Galaxy Entertainment Group Summary
Core Content and Key Insights
Company Overview
Galaxy Entertainment Group is a leading player in the casino and entertainment sector in Macau, with a strong growth story and a focus on VIP and mass gaming segments. The company's operations include Galaxy Macau and StarWorld, with Galaxy Macau being the most profitable property. The firm is currently rated BUY with a 12-month price target of HK$72.00, following an upgrade from Hold.
Main Points
Performance Highlights
- 1Q14 EBITDA increased by 38% year-over-year to HK$3.827 billion, aligning with market expectations.
- VIP Revenue grew 47% year-over-year and 7% quarter-over-quarter.
- Mass Revenue rose 46% year-over-year and 9% quarter-over-quarter.
- Slots Revenue increased 10% year-over-year and 9% quarter-over-quarter.
- Market share for VIP, mass, and slots segments improved by 3.5 pts, 0.7 pts, and -0.1 pts respectively.
- Galaxy Macau is now the second most profitable property after Venetian Macao.
Growth Drivers
- New VIP rooms at Galaxy Macau are expected to drive higher table yields.
- Increase in average minimum bet on gaming floors.
- Union Pay crackdown is limited to illegal mobile devices and is not expected to significantly impact gaming revenues (GGR).
- New smoking ban on mass casino floors is anticipated to have little adverse effect on GGR.
Valuation and Investment Outlook
- Stock price corrected by over 20% since the downgrade in January, bringing its valuation to a more reasonable level (15.5x EV/EBITDA).
- Sum-of-the-Parts (SOTP) valuation is maintained at HK$72.00, with Galaxy Macau II expected to contribute HK$47,975 million.
- Total enterprise value is estimated at HK$303.894 billion, with a per share price target of HK$72.02.
Financial Metrics
- Revenue is projected to grow from HK$78.007 billion in 2014 to HK$88.037 billion in 2015.
- EBITDA is expected to rise from HK$15.616 billion in 2014 to HK$18.666 billion in 2015.
- Net Profit is forecasted to increase from HK$12.893 billion in 2014 to HK$15.682 billion in 2015.
- ROAE has declined from 40.9% in 2013 to 31.2% in 2015.
- Net Debt/Equity is CASH in 2013 and HK$15.592 billion in 2014, indicating a strong cash position.
Operating Performance
- Gaming EBITDA margin for Galaxy Macau has improved from 21.3% in 2013 to 21.7% in 2014.
- VIP revenue is the largest contributor to GGR, with a 47% year-over-year increase.
- StarWorld has shown strong growth, with VIP plays contributing to a 26% year-over-year EBITDA increase.
Shareholder and Market Data
- Issued Capital: 4,240 million shares
- Market Cap: HK$255.908 billion / US$33.011 billion
- Major Shareholders: Lui Che Woo & Family (41.7%), Waddell & Reed Financial, Inc. (7.0%), Free Float (45.0%)
- Average Daily Volume: 15,241 thousand shares
Key Financial Tables
Forecasts and Valuation
| FY Dec (HK$ m) |
2012A |
2013A |
2014F |
2015F |
| Turnover |
56,746 |
66,033 |
78,007 |
88,037 |
| EBITDA |
9,847 |
12,575 |
15,616 |
18,666 |
| Net Profit |
7,378 |
10,052 |
12,893 |
15,682 |
| EPS (HK$) |
1.76 |
2.38 |
3.06 |
3.72 |
| EPS Growth (%) |
141.9 |
35.2 |
28.3 |
21.6 |
| PE (X) |
34.3 |
25.3 |
19.8 |
16.2 |
| EV/EBITDA (X) |
25.2 |
19.4 |
15.3 |
12.1 |
| P/Book Value (X) |
11.6 |
7.8 |
6.0 |
4.4 |
Headline and Operating Figures
| Galaxy Macau |
StarWorld |
City Clubs |
Construction Materials |
Total Revenue |
| 12,816 |
6,849 |
48 |
498 |
20,211 |
| 44% YoY |
19% YoY |
4% YoY |
19% YoY |
33% YoY |
| 9% QoQ |
8% QoQ |
23% QoQ |
-34% QoQ |
7% QoQ |
| Galaxy Macau |
StarWorld |
City Clubs |
Construction Materials |
Total Adjusted EBITDA |
| 3,827 |
1,087 |
48 |
73 |
3,548 |
| 38% YoY |
26% YoY |
4% YoY |
19% YoY |
38% YoY |
Segmental Breakdown (HK$ m)
| Segment |
FY Dec |
2011A |
2012A |
2013A |
2014F |
2015F |
| Gaming and entertainment |
39,612 |
54,696 |
63,620 |
75,353 |
85,118 |
|
| Construction materials |
1,574 |
2,050 |
2,412 |
2,653 |
2,919 |
|
| Total |
41,186 |
56,746 |
66,033 |
78,007 |
88,037 |
|
Income Statement (HK$ m)
| FY Dec |
2011A |
2012A |
2013A |
2014F |
2015F |
| Revenue |
41,186 |
56,746 |
66,033 |
78,007 |
88,037 |
| Pre-tax Profit |
3,061 |
7,426 |
10,037 |
12,976 |
15,784 |
| Net Profit |
3,004 |
7,378 |
10,052 |
12,893 |
15,682 |
Balance Sheet (HK$ m)
| FY Dec |
2011A |
2012A |
2013A |
2014F |
2015F |
| Net Fixed Assets |
21,991 |
22,737 |
28,422 |
35,293 |
37,834 |
| Cash & ST Invts |
7,260 |
16,308 |
11,760 |
21,228 |
37,916 |
| Total Assets |
35,764 |
44,389 |
46,257 |
63,118 |
82,805 |
| Shareholder's Equity |
14,222 |
21,853 |
32,441 |
42,373 |
58,056 |
Cash Flow Statement (HK$ m)
| FY Dec |
2011A |
2012A |
2013A |
2014F |
2015F |
| Net Operating CF |
5,698 |
10,056 |
13,322 |
17,060 |
19,462 |
| Net Investing CF |
-4,913 |
-7,516 |
-2,481 |
-9,624 |
-5,312 |
| Net Financing CF |
1,616 |
-426 |
-10,736 |
2,032 |
2,537 |
| Change in Cash |
2,424 |
2,114 |
121 |
9,468 |
16,687 |
Key Recommendations and Catalysts
- Upgrade to BUY due to improved valuation and continued growth visibility.
- Potential Catalysts: New table allocation, market share gains, and strong operational performance.
- Recommendation History:
- 17-Jul-13: Buy at HK$43.00
- 21-Aug-13: Buy at HK$49.80
- 2-Oct-13: Buy at HK$60.60
- 7-Nov-13: Buy at HK$64.10
- 27-Jan-14: Hold at HK$73.00
- 20-Mar-14: Hold at HK$72.00
- 16-Apr-14: Hold at HK$72.00
Conclusion
Galaxy Entertainment Group has demonstrated consistent growth in its gaming and entertainment segment, driven by strong VIP performance and new operational initiatives. Despite the Union Pay crackdown and smoking ban, the company's revenue and EBITDA growth remain robust. The upgrade to BUY reflects the analyst's confidence in the company's future performance and the opportunity presented by the corrected stock price. The SOTP-based price target of HK$72.00 is based on strong fundamentals and positive outlook for the company's segments.
