Galaxy Entertainment Group Ltd is revamping the main casino floors at its flagship Galaxy Macau resort on Cotai, which should boost gaming business irrespective of a fourth-quarter loss of market share in gross gaming revenue (GGR), says a note from Goldman Sachs (Asia) LLC, citing recent conversations with management. The bank also said that cost pressure for Galaxy Entertainment “may not be as bad as we originally feared”.
The casino operator – one of six in the Macau market – was positioned to “regain” its GGR share amid ongoing “expansion and renovation” work on its Galaxy Macau gaming floors (pictured in a file photo), said Goldman Sachs in a Wednesday memo, citing conversations at a consumer and leisure sector corporate day held by the bank.
Costs-wise, a possible pay increase for the casino group’s staff would in likelihood be at a level “less than” had been “expected” by the bank. It also cited Galaxy Entertainment’s “relatively stable non-gaming spending”. This was anticipated to result in “less pressure” on the company’s margin on earnings before interest taxation, depreciation and amortisation (EBITDA), relative to Macau market rivals, said Goldman Sachs.
The bank stated that in mid-December, Galaxy Entertainment had introduced a “40-table” premium mass gambling area at the “south side” of Galaxy Macau’s casino hall, aimed at capturing “continued growth” in Macau’s premium mass segment. The casino operator had also started some renovation work in the mass gaming area at Galaxy Macau to divert existing “busy traffic” on the north side of the main floor, to the south side.
The Galaxy Macau mass gaming area revamp is scheduled for completion before the next Chinese New Year holiday period, according to Goldman Sachs, citing management. Chinese New Year itself falls on February 10, with a public holiday in mainland China due to run from February 10 to 17 inclusive. The lunar new year is usually a peak trading period for Macau casinos.
“The various expansion and renovation works on its gaming floors [in Galaxy Macau]…should better prepare the company to capture gaming demand and regain GGR share,” wrote Goldman Sachs’ analysts Simon Cheung, Alpha Wang, Leah Pan and Dorothy Wong.
The analysts estimated that for the fourth quarter of 2023, Galaxy Entertainment bore a 1.4-percentage point sequential GGR share loss, putting it on 17.1 percent. This was attributed mostly to “bad luck” in the VIP and mass gaming segments during November, said Goldman Sachs.
The bank also cited Galaxy Entertainment management mentioning a “gradual return” of “lower-value players”, which brought grind mass GGR “back to 80 percent to 90 percent” of 2019-level. Meanwhile, the GGR generated from premium mass play had already reached “110 percent to 120 percent” of 2019-level, according to the casino group.
Galaxy Entertainment defined “premium mass” players as those with an average daily theoretical loss of HKD15,000 (US$1,919) or more, the memo noted.
Cost issues not ‘as bad as feared’
The segment – a “key driver” to Galaxy Entertainment’s gaming business in 2023 according to the bank – had benefitted from customers that shifted from VIP play, as well as the “return of more players” from the “wealthier” Chinese provinces.
Taking into account “additional costs incurred for the launch of Andaz hotel in September” at Galaxy Macau Phase 3, “and various sponsorships or events” including support for the Macau Grand Prix meeting, Macao International Marathon, and “concerts… we estimate the company’s daily operating expense might have jumped back close to pre-Covid-19 level of US$3.4 million, versus US$3.1 million in the third quarter of 2023 ,wrote Goldman Sachs. This translated to “steady EBITDA of HKD2.8 billion in the fourth quarter of 2023,” the bank added.
But the institution remarked that the “cost pressure” for the casino operator might not be “as bad” as the market “originally feared”.
Galaxy Entertainment recently announced a one-month discretionary bonus for eligible staff, to be paid on January 31. In addition, Goldman Sachs thought the company was likely also to budget for a “2-percent to 3-percent” salary hike for its staff.
This would be “less drastic than… the market feared,” as Macau casino salaries had seen “hikes of 5 percent to 8 percent in the prior upcycle,” the analysts stated.
They cited Galaxy Entertainment’s management as confirming that “two-thirds” of its nearly HKD28.5-billion investment commitment under the current 10-year concession would be in the form of operating expenses, with the remaining one-third in capital expenses (capex).
“Capex for Galaxy Macau Phase 4 will not be counted as part of this commitment,” the memo noted.
The Goldman Sachs team has added: “Investors have raised concerns that casino operators have generally underspent last year and there could be a step-up in their spending in fiscal year 2024.
“Galaxy [Entertainment] management explains that much of this spending has been embedded or included in its daily operation, and they do not foresee a significant increase in related operating expense this year (i.e., still budgeting around HKD3 billion).”
