Galaxy earnings were out on cue, and I would have been accurate for earnings save for their write-down of the value of convertible bonds. C’est la vie, no point in dwelling further on this when I did the analysis more than 5 months ago and got the average number of forecasts that Bloomberg compiled from analyststhis week.
What is interesting however is that there are now a few further developments that they’re talking more closely about:
- Retained dividend on the year, for mostly regulatory purposes but also a willingness to reinvest the earnings into expansion.
- Galaxy underperformed expectations and Star World outperformed!
- Expansion phases and new VIP and Premium Mass is coming online soon in both the casino, entertainment and dining areas.
Point 1 is pretty much self explanatory and lends itself really well to normal equity investing. No dividend, so you’re out on the price projection curve alone, and some dividend seekers are abandoning the stock, but growth hunters are instead rotating in. Is there a reason so far to abandon the Chinese high-end consumer growth story? Looking to indications of easing policy working its way through the Chinese stock markets, things are looking bright for the ultra-rich!
Star World mass market expansion explained:
Number 2 is a little bit more peculiar, and the increased mass market flow that was reported on this end just seems really weird… until you consider the following: Galaxy Entertainment is the only casino operator that has one attractively located major property on both the Cotai Strip and downtown Macau. While Venetian is the star and centre of Cotai, Sands Macau is walking distance from the Ferry, but you need to take a cab to get anywhere else from there. SJM has a few satellite casinos spread out pretty much everywhere, but not really well placed on the Cotai Strip. Wynn? Downtown only. MGM? Downtown only. Melco? Cotai only.
Star world is arguably on “the edge” of the casino district in Macau downtown, meaning that you can pretty much only walk eastwards if you want to gamble elsewhere (Jimei and Sands are out west by cab, a bunch of smaller ones are hidden around the blocks directly north) but east you do find Wynn, the Lisboas, and MGM. Galaxy on the other hand is located on the “wrong side” of the Venetian/City Of Dreams crossing, so it means a fairly long walk around the area if you want to go down for most CoD entertainment, although hopefully they amend that fairly soon.
Thus, what’s the most convenient way to get from Cotai to Macau Casinos with high frequency? Galaxy-Star World bus link! Can’t believe I didn’t think of this before given how much I’ve used it. It does explain the mass-market appeal of Star World, which isn’t a bad gambling den after all, and with increased throughput comes increased revenue on the mass-market side!
Expansions and revenue projections for 2012:
For the third point, I guess the major question here is the speed of expansion and also success of their recent VIP initiatives, since this table revenue carryover from Star World was even more disappointing than my generous discounts that I gave 5 months ago, and the profit margin went up slightly less than I expected, clicking in at 7.3% rather than the forecast discount-adjusted 10%. Discounts should be gone in 2012, thus adding another roughly 2% to profit margin, and we’re talking a full year of Galaxy Macau operations, those factors alone contributing to a doubling of 2012 profit relative 2012. Add in market growth of 15-20% and you get a flat expectation of HK$7-7.2 bn for 2012 profit on the group.
Of course, we have the late openings of the extra casino and entertainment areas that are almost entirely attributable to FY 2012. Using the number of 30-50 new VIP tables that have been added as of late, that alone should add 10% of revenue on a linear basis if not more, and on top of this the cinema complex will likely add bad-weather day attractiveness to the fully integrated resort. Thus, I increase my forecast for 2012 earnings from HK$7.5 bn to HK$8.4 to 8.8 bn range on the given data out so far. The company has very thankfully outlined the new broadening of the immigration gates factor, and other increased infrastructure projects in the Pearl River Delta are making me increasingly bullish on the long-term prospects of the property, despite the opening of Sands Cotai City. For example, when both the high-speed rail links and the bridge to Zhuhai and Hong Kong will open in 2015-16, it’s highly likely that the only company that has managed to do further worthwhile expansion in Macau beyond Sands will be Galaxy Entertainment.
Yes, I know that a 2 P/S number is pushing the envelope slightly, and that there are other reasons to consider the valuation slightly frothy, but the increased financial well-being of the company reflected in current- and quick ratios pushing above 0.9, given the relative run-down of debt after the income streams of Galaxy Macau came online.
Broker upgrades comments:
Take the Bloomberg earnings estimates with a pinch of salt. Yes, Galaxy fell 3% short of the median estimate, mainly on the write-down on convertible bonds. But what is surprising is that all the brokers went out and raised the target price, following the earnings announcement this week. If this was truly a median estimate, and there were dissenters from this view, unless the conference calls included many positive surprises, wouldn’t there be any brokers lowering their target prices? Strange indeed, is it just that no-one wants to run into a raging bull market and be caught short? Even Deutsche Bank were out raising their forecasts from HK$ 25 to 25.7 after the conference calls.
Upped profit forecast to average estimate of HK$8.6 bn. for 2012, expecting outperformance at Galaxy rather than Star World, and seeing potential upside revisions to the forecast, although current P/E (27.6) and P/S (2) ratios are slightly optimistic if one does not look at the company growth prospects. My final year fair price range is in the HK$30-35 area, reflecting a very roughly 2 P/S and 22 P/E ratios on 2012 numbers, as the relative pace of Galaxy’s expansion and the visitor inflows will both slow during 2013-14 and likely re-accelerate during 2015-2016.
Note: Adjusted numbers to account for more accurate data on added VIP tables.