Galaxy Entertainment Group [0027.HK]

March 27, 213 Galaxy Entertainment Group [27.HK] FY212 Results Margin Expansion Will Continue Marginal beat on net profit of HK$7,378m, up 146%. Revenue of HK$6,746m at 38% year on year (YoY) was in line with our expectations, while lower-than-expected operating expenses produced a 6% positive surprise to our earnings estimate. Net margin expanded to 13% from 7% in 211, with the continued ramp-up of Galaxy Macau. As expected, the company did not declare a dividend despite its net cash position of HK$bn, explained as necessary for upcoming projects. More room to improve table yield in Cotai. We believe the margin expansion story will continue in 213, boosting earnings growth. Excluding Sands China, which will benefit from the ramp-up of Sands Cotai Central, we believe GEG will achieve the sector s strongest growth in gaming volume. Galaxy Macau is running at a low mass market table yield, providing more room to cater to increasing numbers of visitors by train. With the continuing ramp-up, we expect net profit to grow 3% in 213. Macau Gaming Sector BUY Close: HK$33. (Mar 26, 213) Target Price: HK$37.4 (+13%) Price Performance Capex budget for Galaxy Macau 2 up by 23%. GEG announced a rise in total project capex from HK$16bn to HK$19.6bn. The increase is largely for adjustments in scale, and partly for cost inflation. We see GEG putting more effort into improving nongaming areas, which may reduce return on investment (ROI), but a necessary investment to secure table approvals from the government in future. Reiterate BUY, lift TP to HK$37.4. After updating 212 results and fine-tuning the capex budget, we revise upward our 213 net profit forecast by 2% to HK$9,634m. On the change in time horizon and improved long-term visibility, we revise upward our DCF-derived target price (TP) by 11%, for an implied 16x 213E PER. At the industry level, it was anecdotally observed that the VIP segment is improving fast while mass gaming is growing at >3%. We believe the pressure from anti-corruption measures will fade out along with the conclusion of Lianghui, and the sector will benefit on stable growth from both mass market and VIP gaming. GEG remains our top pick of the sector along with Sands China, for its increasing exposure to the mass market in Cotai. Market Cap US$17,914.9.m Shares Outstanding 4,26.3m Auditor PWC Free Float 3.8% 2W range HK$16.94-3.7 3M average daily T/O US$2.1m Major Shareholding Management (48.%) Source: Company, Bloomberg Turnover (HK$m) 41,186 6,746 63,463 71,11 8,647 Net profit (HK$m) 3,4 7,378 9,634 13,377 17,78 Net margin (%) 7.3 13. 1.2 18.7 21.8 EPS (HK$).73 1.76 2.3 3.19 4.2 Change (%) 219.3 142. 3.6 38.9 31.4 PER (x) 4.4 18.8 14.4 1.3 7.9 Yield (%) - - - - - Angela Han Lee (82) 3698-6318 angelahanlee@chinastock.com.hk John Mulcahy (82) 3698 6889 johnmul@chinastock.com.hk 1

Key financials Profit & loss (HK$m) Cash flow (HK$m) Total revenue 41,186 6,746 63,463 71,11 8,647 Net income 3,4 7,378 9,634 13,377 17,78 Other income/gains, net 13 246 26 27 283 Depreciation and amortisation 1,133 1,887 1,8 1,961 1,97 Gaming tax and lev ies (1,117) (2,72) (23,136) (26,64) (29,498) Change in working capital 2,74 1,2 1,2 611 79 Junket commission (14,994) (18,432) (19,987) (2,78) (21,66) Other operating cash f low 4 13 3 26 2 Raw materials/consumables used (7) (1,17) (1,81) (1,29) (1,393) Operating cash flow 7,111 1,82 13,44 16,476 2,768 Amortisation and depreciation (1,248) (1,83) (1,8) (1,961) (1,97) CAPEX (6,284) (3,473) (,219) (6,997) (8,797) Employ ee benef it expenses (3,276) (4,72) (4,32) (,44) (,614) Proceeds f rom sale of PPE 12 11 48 6 8 Other operating expenses (2,476) (3,16) (2,942) (2,793) (2,67) Other inv esting cash f low (2,64) 1,49 (136) (131) (132) EBITDA 4,683 9,771 12,1 1,961 2,197 Investing cash flow (8,336) (1,971) (,36) (7,63) (8,872) Operating profit 3,46 7,829 1,18 13,92 18,26 Proceeds f rom borrowings 4,246 836 491 (189) (38) Financial costs (4) (13) (3) (26) (2) Share issue 22 3 - - - Change in fair value of deriv ativ es (16) - - - - Other f inancing cash f low 18 (18) 2 (121) (86) Share prof its with JV entities 169 19 131 133 132 Financing cash flow 4,448 73 11 (31) (124) Share prof its with associates Prof it bef ore tax 3,61 7,426 9,781 13,9 17,813 Net change in cash 3,222 9,61 8,748 9,12 11,773 Tax expenses (32) (4) (8) (97) (137) Prof it af ter tax 3,3 7,38 9,71 13,462 17,676 Minority interests (26) (3) (67) (8) (98) Net profit 3,4 7,378 9,634 13,377 17,78 Basic EPS (HK$).73 1.76 2.3 3.19 4.2 Key ratios Total DPS (HK$) - - - - - Rev enue growth (%) 113.8 37.8 11.8 12.7 12.8 EBITDA growth (%) 29.6 18.7 23.9 31.9 26. Operating prof it growth (%) 197. 126.6 3.1 37. 3. Balance sheet (HK$m) Net prof it growth (%) 234.3 14.6 3.6 38.9 31.4 Cash and cash equivalents 7,21 16,3 24,13 33,89 44,338 EBITDA margin (%) 11.4 17.2 19.1 22.3 2. Inv entories 138 139 249 278 29 Operating margin (%) 8.4 13.8 16. 19. 22.6 Debtors and prepay ments 1,79 1,971 2,742 3,11 3,3 Net margin (%) 7.3 13. 1.2 18.7 21.8 Other current assets 31 414 29 214 29 ROA (%) 8.4 16.6 17. 18.9 19.7 Total current assets 9,283 18,823 27,714 36,682 48,371 ROE (%) 21.1 33.8 3.6 29.8 28.2 PPE 17,469 18,264 21,82 27,1 34,16 Net debt to equity (%) 31.1 Net Cash Net Cash Net Cash Net Cash Leasehold land and land use rights 4,444 4,391 4,33 4,274 4,29 Quick ratio (x).9 1.2 1.6 2.1 2. Intangible assets 1,27 1,14 937 77 63 Current ratio (x).9 1.2 1.6 2.1 2. Other non-current assets 3,297 1,87 1,939 2,72 2,24 Interest cov erage ratio (x) 8.6 1.3 19. 26. 34.7 Total assets 3,764 44,389 6,727 7,799 89,43 ST borrowings 1,142 4,966 4,3 3,37 4,336 Creditors and accruals 8,829 1,327 12,19 13,23 14,668 Other current liabilities 22 41 42 44 48 Total current liabilities 9,993 1,334 17,64 17,14 19,1 LT borrowings 1,31 6,291 7,24 8,22 7,186 Revenue (HK$m) Other non-current liabilities 97 469 6 2 32 Net gaming wins 38,433 2,647 8,682 66,19 74,996 Total liabilities 21,121 22,94 24,866 2,647 26,77 City Club casinos 118 11 146 142 139 Share capital 417 42 42 42 42 Tips received 18 19 19 2 2 Reserves 13,8 21,433 31,67 44,444 62,22 Hotel operations 1,34 1,867 2,37 2,3 2,627 Shareholders' equity 14,222 21,83 31,487 44,864 62,442 Administrativ e f ees 9 12 14 16 18 Minority interests 421 441 374 288 191 Construction materials 1,74 2, 2,226 2,9 2,846 Total equity & liabilities 3,764 44,389 6,727 7,799 89,43 Total revenue 41,186 6,746 63,463 71,11 8,647 BPS (HK$) 3.41.32 7.61 1.78 14.96 2

Comparable Valuation Table Company Ticker Price 2-Wk Price Range Mkt Cap 3m Avg PER EV/EBITDA Turnover 211 212 213E 211 212 213E (HK$) (HK$) (US$m) (US$m) (x) (x) (x) (x) (x) (x) SJM HOLDINGS LTD 88 HK 19.44 12.34 / 22.1 13,862 21.1 2.2 16. 14.7 13.1 1.7 1.1 SANDS CHINA LTD 1928 HK 39.9 2.6 / 39.9 41,314 7. 36. 32.3 23. 29.4 24.8 18.9 GALAXY ENTERTAIN 27 HK 33. 16.94 / 3.7 17,869 2.2 4.4 18.8 14.4 28.7 13.8 11.1 WYNN MACAU LTD 1128 HK 2.2 14.62 / 2. 13,2 27.2 17.8 16.9 1.4 14.2 13.7 12.4 MELCO CROWN ENTE 6883 HK 8.2 24. / 8.6 12,434.1 4.8 28. 2.9 19. 1.6 12.8 MGM CHINA HOLDIN 2282 HK 16.96 9.1 / 18.4 8,284 18.1 19.7 14.2 12.8 13. 11.7 1. Simple Avg 3. 21. 16.9 19.6 1. 12. Mkt Cap Avg 32.7 24.1 18. 22.8 17.7 14.2 Company Dividend Yield PBR ROE Net Debt/Equity 211 212 213E 211 212 213E 211 212 213E 211 212 213E (%) (x) (x) (x) (x) (x) (%) (%) (%) (%) (%) (%) SJM HOLDINGS LTD 3.8 4.6.1 6.2.4 4.9 27.1 3.8 33.9 Net Cash Net Cash Net Cash SANDS CHINA LTD 2.9 3.4 3.3 7. 7.4 6.9 2. 22.9 3. 16.6 17.4 17. GALAXY ENTERTAIN - - - 9.7 6.2 4.3 9.8 21.1 33.8 3.1 2.2 Net Cash WYNN MACAU LTD.9. 4.9 26.1 21.2 1.8 147. 12.4 12.2 Net Cash Net Cash 16.3 MELCO CROWN ENTE - - - 3.8 3.4 2.9 1. 13. 14.8 39. 17.6.3 MGM CHINA HOLDIN 4.8 6. 6. 14.6 1.9 9.1 1.8 74.3 76.6 6.1 Net Cash Net Cash Simple Avg 4.3 4.8 4.9 11.3 9.1 7.3 3.4 47.9 48. Mkt Cap Avg 2.7 3. 3. 1.1 8. 7. 4.9 39.3 42.1 Source: Bloomberg, CGIHK Research March 26, 213 Q4: Cotai Is Strong But Peninsula Lost Market Share Stable Q4 in Cotai. Galaxy Macau s adjusted EBITDA was up 6% quarter-on-quarter (QoQ) to HK$1,87m at a stable margin of 21%. QoQ revenue growth of % has proved that this operation has achieved stable and continuous improvement since opening. 11% QoQ growth in mass gaming revenue was the main driver during the quarter, due to an improved win rate to 32.3%, both luck and game-mix driven. While VIP gaming volume declined by 3% QoQ, VIP revenue grew 4% QoQ on a relatively high win rate. We see some market-share dilution in the VIP segment (industry Q4 growth at 7% QoQ) resulting from the new supply in Cotai in September last year, and the negative impact may gradually fade out from 2H 213. Relatively weak Q4 in peninsula. StarWorld s performance retreated, with adjusted EBITDA of HK$646m, down 23% QoQ. 4% QoQ decline in revenue was the main cause, impacted by relatively low VIP win rate. VIP win rate was 2.8%, lower than 3.% in Q3 and 3.1% in Q4 211. Due to its focus on VIP and premium mass players, we believe the unfavorable macro environment had a bigger negative impact on StarWorld compared with other operators with more contribution from mass gaming. We see further market share loss to Cotai properties as another reason, as players prefer newer casinos with better facilities. As mentioned during the Q3 announcement, GEG is implementing initiatives to rejuvenate stagnant growth of StarWorld s VIP segment, so we see additional amenities or new gaming mix might be a potential catalyst from 2H 213. 3

Quarterly Updates HK$m 1Q11 2Q11 1H11 3Q11 4Q11 FY211 1Q12 2Q12 1H12 3Q12 4Q12 FY212 Group Revenue,726 7,94 13,666 13, 14,2 41,186 13,2 1,122 28,322 14, 14,42 6,746 3% -1% 38% Adjusted EBITDA 712 1,16 1,818 1,793 2,138,749 2,13 2,9 4,712 2,6 2,3 9,847-3% 19% 71% Adjusted EBITDA breakdown Galaxy Macau - 376 376 973 1,232 2,81 1,3 1,6 2,9 1,77 1,87 6,27 6% 2% 13% StarWorld 664 68 1,349 779 827 2,9 82 948 1,8 843 646 3,289-23% -22% 11% City Clubs 7 49 16 32 4 183 43 39 82 39 42 163 8% -7% -11% Construction Materials 68 11 178 117 139 433 83 14 228 113 118 49 4% -1% 6% 4Q12 QoQ 4Q12 YoY FY212 YoY Galaxy Macau Revenue - 2,4 2,4 6,39 7,61 16,4 7,2 8,8 16, 8,3 8,7 33, % 14% 11% VIP gaming - 1,8 1,8 4,867,26 12,193,12 6,287 11,4,72,96 23,83 4% 8% 89% Mass gaming - 4 4 1,4 1,386 2,84 1,93 1,717 3,3 1,88 2,96 7,291 11% 1% 17% Electronic gaming - 114 114 262 269 64 298 271 69 313 328 1,21 % 22% 88% Others - 86 86 27 429 722 189 2 731 382 32 1,416 Adjusted EBITDA - 376 376 973 1,232 2,81 1,3 1,6 2,9 1,77 1,87 6,27 6% 2% 13% Adjusted EBITDA margin - 16% 16% 1% 16% 16% 18% 18% 18% 21% 21% 2% Occupancy rate - 88% 88% 91% 91% 9% 89% 99% 94% 97% 9% 9% Turnover VIP gaming -,, 162,824 166,847 379,671 171,393 186,442 37,8 173,29 167,9 698,72-3% % 84% Mass gaming - 2,4 2,4,41,61 13,92,871 6,41 11,9 6,297 6,497 24,76 3% 1% 89% Electronic gaming - 1,8 1,8 4,4 4,289 1,129 4,346 4,38 8,7,34,484 19,6 3% 28% 93% Win rate VIP gaming - 3.% 3.% 3.% 3.3% 3.2% 3.1% 3.4% 3.2% 3.3% 3.6% 3.3% Mass gaming - 17.% 17.% 2.9% 24.1% 21.7% 27.1% 28.4% 27.8% 29.9% 32.3% 29.% Electronic gaming - 6.3% 6.3% 6.% 6.3% 6.4% 6.9% 6.2% 6.%.8% 6.% 6.2% StarWorld Revenue 4,93,47 1, 6,4 6,1 22,,,8 11,3,2, 21, -4% -18% -4% VIP gaming 4,436 4, 8,9,8,461 2,22 4,74,11 9,9 4,416 4,98 18,383-7% -2% -9% Mass gaming 362 366 728 433 1,661 64 4 1,19 618 76 2,433 14% 41% 46% Electronic gaming 7 49 119 8 64 241 62 6 122 9 66 247 12% 3% 2% Others 8 132 23 4 7 346 12 8 169 17 13 437 Adjusted EBITDA 664 68 1,349 779 827 2,9 82 948 1,8 843 646 3,289-23% -22% 11% Adjusted EBITDA margin 13% 14% 13% 12% 14% 13% 1% 16% 16% 16% 13% 1% Occupancy rate 97% 97% 97% 99% 98% 98% 98% 98% 98% 99% 99% 99% Turnover VIP gaming 11,424 18, 39, 18,481 173,981 663,886 176,117 162,971 339,1 147,64 146,91 633,67 % -16% -% Mass gaming 1,94 2,1 4, 2,24 2,317 8,616 2,392 2,374 4,76 2,627 2,8 9,978-2% 12% 16% Electronic gaming 1,4 1,2 2,7 917 1,34 4,2 927 83 1,77 882 91 3,4 2% -13% -12% Win rate VIP gaming 2.9% 2.9% 2.9% 3.2% 3.1% 3.1% 2.7% 3.1% 2.9% 3.% 2.8% 2.9% Mass gaming 18.1% 17.3% 17.7% 18.9% 21.3% 18.9% 23.2% 22.% 22.9% 23.1% 26.7% 23.9% Electronic gaming 6.7% 4.8%.8% 6.3% 6.2% 6.% 6.6% 7.2% 6.9% 6.7% 7.3% 7.% 4

Expansion Schedule of Galaxy Macau Phase 1 Phase 2 Phase 3 Phase 4 Opening May 211 Mid 21 Begin construction in late 213 / early 214 Budget HK$16.bn HK$19.6bn HK$4bn-bn HK$8bn-1bn Gross floor area,m 2 in Cotai 4,m 2 in Cotai 1,,m 2 in Cotai 28,m 2 in Cotai Capacity of gaming facilities 4 tables and 1, slots tables and 1, slots 6 tables and 2, slots 4 tables and 1, slots No. of hotel rooms 2,26 1,3 4,2 Not disclosed yet Retail space 3,m 2 6,m 2 12, m 2 for retail, theatre MICE space MICE space (18-2 people), F&B Other use (1,1 people) (2, people) and leisure space MICE space, m 2 Galaxy Macau 2 on track. We believe Phase 2 construction is on track to open in mid 21, as the next major property in Macau. A notable change in the schedule is on project budget, which was lifted from HK$16bn to HK$19.6bn. The company clarified that the change is partly from Phase 2 fit-out enhancements and scope adjustments, and partly for cost inflation. We think the main increase is for enhancement in non-gaming facilities, as the projected gaming capacity has not changed. However, we believe improved nongaming areas should help in the longer term despite some downside in ROI, since it is becoming more important in winning table approvals from the government. As a highlight, retail space of Phase 2 with ~16 outlets will be much larger than Phase 1, so it will not only attract family visitors but also generate handsome rental income as in the Venetian Macao. Galaxy Macau 3 & 4. No material updates announced since it is still at planning stage. GEG intends submitting plans this year to commence construction in late 213 / early 214. Since the construction will last ~3 years, we expect the property to make a contribution starting from 216-218. Valuation Valuation. GEG is trading at 14.4x our 213E earnings forecast, while its EV/EBITDA is also undemanding at 11.1x level. This compares to the sector average PER of 18.x and sector average EV/EBITDA of 14.2x for 213E. BUY reiterated, target price lifted to HK$37.4. After updating 212 results and fine-tuning the capex budget, we revise upward our DCF-derived TP by 11%, for an implied 16x 213E PER. It is at high range of its historical valuation level, but justified through its continuous improvement in operating efficiency and more upsides coming from large landbank in Cotai for development. Assuming 33.6% EPS CAGR during 212-1E, we believe our target PEG of.x is attractive for the longer term. Our TP only accounts for the currently operating properties and Galaxy Macau 2 until the expiry of the current gaming license (by 222). As a result, we expect more upside to our value estimation when 1) we include the value of Phase 3 & 4 with more visibility, and 2) confirmation on gaming license renewal. Catalysts and Risks. Catalysts are: 1) any dividend announcement and 2) better than expected recovery in StarWorld s VIP business in 2H 213. Risks are: 1) influential political measures from Beijing regarding visits to Macau for VIP gamblers, and 2) potential slowdown in China s economy, impacting on slower growth in mass market gaming.

% % HK$m HK$m Key Valuation Metrics Figure 1: Revenue/Operating profit/net profit 8, 7, 6,, 4, 3, 2, 1, Revenue Operating profit Net profit Figure 3: Margins 3 2 2 Figure 2: Revenue Breakdown 9, 8, 7, 6,, 4, 3, 2, 1, - Net gaming wins City Club casinos Tips received Hotel operations Administrative fees Construction materials Figure 4: ROE/ROA 4 3 3 2 1 1 2 1 1 EBITDA margin Operating margin Net margin Figure : PER band 6 4 3 2 1 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Share price 8.x 12.x 16.x 2.x Source: Company, Bloomberg, CGIHK Research ROE ROA Figure 6: PBR band 4 4 3 3 2 2 1 1 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Share price 1.x 2.x 4.x.x Source: Company, Bloomberg, CGIHK Research 6

Analyst Certification The research analyst who is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 3 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. Explanation on Equity Ratings BUY: We expect the total return on the stock to exceed 2% over a 12 to 18 month horizon. HOLD: We expect the total return on the stock will be between % to 2% over a 12 to 18 month horizon. SELL: We expect the total return on the stock will be less than % over a 12 to 18 month horizon. DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressee whether they are professional investor, institutional client or otherwise, in good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment(s) and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM49, Room 31-37, 3/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888. 7