Global Research Galaxy Entertainment Group (GEG) is one of six casino gaming concessionaires in Macau SAR and has the largest undeveloped land bank in Macau. The company currently operates six casinos and opened the new mega casino resort, Galaxy Macau, on 15 May 2011. Galaxy Macau has transformed GEG. The new mega resort, Galaxy Macau, has transformed GEG on many levels. If we were to add the 2010 results from StarWorld to the 2012 forecasts for Galaxy World, then the new resort will increase reported revenue by 120%, reported EBITDA by 200%, total employees by 233%, hotel rooms by 436%, and F&B outlets by 725%. But beyond the metrics, Galaxy Macau is not only one of the largest casino resorts in Macau, it has set new standards for interior finishes, functionality and family entertainment, in our view. Undeveloped land bank offers 15.5m sqf of additional GFA. GEG owns the largest contiguous piece of undeveloped land in Macau, spanning 31 hectares. We believe this land can yield 15.5m sqf of new resort facilities and we expect the company to announce major new developments as early as 2H11. We initiate coverage on GEG with an Overweight (V) rating and a target price of HKD19.37. The stock has run hard over the past 12 months, outperforming the Hang Seng Index by 359%. We believe the company continues to be in a major re-rating phase and the stock offers a potential return of 28%. Investment risks: Specific risks for GEG relate to the company’s ability to secure and retain sufficient staff to develop and operate its resorts. Generic risks for Macau casino concessionaires include unexpected changes in government gaming policy, or economic changes in China that can impair customer visitation and expenditure. Business concentration risk also exists given all of the company’s operations are largely centred in Macau SAR. Overweight (V) Target price (HKD) 19.37 Share price (HKD) 15.18 Potential return (%) 27.6 Dec 2010a 2011e 2012e HSBC EPS 0.23 0.58 0.93 HSBC PE 66.7 26.1 16.4 Performance 1M 3M 12M Absolute (%) 8.6 52.4 358.6 Relative^ (%) 15.2 54.2 282.8 Note: (V) = volatile (please see disclosure appendix) 30 May 2011 Sean Monaghan * Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6239 0655 [email protected]View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch MICA (P) 208/04/2011 MICA (P) 040/04/2011 Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Consumer & Retail Hotels Restaurants & Leisure Equity – Hong Kong Company report Free float (%) 50 Market cap (USDm) 8,066 Market cap (HKDm) 62,761 Source: HSBC Index^ Hang Seng Index Index level 22,747 RIC 0027.HK Bloomberg 27 HK Source: HSBC Galaxy Entertainment (27) Initiate OW(V): A company transformed Galaxy Macau: a market-leading resort We expect further announcements of new projects Initiate with OW(V) rating and TP of HKD19.37 based on weighted average of the SOTP and DCF valuations
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���Global Research
Galaxy Entertainment Group (GEG) is one of six casino gaming concessionaires in
Macau SAR and has the largest undeveloped land bank in Macau. The company currently
operates six casinos and opened the new mega casino resort, Galaxy Macau, on 15 May 2011.
Galaxy Macau has transformed GEG. The new mega resort, Galaxy Macau, has
transformed GEG on many levels. If we were to add the 2010 results from StarWorld to
the 2012 forecasts for Galaxy World, then the new resort will increase reported revenue
by 120%, reported EBITDA by 200%, total employees by 233%, hotel rooms by 436%,
and F&B outlets by 725%. But beyond the metrics, Galaxy Macau is not only one of the
largest casino resorts in Macau, it has set new standards for interior finishes, functionality
and family entertainment, in our view.
Undeveloped land bank offers 15.5m sqf of additional GFA. GEG owns the largest
contiguous piece of undeveloped land in Macau, spanning 31 hectares. We believe this
land can yield 15.5m sqf of new resort facilities and we expect the company to announce
major new developments as early as 2H11.
We initiate coverage on GEG with an Overweight (V) rating and a target price of
HKD19.37. The stock has run hard over the past 12 months, outperforming the Hang Seng
Index by 359%. We believe the company continues to be in a major re-rating phase and
the stock offers a potential return of 28%.
Investment risks: Specific risks for GEG relate to the company’s ability to secure and
retain sufficient staff to develop and operate its resorts. Generic risks for Macau casino
concessionaires include unexpected changes in government gaming policy, or economic
changes in China that can impair customer visitation and expenditure. Business
concentration risk also exists given all of the company’s operations are largely centred in
Note: (V) = volatile (please see disclosure appendix)
30 May 2011
Sean Monaghan * Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6239 0655 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
MICA (P) 208/04/2011
MICA (P) 040/04/2011
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Consumer & Retail Hotels Restaurants & Leisure Equity – Hong Kong
Company report
Free float (%) 50Market cap (USDm) 8,066Market cap (HKDm) 62,761
Source: HSBC
Index^ Hang Seng IndexIndex level 22,747RIC 0027.HKBloomberg 27 HK
Source: HSBC
Galaxy Entertainment (27)
Initiate OW(V): A company transformed
� Galaxy Macau: a market-leading resort
� We expect further announcements of new projects
� Initiate with OW(V) rating and TP of HKD19.37 based on weighted average of the SOTP and DCF valuations
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
Source: Datastream, Bloomberg concensus estimates, HSBC estimates for rated companies *TPs for Genting Berhad and Genting Malaysia were changed on 30 May.
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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Share price analysis
Figure 12: Galaxy Entertainment Group share price and other Macau listed casino companies
0
1
2
3
4
5
Dec-09 Feb-10 May -10 Aug-10 Nov -10 Jan-11 Apr-11
Galax y Entertainment SJM Sands ChinaWy nn Macau Melco Crow n Hang Send Index
Source: Datastream, HSBC estimates
Figure 13: Asia gaming company share price performance
Balance sheet GEG had a net-debt-to-equity ratio of 57% in
2010 and we forecast this will decline to -12% in
2012 (assuming no further new developments).
GEG’s gearing increased throughout the
construction phase of Galaxy Macau although we
now forecast this to rapidly decline as the cash
flow increases from the new operations.
Figure 37: GEG balance sheet (HKDm)
2009 2010 2011e 2012e
C/ assets Cash 3516 4003 10625 14863 Other 1109 1532 1532 1532 Total 4626 5536 12157 16395 NC Assets PPE 7175 12394 15219 15944 Intangibles 1391 1320 1249 1178 Other 5771 5936 5919 5902 Total 14337 19650 22387 23024 Total assets 18963 25186 34545 39419 C/Liabilities Borrowings 1383 2283 2283 2283 Other 4182 5725 9258 10307 Total 5565 8008 11541 12590 NC Liabilities Borrowings 4460 7144 10622 10622 Other 503 460 460 460 Total 4962 7604 11082 11082 Total 10528 15612 22623 23672 Net assets 8435 9575 11922 15747 Debt/Assets 31% 37% 37% 33% Net Debt/Equity 28% 57% 19% -12%
Source: Company reports, HSBC estimates
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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Share capital We forecast GEG will have 4.13bn shares in issue
at the end of 2011. Key equity issues include:
� 2005: issue of 1994m new shares by way of
restructure and acquisition of Galaxy SA
� 2007: issue of 640m shares by way of a
placement to Permira
� 2011: issue of 183m new shares from
conversion of convertible debt in 1H11
Figure 38: GEG shares in issue (m)
2009 2010 2011e 2012e
Shares beginning 3938 3942 3947 4130 New issue 3 5 183 1010 Buy back 0 0 0 0 Shares end of year 3942 3947 4130 4140 Weighted average 3938 3945 4135 4135
Source: Company reports, HSBC estimates
Figure 39: GEG shares in issue (m)
0
1000
2000
3000
4000
5000
2004 2006 2008 2010e
Shares beginning New issue
Acquisition of
Galax y SA
Placement to
Permira
Source: Company reports, HSBC estimates
Dividend policy and forecast GEG has yet to announce a dividend programme
and this largely reflects the fact that it has been in
the development phase of the StarWorld and
Galaxy Macau projects.
We have assumed that GEG will not commence a
dividend programme within the forecast period.
We expect the company to announce further resort
developments in the near term and suggest excess
cash flow will be dedicated to such projects.
In the absence of any short-term resort
announcements, we suspect the company will
commence the repayment of existing
bank borrowings.
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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Galaxy Macau
Appendix
� Galaxy Macau is a stunning new addition to Macau
� Cotai is where all the major new development is underway
Figure 40: Galaxy Macau casino resort located on Cotai, Macau SAR
Source: Galaxy Entertainment Group
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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Macau casino location map
Figure 41: Location of Macau casinos by concessionaire
3
1. Lisboa
2. Jai Alai
3. Kam Pek
4. Macau Palace
5. Casino Jimei
6. Lan Kwai Fong
7. Diamond
8. Casa Real
9. Marina10. Greek Mythology
11. Grandview12 Taipa
13. Pharaoh's14. Golden Dragon
15. Fortuna
16. Grand Emperor
17. Babylon
18. Grand Lisboa
19. Le Arc
20. Ponte 16
21. Oceanus
22. Cotai Project (PD)
Sociedade de Jogos de Macau Las Vegas Sands
1. Waldo
2. RIO3. President
4. Grand Waldo
5. StarWorld
6. Galaxy Macau
Galaxy Entertainment
Wynn Resorts
1. Wynn Macau2. Wynn Cotai (PD)
Melco PBL
1. Altira Macau
2. City of Dreams 3. Taipa Square
4. Macau Studio City (PD)
MGM Paradise
1. MGM Macau 2. MGM Cotai (PD)
UD = Under development
PD= Pre Development/Planning
Theme Park
Taipa
2
Golf Course(Harrah’s)
Go Cart
SportsDome
3
4
Sites “14,15,16”
GreenSpace
Coloane
Power Station
4
Pac On Terminal
Friendship Bridge
Macau-Taipa
Bridge
Sai Wan (Van) Br idge
Nam Van Lake
Macau Airport
Lotus Bridge
Zhuhai PRC(Hengqin Island)
Zhuh
aiPR
C
Zhuhai PRC Proposed Zhuhai-HK-Macau Bridge
Reservoir
Reservoir
Proposed Cross H
arbourTunnel
3
Crowne PlazaIntercontinentalHoliday Inn
6.
InterContinental (Ph I,II)St Regis (Ph III)Sheraton (PHIII)
4/5Four Seasons 3.
Venetian Macau 2.
Sands Macau1.
1618
20
10
2
3
1
1
12
11
1
3
2
5
1
71 5
19
13
9
62
42
35
Primary CasinoActivity Cluster
Primary CasinoActivity Cluster
SecondaryCasinoActivity Cluster
SecondaryCasinoActivity ClusterB
A
C
D
6
2141
1
17
Ferry Terminal86
CancelledHilton/ConradFairmont/Raf fles
7.
7
8
8.
Shun
Tak
2
23Sports
22
23. Cotai Project (PD)
5
China Sea
B
3
1. Lisboa
2. Jai Alai
3. Kam Pek
4. Macau Palace
5. Casino Jimei
6. Lan Kwai Fong
7. Diamond
8. Casa Real
9. Marina10. Greek Mythology
11. Grandview12 Taipa
13. Pharaoh's14. Golden Dragon
15. Fortuna
16. Grand Emperor
17. Babylon
18. Grand Lisboa
19. Le Arc
20. Ponte 16
21. Oceanus
22. Cotai Project (PD)
Sociedade de Jogos de Macau Las Vegas Sands
1. Waldo
2. RIO3. President
4. Grand Waldo
5. StarWorld
6. Galaxy Macau
Galaxy Entertainment
Wynn Resorts
1. Wynn Macau2. Wynn Cotai (PD)
Melco PBL
1. Altira Macau
2. City of Dreams 3. Taipa Square
4. Macau Studio City (PD)
MGM Paradise
1. MGM Macau 2. MGM Cotai (PD)
UD = Under development
PD= Pre Development/Planning
Theme Park
Taipa
2
Golf Course(Harrah’s)
Go Cart
SportsDome
3
4
Sites “14,15,16”
GreenSpace
Coloane
Power Station
4
Pac On Terminal
Friendship Bridge
Macau-Tai pa
Bridge
Sai Wan (Van) Br idge
Nam Van Lake
Macau Airport
Lotus Bridge
Zhuhai PRC(Hengqin Island)
Zhuh
aiPR
C
Zhuhai PRC Proposed Zhuhai-HK-Macau Bridge
Reservoir
Reservoir
Proposed Cross H
arbourTunnel
3
Crowne PlazaIntercontinentalHoliday Inn
6.
InterContinental (Ph I,II)St Regis (Ph III)Sheraton (PHIII)
4/5Four Seasons 3.
Venetian Macau 2.
Sands Macau1.
1618
20
10
2
3
1
1
12
11
1
3
2
5
1
71 5
19
13
9
62
42
35
Primary CasinoActivity Cluster
Primary CasinoActivity Cluster
SecondaryCasinoActivity Cluster
SecondaryCasinoActivity ClusterB
A
C
D
6
2141
1
17
Ferry Terminal86
CancelledHilton/ConradFairmont/Raf fles
7.
7
8
8.
Shun
Tak
2
23Sports
22
23. Cotai Project (PD)
5
China Sea
B
Source: HSBC
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Sean Monaghan
Important disclosures
Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 27 May 2011, the distribution of all ratings published is as follows: Overweight (Buy) 50% (23% of these provided with Investment Banking Services)
Neutral (Hold) 37% (20% of these provided with Investment Banking Services)
Underweight (Sell) 13% (16% of these provided with Investment Banking Services)
HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
GALAXY ENTERTAINMENT GROUP 0027.HK 15.90 26-May-2011 1, 5, 11Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 30 April 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 30 April 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures 1 This report is dated as at 30 May 2011. 2 All market data included in this report are dated as at close 25 May 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Galaxy Entertainment (27) Hotels Restaurants & Leisure 30 May 2011
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Disclaimer * Legal entities as at 04 March 2011 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch
Issuer of report
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch