Galaxy Entertainment Group Ltd

HKEX:27

Earnings Call Analysis

Robust Revenue Growth Amid Renovations

Galaxy Entertainment Group (GEG) recorded a notable rise in net revenues, totaling $10.6 billion for Q1 2024. This represents a 50% increase year-on-year and a modest 2% growth quarter-on-quarter. Despite short-term disruptions caused by substantial renovations at Galaxy Macau's gaming floor, which concluded prior to the Chinese New Year, the company saw a significant improvement in customer traffic flow post-renovation .

Strong EBITDA and Balance Sheet

GEG reported an adjusted EBITDA of $2.8 billion for Q1 2024, which is a 49% increase compared to the previous year and a 1% rise from the previous quarter. The company benefited from favorable gaming results, adding $63 million to EBITDA. GEG’s balance sheet remains strong, with $25 billion in net cash. This financial health underpins their ability to pay a special dividend of $0.30 per share in April 2024, demonstrating their confidence in the Macau market and future performance .

Key Performance Metrics

The Mass gaming segment achieved impressive results, with gross Mass revenue reaching 105% of 2019 levels, compared to 67% in Q1 2023 and 107% in Q4 2023. Specifically, Galaxy Macau’s Mass business excelled, hitting 126% of 2019's levels, whereas StarWorld lagged at approximately 73%. This variance highlights the success of the renovations and enhancements at Galaxy Macau in driving customer engagement .

Strategic Upgrades and Future Prospects

GEG continues to innovate and upgrade its offerings to attract high-value customers. Implementations include smart tables and upgraded slot machines aimed at enhancing efficiency and customer experience across their properties. Moreover, the introduction of the luxury Capella Hotels and Resorts brand to Galaxy's portfolio is anticipated to boost the luxury hospitality sector in Macau, with its opening slated for mid-next year .

Optimistic Outlook for Macau

The company remains optimistic about Macau's outlook, driven by increased visitor numbers, the expansion of the Individual Visit Scheme (IVS), and looser visa policies. During the Golden Week, Galaxy's group-wide mass drop and slot handle reached about 120% of 2019’s levels, indicating positive momentum that continued into May. GEG aims to extend this recovery trajectory by leveraging their revamped gaming floors and expanded sales teams .

Investment in Future Growth

GEG has committed substantial investments into their Phase 3 and Phase 4 developments, with $1.4 billion allocated in Q1 2024 bringing the total investment to $30.7 billion. The Phase 4 development is on track to be completed by 2027, which is expected to further diversify their product offerings and enhance long-term sustainable growth. These developments align with the increasing demand from the premium mass segment and the Macau government's supportive policies aimed at boosting international tourism .

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for holding, and welcome to Galaxy Entertainment Group's Management Update for the First Quarter Results of 2024.

Joining us today are Mr. Ted Chan, Chief Financial Officer; Mr. Roland To, Senior Director of Strategic Planning; and Mr. Peter Caveny, Assistant Senior Vice President of Investor Relations. [Operator Instructions]

I would now like to pass over to Mr. Chan for a presentation. Mr. Chan, please go ahead. Thank you.

[Ying Tat Chan, executive]

Thank you, operator. Hello, everyone, and thank you for joining us for the update call on GEG's Q1 2024 results. Joining here on today's call is Roland To and Peter Caveny. Copies of our media release, stock exchange announcement and PowerPoint presentation are available on our website, which also includes our customary disclaimers.

During Q1 2024, we made substantial reconfigurations to Galaxy Macau's gaming floor. In the shorter term, this was disruptive for the month of January and the early part of February. The renovation was completed just prior to the Chinese New Year. With the completion of these renovations, we have been seeing a significant improvement in the flow of customer traffic across the entire floor.

For Q1 2024, GEG reported net revenues of $10.6 billion, up 50% year-on-year and up 2% quarter-on-quarter. Adjusted EBITDA was $2.8 billion, up 49% year-on-year and up 1% quarter-on-quarter. We played lucky in Q1, which increased our EBITDA by $63 million.

Our balance sheet remained healthy and liquid with a net cash of $25 billion as of Q1 2024. We recently paid the previously announced special dividend of $0.30 per share in April 2024. Our dividends demonstrate our continued confidence in the Macau market as well as Galaxy's future performance and our commitment to return capital to shareholders.

In Q1, the gross Mass revenue was 105% of 2019's levels compared to 67% and 107% in Q1 and Q4 2023, respectively. In Q1, Galaxy Macau's Mass business performed well, achieving 126% of 2019's level, whereas StarWorld was approximately 73%.

We continue to refine and upgrade our resorts to make them even more appealing. We are particularly focused on driving high-value customers to our properties and converting more of our non-gaming customers to gaming. Across our properties, we are in the process of implementing smart tables, which will drive further efficiency across the gaming floor. In addition, we are upgrading our slot machine products, including high limit slot area in Galaxy Macau.

We were also pleased to announce the addition of our 10th hotel brand, Capella Hotels and Resorts, to Galaxy's portfolio of hotels. We are actively fitting out the property and anticipate to open mid next year, offering approximately 100 ultra-luxury sky villas and suites. We are poised to elevate the luxury hospitality center in Macau.

We firmly hope and believe that we should compete on quality and service, not on price. We believe the addition and upgrades to our resorts, expansion of our sales team and the introduction of smart table technology will allow us to grow and recapture our market share.

At StarWorld, we continue to evaluate a range of major upgrades that includes the main gaming floor, the lobby experience and increasing the F&B options. We are committed to a year-long transformation of the property to capture the unique opportunity on the Macau Peninsula side.

We continue to work hard on managing our cost structure. Our current staff number is approximately 21,000, equivalent to 95% of the count from 2019, even after the full opening of Phase 3. Staff cost represents around 75% of our OpEx.

Our unwavering confidence in the future prospects for Macau is reinforced by our significant investments in the business. During Q1, we invested approximately $1.4 billion into Phase 3 and Phase 4 development, taking our cumulative investment to date to $30.7 billion in the project.

Phase 4 development is progressing and is earmarked for completion by 2027. We will continue to adjust the development time line in accordance with the market demand. We believe that the many additional facilities that we have added and will continue to add in the future set a strong foundation for our sustainable growth in the long run.

The Central Government continue to support Macau. This is evidenced by the recent expansion of the existing IVS to include an additional 10 cities. This brings the total number of Chinese cities under IVS to 59 with a combined population of near 0.5 billion.

Furthermore, the government has introduced a range of new visa measures for Mainlanders, allowing them more easily access to Macau, including exhibitions and multiple-entry visas. The recent expansion of IVS and introductions of the new visas were supported by the visit of Director Xia Baolong to Macau. This gives us great confidence in the medium- to long-term outlook for Macau.

Last, to support the government's goal of expanding international visitors to Macau, we have opened our first overseas office in Tokyo and Seoul, and we are in the process of opening an office in Bangkok.

That concludes my prepared remarks. Operator, we're ready for the Q&A session.

[Operator]

[Operator Instructions] The first question comes from D. S. Kim from JPMorgan.

[D. S. Kim, analyst]

I guess, first quarter wasn't amazing for us, but it's already behind us. I don't want to [ call out ] with that. But let me ask, if that's okay, a couple of questions on the latest trend, second quarter to date and beyond. First of all, can you share with us how much market share we have had in April and March, if possible, and any comments on a day-to-day performance? And I just want to compare third -- first quarter market share and how was the exit rate in first quarter and then how we trend this quarter to date. That was my first question.

And second question would be revising the promotional activities in the market, particularly for so-called super-premium mass players. I have heard on the ground that there may have been some changes in market dynamics very recently. And I'm wondering if you could share some details, if you saw anything changing on the ground, like not necessarily for Galaxy, but for overall market or some of the peers. Perhaps we and everyone in the market are agreeing to do a little more reasonable promotion activities and whatnot. Any changes anecdotally, if you could share, would be really appreciated.

[Ying Tat Chan, executive]

No problem, D. S. Why don't I just combine your 2 questions into one answer? So let's really look at the -- I think the market is actually very concerned about the promotion activities in Macau and how is it impacting each other, and Q1 has passed, what about Q2, right? Let me [ grab ] it into the following. First of all, I think we acknowledge competition is actually quite intense in Q1, and it's actually extended in Q2. And you heard that recently, there may be some stabilization. I can acknowledge that as well. There is some stabilization in terms of the competitions.

But let me look at it this way, in terms of competitions, I think the 6 gaming operators already aligned according to their respective characteristics. So every gaming operator have a different characteristic. So let's focus on Galaxy for a moment. We basically aligned our whole structure post Chinese New Year in order for us to increase our sales force and also to yield our database better.

And number two, we have to improve our entertainment offerings, especially at the Arena program, to be more relevant to our customers, especially we can see some amazing results in the past weekend even after the Golden Week. If we look at the reinvestment of Galaxy -- I can't comment on the others. But if I look at the reinvestment rate in the last 6 months, basically, we are rating our reinvestment rate on our rate customer in the range of roughly about 150 basis point difference.

So this brings already allow us the possibilities for us to offer different patrons according to different offerings. So no matter how competitive market, we try our very best to cope with different level of ADT customer on that. So with all the efforts post Chinese New Year, with all the efforts that we've done, I think we see some results. And I'm quite happy to see that the market share is actually for Galaxy has stabilized, especially after -- especially in April.

If I compare with all the segments, mass, slot, VIP market share, all the data points are showing me that our market share is about, the last 3 months or 6 months, average in April. And also the momentum continued in May, especially during Golden Week and after Golden Week. So I think that's the direction that we are heading in, and I'm quite happy that what we've been doing post Chinese New Year is actually bearing some fruit.

[D. S. Kim, analyst]

That's very encouraging. And similar to what we hear on the ground, like Galaxy has been regaining market share. I think the direction has been set, and kudos to that. But if I may follow up, when you say the reinvestment rate within the range of 150 bps, I missed that part a little bit. Did you mean that our reinvestment rate has moved up about 150 bps versus like 6 months ago? Or wouldn't it [ definitely appear ] the gap between a top tier and bottom tier is only about 150 bps?

[Ying Tat Chan, executive]

So what I'm referring to is actually, if we look at the last 6 months, including April, our reinvestment on the rate of customers range within 150 bps, so which means the ranges -- we believe the range is big enough for us to build on the flexibility to reinvest on the type of customers. So we see sometimes the competition is particularly high on a particular area, we can actually use this possibility to do so.

So I guess, as I said, every company has a different characteristic. We use more reinvestment on the programs, on the service, on the database yielding, while the other company might have different amenities for them to reinvest to the customer. So there's no perfect apple-to-apple comparison. But I think we have been doing what we can to leverage our non-gaming facilities as well as our database management to do a better job for us. And after the Chinese New Year, we put some efforts and it looks like we're on the right directions.

[D. S. Kim, analyst]

Final question, if you don't mind, is just as a housekeeping. Could you comment a bit about CapEx budget for this and next year, if possible, broken down [ focused ] different types, i.e., maintenance versus concession-related commitment versus Phase 3 and 4 growth CapEx? If you could share with us, that will be great.

[Ying Tat Chan, executive]

No problem. For the quarter 1, the CapEx -- total CapEx for the company is, let's say, HKD 1.5 billion in Q1. We haven't spent too much on the concession-related CapEx at the moment because it's a year on and it's also subject to changes after we submit the plan to the government. So you can assume that most of the CapEx in Q1 is related to the business and also Phase 4.

[D. S. Kim, analyst]

If you don't mind, could you give us a little bit of color on the CapEx budget for the year, like full year 2024?

[Ying Tat Chan, executive]

Full year 2024 on the CapEx will be around HKD 5 billion. And that excludes those related to the concession-related, and that's also still subject to some final changes. But as you will all know that on a 10-year basis, the CapEx versus OpEx related to concession for Galaxy is actually 30:70 ratio, so 30% CapEx and 70% OpEx. But every year, I think the government is flexible enough for us to change according to the plan.

[Operator]

Our next question comes from George Choi from Citi.

[George Choi, analyst]

First of all, would you please remind us your time line for the introduction of smart tables?

And secondly, we understand that you guys have recently introduced a new side bet called Small 6/Big 6, and you have rolled that out to all of your baccarat tables. I'm just wondering, theoretically, how much is the incremental theoretical house advantage from this new side bet versus your normal Lucky 6? And based on the data that you have gathered so far, has this become a popular side bet amongst your players?

[Ying Tat Chan, executive]

Okay, George, thank you for the questions. So smart tables, we are launching the smart table in the second half of the year, so basically, sometime around July. And the plan is actually to complete the whole implementations within the year. So basically, Q4, we will have all the smart tables implemented in all our properties, including StarWorld and Galaxy Macau.

I think smart table implementation is one thing. Installation of the furniture is one thing, but also, more importantly, it's actually on the back end, the database management. So we are doing the same time. So we hope that by the end of the year, we have the full set of smart tables, including the back-end setup being ready for the operations.

Side bet, I think, is a hot topic. We are very pleased the government is actually supportive in terms of the additional new games, new side bet that we have put in place. Very, very successful, very, very nice. I think the customer -- we thought that it would take some time for customers to get used to it, but very quickly, I'm amazed by how smart our guests are and they like the game very much.

So there's no way to really give you a number on that. It's too early. But I must say, the side bet percentage of the bets is increasing almost every day. So we're very happy that definitely will be improving our whole percentage. In May, our whole percentage is actually a little bit on the high side of our range. We cannot make a conclusion whether this is purely because of the side bet or perhaps our reconfiguration of the casino floor. We're having a great result of the improvement in terms of efficiency. So it's a combination of things, efficiency of the operation and also the side bet improving our whole percentage in May.

[Operator]

The next question comes from Karl Choi from Bank of America.

[Karl Choi, analyst]

A couple of questions. First is, as you mentioned in your announcement, the market growth has been driven more by the premium segment. Just curious about what's your thinking -- latest thinking about the base Mass segment. Is it just not -- the recovery is just not going to be that as exciting as the premium segment because of economic downturn that China has gone through? Or is it still more of a timing issue?

Second is, could you talk a little bit more about the trajectory for whether it's GGR market share or EBITDA market share improvement that you expect? Just knowing that you're trying to balance the investment and investment in your marketing close program. At what point do you say, we need to step up? Or is it the trajectory is going to be very sort of year-end weighted in terms of improvement given the timing of rollout of the smart tables?

[Ying Tat Chan, executive]

All right. So base Mass, interestingly, when we analyze the rate of customer on the premium mass and also the base mass, the characteristic is actually quite similar. And one thing is more about the frequency of travel is actually still below the premium mass. So I guess with many reasons that you guys may understand, but with the current Central Government's very encouraging policy to ease the visa relaxation policies, I think that definitely will help both premium mass and base mass. And also with the expanded IVS, it definitely will help.

Even though I said that the premium mass actually lack the improvement and the recovery of the business, mass is also increasing and improving every day, but it's lower than premium mass. But with the new policy led by the Central Government, that definitely will help us in terms of the performance.

Sorry, I missed the second question.

[Peter J. Caveny, executive]

GGR share.

[Ying Tat Chan, executive]

Yes, the GGR share, I think I just mentioned earlier that after our -- the effort that we play -- we did in post '22 year and with the emphasis on the yielding of database with our increased sales hold and also some improvement on our entertainment offering, especially the Arena offering, from April, when we look at our market share, it's above Q1 when we compare to Q1 from April.

And if we also look at the past 3 months or 6 months average, our April's market share is also above all these metrics. And more encouragingly, the momentum actually continue in May Golden Week. And after Golden Week, we continue with the momentum. So it looks like we're on the right direction.

[Karl Choi, analyst]

But just as a follow-up, I mean, should we expect just more incremental improvement until we get these smart tables all rolled out at the end of the year? Or you actually already have seen pretty big improvement?

[Ying Tat Chan, executive]

We see some improvement already. So with smart table, I think you will see more accuracy in reinvestment to the right customer, so which means you can improve your reinvestment range within your different ADT level of customers.

But without smart table, we can still have a lot to do, and that's what I just mentioned. And I think that in April or, let's say, quarter-to-date, it looks like there's some meaningful improvement happening. So I hope that the trend continue. And coupled with some initiative going forward in Q3 and Q4 with smart table being ready, we should further improve.

[Operator]

The next question comes from Simon Cheung from Goldman Sachs.

[Simon Cheung, analyst]

I just got a couple of questions. Again, related to the competition, I think that's well documented and well understood that the market is highly competitive. I just wanted to get a bit more sense, we know the high end of the segment is very competitive, but obviously, there are a lot of concerns that such a competition intensity would spill over to maybe even low end of the segment. Do you see any sign of that? I hear that you mentioned that things have stabilized a bit.

Perhaps just back to D. S.'s questions, what is the reinvestment rate differences between the high end and low end and compared to before Chinese New Year, before you implement all these changes? That's the first one.

And then the second one, you mentioned that Arena are doing a great -- good job and that we have 2 IVS cities opened since early March. I'm just trying to understand a bit how can -- if possible, can you help to quantify an impact in terms of, I guess, foot traffic? Just wanted to get a better sense how your property would be able to capture these perhaps incremental or accelerating recovery on the low end of the grind Mass Market segment?

And then the very last question, in relation to capital return, we have received a lot of questions whether Galaxy would consider increased dividend. I guess that's also taking into consideration of Bangkok being a potential investment in the future. Just would like to hear your thoughts on those 2 fronts.

[Ying Tat Chan, executive]

Thanks, Simon. I guess the question is more about the competition landscape and how do we see that being an impact and how do we address this. I guess the -- if we look at the reinvestment rates between the high-end premium mass and base mass, for sure, the reinvestment percentage on the premium mass, high-premium mass is actually lower than the low end or base mass. But literally, because the room rate is actually already determined more than half or 50% of the total reinvestment on the base mass.

So if you look at that way, if we strip out room, that's a different story. So I guess, if we look at that way, in our portfolio, we still see quite a lucrative high-end premium mass segment in terms of the profitabilities in there, whereby the lower end one, the room is already determined the high percentage of the reimbursement rate there.

So as I said, every gaming company have a different characteristic. Some of them are more on spilling -- or in your world, explaining the competition to them. Base mass, to me, is more like a service level elevations on the game floor. So some of them choose to doing more F&B offering on the casino floor for the base mass.

But I think this really depends on what kind of characteristic of your floor. I think for Galaxy, it's more about integrated experience. And we have an amazing entertainment retail so that we can have more programs combining and working together to generate enough visitation on the casino floor. So it's quite different. There's no one equation to full success on that particular area.

So I guess, if we look at the reinvestment rate, yes, premium mass is actually lower than the base mass purely because of the room rate issues. Whether the competition is going to the base mass as well, I think we all know that is happening all the time in, just not now, but in the last few quarters already. And I think every competitors are using different characteristics in their properties, and we are using entertainment and retail. So that's one.

In terms of the capital deployment, yes, we are looking at that carefully on every quarters. If we -- in terms of the Phase 4, we still require roughly about $20 billion to build. And we are looking very serious on the overseas development for -- as you just pointed out, Thailand, if Thailand is happening, that would be very interesting. In the Land of Smiles, they have all the ingredients for success in terms of hospitalities.

So what I understand is actually the Minister of Finance is already leading the relevant agencies to revise the study of the feasibility study by the Parliament. I hope that this year when the legislation -- when the Parliament reopen in summertime and when they are able to pass the law within the year, then hopefully, the bidding process could start.

But it's too early to comment on how Thailand look like. We don't know where's the location, how big this size is, but I think we are very interested in Thailand. And if we have more information, definitely, we'll be seriously consider that. So that will be part of the consideration in terms of our capital deployment.

[Simon Cheung, analyst]

Okay. Can I just quickly, one quick follow-up, just on -- back to the competition. Obviously, the market succeeded -- or focused a lot on the GGR market share, and we hear that you've done a lot to drive better market share in April or even May. I guess the fair share, market share that everyone had been talking about, I remember you alluded earlier that would be, what, closer to 20%. I don't know whether it's still relevant. And if so, then would you be able to perhaps share with us the time lines of that kind of -- whether it's achievable by end of the year, next year, that would be very helpful.

[Ying Tat Chan, executive]

I'd love to do it right now. I mean the market share is actually a relevant relativity terms. So I just mentioned to you that our April and May number, we are above the 3 months and 6 months average, of the past 3 months or past 6 months average, which means it's moving on north, not on the south side, and that is quite positive.

And also, I mentioned that the reinvestment rate on the last 6-months range was within 150 bps, which means that we are not only increasing our market share by just increasing the reinvestment, but also our flexibility within the 150 bps in terms of investment allocations.

So one encouraging outcome in Q1 was that our OpEx level has already stabilized also. Last year, we increased our workforce to cope with the opening, at the same time, expansion on Phase 3. So every quarter, we have an increase in terms of OpEx. But in Q1, we're already stabilized, and we continue to see the stabilization going forward in the next few quarters across the year.

That will be giving you an idea that when we are in the trajectory or recovery in the revenues, that will be having a positive EBITDA flow-through going forward unlike the trend in the last few quarters.

[Operator]

There are currently no more questions in the queue.

[Ying Tat Chan, executive]

So thank you, operator.

So before we close, I'd like to make a summary on the outlook. And I would say that we at Galaxy here remain very confident on the outlook of Macau in general and also specific for our company with the following reasons. Number one, the strength of the ongoing recovery in visitor numbers and associated revenue. This is further supported by the expansion of the IVS scheme and the easing visa policies.

For us, in Q1, we meaningfully expanded our sales and hosting team. Our market share has now stabilized in Q2. The sign of further improvement was seen in May. And during Golden Week, Galaxy's group-wise mass drop and slot handle were around 120% of 2019's level. And we are very encouraged that the momentum continue post the holiday week.

We also successfully completed the reconfiguration of Macau -- Galaxy Macau's main gaming floor, and we have seen a significant improvement in the flow of customer traffic across the entire floor. Going forward, it will improve our whole percentages accordingly.

We are also in the process of rolling out the new and updated slot product, and we will launch our smart tables in Q3, as I said earlier. And we will complete the entire portfolio by Q4 with our smart tables. Raffles at Galaxy Macau and Horizon Club has proven to be very successful, and we'll continue to ramp up GICC and Galaxy Arena with more relevant shows and events.

And at Galaxy, we have always believed in competing on quality of product and service, but not on price. So our newly announced partner hotel, capital -- I mean, Capella Galaxy, will further lift the level of luxury in Macau and growth position of Galaxy at the top end of the market.

And beyond that, we continue with the development of Phase 4, which will, again, increase our hotel room count and diverse product offering, including all these non-gaming products, in order for us to align with the increasing demand from the premium mass segment.

So with that, this concludes today's call, and thank you all for your time today. And we will see you in the next earnings call. Thank you.

[Operator]

This is the end of Galaxy Entertainment Group's conference call. Thank you for joining us today. You may now disconnect.