Bet On Galaxy Entertainment As A Strong Reopening Macau Play

• Galaxy Entertainment’s rare negative net debt position means continued long term development plans on non-gambling entertainment to be a playground for grown-ups and kids alike, as Macau aims to be more than the “Gambling Capital of the World”.  
• Flagship casino resort Galaxy Macau marked its 10^th anniversary this year with the addition of the legendary Raffles brand to up the ante on luxury.
• The market had made bold bets on Galaxy Entertainment pushing up the stock to over HKD 80 each in February 2021, levels last seen in 2014.

Whether you’re a seasoned gambler or savvy investor, casinos should be a source of interest. Whilst the odds are notoriously stacked against casino patrons, casino stocks offer investors a smarter way to hit the jackpot.

Macau – also dubbed The Vegas Of The East – has 41 casinos and resorts for gamblers to splash their cash and hedge their bets. Typically boasting an exuberant level of luxury, these often-extravagant establishments are most heavily concentrated on Macau’s prestigious Cotai strip. Vegas sister casinos such as The Venetian, MGM and Wynn are located here, collectively forming a gambling haven for the Chinese market. 

However, there’s one ace in the hole that investors should be paying close attention to: Galaxy Entertainment Group (GEG). Sanford C. Bernstein analysts have described the group as the “best-positioned gaming operator to increase market share in post-pandemic recovery.” 

More specifically, GEG’s flagship casino resort Galaxy Macau along the Cotai Strip is of particular interest.

15 May 2021 marked 10 years since Galaxy Macau – with its brand name luxury hotels, an artificial beach, the world’s largest sky top aquatic ride and sky top wave pool, designer boutiques and several Michelin starred restaurants – opened its doors to become the group’s main revenue driver. 

And a decade on, GEG continues to build on its flagship resort to stay relevant. 

Inheriting China’s rapid pace and development speed, Macau is regularly under construction, constantly breathing new life into Cotai Strip.

Similarly, GEG has continued its phase 3 and 4 expansion plans along the Cotai Strip, despite the on-going COVID-19 pandemic that has severely impacted global travel and tourism.

It also operates Broadway Macau, adjoining Galaxy Macau, and StarWorld Macau on the Peninsula.

GEG’s rare negative net debt positions among its peers in Macau provides GEG with “valuable flexibility in managing our ongoing operations and allows us to continue with our longer term development plans”. As at the end of 1Q2021, it had HKD 33.6 billion (USD 4.33 billion) of net cash, while total debt stood at HKD 8.8 billion. 

GEG Has A Trick Up Its Sleeve… And It’s Not Casinos 

GEG’s “strong focus” on developing non-gaming facilities is key to attracting a wider crowd, alongside Macau’s plans to transform into a world class tourist destination and be more than just a gambling den. Vegas is recognised as ‘The Disneyland for Adults’ but Macau is offering a family playground for grown-ups and kids alike. GEG is strongly pushing this narrative.

“The gradual reopening of travel from mainland China emphasizing individual and family tourism benefits Galaxy’s comprehensive non-gaming facilities,” University of Macau economist Ricardo Siu told Forbes. 

Phase 3 and 4 expansion plans have been devoted to building facilities for families and the event industry and will add another 3,000 hotel rooms in all and a brand new convention center. As at FY2020, Galaxy Macau alone has 3,600 rooms, suites and villas.

Phase 3 developments to be introduced from 2Q2021 onwards include the Galaxy International Convention Center (GICC), housing 40,000 square metres of space for MICE, a 16,000-seat Galaxy Arena, a banquet hall for 2,400 guests, and 650-seat auditorium, among others. GICC will also be connected to the over 700-room luxury lifestyle Andaz Hotel.

In March 2021, GEG also revealed a partnership with French hospitality giant Accor to bring Singapore’s legendary Raffles brand to Galaxy Macau by year end as part of Phase 3. Featuring 450 suites, the Raffles brand will add a level of sophistication and refinement to Macau, including a version of the seminal Singapore Sling to be tailored exclusively for Macau.

GEG boasts the largest collection of luxury hotels in Macau. Galaxy Macau is home to Banyan Tree Macau, JW Marriott Hotel Macau, The Ritz-Carlton, Hotel Okura Macau, and its own namesake hotel, in addition to Raffles.

Luckily, China’s appetite for luxury has not been diminished by the COVD-19 pandemic, according to research company Bain & Co,. Wealthy Chinese consumers have simply directed their purchasing power locally, which bodes well for GEG and Macau as a whole.

Macau is a special administrative region of China.

Swiss bank UBS recently upgraded Macau’s casino stocks to a “buy” from “neutral”, citing expected pent-up demand from Chinese travellers when travel re-opens fully. While continued volatility is expected in the short-term, the pandemic will ultimately pass.  

Recovery Will Take Time

As expected, COVID-19 hit 2020 was a washout for GEG. Q4 2020 results revealed a 75% decline in the group’s YoY revenue to HKD 12.9 billion. Macau itself suffered tremendously too. Visitor arrivals to Macau were down 85% year-on-year in 2020. Travel restrictions contributed to a more than 30 million drop in visitors to Macau in the year. 

Q1 2021 results were slightly more encouraging. In line with the broader market recovery, GEG’s revenue for 1Q2021 rose 1% YoY to HKD 5.1 billion, while adjusted EBITDA soared 204% YoY to HKD 859 million.

But, it’s still early days.

“We have seen signs of early recovery…and it may take a few more quarters for business volumes to ramp up,” GEG’s chairman Lui Che Woo said in its 1Q2021 results. “However, we do acknowledge the ongoing difficulties associated with COVID-19 and potential future flare ups of COVID-19 could have a material adverse impact on our financial performance.”

GEG is right to be careful.

It had experienced declining revenues in the years leading up to the pandemic, recording HKD 51 billion in FY2019 down from HKD 62 billion in 2017, in part due to a slowdown in the Macau gaming industry, as an extension of China’s economic slowdown due to increasingly intensifying US-China trade relations at the time. 

Additionally, Galaxy Macau had lost VIP market share, although it still retained the lion share. This was in part due to its closing of two VIP rooms in 2019, reducing its capacity by 8-10%, whilst competitors MGM China and Meclo added new VIP capacity.

Furthermore, on 1 January 2019, Macau introduced a smoking ban in VIP rooms. This blow was felt hard by Galaxy Macau, which had more VIP smoking rooms than its peers. 

That said these are largely industry-wide issues. And just as society has been finding ways to function with COVID-19, GEG has been making adjustments to accommodate for shifting market behaviour. 

Fortune Favours The Bold 

As normality is restored to the wider world, the appetite for both traveling and gambling will also return. And it’s simply a matter of time before Macau is thriving again. 

Already, Macau has seen an increase in visitors from the mainland since the end of 2020 with the easing of travel restrictions in September 2020. It received 794,819 visitors in total in April 2021 compared to 449,085 in September 2020.

Macau’s Gaming Inspection and Coordination Bureau noted gross gaming revenues (GGR) have also increased. Macau recorded GGR of MOP 42.4 billion (USD 530.91 million) for the first 5 months of 2021, up 28.7% from a year ago.  

GEG houses one of the best casino resorts in Asia anecdotally, as well as financially, and its expansion plans guarantee that it will continue to scale in every facet. With the completion of phase 3 and 4, GEG’s footprint along Cotai Strip will double to more than 2 million square meters – about as big as Monaco.

“Looking forward, Galaxy is prime positioned to be a market share gainer with the opening of Galaxy Macau Phase 3 later this year and with the opening of Galaxy Macau Phase 4 in 2024,” Sanford C. Bernstein posted in a research note.

Perhaps that’s why investors have been betting big on GEG, whose stock hit a high of HKD 80.30 each in February 2021, levels unseen since 2014.

GEG was trading at around HKD 65 each at the time of this report. 

Fortune favours the bold.