Q2 adjusted EBITDA meets expectations
Galaxy Entertainment's Q2 net income in 2021 was HK $5.57 billion (the same below), compared with the same period last year, + 382.7% / month-on-month + 9.2%; mid-field gaming revenue was + 7.4%, returning to 42.6% of the same period in 19 years, slightly outperforming the industry average; the group's adjusted EBITDA was 1.13 billion yuan (month-on-month + 31.8%, year-on-year loss to profit), in line with our expectations (1.17 billion). The adjusted property EBITDA of Macau's gaming-related business was 1.06 billion yuan (+ 15.0%), which has recovered to 25.4% in the same period of 19 years. The recovery rate is much faster than that of the industry, mainly due to: (1) strict cost control; (2) the increase in the share of midfield and other non-gaming revenue. Even though Guangdong tightened immigration controls at the beginning of Q2 this year, resulting in a 37.4% drop in industry gambling revenue in June compared with the previous month, the group still recorded positive EBITDA in a single month.
It is worth mentioning that the group's income from the non-gaming business in Macau has recovered to 62.3% in the same period in 19 years (the industry average is 55.7%), and the mall revenue in Galaxy Macau has reached an all-time high, mainly due to the retaliatory shopping consumption demand of high-end tourists from the mainland. The company has a strong balance sheet, with net cash of HK $31.6 billion as of June 30 and interest income of approximately HK $300000 per day. Galaxy Phase III / IV in Macau, Hengqin Project, Greater Bay area and Japan Comprehensive Resort are all the medium-and long-term development directions of the Group.
Raffles Hotel Galaxy Macau will open in early 2022
Management expects the conference, incentive travel, exhibition and event and entertainment markets to recover after the increase in vaccination rates and the reopening of local checkpoints. The Galaxy Raffles Hotel Macau (with 450 full rooms) will open in early 2022, followed by the Galaxy International Convention Center and the Anders Hotel Macau. The Group also continues to press ahead with the construction of Galaxy Phase IV. Upon completion of the project, the territory and passenger carrying capacity of Galaxy Macau will more than double that of the current one. In the long run, the Group will carry out the renovation of the Broadway Hotel, and the development of Hengqin Land will also bring long-term opportunities.
The epidemic in the mainland has hit the progress of recovery, but it is expected that the relaxation of epidemic prevention restrictions will quickly rebound. The recent epidemic in the mainland and Macao has worsened, which is expected to slow down the gaming revenue of Q3 this year and the progress of recovery since the epidemic. As many as 31 provinces and cities remind residents to "do not leave the province or leave the city unless necessary" or "reduce the number of leaving the province and leaving the city" during the summer vacation. Although the negative nucleic acid test certificate for entry and exit through Yueao Port has been relaxed from 12 hours to 48 hours since August 6, it is not very helpful to stimulate passengers in the short term. Before the vaccination rate is met, the mainland government may be more cautious in relaxing the immigration measures for the future National Day. However, considering the rise of the middle class in the mainland and the demand for outbound travel has been suppressed for more than a year, with reference to the prices of Las Vegas in the United States and Macao this year, it is believed that when epidemic prevention restrictions are relaxed, Macao's demand for gambling, leisure and entertainment will rebound quickly.
Lower the profit forecast, lower the target price to HK $58.05, and maintain the "buy" rating, taking into account the tightening of passenger flow controls as a result of the spread of the epidemic in the mainland and the occurrence of local cases in Macao at the beginning of this month, it is expected that the relaxation of immigration restrictions will also be delayed in the next phase. It is believed that the chances of the mainland relaxing electronic endorsement and customs clearance in Hong Kong and Macao this year are relatively low. We lowered our 21-23 adjusted EBIDTA forecast of 49.3% 25.1% to HK $3.54 billion / 12.18 billion / 18.03 billion, respectively, and lowered the target price from HK $73.55 to HK $58.05, equivalent to 17.5 times EV/EBITDA in 2022, maintaining the "buy" rating.
Risk tips: (1) the risk of the spread of the epidemic; (2) the risk of casino license renewal; and (3) the impact of the economic slowdown on gambling demand.