This decision is driven by observations of stagnant market share growth following the opening of Galaxy Macau Phase 3 and anticipated further declines in market share during the first quarter of 2024.
Market Share
Analysts Praveen Choudhary and Gareth Leung from Morgan Stanley have highlighted key discrepancies between market expectations and actual performance. They note that consensus estimates for GEG’s earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024 and 2025 were overestimated, assuming substantial gains in mass market share attributed to Phase 3. However, these gains have not materialized, causing the bank to lower its estimates by 13% below consensus.
Contrary to consensus projections, Galaxy’s market share in the mass market segment during the second half of 2023 was 18.5%, significantly lower than the anticipated 20%. Analysts predict a further decline to 17.7% in the first quarter of 2024. This decline is attributed to increased operational expenses aimed at capturing market share and investments in non-gaming ventures, potentially leading to operating deleverage.
Premium Valuation
Despite market share challenges, Galaxy Entertainment Group continues to maintain a premium valuation compared to its Macau peers. The stock trades at a 12% premium over Sands China and a 20% premium over other industry competitors. This premium is likely supported by Galaxy’s net cash position and high growth expectations from Phase 3 and the forthcoming Phase 4 developments.
EBITDA Growth Outlook
Morgan Stanley foresees slower EBITDA growth for GEG compared to its peers in the first quarter of 2024. However, the bank indicates a potential shift in sentiment if there are tangible signs of market share recovery from the second half of 2024 onwards. Investors are drawn to Galaxy’s robust operational history and its financial resilience amidst China’s uncertain economic landscape.
Morgan Stanley’s downgrade of Galaxy Entertainment Group reflects market challenges in gaining mass market share post-Phase 3 expansion. Despite premium valuations, Galaxy’s performance fell short of consensus estimates, prompting revisions in earnings projections and target prices. The bank remains watchful for indications of improved market share dynamics to potentially reassess its outlook on GEG’s investment prospects.