4Q21 adjusted EBITDA is higher than market expectation
Galaxy Entertainment (27.HK) announced 4Q21 results: net income reached HK $4.75 billion, down 7% from a year earlier, up 11% from a month earlier, and adjusted EBITDA reached HK $1.04 billion, up 3% from a year earlier and 107% from a month earlier, exceeding Bloomberg's consensus market forecast of HK $691 million and our HK $550 million forecast. We attribute Galaxy Entertainment's performance to: 1) Macau Galaxy's superior midfield business performance (up 11% month-on-month); 2) Macau Galaxy's continued strong mall operation; and 3) an one-time reversal of HK $168 million in fees.
Development trend
Management said on the conference call:
On the 2022 Spring Festival holiday and Macau gaming operating environment: 1) the recovery of gambling business during the 2022 Spring Festival holiday is dominated by high-end midfield and direct VIP business, an increase compared with the 2019 Spring Festival holiday; 2) the company has observed tail demand after the 2022 Spring Festival holiday and expects seasonal demand to be weak thereafter; 3) the number of mainland visitors outside Guangdong Province has increased. 4) the company has stopped operating with all gaming agents, and VIPs are moving to direct VIPs and high-end midfield business.
The Galaxy Phase III project has been completed and the company is expected to open when Macau's visitor volume recovers, and the Galaxy Phase IV project is under way. Capital expenditure for Galaxy Phase III and Phase IV has reached HK $20 billion, with a total planned expenditure of HK $50 billion.
Galaxy Entertainment, the only gaming company in Macau to declare a 2021 dividend, announced a special dividend of HK $0.30 per share.
Profit forecast and valuation
Based on current trends that are in line with expectations, we maintain our 2022 and 2023 income and adjusted EBITDA forecasts unchanged. The current share price is HK $47.50, corresponding to 21.5x 2022e EV/ adjusted EBITDA and 12.7x 2023e EV/ adjusted EBITDA. We maintain an outperform industry rating and target price of HK $50.90, corresponding to 14x 2H22e+1H23e EV/ adjusted EBITDA, with a 7.16% upside over the current share price.
Risk
COVID-19 epidemic intensified; adverse changes in regulatory policy; road competition intensified.