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Galaxy Entertainment Summary

Core Content

Galaxy Entertainment is a leading player in the casino and entertainment industry, operating in the Travel & Leisure sector. The report highlights the company's performance and valuation based on financial data from FY Dec and forecasts for 2013 to 2015. The company's stock is listed on the Hong Kong Exchange (0027.HK), and the report provides an updated target price and investment recommendation.

Key Financial Highlights

• Price Target: HK$64.10 (upgraded from HK$60.60)
• Recommendation: BUY
• Earnings Growth:
  • 2013F: 29.9%
  • 2014F: 30.2%
  • 2015F: 22.0%
• EBITDA Growth:
  • 2013F: 26.6%
  • 2014F: 21.7%
  • 2015F: 16.6%
• Net Profit Growth:
  • 2013F: 29.9%
  • 2014F: 30.2%
  • 2015F: 22.0%
• Gaming Revenue:
  • 2013F: HK$62,484 million
  • 2014F: HK$70,869 million
  • 2015F: HK$80,257 million
• Total Revenue:
  • 2013F: HK$64,739 million
  • 2014F: HK$73,350 million
  • 2015F: HK$82,986 million
• EBITDA:
  • 2013F: HK$12,466 million
  • 2014F: HK$15,165 million
  • 2015F: HK$17,682 million
• Earnings Per Share (EPS):
  • 2013F: HK$2.97
  • 2014F: HK$3.62
• Dividend Yield: 0% (no dividends paid)
• Market Cap: HK$242,124 million (US$31,235 million)
• Issued Capital: 4,218 million shares
• Free Float: 27.3%

Key Performance Drivers

• 3Q13 Earnings: 3% above consensus, with Galaxy Macau and StarWorld performing well.
• StarWorld Performance:
  • Adjusted EBITDA: HK$3.2 billion (+24% y-o-y, +7% q-o-q)
  • Mass gaming revenue increased by 64% y-o-y and 18% q-o-q
  • EBITDA margin improved to 16.1% despite a decline in VIP performance
• Galaxy Macau Performance:
  • VIP revenue grew by 13% y-o-y and 9% q-o-q
  • Mass revenue increased by 45% y-o-y and 8% q-o-q
  • Slots revenue rose by 28% y-o-y and 5% q-o-q
  • Gaming margin rose to 20.8% (up from 20.1% in 2Q13)
• Expansion:
  • Galaxy Macau Phase II: 50% of the first tower expected to be completed by year-end
  • StarWorld is expected to open more VIP rooms next year

Valuation Metrics

• EV/EBITDA:
  • 2014F: 14.7x (vs Cotai average of 15.0x and Sands at 15.8x)
• P/Book Value:
  • 2014F: 5.5x (vs 2013F: 19.3x)
• P/Free Cash Flow:
  • 2014F: 38.3x (vs 2013F: 31.8x)
• Sum-of-the-Parts Valuation:
  • Galaxy Macau: HK$174,538 million (41.56 per share)
  • StarWorld: HK$36,464 million (8.68 per share)
  • City Clubs: HK$1,886 million (0.45 per share)
  • Total Enterprise Value: HK$269,028 million (64.06 per share)
• Net Cash/(Debt):
  • 2014F: HK$18,644 million (4.44 per share)
• Total Shareholders' Value:
  • HK$250,384 million (59.62 per share)

Key Assumptions and Growth Projections

• GGR Growth:
  • FY Dec: 118.2%
  • 2011A: 38.1%
  • 2012A: 13.4%
  • 2013F: 13.7%
  • 2014F: 13.5%
• Rolling Chip Growth:
  • FY Dec: 93.9%
  • 2011A: 27.4%
  • 2012A: 3.6%
  • 2013F: 7.5%
  • 2014F: 7.5%
• Non-Rolling Chip Growth:
  • FY Dec: 139.9%
  • 2011A: 50.0%
  • 2012A: 13.5%
  • 2013F: 34.4%
  • 2014F: 27.8%

Investment Recommendation

• Reason for Report: Galaxy conference call update and target price upgrade
• Potential Catalyst: Market share gain ahead of expectations
• SOTP-Based TP: Raised to HK$64.10/share after earnings revisions
• Comparison with Sands:
  • Galaxy: 14.7x EV/EBITDA
  • Sands: 15.8x EV/EBITDA
  • Sands has a better growth profile with a two-year EBITDA CAGR of 35% vs Galaxy's 23%
• Recommendation: Reiterate BUY, but Sands has higher upside potential

Company Focus

• Segmental Breakdown:
  • Gaming and Entertainment: 2013F: HK$62,484 million (3Q13: HK$3,742 million)
  • Construction Materials: 2013F: HK$2,255 million (3Q13: HK$645 million)
• EBITDA Margins:
  • Gaming and Entertainment: 20.0% (2013F)
  • Construction Materials: 22.4%
  • Total: 19.3%
• ROAE:
  • 2013F: 36.0%
  • 2014F: 33.1%
  • 2015F: 29.5%

Summary of Key Points

• Galaxy Entertainment continues to outperform expectations with strong earnings growth and improved EBITDA margins.
• StarWorld is a surprise outperformer, particularly in the mass market segment.
• Galaxy Macau is expected to hit a US$1 billion EBITDA milestone in 2013.
• The company's expansion plans, particularly for Galaxy Macau Phase II, are expected to drive future growth.
• Galaxy trades at a lower EV/EBITDA multiple compared to Sands, which has a better growth profile.
• The report recommends maintaining a BUY rating, with an upgraded target price of HK$64.10/share.

Conclusion

Galaxy Entertainment is a strong performer in the casino and entertainment sector, with solid earnings growth and efficient floor space management. The company's focus on mass market expansion and its progress in the VIP segment have contributed to its strong financial performance. While Sands offers better growth potential, Galaxy remains a good investment with a target price of HK$64.10/share. The report recommends maintaining a BUY rating for Galaxy Entertainment.