Company Reports

Following Galaxy’s special interim and final dividend offerings, MGM China and Wynn Macau have followed suit and both declared final dividends on March 21. We view this as a positive surprise, which came in at least one year earlier than our expectations, suggesting that management groups are confident in Macao’s gaming demand recovery. We maintain our assumption that industry gross gaming revenue will rise to 85% of 2019’s level in 2024, up from 63% in 2023. With that, we believe Macao casinos will record meaningful improvements in profitability and cash flows in 2024. We also expect Sands China to resume its dividend program in 2024, while Melco Resorts and SJM will likely be later in 2025 given the still-stretched balance sheet for both companies.

Galaxy’s fourth-quarter results were largely in line with our expectations, but quarter-over-quarter improvement in gross gaming revenue, or GGR, lagged industry peers and led to a market share loss to 17.6% from 18.5% a quarter ago. Management attributes this to seasonal volatility in VIP drop volumes rather than reflecting a fundamental shift of customers away from its properties. We believe Galaxy’s high-quality assets and services, along with continued volume ramp-up at the newly launched Galaxy Macau phase 3, will drive sales growth and market share gain in the coming quarters. We also expect operating leverage to lift margins and accelerate profit growth. We maintain our fair value estimate of HKD 52.00 for Galaxy, after a minor tweak of our earnings forecasts to factor in the latest project schedule. We keep our five-year revenue and adjusted EBITDA CAGR of 17.3% and 19.7%, respectively, unchanged. The shares are undervalued currently, and we think Galaxy’s premium asset quality and strong expansion pipeline make it better positioned to capture Macao’s long-term prospects.

Galaxy Entertainment, one of six casino licenseholders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per-capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Galaxy Entertainment's third-quarter results were in line with our expectations, reflecting continued recovery in both the gaming and nongaming segments. Notably, Galaxy gained decent gross gaming revenue market share of 18.5% in the quarter, from 17.4% in the prior quarter, following the progressive launch of Galaxy Macau Phase 3. Management also sees strong momentum into the fourth quarter, with quarter-to-date mass drop volume 10%-20% above the level in 2019, along with further market share gains. We maintain our HKD 52 fair value estimate after a minor tweak to our earnings forecasts. We think the shares are slightly undervalued as of Nov. 9's market close. We believe narrow-moat Galaxy’s premium asset quality and strong project pipeline make it best positioned for long-term growth.

Although Galaxy’s June-quarter adjusted EBITDA of HKD 2.47 billion was slightly behind Bloomberg consensus, we think performance is positive, continuing to reflect a solid recovery, with revenue and adjusted EBITDA returning to 66% and 57% of pre-COVID 2019 levels, from 54% and 48% in the prior quarter. The special dividend of HKD 0.20 per share is a nice surprise, reflecting management’s confidence in the profit growth outlook. Management also sees strong momentum into the third quarter, with quarter-to-date mass drop volume 20% above the level in 2019. This is impressive, and we think the launch of the Galaxy Macau Phase 3 project, along with continued recovery in transportation capacity, will further accelerate Galaxy’s sales growth.

Galaxy Entertainment, one of six casino licenseholders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per-capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

In line with its Macao peers, narrow-moat Galaxy witnessed a solid recovery in the first quarter, with revenue and adjusted EBITDA reaching 54% and 48%, respectively, of 2019 levels, despite fewer available rooms from the ongoing labor shortage. Management also indicated improving momentum into the second quarter, with the premium mass drop volume surpassing the level in 2019, and retail sales more than doubling. The decent performance is within our expectation. We think the launch of the Galaxy Macau Phase 3 project, along with continued recovery in transportation capacity, will further accelerate Galaxy’s sales growth in coming quarters. We maintain both our profit forecasts and fair value estimate of HKD 51 per share for Galaxy, and we think the shares are fairly valued as of market close on May 22.

Galaxy Entertainment, one of six casino licenseholders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per-capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Galaxy’s fourth-quarter EBITDA loss was well expected, and we’re encouraged by the company’s strong Lunar New Year performance, with mass gaming volume returning at 100% of 2019 levels and retail sales hitting an all-time high. Post-holiday demand is also robust, and management indicated its properties have generated HKD 1 billion EBITDA during the first one and a half months of 2023, almost doubling the three-month EBITDA of HKD 575 million in first-quarter 2022. We think these positive data points confirm a solid recovery of the Macao gaming sector, and the company’s plan to open its Galaxy Macau Phase 3 project further demonstrates management’s confidence on the demand outlook. We maintain our assumption of industry gross gaming revenue, or GGR, returning to 50% of 2019's level in 2023, up from 14.4% in 2022. We raise our fair value estimate for Galaxy to HKD 51.00 per share from HKD 49.50, after updating property opening schedule and rolling our model one year forward. Our tweaks of the earnings forecast are minor, we expect adjusted EBITDA of HKD 10 billion in 2023, or 61% of 2019 levels. We think the shares are fairly valued as of the Feb. 24 market close.

Galaxy Entertainment, one of six casino license holders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

We have lowered our Morningstar Uncertainty Rating to High from Very High for the Macao gaming companies under coverage, as the removal of China’s COVID-19 restrictions from Jan. 8 should have removed the major hurdle that has been hindering Macao’s recovery over the past three years. Although it is likely that Macao and China will experience additional COVID-19 waves, which may cause demand to fluctuate, the evidence from other countries shows that the impact on the recovery trend was shorter and less impactful with each wave. We expect the same in Macao, and we have improved visibility around our existing base-case assumption that industry gross gaming revenue, or GGR, will return to 50% of 2019’s level, or MOP 145 million, in 2023, up from 14.4% in 2022. This is slightly higher than the Macao government’s estimate of MOP 130 million, reflecting a more upbeat outlook on the pent-up demand from both mainland China and Hong Kong.

Galaxy Entertainment, one of six casino license holders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

As expected, the Macao government granted the fresh 10-year gaming concession to the six existing casino operators on a provisional basis. We think the announcement will remove many of the remaining concerns on casino licenses. Although detailed terms of the contracts haven’t been disclosed yet, including the investment pledged by each company and nongaming activities each company planned to develop, we don’t expect material risks toward the finalization of the license grants by the end of December, as Macao’s gaming law amendment has concluded, with major changes in line with majority opinions.

In line with most Macao peers, Galaxy saw a widened adjusted EBITDA loss of HKD 581 million in the third quarter from negative HKD 384 million in the prior quarter. The results contained few surprises, as Macao gaming demand was hit by a two-week shutdown in July, which dampened industry gross gaming revenue, or GGR, to just 7.8% of the 2019 level. We expect industry GGR to improve from the worst of times in the third quarter, following the resumption of e-visa travel to Macao from Nov.1, which we think is a significant step toward a durable recovery of Macao gaming demand. We maintain our long-term constructive outlook for Macao gaming sector but slightly tweak our assumptions of industry revenue to 50% of 2019 levels in 2023 from 60% in our earlier forecast, to reflect the challenges resulting from: 1) an extended zero-COVID-19 period, which may continue to disrupt tourism; and 2) slow economic growth that will likely weigh on customer spending and patron betting sizes. We expect the opening of Galaxy Macau Phase 3 project and a quicker ramp-up of volume to offset the impact of the slightly lower industry GGR assumption, and we maintain our fair value estimate of HKD 49.5 per share.

Galaxy Entertainment, one of six casino license holders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Malaysia Genting Group’s participation in Macao’s gaming concession bidding surprised the market, which brings some uncertainty as to whether the existing players will win renewed licenses, given Genting’s strong presence in global gaming markets and successful track record in diversification of non-gaming business. Nevertheless, we think Genting’s bid is unlikely to threaten the existing players’ competitiveness in the tendering process, as the six have put two-decade efforts in supporting Macao’s economy and employment, which include more than two years’ downturn resulting from COVID-19 restrictions. We think it is unlikely for the Macao government to rule out any of the six, if they could meet the requirements of the new concession tendering process. As such, our base-case scenario is unchanged, which assumes all six existing casino operators would be granted new gaming concessions, and we keep our fair value estimates of Macao casino operators unchanged.

In line with Macao peers, Galaxy’s second quarter continued to reflect COVID-19 headwinds, with adjusted EBITDA turning to a loss of HKD 384 million, after eight consecutive quarters of above its breakeven levels. This was still better than Bloomberg consensus of HKD 509 million, on the back of cost-cutting efforts. Although China's zero-COVID-19 strategy may continue to hinder Macao’s tourism demand, and near-term recovery visibility remains low, policies are being tweaked to match reduced COVID-19 severity and we expect a gradual relaxation of border restrictions in the coming quarters. We retain our long-term constructive outlook for Macao's gaming sector, and maintain our assumption for Macao’s gross gaming revenue, or GGR, to return to 60% of 2019 levels in 2023, with a full recovery by the end of 2024.

Macao’s new gaming law has been approved by the city’s Legislative Assembly, with no major revisions compared with the earlier draft. This provides a basis for the upcoming tender process of new gaming concession, and we expect all six existing casino operators to take part in the fresh tender for a 10-year concession with the possibility of a three-year extension. We think the key negative is the increase in the gaming tax and special levy by 1 percentage point to 40%, but the new law provides casino operators with tax incentives of up to 5% for diversifying their customer base outside of China. The new gaming law framework also highlights a tighter scrutiny on liquidity, with requirement of a minimum capital requirement and net asset value of MOP 5 billion at concessionaires. In addition, the upfront license fee, requirements of non-gaming investment, and minimum gross gaming revenue are also the keys to watch in the upcoming tender documents.

Macao is considering a cut of gaming tax up to 5%, if casino operators can demonstrate efforts to bring in players from outside of China, according to media reports including GGR Asia. We think this signals the government’s willingness to support the city’s gaming sector amid the challenges of China’s crackdown on cross-border gambling and ongoing COVID-19-related travel restrictions. The gaming sector not only contributes about 80% of Macao’s fiscal income, but is also the most important employer in the city. However, given the pandemic-related travel restrictions are still in place in Macao, and competition from regional markets is high, particularly after Singapore and Philippines have eased travel restrictions, we think casino operators may face difficulties in diversifying the customer base at least in near-term.

Galaxy Entertainment continued to post better-than-expected quarterly results, with adjusted EBITDA of HKD 575 million beating Bloomberg consensus of HKD 500 million. The number represents a 33% year-over-year decline, which we think is still solid, given the COVID-19 headwinds. In comparison, most of its Macao peers were unable to return to the EBITDA breakeven point in the quarter. We believe this reflects the firm’s premium asset quality and best-in-class management, which is allowing Galaxy to attract more mass and premium mass visitors, while maintaining prudent cost management.