Analyst Research Report Snapshot


Galaxy (27.HK): Q4 VIP Comeback; Long Term Pipeline Solid




Sun Hung Kai Financial


19 Mar 2014





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* What’s New: Reported 2013 revenues and adjusted EBITDA were in line with consensus estimates. Diluted EPS was HK$2.35, a miss compared to consensus estimates due to onetime charges of HK$324m associated with loan transaction cost. Management also noted that luck cost the firm HK$135m in Q4. The firm finished the year with a D/E ratio below 1% and cash balance of HK$10.3bn. A first time special dividend of HK$0.70/share will be paid on July 31. * Highlights: * Q4 – The firm reported another strong quarter. Revenues grew 32%y/y while Adjusted EBITDA increased 41%y/y to a quarterly record of HK$3.5bn. EBITDA margins were 18.8%, up 1.2ppt from the prior year but down 1.1ppt from Q3. The q/q margin dip was due to higher mix of VIP gaming. VIP GGR mix was 74.2% in Q4 compared to 72.4% in the prior quarter. * StarWorld – We continue to be impressed with the overall performance from the firm’s flagship property on the Macau peninsula. Q4 revenues were up 27.5%y/y driven by a 69%y/y lift from mass gaming. Management highlighted that the quality of the property plus development of its premium mass and player loyalty programs has allowed StarWorld to outperform its peers on the peninsula side. * GMP 1 – GGR was up 37%y/y in Q4. VIP revenues jumped 37% partly helped by the opening of a new VIP room. Mass gaming saw revenues improve 40%y/y. * GMP 2 – Construction progress remains on schedule. The hotel tower is built up to level 31 to date and management expects the property to open mid-2015. * Grand Waldo – Refitting on the acquired satellite has begun and detailed plans will be provided in mid-2014. Management said the renovations will likely be a near term * Phases 3 & 4 – The firm is finalizing its HK$50-60bn budget with construction to start at the end of this year. The focus of the property looks to be non-gaming. The project would double the existing GFA footprint of Phases 1 & 2. * Hengqin Island – The firm has entered into a framework agreement to invest RMB10bn to develop a resort on a 2.7 km2 land parcel. For comparison, the land bank is 6x the size of Galaxy’s land bank in Cotai. The property is expected to focus on non-gaming facilities and will include a significant number of low-rise resort style hotel rooms. * Outlook and Forecasts – Management noted that the first two months have been very good for Galaxy, with VIP performing well. The first half of 2014 will present easier comps for most of the casinos including Galaxy. The opportunity this year will continue to be from a growing mix of mass and premium mass segments to drive EBITDA margin expansion. Notably, the growth from StarWorld mass gaming revenues has been very strong. Results were in line with consensus but beat our revenue and EBITDA estimates for 2013. We are raising our 2014 and 2015 EBITDA estimates 4% and 7% respectively. Our expected EBITDA CAGR from 2014-2016E is 32%. * Conclusion – The firm’s pipeline for growth continues to be solid. The recently announced Hengqin framework agreement provides long-term growth potential for the firm. We are raising our target price on Galaxy Entertainment Group (GEG) to HK$82/share from HK$74. Our valuation is based on an SOTP methodology across GEGs existing properties and future properties. Our target implies an EV/EBITDA multiple of 16X on our 2015E EBITDA estimate (previously 15.5X). We believe strong growth drivers as a result of GMP2 opening in 2015 justify a higher than historical valuation multiple for Galaxy...

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