Galaxy Resorts (Macau) Trapped In Junket Syndrome

Posted: March 21, 2012 in Uncategorized

21st Mar 2012  Wed

Special commentary on Macau casinos

by:  Steve D.  (Hong Kong)

The recent released 2011 performance results of Galaxy Entertainment Group is not a surprised to long-time observers of Macau casinos. Though it might be a surprise to those uninitiated investment analysts.

As reported, Galaxy’s (net) income hits HK$3b ((approx. USD450m) for the year 2011 and it is still below the expectations of most analysts.  To many investors of Galaxy stocks, it does not make sense that with increase business pie and volume, Galaxy was not able to achieve the expected revenue/income level.

The reason is indeed very clear. Galaxy’s casino revenue mainly comes from Junket Rooms. Junket derived casino revenue is amounting to at least 97% of Galaxy’s total casino revenue.  That’s to say, Galaxy’s Ebitda margin is the lowest among all Macau major casino operators. Most of Galaxy’s casino revenue are split by two “value-destroyers”, i.e.  Gaming tax and Junket Rooms.  In which, gaming tax would take away 40% of casino wins and Junket Rooms, close to 45% of casino wins.  That said, Galaxy is only left with at best 15% of gross casino wins before costs.

So, the figure of HK$3b (approx. USD450m) “net” income bearing in mind the above factors it is not an impressive enough performance. Observers who are familiar with Macau casino landscape knew this situation very well.

What Galaxy needs to do going forward is to systematically expand its Mass gaming pie with greater competitive service and (casino) floor efficiency. Galaxy needs to strike a balance of at least 25% (Mass) vs 75% VIP distribution of gaming revenues in order to create for the group strong Ebitda margins. Otherwise, it is hard for the group to manage debts vis-a-vis net return on investment. Simply put, having a larger land-bank at Cotai Strip is not an advantage. Just look at Galaxy’s higher than industry P/E ratio.

 

After costs expenses, Galaxy is probably left with <10% operating margin...

 

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