Galaxy Entertainment Group Ltd

HKEX:27

Earnings Call Analysis

GEG Reports Stellar Q3 Results and Continued Recovery

Galaxy Entertainment Group (GEG) indicated a remarkable recovery in Q3 2023, with a remarkable 576% year-on-year EBITDA increase to $2.8 billion, due to relaxed travel restrictions boosting gaming, hotel, retail, and F&B revenue. They declared a special $0.20 dividend, evidencing their confidence and commitment to shareholder returns. GEG continues to expand market share, particularly with Galaxy Macau leading the charge. Q4 so far shows further gains, with various entertainment partnerships in place and big events planned. Staff levels remain controlled at 88% of 2019's despite expansion, with staff expenses at 76% of operational costs. Amidst aggressive investment in Macau's growth as a global tourism and leisure center, Q3 saw $1 billion spent on development, targeting $7 billion for the full year. GEG's investment includes the ongoing Cotai Phase 4 project and increased international presence, with offices in Tokyo, Seoul, and soon Bangkok, to attract high-value tourists. Their robust balance sheet showcases $24.8 billion in cash and investments.

Galaxy Entertainment's Strong Q3 Performance Signals Confidence and Growth

Galaxy Entertainment Group (GEG) witnessed a spectacular turnaround in the third quarter of 2023, buoyed by the easing of travel restrictions in Macau. The period was marked by an eye-catching 576% year-on-year surge in EBITDA, reaching $2.8 billion, and a quarter-on-quarter rise of 12%. This leap in earnings is noteworthy, even considering a $122 million reduction in EBITDA attributed to unfavorable luck in gaming operations. GEG also reported robust mass gaming revenues at 102% of 2019's pre-pandemic levels, indicating that consumers have eagerly returned to the gaming tables. Leading the charge, Galaxy Macau outperformed with revenues hitting a remarkable 121% compared to 2019, and StarWorld Macau maintained a solid 71%. The retail and hospitality segments showed similar vigor, with mall rentals and hotel and food & beverage revenues reaching 114% and 112% of pre-COVID levels, respectively.

Strategic Investments underpinning Long-Term Growth

GEG is doubling down on its commitment to Macau's vision of becoming a world center for tourism and leisure, injecting approximately $1 billion into development projects in Q3 alone, with a staggering planned investment of $7 billion for the full year. The strategic initiative includes the development of Cotai Phase 4, a grandiose, 600,000-square-meter project expected to complete by 2027. This phase will introduce an array of high-end hotels and a 4,000-seat theater, enhancing Macau's entertainment and retail offerings. Meanwhile, GEG has signed several multi-year agreements with prominent entertainment companies, with a line-up of major events and concerts poised to enthrall visitors in the coming months. On the international front, the company has established a presence in Tokyo and Seoul, and is setting up another office in Bangkok, seeking to bolster its reach within the high-value international tourist market.

Dividend Payment Reflecting Confidence and Commitment to Shareholders

Reflecting its robust financial performance and solid prospects for future growth, GEG has declared a special dividend of $0.20 per share, paid out on October 27th. This move underscores the company's strong position and ongoing commitment to delivering shareholder value, backed by a net cash position of $23.3 billion as of the end of September.

Efficiency and Cost Management as Cornerstones for Stability

To ensure the sustainability of its growth trajectory, GEG focuses on managing its operating expenses, with staff costs constituting approximately 76% of OpEx. Despite the expansion following the full opening of Phase 3, GEG is on course to deliver savings in headcount, with staff levels maintaining at 88% of the 2019 mark. The company has maintained a disciplined approach to its promotional environment, avoiding price wars and instead competing on service quality and facility offerings. GEG has also fulfilled its non-gaming commitment to the government's budget, staying on track with its financial obligations which include significant contributions to both OpEx and CapEx for the year.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for holding, and welcome to the Galaxy Entertainment Group's Management Update for the Third Quarter Results of 2023. 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] This conference call is being recorded.

I would now like to pass to Mr. Chan for our 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 Q3 '23 results. Joining me 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 include our customary disclaimers.

Macau has demonstrated a remarkable rebound, capitalizing on the relaxation of travel restriction earlier this year. The third quarter has proven to be highly promising with noteworthy growth across key metrics such as gaming revenue, hotel occupancy, retail and food and beverage.

For Q3, GEG reported EBITDA of $2.8 billion, up 576% year-on-year and up 12% quarter-on-quarter. We played unlucky in Q3, which reduced our EBITDA by $122 million. We are pleased to see a continued ongoing recovery in both visitor arrivals and associated gaming revenue.

In Q3, group's mass gaming revenue was approximately 102% compared with 2019's level. Specifically, Galaxy Macau performed exceptionally well, achieving 121% of 2019's level, while StarWorld was approximately 71%. Moreover, retail sales and subsequent mall rental has seen demand normalized post reopening. Mall rental in Q3 across our portfolio was $379 million, which was equivalent to 114% of 2019's level. Hotel and F&B revenue reached 112% after pre-COVID level.

Overall, we are pleased with the solid performance of the quarter. We paid a special dividend of $0.20 per share on 27th October this year. Our special dividend certainly demonstrate our continued confidence in the Macau market and GEG's future performance as well as our commitment to return capital to shareholders.

We are already halfway through Q4. Let me give you some color on the outlook. Following a solid Q3, we are pleased with the recovery situation we have moving into Q4. We continue to grow our market share, spearheaded by Galaxy Macau, while we actively reposition StarWorld. Indeed, we continue to see encouraging business performance.

Quarter-to-date, the continued recovery has been verified by the performance during National Day Golden Week holidays. Our hotels were effectively fully occupied for the period. In Q3, the successful launch of Raffles at Galaxy Macau, Horizon Premium Club and Andaz Macau has resulted in a meaningful improvement in gaming performance.

Q4 to date, we have seen further market share gains. We have signed a number of multiyear agreements with well-established entertainment companies. In coming months, we will continue to host a number of big events and concerts.

We continue to work hard at managing our cost structure while ramping up the business. Our current staff number is equivalent to 88% of 2019's level even after the opening of Phase 3. Staff costs represent around 76% of our OpEx. We are on track to deliver some headcount savings even with the resort expansion after the full opening of Phase 3 by year-end.

Our unwavering confidence in the future prospect of Macau is reinforced by our significant investment in the business. During Q3, we invested approximately $1 billion into development, bringing the year-to-date investment to $5 billion, and we are on track to invest $7 billion for the full year. This is a testament to our long-term dedication to helping Macau to achieve its vision of becoming a World Centre for Tourism and Leisure.

The development of Cotai Phase 4 is well underway. We are committed to creating a stunning destination that showcases renowned hotel brands, unrivaled entertainment options and world-class amenities. Phase 4 will include multiple high-end hotel brands new to Macau, together with a 4,000-seats theater, extensive F&B, retail, non-gaming amenities. It is approximately 600,000 square meters of development and is scheduled to complete in 2027.

We will continue to adjust the development time line in accordance with the market demand. And we believe that with the many amenities that we have added and will continue to add in the future will position us strongly for long-term growth.

Additionally, we have opened our first overseas offices in Tokyo and Seoul, and we're in the process of opening another office in Bangkok in order for us to tap into the international tourist market and opportunities. We do acknowledge that the competition for high-value international tourist is significant, and we'll do our best to support this Macau Government initiative.

Last but not the least, on the balance sheet, cash and liquid investments were $24.8 billion at the end of September, and we are in a net cash position of $23.3 billion.

That concludes my prepared remarks. Operator, please begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Angus Chan from UBS.

[Angus Chan, analyst]

Congrats on the top line and market share gains in Q3. My question is more on costs. Can you comment your OpEx Q-on-Q, how much has that gone up? And also, I guess there's been some questions around the promotional environment and reinvestment rates. Can you comment a bit on that as well Q-on-Q? How that's trended Q-on-Q and into October?

And lastly, Ted, if we -- if you could comment on the commitment -- non-gaming commitment to the government this year. Of the budget, how much have you spent? And are you on track to delivering that commitment this year? That will be all.

[Ying Tat Chan, executive]

Thank you, Angus. So first of all, on the OpEx, we start with a very low number this year because of the opening of the borders. And the August numbers represented by -- mainly by the staff costs, which should represent roughly about 80% of our total OpEx. And in Q3, in particular, it's actually 76%. And currently, the Q3 number -- staff number is actually 88% of the 2019's level. To be exact, it's 19,500 headcount at the moment.

And we believe that with this run rate after we opened up all the hotel rooms and amenities, we're still ramping up the Andaz operation and the rest of the service staff required. Throughout the -- by the end of the year, we believe that the number will be -- ramp up a little bit, but we still see a certain percent of savings compared to 2019. So we believe that it will be roughly more than [ 1/10 ], a 1,000 headcount saved after the full opening of Phase 3. And staff costs, as I said, represent roughly about 80% of the total office for your better modeling purpose.

Promotional environment, I think, currently, after the 3 quarters of the opening and the ramp of business, I believe that the promotion environment in Macau is quite in the range that we believe is quite acceptable. I think all operators are really, really sticking with the principle that we are really competing in service and facility rather than the price. So I think we're still in the range -- a comfortable range of competition at the moment.

For the third one, I think it's the commitment for our non-gaming commitment to the license for the next 10 years. Year-to-date, we spent our committed amount. And this year, we'll be around $3 billion [indiscernible]. And 2/3 of it, which is OpEx, and 1/3 is actually CapEx. I think we are spending almost by 7%, 8%. And we have -- we believe that we will be committed fully for the year.

More importantly, I think for Galaxy's commitment to the market, I think we are 2/3 OpEx for the 10 years and 1/3 being CapEx. And also, we are in the early stage of development and still in the phase of development and negotiation with the government at the moment. So I think that number could change in terms of the mix of the CapEx and OpEx. So we'll give you more color when we have more information going forward in the next few quarters.

[Operator]

Our next question is from D. S. Kim from JPMorgan.

[D. S. Kim, analyst]

Actually, Angus just asked all my questions that I wanted to check. But my follow-up here would be, a, when you remarked, we have continued to gain market share in fourth quarter to date, can you give us some numbers, say, versus third quarter or versus 2019 so that we can have a better color and sense where we are? And if possible, maybe if we can talk specifically about mass GGR or non-VIP GGR today or fourth quarter to date or October versus anything that we can benchmark would be really helpful.

And second question, for the modeling purpose, and like -- when we look at retail revenue in third quarter, we couldn't help but notice, it came down a little -- it's still very strong. It's well above pre-COVID level. But sequentially quarter-over-quarter, it's down about 7%. I think we asked in 2Q, why it was down sequentially, and I think it happened again. So just wanted to check, any particular reasons here? And how has been the tenants turnover, the retail turnover itself been tracking over the past couple of quarters to have a sense on the underlying demand.

And maybe if I may ask one final question. Can I confirm or doublecheck what kind of room ADR we are using for internal transfer pricing for the compings and whatnot in recent quarters? I mean, have you changed this practice or reset, readjusted this ADR for the comping?

Because I think when you talk -- when we talk to some of your competitors, some of the other operators have been adjusting this a bit, making it more realistically higher than what they had been using, hence, in turn, boosting both non-gaming revenues and contract revenue or reinvestment ratio on the accounting perspective, although in reality, it has zero impact on EBITDA. So I just wanted to have some sense on what kind of room ADR we have been using. And have they -- have we been adjusted for the internal transfer pricing purpose here? Sorry for lots of questions, Ted.

[Ying Tat Chan, executive]

Don't worry, D. S., I'm happy to answer all the questions. So why don't we start with the last one, so the ADR of gaming or internal transfer. I think the purpose, as you know, is not really for setting up the non-gaming revenues, also on looking at the [ benefit ] for our sales team on the programs.

So actually, we really increased the gaming ADR this year compared with last year because during COVID time, we would like to reduce it as much as we can. As long we can cover all the cost of the operation, it's fine during COVID. So we really adjust the ADR this year. Quarter-to-quarter, Q2 to Q3, we did not really change that much or, in fact, we stay intact in terms of the non-gaming -- in terms of the gaming ADR. So that's for the room.

In terms of retail, first of all, I think we have to acknowledge that Galaxy's rental income recognition is a bit different from the other gaming company, I believe. We do recognize the rental income in terms of both base rent as well as the turnover rent on a monthly basis, not on a cumulative basis. So we reflect accurately on the monthly income and sales volume directly on a monthly basis. So that's one.

Secondly, I think we did experience in the last few quarters, perhaps that's because of the revenge spending behavior of our customers after the borders reopened. We see a huge trading volume in Q1 and Q2. And also, we also see a lot of volatility on the high jewelry segment of the retail business.

So these are the 2 major areas that we experienced. And we still see a very solid base rent and some of the drop and increase in the turnover rent for various different segments of the mall. So I think that's the outcome resulted into Q3. We see some of the reduced rental income from Q2. I must say, in a more forward-looking perspective, you should see Q3 and Q4 as a more normalized period after the revenge spending behavior in the first quarter and the second quarter.

In terms of the, yes, market share performance quarter-to-date, we did experience an improvement for the fourth quarter. Q3 total market share grew around 18.5%. But of course, our mass revenue is actually -- our performance in mass is much, much bigger. So I think in the Q4, we continue the trend.

I'll give you a better reference, if you like. In Q3, our mass revenue was just over 100% of 2019's level. And quarter-to-date, on a company level, we achieved 110% to 120% range already. So you see some improvement there, in particular, so using that calculation in terms of the market share, if you like.

[D. S. Kim, analyst]

That's very insightful and really great color. And just to add on to that ADR point, I totally understand and I think it makes a lot of sense. And -- but the reason why I asked is not because there was any economic impact or anything, but it's just that some investors seem to have been confused by a surge in reinvestment ratio for some of our peers, not us, who reported today as well. And one of the reason is that they really adjusted the ADR this past quarter, and just wanted to clarify if there was anything like that. But glad to hear that. We didn't have such one-off issues this quarter.

[Operator]

[Operator Instructions] And the next question is from Simon Cheung from Goldman Sachs.

[Simon Cheung, analyst]

I think I have 2 questions. One in relation to, again, your Galaxy Macau Phase 3. I know the opening schedule for Raffles and Andaz is actually a mix, one in August and one in September. And that resulted in a bit of a volatility in terms of the room occupancy capacity, et cetera, et cetera. So maybe my question is, if you remember, I think in the second quarter, your room capacity was running at about 85%. Perhaps you can share with us, what is the third quarter room capacity? And equally, what's the fourth quarter room capacity? Are we running at 120%, 130%? And correspondingly, I think on Angus' question, just wondering if you can share with us the exact daily OpEx per day number in the third quarter. So that's on the first question.

The second one is, when you're at your -- [ mass GGRs ] are back to 110%, 120%. Obviously, it looks like it's driven by Galaxy Macau, but I think StarWorld this last quarter, the EBITDA momentum was still quite slow. I remember in the last several results, you mentioned some of the ramp that you're preparing at StarWorld. Perhaps give us an update on that. And obviously, your competitors are also doing some [ remodel ] on the property in Peninsula. How are you thinking about your recovery trajectory going forward?

[Ying Tat Chan, executive]

Okay. So Simon, in terms of the room count for the whole company, we're currently roughly about 5,000 rooms; and for Andaz, let's say, 700 rooms. So we are able to only ramp up to around 300 rooms at the moment. So in Q3, Raffles was actually start with early July, and we have successfully opened fully for that 450 suites. And Andaz actually opened in middle of September, and we would be only opened roughly 100 and then -- 100, 150, and then now ramp up to around 300 rooms. Our goal is actually to ramp up fully not later than the Chinese New Year. So I hope that will clarify with that.

For the OpEx, I think I explained quite a bit in terms of the staff costs, but -- and also the total OpEx level. Pre-COVID level, we are running, on a daily basis, USD 3.4 million per day. Currently, it's about 90% of that number. And we still experienced a little bit higher after we add on all this headcount to ramp up Andaz and the remaining on gaming facilities. So we -- as I said, we'll effectively save around 1,000 headcount after all this incremental facility being added.

Finally, in StarWorld. I must say, StarWorld, starting from mid of August, we experienced a total casino floor re-layout and also some changes since middle of August to end of September. So almost half of the quarter, we experienced some business interruptions in terms of the re-layout. It's quite a major one. And effectively, by the end of the quarter, the number of table accounts from -- in StarWorld has been reduced by 54 tables. So currently, we are running about 160 to 166 tables in StarWorld to better utilize the table inventory, to support the need or better service the needs of Galaxy Macau in Q4.

So the guideline, I think, is actually from October going forward, you see a more normalized operation in StarWorld. Having said that, we still see some opportunities in repositioning StarWorld in this Peninsula side. We see some unique opportunity in the [ costa ] area amongst MGM, Wynn and StarWorld area. So we continue to see a great opportunity over there. So the repositioning plan, we think that it will be a year-long plan for StarWorld. But having said that, we believe the operation actually normalized in October going forward.

[Simon Cheung, analyst]

Can I just -- as I remember, can I have one quick follow-up? Just remember, last quarter or last time when we met, you mentioned that you're very pleased with how Raffles, particularly the Horizon Club is doing in terms of capturing the premium mass segment. I'm not sure whether quantitatively or qualitatively, you can maybe share with us how you're thinking about the performance of Raffles in particular on that premium mass segment, which obviously is the highly competitive segment that everyone has been focusing in.

[Ying Tat Chan, executive]

We were extremely happy with the performance on that particular area. I'm sure you visit the place. And in both terms of metrics such as drop and whole percentage and in terms of the occupancy, it's also the high amount of all the premium mass area that we have experienced. So with this experience, I think we are going to perhaps extend to some of the area in the proximity area in the casino floor next to Raffles going forward in the next few quarters that you'll see. So the number is actually by far the best performing area that we have.

[Simon Cheung, analyst]

Okay. Congrats on a solid set of results.

[Ying Tat Chan, executive]

Thank you, Simon.

[Operator]

There are currently no more questions.

[Ying Tat Chan, executive]

Thank you so much, and we'll see you in the next quarter.

[Operator]

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