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Why Does Galaxy Entertainment's Stock Cost Less Than A Cup of Coffee?



Harrah's CEO Gary Loveman was in Macau at about the same time that I was. While my mission was to scope out the joints and bring back the soup, Loveman was there to buy the Macau Golf and Country Club and raise a bunch of questions about Harrah's intentions in Cotai.

Let me start off by saying that I'm only partially familiar with the way that Macau's casino concessions work, so if my explanation is off, feel free to post a correction below.

Shortly after Macau was handed over to China in 1999, the Chinese government decided to end Dr. Stanley Ho and his company STDM's (Sociedade de Turismo e Diversoes de Macau) monopoly on gambling and offer up three gaming concessions, one of which would go to Dr. Ho. Each victorious concessioner was given the ability to sell one sub-concession to an operator of their choosing. Macau's government hoped that by spurring competition in the Macau gambling market, they could stem the decline of tax revenue that Macau's floundering gaming industry provided to the government. The Macau government holds the right to grand additional casino concessions after April 1, 2009.

The winners of the gaming concession selection process were Galaxy Entertainment - a Hong Kong based hotelier and construction materials company who were new to the gaming business, Wynn Resorts - U.S. based operator of Wynn Las Vegas, and SJM (Sociedade de Jogos de Macau) - the gaming wing of Dr. Ho's STDM company,.

SJM granted their sub-concession to Dr. Ho's daughter, Pansy, who elected to partner with U.S.-based casino operator MGMMirage. With Dr. Ho casting a long and wide shadow in unsavory areas, U.S.-based gaming regulators keenly investigated Pansy Ho's business dealings, her relationship with her father, and whether or not she would be a suitable business partner for MGMMirage. If Ms. Ho wasn't approved, MGMMirage was in jeopardy to either part ways with Ms. Ho, or potentially lose their gaming licenses in Nevada, New Jersey, Michigan and Mississippi. After much scrutiny, gaming boards in all states approved the partnership between Ms. Ho and MGMMirage.

Wynn Resorts sold their sub-concession to Melco/PBL for US$900M in 2006. MelcoPBL is a new partnership between Hong Kong based Melco (Entertainment, Technology and Financial Services) and Australian-based Publishing and Broadasting Limited (Media, Gaming, Entertainment).

Galaxy Entertainment had elected to partner with Las Vegas Sands in the concession bidding process, and to collaborate on plans to build casinos on the Macau peninsula and the Cotai Strip which, at the time, was water. Galaxy Entertainment and Las Vegas Sands parted ways after philosophical differences arose between the two companies. Apparently, LVS wished to go full steam ahead on Cotai Development, whereas Galaxy preferred a more patient approach. Las Vegas Sands Corporation walked away from the partnership with Galaxy's gaming subconcession.

As Las Vegas Sands quickly built the Sands Macao near the Fisherman's Wharf and began designing for the reclaimed land that would become the Cotai Strip, Galaxy Entertainment installed a handful of SJM-styled casino operations in the bottom floors of a number of hotels on the Macau peninsula. These joints, called "City Clubs" are a prettier vision of what SJM has been offering for years, but with better surroundings, better dining, better bettor services and more elegant hotel operations. Galaxy operates City Clubs at Rio, President, Waldo Hotel on the peninsula and a larger version at the Grand Waldo in Cotai.

Concurrent with Galaxy's City Clubs expansion, the company began to plan construction of Galaxy StarWorld Hotel located at the split of Avenida de Amizade and Rue Cicade de Sintra. Design of Galaxy StarWorld was completed in 2003 by architect Rocco Yim with construction beginning shortly thereafter. Galaxy StarWorld opened on October 19, 2006 but some of their hotel rooms remained offline until April 2007.



Galaxy's Cotai development Galaxy World, which operated under the project title Galaxy Cotai Megaresort, is currently topped out and steaming towards a late 2008 opening of the first phase of the multiple resort property. Galaxy World's first phase hotel tower will feature 1500 rooms, a large casino and an entertainment complex. The second tower is scheduled to open in 2009 bringing the total of Galaxy Worlds first phase operations to 2500 rooms. The second tower of Galaxy World will be managed by an outside hotel management company with five star hotel management experience.

When Phase 1 of Galaxy World is complete, the casino will be one of the worlds largest - 700 table games + VIP areas and 4,000 slot machines. There will also be a large shopping esplanade and over 25 restaurants. Even when Phase 1 is completed, Galaxy Entertainment will have another 10 million square feet of land to play with for the future. Their recently announced, yet still short on the details, plans call for nine more hotels containing 6,000 rooms, a shopping mall, convention center, theaters and fifty more restaurants.

Total cost for Phase 1 : HK$6B.

When they said "megaresort" they weren't kidding.

Let's do a quick little recap here. Galaxy Entertainment has one of three gaming concessions in Macau. They've opened a slew of City Clubs, all of which are making a bunch of money - more than MelcoPBL's Mocha Clubs I'll bet (I'll talk about the Mocha clubs in a future post). In a few short years they've managed to grab 20% market share. Galaxy Entertainment opened a brand new five-star resort a year ago - StarWorld - right in the thick of things next to the big guns: Wynn Macau, MGM Grand Macau and the MelcoPBL Trinity project. Galaxy World project has one of the largest chunks of land in Cotai and have impressive plans to fill and expand it for the next five years. They have a higher win per table per day in the VIP sector than Sands Macao, and are rapidly approaching Wynn Macau's numbers. They've also jumped ahead of Sands Macao in the average win per table per day in the Mass market as well. Their hotel operations have a higher Average Daily Rate (HK$1019) than the market average (HK$875) and their occupancy rate is 82% compared to the market average of 75%.

So why the hell is Galaxy Entertainment's stock farting around at HK$9.14/share? Yes that's right you can get a share of Galaxy for less than a cup of joe at the 7Eleven. I guess US$1.25 goes a long way on the Hong Kong Stock Exchange.

If I were a gaming sector investment strategist, I'd tell you to get your ass over to the Hong Kong Stock Market and buy as much of Galaxy Entertainment as you can afford, hold a chunk for long term and peel some bits off as it hits $30 and $50 and $100. With proven results coupled with long term plans Galaxy Entertainment is not going to be a major player in Macau, they ARE a major player in Macau. I can only guess that since Galaxy is listed on the HK stock exchange and not the NASDAQ or NYSE, Galaxy is hidden from the eyeballs of 99% of investors. Which brings me to another point...

With a stock price so low, will Galaxy Entertainment be a target of a larger gaming company that does not have a license in Macau? Say Harrah's for example. Gary Loveman and Co, just bought the Macau Country Club for US$25M an acre, why partner with MelcoPBL when you can buy Galaxy for less that it will cost to wreck and rebuild Ballys properly. With Harrah's deep pockets and their obvious interest in wanting a piece of the Macanese egg tart, it makes perfect sense that they would be interested in buying out the assets (and the concession) of an existing operator. Looking at the possibilities (Wynn, Las Vegas Sands, SJM, Melco/PBL, Galaxy, MGM/Paradise) the only real potential targets for a takeover would be MelcoPBL and Galaxy. With MPEL having their fingers in a lot of different pies and their target demographic tilting more towards VIP than Harrah's traditionally mass market clientele, it is doubtful that Harrah's will attempt to absorb MelcoPBL. Galaxy, on the other hand, is a decidedly Asian company that appeals to both the mass market with their City Clubs and the VIPs with StarWorld. Galaxy Entertainment seems to communicate naturally with the Chinese gambling psychology, they've scraped out 20% market share in five years, they've got a huuuge footprint in Cotai, a lot of projects in the pipeline and their stock is a steal at HK$9 (US$1.25).

Now, let me state for the record that I never have, nor do I currently own any gaming sector stocks, at least that I am aware of. My 401k from a previous employer could have some gaming stuff in it, but I don't think so. I'm also not a seasoned stock analyst so you should crunch a bunch of your own numbers before you dive headlong into anything. If you choose to invest your children's college fund into Galaxy and it tanks because Macau floods over, you're on your own. Any actions you choose to make or not make based on my crack pot commentary is your responsibility not mine. That being said, I'm gonna go out on a limb and predict that either Galaxy shoots through the roof and/or they get bought out by Harrah's.

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