Key points of investment
The performance was slightly lower than expected, and I am optimistic that adjusted EBITDA profit margins will return to 2019 levels. On the revenue side, 4Q23 achieved net revenue of HK$10.32 billion (our forecast is HK$10.95 billion), recovering to 79.5% of 4Q19. Net revenue from gaming/non-gaming (excluding construction materials) was HK$7.96/HK$1.58 billion, respectively, recovering to 74.0%/110.8% in the same period in 2019.
On the profit side, the adjusted EBITDA of the 4Q23 company's standardized adjusted profit ratio was HK$2.91 billion (our forecast is HK$3.35 billion), recovering to 68.7% in the same period in 2019. The recovery rate was slower than revenue, and the company's 4Q23 adjusted EBITDA profit margin was still 4.3 pct from 31.5% of 4Q19. Management pointed out that the company's slow recovery in adjusted property EBITDA was mainly due to the company's opening of Galaxy Phase III in 2023, and operating expenses increased compared to 2019.
The company believes that with the continued recovery of the gaming industry in Macau, operating leverage will be further reflected, and profit margins are expected to return to 2019 levels.
4Q23 achieved total revenue of HK$9.24 billion, recovering to 64.0% of 4Q19: VIP/midfielder (including slots) revenue of HK$9.1/8.33 billion respectively, recovering to 14.1%/104.3% in the same period in 2019 (lower than 25.2pct/higher than industry 0.4pct, respectively). Midfield recovery narrowed its lead compared to the industry, leading the company's midfield (including slot machines) market share to a decline of 1.3 pct to 20.7%, and the total market share rate declined by 1.3 pcts to 20.7% 0.9 pct to 17.6%.
However, the company pointed out that it has noticed a recent decline in market share and will focus on the high-end midfield to re-increase its market share. Specific measures include: 1) increasing more sales staff focusing on high-value high-end midfield customers; 2) 4Q23's rebate rate (about 14%) declined month-on-month compared to 3Q23 (about 15%). In the future, the company will appropriately increase the rebate rate for high-end midfield customers.
Continued renovation & new construction industry to enhance the company's long-term competitiveness. 1) In 2023, the company redesigned and adjusted the layout of the central high-end midfield high-value betting area and added a number of restaurants. 2) The company's 3D project is expected to be completed in 2025. After completion, 100 luxurious guest rooms will be added that can only accommodate direct guests and high-end midfield customers, further enhancing the company's appeal to high-end customers. 3) The company will invest HK$5.1 billion in the construction of Galaxy Phase IV in 2024. The project is expected to be completed in 2027, which is expected to open up space for the company's medium- to long-term growth. 4) The company is evaluating the StarWorld Hotel renovation project, focusing on the expansion of the main gaming area, lobby welcome area, and restaurant options.
Profit forecast and investment rating: We maintain the company's 2023-2025 net revenue forecast of HK$363.1/437.81 billion; maintain the adjusted property EBITDA forecast of HK$105.0/138.3/HK$15.82 billion; the current stock price corresponds to 2023/2024/2025 EV/EBITDA of 17.3/13.2/11.5 times, respectively. Our target price is HK$57.0, maintaining a “buy” rating.
Risk warning: Macau's tourism recovery fell short of expectations, China's macroeconomic growth fell short of expectations, overseas gaming markets were diverted, and VIP recovery fell short of expectations.