Upside driven by Galaxy Macau which bested arguably conservative initial projections. A standard ramp of the new property should drive solid ROI.
Galaxy’s 2Q Adjusted EBITDA of HK$1.1BN beat our estimates and the Street’s by about 15%. Most of the upside – at least versus our numbers – came from Galaxy Macau (GM) which is really what will drive this stock going forward. GM’s results benefited from high hold to the tune of HK$70-80MM according to management. However, we and all the HK analysts already knew and should have factored that into their estimates. If GM ramps as we expect it to do, the property should come in line with the company’s newly revised target of high teens to low 20’s ROI.
Detail
Galaxy Macau reported revenue of HK$2,384MM and Adj EBITDA of HK$376MM, 4% above our revenue estimate and significantly above our EBITDA forecast due to lower overall commissions and expenses.
- VIP turnover and gross win was 4% above our estimate due to direct play at the property
- Galaxy Macau direct VIP turnover was approximately 4% of total VIP RC. Galaxy noted that they would wade slowly into the direct business.
- If hold was 2.85%, GM would have reported $346MM less in revenue and approximately HK$80MM less in EBITDA.
- Rebates were 1.2% or 33.4% of win and we estimate that junket commissions were an incremental 25bps or 10% of win
- Mass win was in-line with our estimate while slot win was 19% better than we estimated (this was offset by a drop off in slot win at Starworld
- Estimated net non-casino revenue was HK$80MM
- Estimated that fixed costs were $290MM
Starworld revenue of HK$5BN was in-line with our estimate and Adj EBITDA of HK$685MM was 3% above our estimate
- VIP and Mass win were in-line with our estimates while slot win was materially lower
- Estimated fixed expenses were HK$330MM – 13% above our estimate – this is likely due to unfavorable VIP win mix (low hold on RC play) which manifests itself as higher direct cost
City Clubs saw the impact from Rio switching to a top line deal this quarter from a revenue sharing deal.
Outlook
Based on July and August to date numbers, we estimate that Galaxy will report 3Q revenue of HK$12.9BN and Adjusted EBITDA of HK$1.96BN and FY11 revenue of HK$41.2BN and Adj EBITDA of HK$6.08BN.
Galaxy Macau:
- 3Q revenue of HK$6.5BN and FY11 revenue of HK$16.6BN
- 3Q Adj EBITDA of HK$1.2BN and FY11 revenue of HK$3.1BN
Starworld:
- 3Q revenue of HK$5.9BN and FY11 revenue of HK$22.9BN
- 3Q Adj EBITDA of HK$757BN and FY11 revenue of HK$2.9BN
