The Galaxy call was fairly optimistic (when is it not?). Most of the issues we see are on the Mass Market side – supply growth and discounting – which shouldn’t affect the VIP centric Starworld much.
Galaxy 2Q09 Earnings call:
- Improving but more competitive Macau market
- Continuing with the development of Galaxy Cotai but at a slower pace
- Added 16 VIP tables in June and 6 more in July at Starworld
- 50% of their Mass table area was closed during the quarter due to renovations
- Cotai shell is due to completed end of 2009 and will align the opening with a recovery in the market
- Maintained 12% market share in Q2 in the face of supply growth
- Annualized ROI of 26%
- Net cash positive at end of June, retired $250MM of debt at .50 on the dollar
- Confident that they can deliver the $200MM of operational efficiencies that they have already announced
Q&A
- Did have 50% of the Mass gaming floor out of operations for at least 50% of the quarter
- Very diligently managing their costs
- Are they able to take on additional debt under their current credit agreements?
- At the corporate level there are no restrictions think they need to get lender approval
- Doesn’t sound like they have an issue here
- Seeing positive trends in Cotai with the opening of City of Dreams – gaining critical mass needed to succeed
- Commission Caps?
- “Momentous occasion” the commission cap has been on the table for over a year. They are cautiously optimistic that there will be a cap implemented by year end
- Don’t think it will have a large impact on VIP volumes
- We remain skeptical that the y will be enforced and are concerned with the number of loop holes – more on that later
- How do they feel about 2010?
- Fairly positive
- Any other trends they can highlight?
- VIP volumes were up around 10% in the 2Q
- July was pretty solid as well
- Added 6 new tables in July and relaunched the Mass gaming area this past Sunday
- Cotai Project – remaining capex?
- Spent HK$4BN already, have another HK$1-1.5BN left for 2009 and then another HK$4BN
- Leverage post project will be 35-40%, and should decline once the property gets up and running
- Mass Market strategy
- Cash rebate programs are very competitive with the market – we are concerned with the potential for shrinking Mass Market margins
- Volumes in July are pretty healthy
- June was the best month for VIP volume
- Starworld ROI – 26%, hope high teens ROI at the Cotai project and eventually break 20%
- Tax gain was from the bond buyback – HK$800MM ($100MM US)
- Areas for operational improvement, future for the company/ strategic direction
- Pleased with the new marketing programs
- Working on efficiencies
- Focused on opening an “Asian Centric” Cotai resort
- Will be prudent and opportunistic with debt buyback now that the paper is trading in the 90s
- May & June visitation numbers have been very weak, despite decent revenues
- Hasn’t affected them as much because they are VIP focused
- Once they re-opened, the majority of the Mass space their visitation has improved
- Bank debt: only a few hundred million HK
- Restatement of Mass and VIP revenues in their reporting
- Reporting is consistent with the way they pay their commission and the DICJ practice
- Where is the cash coming from on their balance sheet?
- Working capital –have had inflows/deposits from new VIP room junkets
- How will the HK$5.4BN of cash on hand be spent?
- Mostly on Cotai – another HK$5-5.5BN to spend
- Construction materials / city clubs/ Starworld cash flow will help fund that
- Not unreasonable to think that they will do a new debt offering in the future given the recent repurchases - Will be opportunistic – but have no plans for a buyback right now
- VIP/ Mass split with the capacity additions:
- VIP – 140
- Mass- 100
- Cotai – spend about HK$300-400MM in 1Q09 and a few hundred MM in 2Q09
- City Club- Declining EBITDA contribution – reorganized the business – they switched from a profit share to a top line agreement – they actually lost money in the 2H08. Think they will contribute around HK$100MM per year
- Lots of questions on where all the cash balances came from – VIP promoter deposits and R/C draw as well… Cash balances will obviously decrease going forward as they develop Cotai
- Bank debt – was HK$200-300MM … now they repaid it. I don’t understand why they just don’t disclose their debt balances – ie net cash
- Seeing HK$50MM per quarter of savings
- Starworld focused on managing labor and marketing.
- Reducing work week from 48 to 40 hours.
- Directing investment of marketing more productively
- The commission cap will definitely benefit their margins, commission caps are north of 1.25% now
- VIP volumes aren’t growing so why is everyone so upbeat?
- Added 16 tables in June and another 6 in July
- Over time- visa restrictions, swine flu, economy… just feels better
