdom in Hengqin. Seven of the top 20 theme parks in Asia are located within the Pearl River Delta, including two parks in Hong Kong, three parks in Shenzhen, and two Chimelong parks in each of Guangzhou and Hengqin. While 2015 data is not available yet, we would expect to see continued modest growth for these theme parks despite the recent announcement by Disney that attendance in Hong Kong fell ~10% in 2015 (driven by declining Chinese visitation to Hong Kong in general). Following its 16 June 2016 opening we would expect Shanghai Disney to quickly launch to towards the top of the Asia attendance list. Visitation Rank Theme park Country City % Chg. 1 Tokyo Disneyland Japan Tokyo 13,683,000 14,847,000 17,214,000 17,300, % 2 Tokyo Disney Sea Japan Tokyo 11,664,000 12,656,000 14,084,000 14,100, % 3 Universal Studios Japan Japan Osaka 8,500,000 9,700,000 10,100,000 11,800, % 4 Ocean Park Hong Kong Hong Kong 6,955,000 7,436,000 7,475,000 7,792, % 5 Lotte World South Korea Seoul 5,780,000 6,383,000 7,400,000 7,606, % 6 Hong Kong Disneyland Hong Kong Hong Kong 5,900,000 6,700,000 7,400,000 7,500, % 7 Everland South Korea Gyeonggi-Do 6,570,000 6,853,000 7,303,000 7,381, % 8 Songcheng Park China Hangzhou 3,327,000 3,800,000 4,200,000 5,810, % 9 Nagashima Spa Land Japan Kuwana 5,820,000 5,850,000 5,840,000 5,630, % 10 Chimelong Ocean Kingdon China Hengqin ,504,000 na 11 Universal Studios Singapore Singapore Singapore 3,411,000 3,480,000 3,650,000 3,840, % 12 Oct East China Shenzhen 3,890,000 4,196,000 3,950,000 3,780, % 13 Changzhou Dinosaur Park China Changzhou 3,500,000 3,400,000 3,600,000 3,700, % 14 Window of the World China Shenzhen 3,123,000 3,170,000 3,250,000 3,600, % 15 Chimelong Paradise China Guangzhou 2,700,000 2,970,000 3,200,000 3,351, % 16 Happy Valley China Beijing 3,438,000 3,055,000 3,100,000 3,340, % 17 Happy Valley China Shenzhen 3,276,000 3,212,000 3,280,000 3,300, % 18 Happy Valley China Chengdu 2,443,000 2,445,000 2,560,000 2,580, % 19 Happy Valley China Shanghai na na 2,270,000 2,360, % 20 Fantawild Adventure China Wuhu 2,230,000 2,186,000 2,204,000 2,253, % TOTAL 96,210, ,339, ,080, ,527, % 4

5 Figure 5: Chimelong Ocean Kingdom Hengqin Chimelong Ocean Kingdom Phase 1 of the park s RMB 10 billion (USD 1.6 billion) construction cost included a 5-star 1,888-room hotel, which for a brief period of time was the largest hotel in China as measured by room count, a performance theater, and Ocean Kingdom, the first of several planned theme parks. Subsequent to the first phase, the park has opened two additional hotels (that we would characterize as 3-star), the 2,500-room Circus hotel and the 2,000 room Penguin hotel. According to the 2014 report published by Themed Entertainment Association / AECOM, Chimelong Ocean Kingdom was the 10th most visited theme park in Asia and the 20th most visited worldwide with 5.5mm visitors. While we suspect this is an inflated number, the point is that the resort is growing in popularity and should be viewed as an element with which Macau's gaming concessionaires and sub-concessionaires should work to further enhance the area's draw as a mass market tourism destination. Source: Chimelong Ocean Kingdom 5

6 Figure 6: Hengqin Bay Hotel at Chimelong Ocean Kingdom Source: Chimelong Ocean Kingdom 6

7 Important Disclosure Analyst Certification The analyst, Grant Govertsen, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst s compensation was, is, or will be directly related to the specific recommendations or views in this research report. Ratings Definitions Current Ratings Definition Union Gaming Securities LLC and Union Gaming Securities Asia Limited use a traditional ratings construct (Buy, Hold, and Sell) that is underscored by percentage upside/downside from current trading levels along with dividend yields for total return. We exclude special dividends and contemplate regular dividends only in our total return forecasts. These are absolute ratings, not relative or forced ratings. We define a Buy rating as a company whose shares exhibit total return (appreciation and dividends) potential of at least 15% within the next 12 months, and conversely a Sell rating as a company whose shares exhibit downside potential of at least 15% within the next 12 months. A Hold rating is reserved for companies whose shares exhibit total return potential between those parameters. Buy the total forecasted return is expected to be greater than 15% within the next 12 months Hold the total forecasted return is expected to be greater than or equal to 0% and less than or equal to 15% Sell whose shares exhibit downside potential of at least 15% within the next 12 months Suspended the company rating, target price and earnings estimates have been temporarily suspended. Valuation and Risks Valuation Valuation Methodology for Price Target: Enterprise Value-to-EBITDA, Sum-of-the-Parts Analysis, Price-to-Earnings Ratio, Discounted Cash Flow Analysis, Price-to-AFFO, Net Asset Value. Risks Investment Risks: Union Gaming Securities equity research team covers the casino, gambling, gaming, lottery and related sectors. The companies operating within these sectors generally have a global presence or significant exposure to China and Las Vegas, among other markets. In addition, the markets that companies in these sectors operate are highly regulated by local and federal governments. Risks across or specific to one or more of these sectors include regulatory or legislative impacts related to licensing, tourism or the competitive landscape. Licenses to operate gaming facilities or supply gaming equipment or lottery services are often governed by regulatory authorities. Additional Risks for investing in these sectors include volatility in consumer discretionary spending and consumer confidence, currency, interest rates, unemployment rates, access to capital, the cost of capital, commodity costs, geopolitical uncertainty, and unfavorable government regulations. Companies operating within our covered sectors rely in part on tourism, and business trends could be impacted by changes or influences to tourism in a given market or markets, including visa policy, transit policies and security, transportation infrastructure, weather and natural disasters. Ratings Distribution (as of 03/08/2016) Coverage Universe Investment Banking Services / Past 12 Months Ratings Count Pct. Rating Count Pct. BUY 13 72% BUY 2 15% HOLD 5 28% HOLD 0 0% SELL 0 0% SELL 0 0% B:$ /26/ B:$ /12/15 B:$ /15/13 B:$ /21/13 Galaxy Entertainment Group Limited Rating History as of 03/06/2016 B:$ /07/13 B:$ /19/14 H:$ /09/14 H:$ /12/14 H:$ /15/14 H:$ /11/14 B:$ /26/15 B:$ /19/15 B:$ /16/15 10 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 B:$ /15/15 B:$ /25/16 powered by: BlueMatrix B:$ /19/15 Closing Price Target Price 7

8 General Disclosures Additional information is available upon request. This report was prepared by Union Gaming Securities Asia Limited. Union Gaming Securities Asia Limited is a licensed corporation with the Securities and Futures Commission (SFC) in Hong Kong and wholly owned subsidiary of Union Gaming Group LLC. Union Gaming Group LLC also owns Union Gaming Securities LLC, a FINRA member firm and Union Gaming Analytics LLC. All questions or comments concerning this research report should be addressed to Union Gaming Securities Asia Limited at Union Gaming Securities, LLC ("UGS"), an affiliate of Union Gaming Securities Asia Limited, does not own any securities of any company analyzed in the research reports it distributes. Neither Union Gaming Securities LLC nor its affiliates or analysts serve as an officer, director or advisory board member of any Subject Company. UGS, its affiliates, analysts and employees may have received investment banking, non-investment banking securities and non-securities service, related compensation from the subject company in the past 12 months. It further intends to seek compensation for investment banking, non-investment banking securities and non-securities service, related activities in the next three months. Accordingly, investors should be aware that the firm and its affiliates may have a conflict of interest that could affect the objectivity of the reports it distributes. UGS is not now nor has ever been a market maker. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Bloomberg and Factset. Data is sourced from Union Gaming Securities LLC, Union Gaming Securities Asia Limited, and subject companies. Union Gaming Securities LLC and Union Gaming Securities Asia Limited are not responsible for errors in prices provided by independent sources. Data, analyses, and reports necessarily contain time-sensitive information, and no subscriber or client should rely on dated reports or conclusions. Investor clients and financial advisers should consider any report from Union Gaming as only a single factor in making any investment decision. 8