1Q22 performance is basically in line with our expectations
Galaxy Entertainment (27.HK) announced 1Q22 results: net revenue reached HK$4.10 billion, down 20% year on year, down 14% month on month, adjusted EBITDA of HK$575 million, down 33% year on year, down 45% month on month, exceeding Bloomberg's consistent forecast of HK$482 million and broadly in line with our forecast of HK$585 million. We attribute Galaxy Entertainment's performance to: 1) the VIP business recovery falling short of the industry (down 21% month-on-month); and 2) the 4Q21 results included a one-off reimbursement of HK$168 million in expenses.
Development trends
Management stated during the conference call:
Regarding the VIP business situation: 1) Star Hotel has stopped operating the VIP business since 2022; 2) Looking forward to the future, Star Hotel will develop the casino with the midfield business as the core; 3) Currently, only Kinmen (direct VIP) operates the VIP business in Galaxy Macau; 4) Management has observed the transfer of intermediary VIP customers to the direct VIP business.
Regarding the May Day holiday business performance: 1) The operating environment was hampered by the recent recurrence of the epidemic in mainland China; 2) Management said that under normal circumstances during the holiday period (before the epidemic), the concentration of travelers from outside Guangdong Province was higher, but visitors to Macao from Guangdong showed a higher concentration during the May Day holiday in 2022; 3) The occupancy rate of hotel rooms during the May Day holiday was around 70%.
Profit forecasting and valuation
We lowered our 2022 and 2023 revenue forecasts by 25% and 3%, and adjusted EBITDA forecasts for 2022 and 2023 by 31% and 3% to HK$6.076 billion and HK$13.786 billion, mainly taking into account:
1) Business recovery fell short of expectations due to the recent recurrence of the epidemic in the mainland; 2) The opening of Galaxy Macau Phase III was delayed. The current stock price is HK$40.70, corresponding to 26.8x 202e EV/adjusted EBITDA and 11.2x2023e EV/adjusted EBITDA. We maintained our industry rating and lowered our target price by 4% to HK$48.80, corresponding to 14x 2H22E+1H23E EV/adjusted EBITDA. The target price has 20% room to rise from the current stock price.
risks
The COVID-19 epidemic has intensified; adverse changes in regulatory policies; competition in Cotai has intensified.