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Galaxy Entertainment Group Summary

Core Content

Galaxy Entertainment Group (HK: 27) is a leading player in the casino and entertainment sector in Macau, with a strong growth trajectory and a significant development pipeline. The report highlights the company's performance, valuation, and market outlook as of March 2014.

Key Financial Highlights

Revenue and EBITDA Growth

• Revenue is expected to grow significantly, with forecasts for FY14F and FY15F showing increases of 14.7% and 13.2% respectively.
• EBITDA is projected to grow by 23.0% in FY14F and 20.0% in FY15F, indicating strong operational performance.
• Gaming and entertainment segment dominates revenue, contributing to the majority of the company's earnings.

Profit Margins

• Gross Margins are improving, reaching 28.9% in FY14F from 27.6% in FY13A.
• Operating Profit Margins are also increasing, from 15.9% in FY13A to 17.1% in FY14F.
• Net Profit Margins are expected to rise from 15.2% in FY13A to 17.1% in FY14F and 18.4% in FY15F.

Dividend Policy

• The company declared a maiden special DPS of HK$0.70 in 4Q13, which is approximately a 1% yield.
• Dividend payout ratio is currently low, at 0.0% in FY14F, but this may change in the future.

Valuation and Performance

Valuation Metrics

• EV/EBITDA is currently at 18.5x for FY14F, which is higher than the Cotai average of 17.2x.
• PE is at 23.4x for FY14F, while P/Book Value is at 7.2x.
• The Price Target has been reduced to HK$72.00, from the previous HK$73.00, reflecting the company's current valuation and dividend payout.

Growth and Market Share

• Galaxy Macau's VIP revenue increased by 30% year-over-year and 19% quarter-over-quarter in 4Q13.
• Mass market revenue grew by 47% year-over-year and 10% quarter-over-quarter, outperforming the industry.
• The company's market share increased to 20.8% in 4Q13, up from 19.6% in 3Q13.

Development Pipeline

• Galaxy Macau II is expected to open in mid-2015, with construction on Phases 3 and 4 delayed to late 2014.
• The company has entered into a framework agreement to invest Rmb10bn in a 2.7 sq km land parcel on Hengqin Island, a strategic move for long-term growth.
• Grand Waldo's renovation plan will be unveiled in mid-2014, but it is not expected to negatively impact Galaxy's growth thesis.

Investment Outlook

• The analyst maintains a HOLD rating due to the company's current valuation being considered demanding.
• The report suggests that MPEL is a more attractive option due to its lower valuation (15.4x EV/EBITDA) and better yield (~2%).
• The dividend payout may dampen investor sentiment in the short term, but the company's growth story remains strong.

Key Assumptions and Financials

Revenue and EBITDA Projections

• Turnover is expected to grow from HK$56,746m in 2012A to HK$75,759m in 2014F and HK$85,749m in 2015F.
• EBITDA is projected to increase from HK$9,847m in 2012A to HK$15,469m in 2014F and HK$18,567m in 2015F.

Balance Sheet and Cash Flow

• Net Profit is expected to rise from HK$7,378m in 2013A to HK$12,920m in 2014F and HK$15,787m in 2015F.
• Net Cash/Debt is at HK$16,720m in 2014F, indicating strong liquidity.
• Capital Expenditure is a key factor in the company's growth, with significant investments in new developments.

Summary of Analyst Recommendations

• Target Price has been adjusted to HK$72.00, down from HK$73.00.
• Rating is HOLD, as the company's valuation is seen as high compared to its peers.
• The report emphasizes the company's strong growth potential, but also notes the high valuation and potential for short-term sentiment dampening due to dividend payouts.

Key Figures

• Issued Capital: 4,228 million shares
• Market Cap: HK$304,433m / US$39,196m
• Major Shareholders: Lui Che Woo & Family (50.5%), Waddell & Reed Financial, Inc. (7.0%)
• Free Float: 42.5%
• Average Daily Volume: 13,203 thousand shares
• Net Profit (FY14F): HK$12,920m
• EPS (FY14F): HK$3.08
• EPS Growth: 28.5% in FY14F

Conclusion

Galaxy Entertainment Group is a strong performer in the Macau casino and entertainment sector, with a robust development pipeline and significant revenue growth. However, the current valuation is seen as high, and the company's dividend payout may affect short-term investor sentiment. The analyst recommends a HOLD due to the current valuation and the potential for market share gains and long-term growth in Hengqin Island.