With Covid-19 restricting tourists flow, the gaming industry in Macau was dealt a heavy blow. Gross gaming revenue slumped 97% in April 2020 to US$95 million as operations were significantly downsized because of the lack of punters.
However, as China controlled the spread of Covid-19 well, travel restrictions will eventually be lifted and customers should return to Macau again.
Galaxy Entertainment Group Limited (HKG: 0027), could be one gaming company that is well-positioned to take advantage of the future recovery of the Macau gaming market. Let’s take a closer look at its businesses, latest earnings, historical financials, and competitive strengths.
Galaxy Entertainment is a leading hospitality and gaming company that develops and operates integrated resorts featuring retail, dining, entertainment, and gaming facilities in Macau.
Galaxy owns three flagship properties in Macau. Among them the Galaxy Macau, one of the world’s largest integrated resorts. It comprises five renowned hotels such as The Ritz-Carlton and JW Marriot with 3,600 rooms, and a huge retail space of 100,000 square meters.
Other assets include the Starworld Macau, the group’s first five-star hotel located on the Macau Peninsula, and Broadway Macau, a family-friendly resort with a 2,500 seat Broadway Theatre.
The Galaxy Macau is the largest revenue contributor of Galaxy with 72% of the total revenue in 2019. 21% of total revenue in the financial year 2019 was generated from Starworld Macau
The group is one of the only two gaming companies featured in the Hang Seng Index. As of 14 July, its market capitalisation is HK$233.9 billion.
The Galaxy Macau. Source: Annual Report 2019
The Covid-19 pandemic went into full swing in the first quarter of 2020, significantly impacting tourists’ arrival and gaming revenue in Macau.
Galaxy net revenue fell 61% year-on-year to HK$5.1 billion. Galaxy Macau and Starworld Macau, the two primary revenue contributors, saw their sales dropping 62% and 66% respectively. The fall in gaming revenue by a similar percentage led to the plunge in overall revenue.
Adjusted earnings decreased by 93% year-on-year to HK$283 million.
Galaxy’s overall revenue breakdown. Source: 1Q 2020 Results Presentation
Earnings in the past five financial years showed that Galaxy had been increasing its revenue and shareholders’ earnings up till 2018, with a minimal fall in 2019. The group’s revenue grew at a compounded rate of 7.8% in the said period, while the profit attributable to shareholders expanded by an impressive 33.1% per year.
The sound financial growth shows up in the rising value of shareholder stakes in the group, as its net asset per share rose consistently from HK$9.65 to HK$16.98.
Galaxy’s five-year financial summary. Source: 2019 Annual Report
Cash Flow Trend
The group’s net operating cash flow has grown from HK$6.6 billion in 2015 to HK$19 billion last year, a compounded annual growth of 30.1%. Note that the rate of growth in cash flow is very close to the increase in shareholders’ earnings (33.1%) shared earlier. This means that indicating that Galaxy runs a healthy business that produces actual cash that matches the growth in earnings.
Source: Self-Compiled from Annual Reports
Galaxy has been able to maintain a healthy balance sheet in the past five years. Its long-term borrowings had decreased substantially from HK$671 million to HK$8.93 million last year, while shareholders’ equity rose consistently from HK$41.1 billion to HK$73.5 billion over the same period.
As a result, the group has a negligible long-term debt to equity ratio.
In fact, as of March 2020, Galaxy has net cash of HK$47.5 billion on its balance sheet. This gives the group strong capital strength to survive the Covid-19 downturn.
Dividends Track Record
With increasing topline and bottom line, Galaxy has also been generous in dishing out dividends to shareholders. Its dividend per share increased from HK$42 cents to HK$91 cents over the five years.
Strengths and Opportunities
Macau is the largest casino hub in the world, with gross gaming revenue of about $36.5 billion in 2019. Its status as the only city in China where gambling is allowed would continue to attract customers from the growing middle class. This provides a backdrop of a stable market which is a boon to Galaxy.
While revenue is inevitably hit by the Covid-19 outbreak, China is keeping the pandemic well under control. Macau has recently lifted the 14-day quarantine requirement for incoming travellers from nearby Guangdong province. This could signify the start of the recovery of China’s domestic tourism hence bringing in higher gaming revenue for Galaxy in the coming quarters.
Galaxy has a clear expansion plan that rides on its undeveloped land bank in Macau, the largest among its competitors. Its Cotai development will double its resort footprint to more than 2 million square meters, while a lifestyle leisure resort on a 2.7 square kilometres land parcel on Hengqin island adjacent to Macau would further cement its status as a world-class resort company.
One major weakness of the Galaxy group is its business’s almost complete dependency on tourist arrival. With Macau’s small population of less than 700 thousand, Galaxy’s casinos rely on high rollers mainly from China Mainland to generate revenue. A health crisis like the current pandemic or un-expected event such as President Xi’s anti-corruption drive on government officials a few years ago would affect Galaxy’s earnings significantly.
With a closing share price of HK$54.80 as of 17 July, Galaxy is trading at a price-earnings ratio of 18.2 with a market capitalisation HK$237 billion.
The company operates in the tourism industry that is very sensitive to government regulations, tourist numbers, and international geopolitics.
However, its strength lies in its strong capital strength and gaming license that rides on Macau’s status as the world’s largest gaming hub.
Currently, Galaxy is pursuing the highly-coveted Japan gaming license which will give them access to the lucrative Japanese market. However, stakes are high as there are many strong competitors.
For an investor who would want exposure to the Macau gaming industry through an established company with blue-chip stock status, Galaxy might be a suitable investment.