Morningstar | Time to Accumulate Galaxy Entertainment at a Discount for Long-Term Investors
We have kept narrow-moat Galaxy Entertainment’s fair value estimate at HKD 54 per share after its third-quarter results and think the shares are undervalued in the long term. Our fair value estimate has incorporated a downturn and license renewal risks in the form of higher gaming tax in the next few years. Although Galaxy Entertainment has continued to see solid gaming demand, we believe we will see weakening gaming demand in the short to medium term. Nevertheless, we adhere to the long-term structural story of Macau gaming and believe a high-quality name like Galaxy Entertainment will be a major beneficiary of the prosperity of Macau in the long run.Our in-house view is that total social financing growth is going to slowdown going forward, and we shall see weaker export and business confidence due to the trade war between the United States and China. We believe that will certainly put pressure on gaming demand. Management has not seen weakening fundamentals in these segments and we believe that it takes time for the impact of a slowing economy to reflect in earnings.
Regarding investors’ concerns over slowing VIP business, management attributed the reasons to the World Cup and the typhoon Mangkhut over the weekend, which were both one-off events. Management continues to see strong VIP demand in their properties in the fourth quarter with strong VIP buy-in. Premium mass and mid mass saw higher rated play with growth not just from Guangdong but also the rest of China, and the two segments were strong during Golden week. Management believed that construction disruption impacted hold rate in the premium mass segment, which led to lower premium mass revenue. Management has seen the value of customers at the premium mass segment up significantly year over year and up quarter on quarter, while the high limit area also had strong buy in.
The opening of phrase three will be around early to mid-2020. We continue to assume an opening in early 2021, as many casino operators have seen delays partly due to factors that are out of operators’ hands such as delay in permits and approvals.
Galaxy Entertainment played very unluckily in the third quarter, as such, adjusted EBITDA margin (over net revenue) in the quarter was 29.8%, versus 31.1% in the second quarter. Adjusted for luck, adjusted EBITDA would have been USD 4.2 billion, up 16% year over year and down 6% sequentially. Two thirds of the unlucky play of 332 million was from the mass business, most of the rest was from the premium direct business.
Galaxy Entertainment is an investment holding company, engaged in operation in casino games of chance or games of other forms, as well as the provision of hospitality and related services in Macau. In addition, Co. manufactures, sells and distributes construction materials through its Construction Materials Division across Mainland China, Hong Kong and Macau. Co.'s segments include gaming and entertainment, and construction materials.
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