Galaxy Entertainment Group (GEG), wholly owns Galaxy Casino S. A. , a gaming concessionaire that received a gaming concession from the Macau SAR government from 2002 to 2022. As of today, GEG owns and operates StarWorld Hotel and City Club Casinos in Macau. GEG is developing an integrated leisure and entertainment resorts in Cotai – Galaxy Macau. Opened on May 2011. GEG (0027.
HK) was listed on the main board of Hong Kong Stock Exchange in 1991. GEG’s management has delivered outstanding results in the past and has demonstrated impressive strategic moves at critical moments. GEG make more independent decisions for the long-term benefit of the company and shareholders. GEG obtained the approval for the largest contiguous land bank in Macau for gaming. And the capacity expansion has been typically accomplished by borrowings, without diluting shareholders returns. Their willingness to take risk and add capacity paid off, with exponential growth in shareholder’s equity.
GEG’s conservation of resources has proved its long-term oriented strategy, which we see is an important asset for GEG’s further outperformance Financial Ratios with Industry Comparison Sands China and SJM’s Holdings are the good industry comparison for GEG as they are the top three operators with combined market share of 61 percent the whole Macao gaming industry. In 2011 the market leader was SJM Holdings with a 29 percent share and GEG and Sands China both have 16 percent respectively.
There are key similarities among all three operators. Location – Sands China and GEG with casinos operating on Cotai Strip currently with landbank ? Market Share – Mass market revenue and VIP market share in 2011 ? VIP market – SJM’s 28%; GEG’s 18%; Sands China’s 12%, VIP market is a main revenue drive in Macau gaming sector which is equivalent to 73% of Macau Gross Gaming Revenue according to DICJ 2011 data (See Chart A) ? Mass market – SJM’s 36%; GEG’s 10%; Sands China’s 25%, it considers a market segment with highest profit margin as it eliminates junket commission ?
Target Customers – Both SJM’s and GEG’s are Chinese-based company, owners and operators are in Greater China and their target customers are focused on China and Asian market The selected key ratios for evaluating the financial performances are based on the uniqueness of gaming industry and the accounting figures for ratio analysis are based on the result of GEG’s Annual Report 2009-2011, SJM’s and Sands China’s Annual Report 2011with calculations listed in Table 1: Current ratio measures the company short term liquidity and the ability of a firm to meet its short terms obligations as they incur.
Calculating quick ratio is less essential as inventory plays a less important role in gaming industry and the inventory amount in the balance sheet is relatively small. Generally the outcomes for current ratio are close to the quick ratio in Macau gaming industry and it is a common practice to focus on the current ratio solely for liquidity measure. Leverage is always one of the main concerns for investors, to see the correlation between the portion of financing items with company assets and shareholders’ fund.
Several leverage ratios were used such as debt to equity ratio, gearing ratio and debt to assets ratio and assets to equity ratios to measure the company’s overall financial risk. These ratios let investors to see how much GEG relies on financing relative to stockholders’ equity, its assets or creditor’s fund. Gaming industrial practice is more emphasized on the net debt to equity ratio for analysis the total borrowings of the company relative to shareholders’ equity as casino operators need financing to support its massive future development plans.
Investors also focused on the level of earnings of a company and the operating efficiency. Return on equity measures rate of return on stockholder’s investment and it is a crucial ratio for investors as it relates to net earnings and stockholder’s equity. Return on total assets measures overall efficiency of a firm in managing investment in assets and generating profits. Operating profit margin measures overall operating efficiency and operating expenses of the company.
Net profit margin measures profit generated after expenses and revenue. Accounts receivable turnover tells how many time receivables are collected during a year on average. The trade debtors are mainly from construction material and advances to gaming counterparties, these advances are granted based on credit references, credit history and business volumes. VIP sales are mostly based on credit sales which is a core revenue driver for GEG. These profitability ratios are all relevant to investors for profitability measure of a company.
In addition, investors concern about the dividend payout ratio, a company with high payout ratio not only attracts investors but the consistency of dividend distributions show financial stability with strong net cash position. EBITDA margin measures the company’s profitability by comparing its revenue with earning. EBITDA can look at the core profitability as the earnings excludes, interest tax, depreciation and amortization. The common stock shareholders concern the returns for each share owned, therefore, earnings per share ratio is significant to investors. Share Price Analysis
Source: etnet. com. hk(Graph A) Source: etnet. com. hk(Graph B) GEG was listed in Hong Kong Stock Exchange since 2005 through K. Wah Construction Materials. GEG’ share price has been in an upward trend with the stunning success of StarWorld which was opened in October 2006 (refer to Graph A) and share price was HKD$6. 8 on 2 Oct, 2006. GEG’s performance was remarkable due to the good result of the gaming industry, in 2008 GEG’s performance was hit by subsequent incidents; the increment of commission to junket to remain competitive caused reducing profit margin in gaming.
In May 2008 China Central Government suddenly had put a travel restriction for China visitors to Macau to slow the rate of growth in Macau gaming industry. The Central Government believed a moderate rate of growth would be healthier for Macau economy in a long run. In the third quarter of 2008, the global financial crisis affected gaming industry severely, visitors to Macau were sharply dropped by 4 million in a year and it was the first reduction since the liberalization of gaming industry in 2002.
The 0027GEG’s share price was dropped to HKD $0. 53 on 28 Oct, 2008 (see Graph A). To cope with the global financial crisis, GEG had made a strategic decision to slow down the pace of Cotai development until there is a sign for economic condition improvement. In the mean time the group had to minimize the operating costs by asking employees to take short term no pay leaves, laid off some expats to accommodate the decelerated demand.
In the first half of 2009, Macau gaming market had overcome the difficulties and the economy indicated a sign of increasing visitor arrivals and customer spend combined with the outstanding performance of VIP’s segment of StarWorld. In the same year Macau government had fixed a commission cap for commission payable on rolling VIP chips to encourage a fair playing field in the gaming market and GEG had officially announced the timeline resumed of the Cotai project – Galaxy Macau.
Galaxy Macau commenced operation in 15 May 2011 (Share price was HKD$13. 4 on 13 May, 2011) and it is considered as one of Asia’s leading gaming companies. Share price had fluctuated from time to time in 2011from the impact of Euro Zone debt crisis until Sept 2012 European Central Bank had announced a series of financial support to ease the fears of a sovereign debt crisis and Global stock market became less volatile. Current price per share on 11 January, 2013 was closing at HKD$32. 05 with PE ratio of 44. 02 (see Graph B) which is relatively high PE ratio compared to the industry. Financial Ratios Analysis
Profitability – In 2011 GEG reported a year on year revenue was HK$41 billion with a strong growth of 114% more than doubled compare to 2010 revenue’s HK$19 billion, operating profit margin, net profit margins, returns on equity and EBITDA margin showed improve in profitability and efficiency tremendously.
The robust result was mainly from the opening of Phase 1 of Galaxy Macau in Cotai Strip which was in operation for seven and a half months since May 2011, it boosted up revenue by 114 percent for the GEG group (2010 – 18 billion vs. 2011- 39 billion). All Galaxy Macau business egments performed exceptional well, the revenue in the period was $16. 4 billion since the opening of Galaxy Macau and it was particularly strong in VIP market with turnover of $380 billion.
Accounts receivable turnover ratio shows positive, adjusted EBITDA was up by 158 percent for the entire group, large contribution from the gaming and entertainment segment with an increase up by 174 percent year on year. Net profit attributable to shareholders in 2011 was $3. 003 billion with 234. 342% changed over the prior year. Return on equity ratio was 21. 12% compare with 9. 7 % in 2010 indicated the outstanding financial performance in 2011.
Return on assets ratios showed positive result, 2010 was 3. 57% and 2011 was increased to 8. 4%. GEG’s overall efficiency in managing its assets to generate its net profit has improved. Operating profit margin ratios was jumped from 4. 248% in 2010 to 7. 020% with similar results as in net profit margin ratios. GEG’s drastic increased in profitability due to the management prudent cost controls combined with substantial growth in revenue with the good result of Galaxy Macau commenced operation.
Leverage & Other Key Ratios – Financials is solid with HK$7. billion cash on hand as of ending 2011, a decelerating gearing ratio dropped from 25% to 19% over the year and the total net debt to equity ratio was dropped simultaneously. Accounts receivable turnover had improved year-on-year. These are all the good indicators to show the GEG’s capital structure has improved. Dividend payout ratio is zero compare to other competitors’ dividend payout ratio is 53% for Sands China’s and 75% for SJM’s look less attractive, however GEG’s intension is to reserve its retained earnings and cash positions to invest Galaxy Macau Phase II which expected to be completed in mid-2015.
Funding of Phase 2 planned to invest about HK$ 16 billion and GEG’ management will not consider equity financing, it will through existing cash on hands, debt financing and cash generated from operations. By doing so, cost of equity will be reduced and in result in higher valuation. According to GEG’s Interim Report 2012, cash on hand is HK $ 11 billion with total group revenue up by 107% (HK$ 28 billion) compare to H1 2011’s, GEG’s substantial strong growth with prudent liquidity management deliver a positive message to investors . Debt to assets ratio consider as healthy as it is close to 1.
Current ratio is slightly less than one but the ratio has been improving gradually year-on-year. Current ratio is less than 1 is quite normal for company in an expanding stage with ongoing construction projects. Basic earnings per share look favorable in 2011 with HK$ cent 72. 8 per share and expect to maintain at a high level throughout the year in 2012 as Galaxy Macau will be in full year operations and the result of the year of H1 2012, earnings per share is HK$ cent 82. 5. The upward trend of earnings per share ratio proved sustainable earnings growth. Macau Gaming Market Analysis
From a macro’s economic perspective, there is a high correlation between China’s GDP and Macau’s gross gaming revenue due to the majority of the visitors are from mainland (see Graph E),there is a foreseeable up trend for visitors arrival based on listed reasons: Zhuhai light rail operates in 31 Dec 2012 to further improve the accessibility to Macau from Guangdong cities. Extend opening hours of Hengqin Border Gate, Hengqin Island development, Hong Kong -Zhuhai- Macau Bridge ? With China Central Government target annual GDP growth of approximately 7. 5%.
China‘s average income per capita has increased year-on-year, it may have a positive impact on gaming spend per visitor. Mainland visitors increased by 22% year-on-year to 16. 2 million according to Macau Statistics and Census Service). 2011 total visitors arrivals was 28 million. ?The appreciation of RMB will attract more visitation from China GEG’s Outlook Robust result for Galaxy Entertainment Group in 2011 and there are indications to show the substantial growth for the upcoming periods. ?Continuous improvement of GEG’s 2012 result as Galaxy Macau is in full year (12 month) operation.
Galaxy Macau has location advantage, Cotai Strip has become a core destination for visitors, opening of Sands Cotai Central create traffic for both properties ? Expect growth in gaming due to VIP’s segment growth, accelerating growth in mass market and premium mass market due to increase of visitations and raising average minimum bet will increase the mass table yield ? GEG’s expands the mass market as it is not as cyclical as VIP’s segment and mass market would have less rely on economic impact. Growth in hotel rooms with occupancy rate reached to approximately 90% shows a strong demand in rooms.
Opening of Phase 2 in mid of 2015, Phase 3 starts construction end of 2013 or early 2014 which contains non-gaming elements, it will double its current size after completion of Phase 2 with luxury hotels and retail outlet. Phase 3 & 4 consists of entertainment and MICE elements. Risks GEG’s facing other risk factors that will affect its share price with different levels of impact for GEG’s performance ? VIP margin may hurt if competition increased. Slower in China economy growth may slow discretionary demand.
China visitors entry control. Gaming tables controls by Macau Government Smoking ban impact may some impact but minimal ?Shortage of labor to deal with the labor demand with unemployment rate of 1. 9% at the end of 2012 Source: DICJ 2011 (Graph D) Graph E Recommendation Due to the existing information for this assignment, our recommendation is based on the above financial ratios outcome, market analysis and other external and internal risk factors that may affect the GEG’s future share price. In addition, we also considered the analysis of investment analysts from the reputable investment firms such as J. P Morgan, Deutsche bank, Capital Care and SVG Capital Investment.
GEG’s management had the advantage in understanding the market needs; its effective marketing strategy strengthen the growth of VIP segment together with the surging growth of the mass market can generate a high EBITDA margin and market share for the group in future. The group future outlook looks optimistic based on the sustainable result in 2009-2011 and we strongly believed that the forecast EBITDA margin of the upcoming periods is optimistic with a strong growth based on the indicators that the economic condition maintains stable with annual growth of 7. % in China as China has a directly impact with the Macau gaming industry with existing hotel rooms occupancy rate.
In relation to the growth of visitors arrival with the infrastructure development, the Macau tourism market outlook stays positive combined with GEG’s prudent cost control and future development plan of Phase 2, 3 & 4 which provide confidence to investors for future growth. GEG’s did not pay dividend in the past, if investors are looking for a short term investment of duration 1-2 years, the dividend payout amount is normally one of the key concerns and its attractiveness will be diminished.
However if the investors are looking for a longer term investment, we agreed GEG’s not to pay dividend and maintain its existing prudent cost control strategy, reduce loan funding to reserve liquidity for future re-investment, it will be beneficial for the group’s balance in a long run and it is a stock that we recommended investors to buy as a mid-long term investment. Target price in 2013 is HK$ 40- HK$ 43.
