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Morningstar | 00027 Updated Forecasts and Estimates from 23 Apr 2019

Galaxy Entertainment, one of six casino licence holders in Macau, benefits from latent Chinese demand for gaming, underpinned by the rise in per capita disposable income in China. Macau has a penetration rate of merely 2%, compared with Las Vegas' 12%. Excluding the neighboring Guangdong province, where only 8% of China's population resides, the penetration rate is merely 1%. We expect the addition of another 4,280 rooms by major casino operators in 2017 and 2018 to accommodate higher visitation rates of tourists from provinces outside Guangdong, increase the length of their stay, and drive the top line for integrated resort operators like Galaxy Entertainment. With the opening of the Hong Kong-Zhuhai-Macau bridge in 2018 and light railway transit at the end of this decade, Macau's carrying capacity for tourists will increase. The neighboring Hengqin Island, 3 times the size of Macau, is under rapid development to complement Macau's growth.Given the scarcity of land in Macau, Galaxy Entertainment’s largest undeveloped land bank of over 1 million square meters, with 50% of the group’s Cotai land undeveloped, gives the group strong project pipelines. We expect Galaxy Macau phases 3 and 4 to open in 2020 and 2022, respectively. An allocation of 125 new tables from the government, 900 new slots, and 5,500 new rooms will drive adjusted EBITDA growth in the coming decade. There will be a casino, 1,500 hotel rooms, a 16,000-seat arena, and meetings, incentives, conferences, and exhibitions facilities in phase 3 and 3,000 rooms in phase 4. This will increase the number of keys from 4,329 currently to 8,829, still below Sands China’s leading 13,412-room count. These nongaming facilities will bring more traffic to Galaxy’s casinos. Galaxy will also develop a low-density world-class destination resort on 2.7 square kilometers in Hengqin, bringing traffic to the group’s Macau casinos. However, as gaming is not included in the Hengqin project, we expect return on investment to be lower than for its Macau casinos. With regard to overseas opportunities, Galaxy is contending for a casino licence in Japan and the central Philippine island of Boracay.