Summary:
– Company Overview
– Latest News
– Financial Model + Valuation
– Investment Thesis
– Geographical Presence
– MD&A
– Shareholder Structure
– Market Capitalization

Company Overview
The Group primarily develops and operates a large portfolio of integrated resorts, retail, dining, hotel and game facilities in Macau. The company operates three flagship destinations in Macau, the Galaxy Macau, Broadway Macau and StarWorld Macau. The destinations are known to hold a large selection of well renowned F&B outlets, from those that have won numerous awards to 2 Michelin starred restaurants.

Galaxy Macau is one of the world’s largest integrated resorts with a footprint of one million square meters. They host an unprecedented range of retail, food & beverage, entertainment and leisure options, such as a water park and 3D Cineplex. They also work with world-class hotels such as Ritz-Carlton and JW Marriott. It is located in Cotai and opened in 2011. In 2019, net revenues took up 72% of total group revenues.

StarWorld Macau is a 5 star hotel with 500 guestrooms and suites located in the heart of the Macau Peninsula. It opened in 2006. In 2019, net revenues took up 21% of total group revenues.

Broadway Macau is a hotel and entertainment development. They are known for their 2,500 seat Broadway theatre. It opened in 2015 and is located next to Galaxy Macau. Net revenues take up a very insignificant portion, around 0.2% of total group revenues.

Gross gaming revenue (“GGR”) for the full year 2019 was $283.9 billion. Galaxy Entertainment Group posted net revenue of $51.9 billion, close to 18% of the market.

Latest News
From September 23^rd, China has recently formed a travel bubble with the world’s largest gambling hub. However the numbers are not promising. Mainland Chinese visitor arrivals during the Golden Week holiday were still 84% lower compared with a year earlier.

However travelers must present a certificate confirming negative result for COVID-19 issued within the past 7 days. National Individual Visit Scheme [tourism visas] will resume. Currently in-person application for IVS permits is reportedly being required.

October GGR was still down 72.5 percent year-on-year. The return of electronic processing for IVS visas and same day visa processing would be a catalyst for visitor numbers to Macau. Analysts expect a 60-65% decline in November and a 50-55% decline in December.

Valuation

Based on Exit year (2023) EBITDA and current trailing EV/EBITDA, Galaxy Entertainment Group is trading at a fair value. However the current LTM EV/EBITDA at around 30 is too high. Historical EV/EBITDA is closer to 15-20. As such the stock is currently pricing in elevated EV/EBITDA levels even when EBITDA returns to pre-COVID levels in 2023.

Even if EBITDA levels hit pre-COVID levels in 2023, the firm might experience multiple compression and the EV/EBITDA might fall back to the $15-20 range.

Investment Thesis  – Sell and wait to see how the chips fall

1. Long road ahead for revenues to return to pre-COVID levels.
Strong growth in revenues over next few years is expected. With the ban on gambling in China still in place, punters will likely return to Macau to get their gambling fix. Recent increases in traveler numbers to Macau are promising and attest to this. However, a return to pre-COVID revenue levels might take a while due to the inefficient IVS and the remaining underlying fear. Revenues in 2020 are expected to be down between 80-90% year on year. Based on optimistic growth projections of 100% over the next two years, resumption to pre-COVID levels is only expected by 2023. This is a long way out.

2. Lower operating margins expected.
Higher commission and incentives as a % of gross revenue is expected. As gambling activity resumes, competition between casinos will become fiercer. Incentives will likely be used to attract punters. This will lead to lower operating margins. We expect commissions and incentives to hold at 27% of gross revenues for the foreseeable future. Revenues from hotel and mall operations might also take a hit due to discounts on rooms and food outlets there.

3. Increase in amount of borrowings over next few years.
The company will face cash flow issues for the next few years. As such huge amounts of borrowings are expected. The firm took on close to $7 billion of borrowings in the first half of 2020. This is comparable to their total debt in 2017 and 2018 at $9 billion. However this this is unlikely to affect liquidity and credit rating as the company has a strong balance sheet with huge amounts of liquid assets (cash and equivalents) and financial assets. Net cash of $43.6HKD billion as at 30 June 2020.

4. Expansion plans will continue to drain cash.
GEG has plans to expand Cotai with a high-end family-friendly hotel tower and international convention centre. This will provide 3 500 hotel rooms, a 500 000 square feet, 16 000 seat multi-purpose arena, F&B, retail and casinos, among others. These plans will drain cash from the firm and the question is whether this expansion is necessary. With capacity at hotels down almost 90%, the additional capacity created will unlikely be utilized for years to come.

Geographical Presence
While the group focuses on Macau, they have interests in Monaco and continue to explore international opportunities in countries such as Japan. In July 2015, they made a strategic investment in “Monte-Carlo SBM”, a world renowned owner and operator of iconic luxury hotels and resorts in the Principality of Monaco.

Management discussion and analysis takeaways
In 2019, the management attributed the Sino-US trade tensions, a volatile RMB and the introduction of the VIP smoking ban in Macau to have had a significant impact on the gaming industry. Despite the visitor numbers being up in 2019 by 10% year on year, the Gross Gaming Revenu (“GGR”) was down 3% year on year. This could be due to the diversification of tourism product offerings in Macau which could have affected the visitor mix from Mainland China to Macau to more family oriented and younger visitors.

Shareholder Structure
As of 2019, the founder and Chairman, Dr Lui Che Woo, together with children Francis Lui (current CEO) and Paddy Tang, who are also executive directors, have a combined interest of more than 50% of the percentage of issued share capital. There is sufficient public float of around 49%, based on marketwatch and market screener. As such the firm is highly liquid. Apart from Patrick Wong and Charles Cheung, all the other directors have a vested interest (0.01% to 0.04%) in the company. There is no known significant holding by other firms.

Market Capitalization
Galaxy Entertainment Group has a market capitalization of around 235.6Bn HKD which is around 30.4Bn USD. This is in on par with Sands China with a market capitalization of around 237.4Bn HKD, equivalent to 30.6Bn USD. Other peers include Wynn Macau (7.85Bn USD), MGM China Holdings (4.81Bn USD) and Melco International Development (2.59Bn USD). This shows that Galaxy Entertainment Group is a big player in this space.