The bottom line: Galaxy Entertainment’s profits rose more than 50% to nearly HK$4.4 billion in the first half of the year, as the company and its peers benefit from a post-pandemic gaming industry recovery, though the pace of that recovery has slowed.
By Lau Chi-Hung
The recovery of Macau’s gambling industry has provided something of a bonanza for the region’s casino operators, but the fortunes are quickly dwindling as the recovery slows.One of the latest companies to benefit from the recovery is Galaxy Entertainment Group (0027.HK), one of the major casino operators, which has reported strong double-digit growth in sales and profits for the first half of the year.
Visitor numbers to the former Portuguese colony reached 16.72 million in the first half of the year, up about 44 percent from a year ago, according to government data, while occupancy rates in the hotel sector rose 6.1 percentage points to 84 percent. Gaming revenue also surged to 132 billion patacas ($16.4 billion) in the first seven months of the year, up about 37 percent from a year ago.
As the recovery continues, Galaxy reported revenues for the first half of the year rose 37% year-on-year to HK$21.5 billion ($2.76 billion). Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) also increased 37% to HK$6 billion, while profits jumped another 52% to HK$4.4 billion. Gaming revenues remain the company’s biggest earner, growing 45% year-on-year to nearly HK$20 billion. Hotel and shopping centre revenues increased 34.5% to HK$3.09 billion.
New developments are underway
Galaxy Entertainment is renovating some of its older Macau resorts and also has one big new project in the works: Its StarWorld hotel is undergoing a series of renovations, and Capella at Galaxy Macau is undergoing a makeover that will offer 100 sky villas and suites when it reopens next year.
The company is also moving full stream on the fourth phase of Galaxy Macau, which will total approximately 600,000 square meters when complete and will house several hotel brands. The project will also include a 5,000-seat theatre, a range of dining and retail services, and non-gaming amenities such as a water park and entertainment park. Completion is currently scheduled for 2027.
Galaxy’s performance is broadly in line with the recovery of Macau’s gaming industry following the pandemic. While all casino operators are affected by industry revenue trends, Galaxy, as the industry profit leader, is almost perfectly in sync with the overall trend. Reflecting this, the company’s revenue growth rate of 37% in the first half of the year is in line with Macau’s overall gaming revenue growth rate for the first seven months of the year. This means that Macau’s future revenue growth trends are a strong indicator for predicting Galaxy’s future performance.
Not reaching previous highs
Following last year’s strong post-pandemic recovery, the Macau government has announced that it expects the city’s gaming revenue to reach MOP216 billion in 2024, up 18% from MOP183 billion last year. Growth in the first seven months of the year was much stronger, but recent month-on-month trends show that the recovery is indeed slowing rapidly.
While sales continue to grow year-over-year each month, the increase has been steadily declining: in February, sales were up 79% year-over-year, but by July, they had fallen to just 11.6%. This trend is expected to continue for the remainder of the year, especially as base effects become more significant in the second half of 2023.
Put simply, growth in the first half of this year was so strong, but that was because the numbers from last year were weak, when China was just emerging from strict pandemic restrictions, but by the second half of last year a recovery was already well underway, meaning that numbers from that period will be harder to beat this year, and growth in the second half of 2024 will pale in comparison to the first half.
Moreover, the city’s new gambling regulations have forced casinos to move away from high-roller gaming rooms, once one of their main cash cows, and instead focus on mass-market businesses. In such a dramatic turn of events, it may be difficult for casinos to return to the golden age before, when annual gambling revenue hit an all-time high of MOP360.7 billion in 2013, or even to the MOP292.5 billion reached in 2019, before the pandemic.
In a media interview earlier this year, Galaxy Vice Chairman Francis Lui gave no clear answer to the question of when Macau’s gambling revenue would return to 2019 levels. He only said that the relative proportions of revenue from high-roller gaming rooms and casino main gaming floors had changed, so everything needed to be viewed in a new perspective. These comments hinted at a new reality: gaming revenue may never return to previous high levels due to the decline of high-roller business.
Mandating increased government spending
Galaxy and its peers are under pressure from the government to further increase new investments while moving forward with new projects already in the planning stages. In their new government license agreements, the six companies agree to increase their total annual investment by an additional 20% between 2023 and 2027 if Macau’s annual gaming revenue exceeds MOP180 billion in any year. Macau’s gaming revenue already exceeded that level last year, at MOP183.1 billion, suggesting the six companies will need to increase their investments this year and possibly in the following four years.
Lui also said Galaxy has been notified by the Macau government this year that it needs to increase its investments, and that the company plans to use some of the new investment to purchase new facilities and upgrade and maintain existing facilities. The additional investment will be made in non-gaming projects that may not generate revenue or profits.
This could lead to increased expenses as the company makes new incremental investments without seeing immediate significant benefits. A request to increase spending by 20% is no small additional burden and would undoubtedly hurt the overall performance of Galaxy and its competitors.
Galaxy’s all-time price-to-earnings ratio, currently at 16.4, has made it a favorite among investors in the sector, just above Sands China’s (1928.HK) 15 times, Wynn Macau’s (1128.HK) 10.5 times and MGM China’s (2282.HK) 9 times.
Most investment banks did not adjust their ratings on the stock after the latest earnings release, but many lowered their target prices given its relatively high valuation and potential concerns about its future prospects. Goldman Sachs lowered its target price to HK$51.90 from HK$52.40, while Macquarie cut its target price to HK$56.80 from HK$57.40. Citic Lyonnais cut its target price by a further 20% to HK$40 from HK$50.20.
This article is an unpaid outside contributor, does not reflect Benzinga reporting, and has not been edited for content or accuracy.
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