2021 Adjusted EBITDA is higher than market expectations

Galaxy Entertainment announced 2021 results: net income reached HK $5.6 billion, an increase of 383% over the same period last year, an increase of 996% over the same period last year. After adjustment, EBITDA made a profit of HK $1.132 billion, turning a profit from the same period of 2Q20, an increase of 32% over the previous month, exceeding the market consensus of HK $1.048 billion. The strong profit is mainly due to 1) EBITDA growth of building materials business 85% month-on-month; 2) revenue from midfield gambling (midfield business + slot machines) increased by 6% month-on-month, driving EBITDA profit margins; 3) revenue from non-gambling business increased by 33% month-on-month. Development trend management said on the performance call that: 1) the company's VIP business continued to shift to the midfield business, and high-end midfield gambling led the overall recovery; 2) the revenue from shopping malls reached a record high and retail revenue increased by more than 20% compared with the same period in 2019. 3) in view of the effective cost-saving measures taken during the epidemic, the company's operating leverage will be improved. 4) the validity period of nucleic acid testing has been extended from 12 hours to 48 hours, and the immigration policy between the Macao Special Administrative region and Guangdong Province has been relaxed; 5) the government is expected to announce the details of the integrated development plan of the Macao Special Administrative region and Hengqin in the near future. The company will focus on potential non-gambling investment opportunities in the Greater Bay area. 6) Macau Raffles Macau is expected to open in early 2022, followed by Galaxy International Convention Center (GICC) and Andaz Macau Macau will also open on a regular basis depending on market conditions; 7) the company continues to keep an eye on investment opportunities in Japan, but says it will not bid for the Yokohama project at this time; 8) the company does not expect to pay a dividend until business operations are clear.

Profit forecast and valuation

We reduced 2021 revenue and adjusted EBITDA by 26 per cent and 37 per cent to HK $23.479 billion and HK $5.137 billion respectively, while 2022 income and adjusted EBITDA fell by 6 per cent and 8 per cent to HK $47.216 billion and HK $15.782 billion respectively, mainly based on the postponement of the opening of Galaxy Phase III to early 2022 and the recent rebound in Macau.

The current share price is HK $49.25, corresponding to the 12x 2022e EV/ adjusted EBITDA, we maintain the outperform industry rating and lower the target price by 14% to HK $66, corresponding to the 15x 2022e EV/ adjusted EBITDA, which has 34% upside compared to the current share price.

Risk

The epidemic situation of COVID-19 has intensified; the adverse change of regulatory policy; the competition for escape has intensified.