The Q3 performance of GEG showed that: the YoY income growth was 6%, reaching HKD17.3 billion. The YoY EBITDA growth adjusted was 1%, reaching 3.3 billion. The Q3 results are basically in line with the market expectations and even higher than that of the same trade or business;

The speed increasing of VIP business is better than that of the same trade or business. The YoY growth of VIP gaming revenue of Galaxy Macau was 11%, reaching 7.2 billion, which is higher than the average growth rate of the industry. While the VIP business income of Star World Hotel declined by 2% to 4.4 billion. Thus, the overall YoY growth of VIP business was 5%, reaching 11.8 billion, which strengthened the relative competitive advantages of GEG. In addition, the growth of the midfield gambling and the slot machine increased by 12% and 6% to reach 4.8bn and 0.5bn respectively, which remains stable;

The second phase of Galaxy Macau will be open in the middle period of 2015. So far, of the total capital expenditure plan of 19.6 billion, 9 billion has been put in. At present, the company holds the cash of HKD11 billion, and is in good condition of assets and liabilities;

The YoY decline of the Macao gaming revenue in October 2014 was 23%, and the decline range exceeded market expectations, which is the worst level in history. We think that apart from the economic factors, the demonstrations in Macao and HK and the high base are also the main causes. We believe the YoY decline will be narrowed in several months this year, improving the confidence of investors.

How we view this

We believe the weakness in Macao gaming market will continue before the middle of 2015. However, we also believe the income decline range is expected to be narrowed gradually. While GEG is the best choice for Macao gaming stocks, both the VIP business and the midfield business are expected to win that of the same trade or business, while the profit rate can remain unchanged.

Investment Action

We believe that the valuation of GEG has a certain attraction, while it is constrained by the weakness of the whole gaming market. We maintain "Accumulate" rating of GEG with 12m TP at HKD56, which is equivalent to 12.8 times of the ratio of EV/EBITDA and 16 times of the prospective P/E ratio of 2015.

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