JPMorgan upgrades Galaxy stock with 45% upside potential despite market bearishness

On Friday, JPMorgan adjusted its stance on Galaxy Entertainment Group Ltd (27:HK) (OTC: OTC:GXYEF), raising the stock's rating from Neutral to Overweight. The firm set a price target of HK$43.00 for the company, maintaining the previous target but extending the timeframe to June 25, 2024.

The upgrade comes after Galaxy Entertainment's stock experienced a significant year-to-date underperformance, declining by 32% compared to the Hang Seng Index's relatively stable performance and an average 18% drop among peers.

The investment bank cited several reasons for the upgrade, including Galaxy Entertainment's valuation, potential for improved shareholder returns, and the opportunities presented by the upcoming Phase IV development.

The analyst noted that the stock could appeal to a broad range of investors, from long-only funds attracted by its low valuation to hedge funds interested in the company's near-term earnings before interest, taxes, depreciation, and amortization (EBITDA) growth due to market share gains.

Despite the bearish sentiment surrounding Macau and China consumer/leisure stocks, JPMorgan believes that Galaxy Entertainment stands out with more than 45% upside potential at its current price. The report acknowledges that sell-side consensus estimates might be slightly optimistic, but this is not unique to Galaxy, as it appears to be a common trend among China consumer names, including Macau's gaming sector.

Furthermore, the firm's discussions with investors suggest that buy-side expectations and positioning for Galaxy Entertainment are considerably lower, which could indicate room for positive revaluation.

Galaxy Entertainment, along with MGM China (OTC:MCHVY), is now listed as one of JPMorgan's top picks in the Macau gaming industry. This optimism is shared despite the overall cautious stance investors have towards the sector.

In other recent news, Macau's casino operators are experiencing a shift in customer demographics, with MGM China and Wynn Macau (OTC:WYNMF) reaping benefits as the industry turns its focus towards affluent 'premium mass' customers.

Despite a decline in the high roller VIP segment and the mass market segment not yet reaching 2019 levels, Macau is set for a 14% growth in its gross domestic product this year.

JPMorgan analyst DS Kim noted that larger operators like Sands China (OTC:SCHYY) and Galaxy Entertainment, which cater more to the lower end of the mass market, have seen their share performance affected.

In contrast, MGM China and Wynn Macau have seen their shares climb by 46% and 15.7% respectively. Analyst Jennifer Song from Morningstar attributes this to the companies' focus on the premium mass market and their smaller size, which allows for better operating efficiency.

MGM China has seen its gross gaming revenue share double from 9.5% in 2019 to over 17% this year, partly due to being allocated more gaming tables by the government.

Wynn Macau's CEO, Craig Billings, highlighted the company's revenue per hotel room success, partly through the development of a new food hall. Despite challenges, executives at Sands China and Galaxy are optimistic about catching up, with plans to open high-end facilities targeting the premium mass market.

Non-gaming spending in Macau increased by 11% in 2023 to 71 billion patacas ($8.82 billion), aligning with the government's mandate for casinos to diversify into non-gaming attractions. Recent policy changes aim to increase visitor numbers from the mainland and beyond, with South Korea emerging as a significant source of visitors this year.

InvestingPro Insights

As Galaxy Entertainment Group Ltd (OTC: GXYEF) navigates through a challenging period, the latest InvestingPro data and tips offer a deeper look into the company's financial health and market position. With a market capitalization of $17.35 billion and a P/E ratio standing at 16.29, the company demonstrates a solid footing in the market. The impressive gross profit margin of 71.4% over the last twelve months as of Q2 2024 underscores the company's efficiency in managing its operational costs relative to revenue, which is a critical factor in its overall financial performance.

InvestingPro Tips highlight that Galaxy Entertainment holds more cash than debt on its balance sheet and analysts are optimistic about the company's sales growth in the current year. These insights align with JPMorgan's positive outlook on the stock, suggesting that the company's financial stability may provide a foundation for future growth, particularly as it embarks on its Phase IV development. Furthermore, the InvestingPro Fair Value estimation of $5.17 suggests potential undervaluation at the current price of $3.9, reinforcing the investment bank's view on the upside potential.

For investors looking to delve deeper into Galaxy Entertainment's prospects, InvestingPro offers a comprehensive list of 12 additional tips on its platform, which could provide valuable guidance in making informed investment decisions. These insights, coupled with real-time data, could serve as a powerful tool for those seeking to capitalize on the opportunities within the Hotels, Restaurants & Leisure industry.

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