Macau casino operator Galaxy Entertainment Group Ltd has already submitted to the Macau government the building plans for Phase 3 of its flagship property Galaxy Macau, the firm’s deputy chairman Francis Lui Yiu Tung (pictured) told Hong Kong media on Thursday.
The firm expects to begin construction of Phase 3 within this year, after receiving government approval, said Mr Lui. Phase 3 could be completed by 2019 at the earliest, he added.
Mr Lui made the remarks on the sidelines of Galaxy Entertainment’s annual general meeting on Thursday. The firm announced its results for the first quarter of 2017 on the same day.
The casino operator reported revenue of HKD14.1 billion (US$1.81 billion) for the first quarter of 2017, up 5.2 percent from the prior-year period. The company said its adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) increased by 31 percent year-on-year, to HKD3.2 billion in the three months to March 31.
Investment analysts noted that Galaxy Entertainment’s first-quarter results were better than expected largely due to stronger mass-market operations and cost savings.
Analyst Chelsey Tam of Morningstar Inc said in a Thursday note that “excellent cost control and higher-margin mass” paid-off for Galaxy Entertainment in the first quarter.
“The group’s strong execution is demonstrated in higher-than market year-over-year mass revenue growth, continuous cost control, and management’s strong focus on mass segment despite a surge in the volatile VIP revenue,” said Ms Tam.
Galaxy Entertainment’s management said on a conference call with analysts following the results announcement that the company is targeting about HKD300 million in incremental cost savings this year, of which more than one-third have been realised in the first three months of 2017.
Speaking about Phase 3 of Galaxy Macau, Mr Lui said the project would feature gaming, space for conventions and exhibitions, as well as venues for entertainment. The casino operator had previously said that “virtually all” floor areas in Galaxy Macau Phase 3 and 4 would be given over to non-gaming facilities.
The aggregate investment budget for Galaxy Macau Phase 3 and Phase 4 will be “definitely no less than” HKD43 billion, Mr Lui had said in March. He added at the time that the venues would include facilities aimed at family visitors and young adults.
In a Thursday note following Galaxy Entertainment’s first-quarter earnings conference call, brokerage Daiwa Securities Group Inc noted that the details on expected capital expenditure for Galaxy Macau Phase 3 have not yet been disclosed.
“The company still has HKD1.7 billion in capex remaining for its Phase 2 development, of which management expects HKD700 million will be spent in the remainder of 2017 (excluding the HKD300 million spent in the first quarter of 2017), and the remaining HKD1 billion in 2018,” said Daiwa analysts Jamie Soo, Adrian Chan and Jennifer Wu.
Brokerage Sanford C. Bernstein Ltd suggested that increasing leverage to fund the development of Phases 3 and 4 of Galaxy Macau “and potentially returning more capital to investors would further enhance valuation”.
“While we continue to believe that the company is currently under-levered, this may be rectified as the company begins to build out Phase 3 of Galaxy Macau (and potentially incurs debt to do so),” said analysts Vitaly Umansky, Zhen Gong and Yang Xie.
They added: “A more optimal capital structure is warranted, reducing the company’s cost of capital and allowing the company to return additional capital to shareholders as any Phase 3 and 4 development could be financed significantly with debt (especially in today’s low interest rate environment).”
Speaking to media on Thursday, Galaxy Entertainment’s Mr Lui has also expressed confidence in a successful bid for a casino licence in Japan.
“We think that Japan is a market with huge potential, and we will try our best to work on that market,” Mr Lui said.
He also added that the firm has worked “non-stop” in building contacts with local companies in Japan that are interested in investing in casino business.
In late March, Galaxy Entertainment and Monaco casino firm Société des Bains de Mer et du Cercle des Étrangers à Monaco, also known as SBM, announced the formal establishment of a strategic partnership. The two companies said they would be working together on the development and operation of entertainment businesses including integrated resort projects in the Asia-Pacific region, namely in Japan.
“We aim to win a casino license there in cooperation with Societe des Bains de Mer,” added Mr Lui.
Galaxy Entertainment has “talked to a Japan partner about possible locations” for a casino investment opportunity, Sanford Bernstein said in its Thursday note.
“Our view is that it remains too early to provide any value for a Japan option at this stage. While Galaxy may be a strong operator in Macau, it will face very strong competition from other more global competitors and a Chinese, a Macau-only operator may not be a top choice for Japan,” wrote the Sanford Bernstein team.
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Analyst at Morningstar Asia