Macau’s most profitable casino operator reported strong revenue growth in the first half of the year as tourism in the city continued to recover after the pandemic
Key findings:
- Galaxy Entertainment’s profit rose more than 50% to nearly HK$4.4 billion in the first half of the year
- The company and its competitors are benefiting from a post-pandemic recovery in the gaming sector, even if the pace of that recovery is slowing.
By Lau Chi Hang
The boom in gambling in Macau is bringing a jackpot to the enclave’s casino operators, even if profits are declining rapidly as the recovery slows. One of the latest beneficiaries of the boom is Galaxy Entertainment Group Ltd. (0027.HK), one of the top players who reported strong double-digit sales and profit growth in the first half of the year.
According to government data, visitor arrivals to the former Portuguese colony reached 16.72 million in the first half of this year, up nearly 44 percent from a year earlier. Occupancy in the hotel sector rose 6.1 percentage points to 84 percent. Gambling revenues also rose to 132 billion patacas ($16.4 billion) in the first seven months of the year, up nearly 37 percent from a year earlier.
As the recovery continues, Galaxy reported first-half revenue of HK$21.5 billion (US$2.76 billion), up 37 percent year-on-year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose a similar 37 percent to HK$6 billion, while profit rose as much as 52 percent to HK$4.4 billion. Revenue from its gaming business continued to be the company’s biggest revenue generator, rising 45 percent year-on-year to nearly HK$20 billion. Revenue from its hotels and shopping malls rose 34.5 percent to HK$3.09 billion.
New developments are progressing
Galaxy Entertainment is currently modernising some of its older resorts in Macau and is also moving ahead with a major new project. The StarWorld Hotel is currently reviewing a number of upgrades and the Capella at Galaxy Macau is currently undergoing renovations. When it reopens next year, it will feature 100 sky villas and suites.
The company is also working at full speed on Phase IV at Galaxy Macau, which upon completion will have a total area of approximately 600,000 square meters and will house several hotel brands. The project will also include a 5,000-seat theater, a wide range of restaurants and retail services, and non-gaming facilities such as water and amusement parks. Completion is currently scheduled for 2027.
Galaxy’s performance is broadly in line with the post-pandemic recovery of the Macau gaming sector. While all casino operators are affected by the industry’s revenue dynamics, Galaxy, as the industry leader, has almost completely synchronized with the broader trends in terms of profits. This is reflected in the fact that the company’s 37% revenue growth in the first half of the year was in lockstep with the growth in gaming revenues across the city in the first seven months of the year. This means that future revenue growth trends in Macau are a strong indicator of how Galaxy may perform in the future.
Previous highs not reached
Following last year’s major post-pandemic recovery, the Macau government expects gaming revenue in the city to reach 216 billion patacas in 2024, up 18% from last year’s 183 billion patacas. Despite significantly stronger growth in the first seven months of the year, recent month-on-month trends show that the recovery is actually cooling rapidly.
While revenue continues to rise year-on-year each month, the level of profits is steadily declining. In February, the figure rose 79% year-on-year, but in July it fell to just 11.6%. This trend is expected to continue for the rest of the year, especially as the base effect becomes a more important factor for the second half of 2023.
Put simply, growth rates in the first half of this year were quite strong because last year’s figures were weak as China was just emerging from its strict pandemic restrictions at the time. But the recovery was already well underway in the second half of last year. This means that the numbers from that period will be harder to top this year and growth rates in the second half of 2024 will pale in comparison to the first half.
In addition, new gambling regulations in the city have caused casinos to turn away from the high-roller gaming halls that were once one of their biggest sources of money and instead focus on mass business. Given these huge changes in the landscape, returning to the previous golden age when annual gambling revenue reached a historic high of 360.7 billion patacas in 2013 could be a major challenge. Even returning to the 292.5 billion patacas reached in 2019 before the pandemic could be difficult.
In a media interview earlier this year, Galaxy vice-chairman Francis Lui was non-committal when asked when Macau’s gaming revenue would return to 2019 levels. He simply replied that the relative split of revenue between high-roller gaming rooms and the main casino gaming floors had changed, meaning everything had to be looked at from a new perspective. Such remarks pointed to the new reality, namely that gaming revenue may never return to previous highs due to the decline in high-roller business.
Government-mandated spending increase
As Galaxy and its competitors push ahead with new projects already in the pipeline, they are under pressure from the government to increase their investments even further. As part of their new government licensing agreements, the six companies have agreed to increase their total annual investments by a further 20% between 2023 and 2027 if the city’s total annual gaming revenue exceeds 180 billion patacas. Last year, Macau’s gaming revenue was already above that level at 183.1 billion patacas, meaning the six companies will need to increase their investments even further this year and potentially in the four years after that.
Lui also said Galaxy has been informed by the Macau government that it needs to increase its capital expenditure this year. The company plans to make some of its capital expenditure by purchasing new equipment and upgrading and maintaining existing facilities. The additional investment will go towards non-gaming projects that may not generate revenue or returns.
So companies can expect to see increased expenses if they make additional investments without seeing huge gains immediately. Asking them to increase their expenses by 20% is no small additional burden and will definitely hurt the overall performance of Galaxy and its competitors.
Galaxy’s price-to-earnings (P/E) ratio is currently 16.4, making it the investor favorite in its sector. Its multiple is slightly higher than 15 times Sands China (1928.HK) and is ahead of 10.5 times for Wynn Macau (1128.HK) and 9 times for MGM China (2282.HK).
While most investment banks did not adjust their ratings on the stock following the announcement of the latest results, many lowered their price targets, as a sign of the relatively high valuation and possible concerns about the stock’s prospects. Goldman Sachs cut its price target to HK$51.90 from HK$52.40, while Macquarie lowered its price target to HK$56.80 from HK$57.40. Citic Lyon even cut its price target by 20% from HK$50.20 to HK$40.
To subscribe to Bamboo Works’ free weekly newsletter, click Here
