On November 7, 2023, City Boya Entertainment, a listed subsidiary of City International Development, announced its 3Q23 results.
Both the revenue side and profit side of 3Q23 fell short of expectations: on the revenue side, 3Q23, the total operating income of Boya Entertainment was US$1.02 billion, up 7.3% from the previous month, and recovered to 71.4% in 3Q19. Among them, gambling/non-gaming net income was US$81/210 million respectively, recovering to 65.9%/106.5% in 3Q19, respectively. The company's non-gaming share increased from 13.5% in 3Q19 to 20.2% in 3Q23. We judge that the company's newly opened Yingxinghui, W Hotel and Indoor Water Park in 2023 are mainly very attractive to visitors. On the profit side, in 3Q23, Xinhao Boya Entertainment achieved an adjusted property EBITDA of US$280 million, an increase of 5.0% over the previous month, returning to 67.1% of 3Q19; the adjusted property EBITDA rate was 27.6%, down 0.6 pct from the previous month, and there is still a gap of 1.5 pct compared to 3Q19.
The slow recovery of the company's Macau gaming business compared to the industry was mainly hampered by the VIP business: 1) On the Macau side, the three major properties City of Dreams, Studio City of Dreams, and New Ho Feng achieved a total gross gaming revenue of US$880 million, a recovery of 57.6% over the same period in '19, lower than the industry average of 11.4pct, mainly hampered by the VIP business. 3Q23's VIP/midfielder (including slot machines) GGR was US$122/760 million respectively, recovering to 17.9%/89.8% in the same period in '19, respectively, below the industry average of 19.9 pct/3.5 pct. When the recovery fell short of expectations, the overall market share of 3Q23's Macau gaming business fell by 2.9pct to 14.5%. Among them, the market share of the VIP/midfield (including slots) business fell 9.3pct/0.6pct to 8.4%/16.4%, respectively. 2) Overseas, in 3Q23, City of Dreams (Manila) achieved gross gaming revenue of US$140 million, recovering to 112.7% of 3Q19. The high degree of recovery was mainly due to the low 3Q19 base.
In 3Q23, the Cyprus business achieved a total revenue of US$44 million. City of Dreams (Mediterranean) fell short of expectations mainly due to the conflict between Palestine and Israel.
The non-gaming business recovered to 106.5% in 3Q19:1) The 3Q23 company's room revenue recovered to 120.9% in the same period in '19: The company opened the Starway Hotel in April, and W Hotel opened in September and opened 70% of the rooms (about 400 rooms). The total number of guest rooms added to the two 3Q23 hotel buildings compared to 3Q19 was about 730 (the number of guest rooms increased by about 18.2%). The increase in the number of guest rooms was basically in line with the increase in room revenue, and the average daily room rate remained at a high level. 2) In 3Q23, the company's retail and other revenue recovered to 74.2% in the same period in '19: The decline in the degree of recovery is mainly due to the fact that Studio City is currently renovating and upgrading its stores, which is expected to be completed in 2-3 months. Furthermore, the company expects the large-scale water show “Water Dance Room” to restart in 4Q24. 3) The average daily operating cost of 3Q23's Macau property was US$2.5 million, a slight increase from US$2.4 million in 2Q23, mainly due to: 1) In the context of the opening of W Hotel, the company added some full-time employees; 2) the company increased its promotion and marketing efforts. Furthermore, the company expects the average daily operating cost of Macau properties in 4Q23 to continue to rise to US$2.6 million, but there will still be a permanent cost savings of 20-25% compared to before the pandemic.
Profit forecast and investment rating: We lowered the company's adjusted property EBITDA forecast for 2023-2025 to HK$79.0/102.4/11.73 billion (previous values were HK$90.1/117.0/HK$13.79 billion respectively). The current stock price corresponds to 8.1/6.2/5.6 times EV/adjusted EBITDA. Our target price is HK$8.5, maintaining our “buy” rating.
Risk warning: Macau's tourism recovery falls short of expectations, mainland endorsement policies have been tightened in excess of expectations, and the diversion of overseas gaming markets.