Morgan Stanley downgrades Galaxy Entertainment Group

Lea Hogg April 19, 2024

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Morgan Stanley downgrades Galaxy Entertainment Group

Investment bank Morgan Stanley has revised its rating for the Galaxy Entertainment Group (GEG) from ‘Overweight’ to ‘Even-weight’. This unexpected shift was primarily due to the unfulfilled anticipation of an increase in mass market share following the grand inauguration of Galaxy Macau Phase 3.

Analysts Praveen Choudhary and Gareth Leung highlighted that their projections for GEG’s expected EBITDA for 2024 and 2025 are now 13 percent lower than the market consensus. The consensus had previously predicted a surge in mass market share as a direct consequence of the Phase 3 launch, however, these expectations did not come to fruition.

The market consensus had also forecasted Galaxy’s 2024 mass market share to be at 20 percent, which is 170bps higher than the 18.5 percent it managed to achieve in the latter half of 2023. Contrary to these projections, Morgan Stanley anticipates that GEG’s mass market share in the first quarter of 2024 will further decrease to 17.7 percent. This downward trend is attributed to the potential operating deleverage as the company escalates operating expenses in an attempt to capture market share and for non-gaming investment. Despite this setback in market share, GEG continues to trade at a premium compared to its Macau counterparts. It trades at a premium of 12 percent over Sands China and 20 percent over the rest. This premium is presumably due to GEG’s net cash position and the market’s optimism about growth from Phase 3 and the forthcoming Phase 4 development.

Implication of downgrade

While Morgan Stanley predicts that GEG’s EBITDA growth will lag behind its peers in the first quarter of 2024, they also indicated that their outlook might turn more positive if they observe a more noticeable trend of market share gains from the second half of 2024 onwards.

Galaxy has a commendable track record in managing and escalating operations. Some investors are drawn to its net cash position amidst an uncertain China macro. However, considering these recent developments, Morgan Stanley has reduced its Target Price on GEG shares by 17 percent to HK$381.

The downgrade by Morgan Stanley has the potential to shake the very confidence of investors in GEG. The perception of underlying issues within the company could lead to a possible sell-off of shares, as investors might view this as a sign of increased risk.

This downgrade often leads to a decline in the company’s stock price. The perceived increased risk could prompt investors to sell their shares, driving down the share price. This, in turn, could result in increased scrutiny from investors and market analysts. The pressure to improve performance could mount on GEG, forcing it to take corrective measures.

The reputation of GEG might take a hit due to the downgrade. It could affect the company’s standing among its peers and could influence future business dealings. If GEG plans to raise capital in the future, this downgrade could impact those plans. Lenders and investors might view GEG as a higher risk, potentially leading to higher borrowing costs or difficulty in attracting investment.

The downgrade might also force GEG to reassess its operational strategies. This is particularly true for its efforts to increase its mass market share and non-gaming investments. This could lead to changes in the company’s operations and business strategy. Despite these challenges, GEG’s response to this situation will be crucial in determining its future trajectory.