Why Galaxy Entertainment may suffer from a worsened credit environment

Its revenue from VIP stood at 74%.

According to Maybank Kim Eng, it is downgrading Galaxy Entertainment from BUY to HOLD while maintaining its target price at HKD42.80. The stock has been strong performer since we began coverage last November and has outperformed the HSI 25% YTD. Switch to mass market play Sands (1928HK, BUY, TP HKD46).

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Last week, the overnight Shanghai interbank offered rate spike 578.50 basis points to peak at 13.44% on 20 June. This is an indication of a tightened liquidity environment which is detrimental to junket liquidity.

Given that Galaxy’s gross gaming revenue’s exposure to VIP stands at about 74% YTD, this makes it highly exposed to a worsened credit environment.

We recommend accumulation of Galaxy at lower levels where EV/EBITDA  valuation is 13x. We are still positive on Galaxy’s long-term development plans in 2015-17, when it will unveil an additional three phases of its highly successful Galaxy Macau casino property.