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Morningstar | Galaxy Fairly Valued; Management Is Starting to See Weakness in the Premium Segment

Narrow-moat Galaxy is fairly valued with an unchanged fair value estimate of HKD 58 per share. In the fourth quarter, Galaxy’s overall VIP revenue was down 4% year over year (up 3% for the market) up 5% sequentially (5% for the market), while mass revenue increased 10% year over year (17% for the market) and 11% sequentially (9% for the market). Management saw some weakness in the premium segment, potentially attributed by weak macro and new smoking rules. This is consistent with our earlier prediction that we would see more weakness going forward as a result of weak macro. Flagship Galaxy Macau’s VIP rolling was down by 10% sequentially as a new supply of VIP rooms in the market such as MGM Cotai took market share. The group saw record mass volume in the quarter in Galaxy Macau and StarWorld. The mid-tier mass segment demonstrates little impact from cyclicality and continues to be strong. Management is planning to invest HKD 1.5 billion to upgrade its existing properties, which has insignificant impact on our fair value estimate, as we already assumed some capital expenditure from time to time to revitalize appeal. Galaxy Macau Phase three is now expected to open in the second half of 2020 versus first half previously due to a slower than expected approval of construction permit, this is not expected to have material change in our fair value estimate.

Galaxy’s adjusted EBITDA margin was 30.6% in the quarter, versus 29.8% in the third quarter and 30.0% in the fourth quarter in 2017. Normalized adjusted EBTIDA in the quarter was up 4% year over year and 1% sequentially to HKD 4.3 billion, as the relatively weaker performance at flagship Galaxy Macau (+1% year over year, negative 1% sequentially) was overshadowed by strong performance at StarWorld (up 18% year over year and 8% sequentially). We think the sequential drop at Galaxy Macau was because of the impact of lower normalized VIP revenue, only partially offset by the higher normalized mass revenue.

Adjusted EBITDA margin at Galaxy Macau was 33.1% in the quarter, versus 31.7% in the third quarter as the casino played more luckily in all three gaming segments. Adjusted EBITDA margin at StarWorld was 30.0% in the quarter versus 31.8% in the third quarter as the casino played less luckily in both VIP and mass segments.

Dividend per share in 2018 totaled HKD 0.91, representing a payout ratio of 29.2%, slightly higher than the 24.2% in 2017. Net cash at the end of the year was strong at HKD 37 billion.

When asked about the Hengqin project, Francis Lui recently told the media that Galaxy is waiting for the introduction of a new visa policy that will allow customers to return to Macau after crossing the border to Hengqin.