The Motley Fool

Macau Gaming: Does Galaxy Entertainment Have a Strong Business Model?

Galaxy Entertainment Group Limited (SEHK: 27), or GEG, is a hospitality and gaming company. It develops and operates hotels, gaming and integrated resort facilities in Macau. The group’s main segments are gaming and entertainment, construction materials and corporate and treasury management.

The group is one of the largest operators of casinos and hotels in Macau. GEG operates three City Club casinos: Waldo Casino, President Casino, and Rio Casino. On the hotels front, some of the luxury hotels the group owns include Banyan Tree Macau and Ritz-Carlton Macau.

With Chinese travellers flocking to Macau in recent years due to an increase in affluence, all the casino operators have witnessed booming business and great prospects.

That said, how can investors determine if GEG has a strong business model? To find out, I looked at three aspects of the business over a five-year time horizon.

Dividends

In terms of dividends, GEG’s track record has been rather erratic. Dividends fell by more than half over FY 2014-2015 as revenue and net profit plunged but did not really pick up again until FY 2017.

FY 2018 saw the payment of special dividends which boosted the total annual dividend to HK 91 cents, and it seems that the dividend is on the way to recovering nicely after the crackdown four years ago. FY 2019 may continue to see better dividends being paid as the group generated healthy FCF in prior years.

Financials and margins

GEG’s five-year financial summary is shown above. Revenue fell from FY 2014 to FY 2015 as a result of the Chinese Government (and President Xi Jinping) clamping down on luxury spending as part of an anti-corruption drive.

This negatively impacted all manner of spending for luxury goods such as hard liquor and jewellery, and crimped consumption for services such as casinos as the anti-corruption drive rounded up many rich officials who used their ill-gotten gains at the casino tables.

However, over time, revenue started to increase again after the anti-corruption purge, while net profit also trended upwards in line with revenue. Net profit margin, which had plunged from 20.9% to 10.8% in the wake of the crackdown, steadily increased until it surpassed the FY 2014 level, hitting an impressive 24.5% in FY 2018.

Free cash flow

GEG has a track record of generating very consistent free cash flows (FCFs), as can be seen by the five-year FCF history for the group.

FY 2015 saw a big dip in FCF due to the previously mentioned anti-corruption crackdown, but this has more than recovered in subsequent years as FY 2016 to FY 2018 saw FCF of more than HK$10 billion (US$1.29 billion) generated per year.

Strong business with great prospects

The above shows that GEG has a strong business and track record along with great prospects. The Chinese are continuing to spend and as the group is one of the largest players in Macau, it will end up benefitting from this trend over the next few years.

However, investors need to be mindful of risks such as regulatory and political risks, as we may see a repeat of what occurred in FY 2015 should another crackdown be announced by the authorities.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang does not own shares in any of the companies mentioned.