Key Takeaways:

• Galaxy Entertainment’s profit rose more than 50% in the first half of the year to nearly HK$4.4 billion
• The company and its peers are benefiting from a post-pandemic gaming rebound, though the pace of that rebound is slowing

By Lau Chi Hang

Macau’s gaming rebound is providing a jackpot of sorts for the enclave’s casino operators, though the riches are rapidly tapering off as that recovery slows. One of the latest to profit from the rebound is Galaxy Entertainment Group Ltd. (0027.HK), one of the top players, which has reported strong double-digit revenue and profit growth in the first half of the year.

Government data shows the number of visitor arrivals in the former Portuguese colony reached 16.72 million in the first half of this year, up nearly 44% year-on-year, while the hotel sector’s occupancy rate rose 6.1 percentage points to 84%. Gaming revenue also surged to 132 billion patacas ($16.4 billion) in the first seven months of the year, up nearly 37% from a year earlier.

As the rebound marches on, Galaxy reported revenue of HK$21.5 billion ($2.76 billion) in the first half of the year, up 37% year-on-year. Its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) rose by a similar 37% to HK$6 billion, while its profit jumped by an even bigger 52% to HK$4.4 billion. Gaming revenue continued to be the company’s top breadwinner, rising 45% year-on-year to nearly HK$20 billion. Revenue from its hotels and shopping centers rose 34.5% to HK$3.09 billion.

New developments move ahead

Galaxy Entertainment is in the process of upgrading some of its older resorts in Macau, and is also moving ahead with one major new project. Its StarWorld Hotel is evaluating a series of upgrades, and its Capella at Galaxy Macau is undergoing a renovation that will see it offer 100 sky villas and suites when it reopens next year.

The company is also moving ahead full stream with Phase IV at Galaxy Macau, which will have total area of about 600,000 square meters and host a number of hotel brands on its completion. The project will also feature a 5,000-seat theater, a wide range of restaurants and retail services, as well as non-gaming facilities such as water and entertainment parks. It is currently scheduled for completion is 2027. 

Galaxy’s performance is broadly in line with Macau’s gaming rebound post-pandemic. While all casino operators are affected by the industry’s revenue dynamics, Galaxy, as the industry’s profit leader, has synced almost completely with the overall trends. Reflecting that, the company’s 37% revenue growth for the first half of the year was in lockstep with gaming revenue growth across the city in the first seven months of the year. That means Macau’s future revenue growth trends are a strong predictor of how Galaxy might fare in the future.

Falling short of previous highs

After last year’s big post-pandemic rebound, the Macau government said it expects gaming revenue in the city to reach 216 billion patacas in 2024, up 18% from last year’s 183 billion patacas. Despite the much-stronger growth in the first seven months of the year, recent trends on a monthly basis show the rebound is indeed rapidly cooling. 

While revenue continues to grow each month from a year earlier, the size of the gains has been falling steadily. The figure grew 79% year-on-year in February, but was down to just 11.6% in July. The trend is expected to continue into the remainder of the year, especially as the base effect for the second half of 2023 becomes a more important factor. 

Put simply, growth rates in the first half of this year were quite strong because year-ago figures were weak as China was just emerging from its tough pandemic restrictions at that time. But the recovery was already well underway by the second half of last year. That means that figures from that period will be harder to top this year, and growth rates in the second half of 2024 will pale in comparison with the first half.

What’s more, new gaming regulations in the city have caused casinos to move away from the high-roller gaming rooms that were once one of their major cash cows, and to focus instead on the mass market business. With such a seismic shift in the landscape, returning to the earlier golden age, when annual gaming revenue reached an all-time peak of 360.7 billion patacas in 2013, might be a tall order. Even returning to the 292.5 billion patacas reached in 2019 before the pandemic might be difficult. 

In a media interview at the beginning of the year, Galaxy Vice Chairman Francis Lui was noncommittal in responding to a question on when Macau’s gambling revenue would return to 2019 levels. He replied simply that the relative revenue split between high-roller gaming rooms and casinos’ main gaming floors had changed, meaning that everything needed to be put into new perspective. Such remarks hinted at the new reality, namely that gaming revenue might never return to previous highs with the decline in high-roller business.

Government-mandated spending boost

While Galaxy and its peers move ahead with new projects that were already in their pipeline, they are also being pressured by the government to boost new investment even more. Under their new government license contracts, the six agreed to increase their total annual investment by an additional 20% in any year between 2023 and 2027 when 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, implying the six will need to increase their investment levels this year and possibly over the next four years after that. 

Lui also said that Galaxy was notified by the Macau government of the need to increase its investment this year, and the company planned to make some of its new investment by purchasing new facilities and upgrading and maintaining existing ones. The additional investment will be made on non-gaming projects, which might not generate revenue or produce any returns.

Thus, companies may see their expenses grow as they make new additional investment without reaping immediate big returns. The request to boost their spending by 20% is no small extra burden and will definitely eat into overall performance for Galaxy and its rivals.

Galaxy’s trailing price-to-earnings (P/E) ratio currently stands at 16.4 times, making it the investor favorite in its sector. Its multiple values it slightly higher than the 15 times for Sands China (1928.HK), and is ahead of the 10.5 times for Wynn Macau (1128.HK) and 9 times for MGM China (2282.HK). 

While most investment banks didn’t adjust their ratings for the stock after its latest results announcement, many lowered their target prices, in a nod to its relatively high valuation and potential concerns about its prospects. Goldman Sachs cut its target from HK$52.40 to HK$51.90, while Macquarie lowered its from HK$57.40 to HK $56.80. Citic Lyon cut its target price by an even bigger 20% from HK $50.20 to HK $40.

This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.