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Galaxy delivered another beat on in-line revenues driven by surprisingly strong margins at their flagship property. We are finally seeing the benefit of mix-shift? 

Looking ahead, GEG remains very confident in the growth prospects for the industry and Macau as a whole as major infrastructure projects come on stream which improve access to Macau.

CONF CALL NOTES

  • Increase in margins at Galaxy Macau is attributable to a shifting mix towards more mass business which carries a higher margin
  • QoQ decrease in VIP turnover at GEG was due to the economic slowdown and moderation of activity before the government changeover
  • GM Ph2 has 900 workers on site currently and is on schedule to complete pilings at the end of this year
  • Acknowledge that VIP has paused but still remains very healthy.  The pause is natural given the changeover in government and economic conditions.

Q&A

  • They are very focused on segment specific marketing and hotel yield management.  Yield their 2 properties as a portfolio rather than individual properties.
  • Average length of stay at GM is 2 days - one of the highest in Macau.  More than half of their hotel guests are gaming customers vs. FIT. As they increase length of stay that has a huge benefit for their business since they capture more play.
  • Pavilion high limit slot lounge is doing very well at GM
  • How much room for margin improvement is there at GM?
    • Primary factor of the improvement was the shift towards more Mass revenue.  Still think that there is upside in margins as they manage costs and yield their product
  • Hold rate on Mass? 
    • High 20s is normal given their premium mass focus. Thinks that high 20s/ low 30s are normal for their business mix.
  • GM:  modest hold adjusted HK$35MM benefit - held very high in premium mass last quarter which had a benefit of HK$100MM in 2Q (total - not just from premium mass)
  • Uses of cash? Spending on GM Ph2 will ramp up next year.  That's not to say that at some point in the future they won't consider a dividend.  Think that the highest and best use of cash given their ROI is reinvesting in their property. 
  • Thoughts on Phase 3 plans? They are very excited for Ph3 but right not they are focused on developing PH2.
  • Haven't seen any slowing collections from their partners.  Their partners are very healthy. They do believe that the VIP market will start growing again just at a slower pace then in the past. The VIP market just feels better now.
  • Spent about HK$600-700MM on capex, most of which was on PH2.
  • How do they feel about getting enough labor post all the other project approvals? They are confident that they will get the labor they need.
  • Galaxy Macau: Still have about HK$2BN unpaid capex balance
  • Their receivables balance in 3Q is very stable
  • VIP at GM used to be in the high 60s on revenue contribution and now it's in the low 60s
  • Smoking Ban:  Meeting with the government to understand how to meet the new standards. They are confident that there will be minimal impact on their business. 

HIGHLIGHTS FROM THE RELEASE

  • "The Macau gaming market continues to evolve with VIP gaming revenues moderating from
    historic highs and higher margin Mass revenues growing as a proportion of total gaming
    revenue."
  • GEG Adjusted EBITDA of HK$2.6BN, up 46% YoY and revenue of HK$14BN
  • Galaxy Macau: Adjusted EBITDA of HK$1.8BN, reflecting an increase in Mass revenue
    • Adjusted EBITDA margin of 21% and 29% under US GAAP
    • Revenue of HK$8.3BN
    • Annualized ROI of 42%
    • Hotel occupancy of 97%
    • VIP turnover: HK$173.3BN; 3.3% hold
    • Mass drop: HK$6.3BN; hold of 29.9%
    • Slot revenue: HK$5.3BN; hold of 5.8%
    • Non-gaming revenue of HK$391MM
  • Starworld: Adjusted EBITDA of HK$843MM
    • Mass revenue grew 43% YoY
    • Annualized ROI of 99%
    • Implementing new growth initiatives with target completion of Q213
    • Occupancy of 99%
    • VIP turnover: HK$147.1BN; 3.0% hold
    • Mass drop: HK$2.6BN; hold of 23.1%
    • Slot revenue: HK$882MM; hold of 6.7%
  • City Clubs Adjusted EBITDA of HK$39MM
  • Construction materials Adjusted EBITDA of HK$113MM
  • Cash: HK$12.6BN (including HK$2BN restricted cash) & net cash position HK$1.5BN
  • Galaxy Macay Ph2: on schedule for mid-2015 opening