20131107-DBS_Group-Still_a_good_bet_11页_459kb

Galaxy Entertainment Summary

Core Information

• Company: Galaxy Entertainment Group
• Stock Code: 27 HK Equity | 0027.HK
• Sector: Travel & Leisure
• Industry: Consumer Services
• Analyst: LEE Wee Keat CFA
• Contact: +852 2971 1929 | wk_lee@hk.dbsvickers.com
• Report Date: 7 November 2013
• Recommendation: BUY
• Price Target: HK$64.10 (12-Month)
• Previous Price Target: HK$60.60
• Market Capitalization: HK$242,124M / US$31,235M
• Issued Capital: 4,218 million shares
• Free Float: 27.3%
• Average Daily Volume: 11,161 thousand shares

Key Financials (FY Dec)

Key Performance Highlights

• 3Q13 EBITDA: HK$3.2bn (+24% y-o-y, +7% q-o-q), exceeding market consensus.
• StarWorld Performance:
  • Mass gaming revenue grew by 64% y-o-y (+18% q-o-q).
  • EBITDA margin improved to 16.1% (from 15.3% in 2Q13).
  • Despite poor VIP performance, the property outperformed expectations.
• Galaxy Macau (GM):
  • VIP revenue rose 13% y-o-y (+9% q-o-q).
  • Mass revenue increased by 45% y-o-y (+8% q-o-q).
  • Slots revenue grew by 28% y-o-y (+5% q-o-q).
  • All segments showed above-average industry growth.
  • Gaming margin increased to 20.8% (from 20.1% in 2Q13).
• Overall EBITDA Margin: Increased to 19.9% in 3Q13 (from 19.3% in 2Q13).
• VIP Revenue: 10,973 HK$ million in 3Q13, up 8% y-o-y and 2% q-o-q.
• Market Share:
  • VIP: 19.6% in 3Q13 (down 0.8 pts y-o-y, up 0.4 pts q-o-q).
  • Mass: 13.8% in 3Q13 (up 1.1 pts y-o-y, down 0.3 pts q-o-q).
• VIP Hold: 2.66% in 3Q13 (down 0.3 pts from 2Q13).
• Gaming Revenue: 39,612 HK$ million for FY Dec, with a strong growth trajectory.
• 3Q13 Revenue: 16,314 HK$ million (+16% y-o-y, +4% q-o-q).
• Gaming EBITDA: 12,499 HK$ million for FY Dec, showing consistent growth.
• 3Q13 EBITDA: 3,239 HK$ million, exceeding expectations.
• Gaming EBITDA Margin: 20.8% in 3Q13, up from 20.1% in 2Q13.
• Rolling Chip Growth: 360,261 in 3Q13 (+6% q-o-q, +12% y-o-y).
• Construction Materials: Revenue grew to 645 HK$ million in 3Q13 (+12% y-o-y, +9% q-o-y).
• 3Q13 Adjusted EBITDA: 3,239 HK$ million, representing 75% of full-year forecast.

Strategic Insights

• StarWorld Expansion: The property capitalized on its new premium mass area, leading to strong mass revenue growth.
• VIP Segment: While VIP performance was weaker, the overall company performance was driven by mass market and slots.
• Galaxy Macau Phase II: 50% of the first tower is expected to be completed by year-end.
• Earnings Revisions: FY13-14F earnings were raised by 4-6% due to higher VIP volume at GM and stronger mass plays at StarWorld.
• Valuation: Galaxy trades at 14.7x 2014F EV/EBITDA, lower than Cotai average and Sands.
• Sands Comparison: Sands has a better growth profile with a two-year EBITDA CAGR of 35% vs Galaxy’s 23%.
• Recommendation: Reiterate BUY, but suggest switching to Sands for higher upside potential.

Valuation Summary (SOTP)

Key Assumptions

• GGR Growth %: 118.2 (FY Dec), 38.1 (2011A), 13.4 (2013F), 13.7 (2014F), 13.5 (2015F).
• Rolling Chip Growth %: 93.9 (FY Dec), 27.4 (2011A), 3.6 (2013F), 7.5 (2014F), 7.5 (2015F).
• Non-Rolling Chip Growth %: 139.9 (FY Dec), 50.0 (2011A), 13.5 (2013F), 34.4 (2014F), 27.8 (2015F).

Financial Highlights

• EBITDA Growth: 218.1% (FY Dec), 71.3% (2011A), 26.6% (2013F), 21.7% (2014F), 16.6% (2015F).
• Net Profit Growth: 234.3% (FY Dec), 145.6% (2011A), 29.9% (2013F), 30.2% (2014F), 22.0% (2015F).
• ROAE: 25.7% (FY Dec), 40.9% (2012A), 36.0% (2013F), 33.1% (2014F), 29.5% (2015F).
• Gross Margins: 22.0% (FY Dec), 26.0% (2011A), 27.4% (2013F), 29.2% (2014F), 30.8% (2015F).
• Net Profit Margins: 7.3% (FY Dec), 13.0% (2011A), 14.8% (2013F), 17.0% (2014F), 18.3% (2015F).

Balance Sheet Highlights

• Net Fixed Assets: 21,991 HK$ million (FY Dec), up from 22,737 HK$ million (2011A).
• Cash & ST Invts: 7,260 HK$ million (FY Dec), increasing significantly over time.
• Shareholder’s Equity: 14,222 HK$ million (FY Dec), growing to 59,133 HK$ million (2015F).
• Net Debt/Equity: 0.3 (FY Dec), transitioning to CASH in subsequent years.
• Current Ratio: 0.9 (FY Dec), increasing to 2.9 (2015F).
• Quick Ratio: 0.9 (FY Dec), increasing to 2.9 (2015F).
• Capex to Debt: 38.6% (FY Dec), with significant fluctuations in later years.

Cash Flow Statement Highlights

• Net Operating CFPS: 1.00 HK$ (FY Dec), increasing to 4.11 HK$ (2015F).
• Free CFPS: 0.29 HK$ (FY Dec), increasing to 3.13 HK$ (2015F).
• Capital Expenditure: 4,500 HK$ million (FY Dec), with notable changes in subsequent years.
• Net Cash/(Debt): -4,413 HK$ million (FY Dec), turning positive in later years.

Recommendations and Catalysts

• Maintain BUY: Due to strong performance and earnings revisions.
• Potential Catalyst: Market share gains ahead of expectations.
• SOTP-based TP Raised: To HK$64.10, reflecting updated earnings expectations.
• Sands Comparison: Higher upside potential due to better growth profile.

Conclusion

Galaxy Entertainment Group demonstrated strong financial performance in 3Q13, with adjusted EBITDA reaching HK$3.2bn, exceeding market expectations. The company's ability to drive property yield, particularly through its mass market expansion, contributed to overall growth. Despite a softer VIP segment, the company maintained a solid EBITDA margin and revenue growth. The analyst recommends maintaining a BUY rating but suggests considering Sands for better upside potential. The SOTP valuation model supports the price target, indicating that Galaxy remains a good investment opportunity.