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Morningstar | Market Share Loss at Galaxy Entertainment Will Be Regained as Galaxy Macau Phase Three Opens

We maintain our fair value estimate of narrow-moat Galaxy Entertainment at HKD 58 and believe the shares are fairly valued. VIP rolling was 22% lower sequentially versus an 18% decline for the industry. Galaxy Entertainment attributed VIP weakness to 10 additional VIP rooms in Macau, 10 to 12 new VIP rooms overseas in the last 18 months, and renovation of its own VIP area. Including the offshore play, the VIP market is estimated to be down 15%. Mass gaming revenue was flattish on a sequential basis, versus 5% increase for the Macau market. Adjusted EBITDA share was 21.1%, 250 basis points lower compared with the fourth quarter. The underperformance is due to the ramp up of MGM Cotai and Morpheus and to a lesser extent renovation disruptions in our view. Net revenue was down 8% both sequentially and year-over-year. Adjusted for luck in both the VIP and mass segments, adjusted EBITDA in the quarter was HKD 3.9 billion, down 12% year over year and 9% sequentially. The group played luckily in both the VIP and mass segment, more than offsetting the very bad luck in the premium direct business in the quarter.

Core and mid mass segments continue to be strong, according to management. Premium mass segment continues to grow but at a lower rate compared with the lower-tier mass segment. The database of the mass segment and the theoretical value of these customers continue to grow, offsetting the reduction in gamblers’ frequency of trips to Macau and value of each trip. With various infrastructure improvements and low penetration, we are comfortable with the long term growth of the less-cyclical mass segment and our high single digit mass growth forecast in the long term.

Galaxy has completed 50% of the HKD 1.5 billion renovation program and is expected to complete the renovation of the VIP area by the end of third quarter this year. The renovation program contains many small projects in the existing properties and we expect to see disruptions in the non-VIP area as well in the following quarters.

Part one of Galaxy Macau Phase three is expected to be launched late next year or early 2021. Galaxy restarted the construction of the convention center in November and the hotel tower last week, both of them are in phase three. Galaxy will cooperate with SBM and its Japanese partners and will pursue all opportunities in the Japan casino market. We continue to think MGM Resorts and Las Vegas Sands are the two candidates with the highest likelihood to win the bid in Osaka given their strong track record in meetings, incentives, conventions, exhibitions and experiences in responsible gaming.

Galaxy has a strong balance sheet with net cash of HKD 42.5 billion as at March 31, but we expect this cash to be used during the construction of Galaxy Macau Phase three.