Galaxy(27.HK): Maintain BUY into New Openings

What’s New -The Company reported Q4 revenues and Adjusted EBITDA in line with street estimates. Group revenues were HK$16bn down 15% y/y, and 8% q/q. Mass gaming revenues were slid 11% y/y and VIP fell 17%. Adjusted EBITDA in the quarter was HK$2.7bn, falling 25% y/y and 19% q/q. EBITDA margins were 16.6%, 2.2ppts lower than a year ago. The company finished 2014 with net cash position of HK$9.4bn and very little gearing. Management proposed a HK$0.28/share special dividend. Last year Galaxy paid a HK$0.70/share dividend.

Highlights from the Call -Starworld revenues fell 27% y/y and property EBITDA dropped 38%. Galaxy Macau Phase I revenues declined 8% while EBITDA declined 19%y/y. Hotel occupancy rate was 96% at Starworldand 97% at Galaxy. The company saw 5 VIP rooms operated by smaller junkets close at the start of the year and Galaxysaid they wouldfocuson working with the largerand bettercapitalized junkets going forward. The company is on schedule to open new properties Broadway and Galaxy Phase II in 69 days on May 27th, 2015. This will increase the company’s hotel capacity by 50%. Room bookings have already begun. Our estimates assume 200 gaming tables received at the opening.

Forecasts and Valuation -The outlook remains very weak for gaming in Macau. We’re forecasting 24% decline in industry GGR for 2015. GGR levels could approach 2011 values. WE estimate March GGR willdrop 37%y/y given the daily run-rates trend through the first half of the month.

We are lowering our 2015 estimated EPS for Galaxy from HK$3.43 to HK$2.26 and our 2016 EPS from HK$4.07 to HK$2.56. We are moving away from SOTP valuation methodology, instead rolling the new property results into group results pending an imminent opening of Galaxy Macau Phase 2. Our target EV/EBITDA multiple remains unchanged at 12X FY2016 EBITDA estimates of HK$13.7bnand net cash of HK$14.3bn. We are lowering our target price from HK$62/share to HK$42/share. Our targetprice does not include valuation for Phases 3&4. Galaxy remains our top pick in the sector. We are maintaining a BUY recommendation on the stock based on undemanding valuations.

Downside Risks -1) Slower-than-expected growth in gaming revenues; 2) Delays and higher-than-expected costs in completing Galaxy Macau Phase 2; 3) Changes in China visitor policies that could impact visitor growth in Macau. 4)Less than optimal gaming table allocation from the DICJ.