Key points of investment

The performance was slightly higher than expected. I am optimistic that subsequent fee control measures will continue to dilute the cost ratio and raise the EBITDA profit margin level. On the revenue side, 2Q24 achieved net revenue of HK$10.92 billion, which recovered to 82.8% in 2Q19. Net revenue from gaming/non-gaming (excluding construction materials) was HK$8.6/1.48 billion, respectively, recovering to 77.1%/112.8% in the same period in 2019. On the profit side, the adjusted EBITDA of the 2Q24 company's standardized adjusted property was HK$3.2 billion, recovering to 73.8% in the same period in 2019. The recovery rate was slower than revenue, resulting in a gap of 3.5 pct between the company's 2Q24 adjusted property EBITDA margin of 32.6% in 2Q19. Management said that while expanding the number of properties and personnel, the company strictly maintained cost reduction and fee control, and operating expenses fell 2% month-on-month in Q2. Currently, as the number of personnel has stabilized, the company is expected to maintain operating expenses at a similar level, and further increase EBITDA profit margins by recovering diluted expenses as revenue recovers.

2Q24 achieved total revenue of HK$10.34 billion, recovering to 68.0% of 2Q19: VIP/midfielder (including slot machines) revenue of HK$1.39/8.95 billion respectively, recovering to 19.0%/113.7% in the same period in 2019 (lower than 19.4 pct/higher than industry 2.5pct, respectively). The slow recovery of VIP has narrowed to the extent that the company's VIP market share ratio increased by 1.5 pct to 10.8%, and the total expo market share ratio increased by 1.5 pct to 10.8% It increased by 1.6 pct to 18.9%, and has been rising for two consecutive quarters. The company pointed out that the continuous increase in market share is mainly due to the addition of more sales staff focusing on high-value high-end midfield customers since the end of last year, effectively increasing the stickiness of high-end midfield customers, and adjusting cashback delivery to accurately target the target customer base. Furthermore, management said that although the overall market recovery was slow in early July due to the late start of the summer season, the company's growth potential resumed strong in late July, and the market share continued to increase. The average number of visitors from July to today increased by 30% compared to Q2, and has increased 50% since August.

Continue to invest in creating non-blog home entertainment experiences to enhance the company's long-term competitiveness. The company invested a total of HK$1.1 billion to refurbish properties in the second quarter, of which 0.7 billion was spent on the construction of Galaxy Phase 3/Phase IV. Capella will be completed in 25 years and will provide more than 100 luxurious sky suites to attract higher value customers through top-tier accommodation experiences. The construction of Galaxy Phase IV is progressing smoothly and will be completed in '27. In addition to the casino, it provides more non-gaming entertainment and home facilities. Management expressed confidence to continue to expand the Asian market share by providing a one-stop family life/entertainment experience.

Profit forecast and investment rating: We gave the company a net income forecast of HK$45.62/50.31/53.49 billion for 2024-2026; an adjusted EBITDA forecast of HK$12.75/15.38/16.66 billion; the current stock price corresponds to 2024/2025/2026 EV/EBITDA of 9.1/7.6/7.0 times, respectively. Our target price is HK$46.6, 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.