Thank you for holding and welcome to the Galaxy Entertainment Group's management update for the second quarter and interim results of 2021 conference call. Joining us today are Mr. Michael Mecca, GEG board's Non-Executive Director, Mr. Robert Drake, Group CFO, Mr. Roland To, Senior Director of Strategic Planning, and Mr. Peter Caveny, Assistant Senior Vice President in Investor Relations. At this time, all participants' line are in listen only mode. The presentation will be followed by the question and answer section, and instructions will be provided at that time. I would now like to pass to Mr. Drake for presentation. Mr. Drake, please go ahead. Thank you.
Thank you, operator, and greetings everyone, and thank you for joining us for GEG's Q2 2021 results update call. The GEG team joining me here on today's call include Mike Mecca, a member of the GEG Board of Directors, Roland To, Senior Director of Strategic Planning, and Peter Caveny, Assistant Senior Vice President of Investor Relations. Copies of our media release, stock exchange announcement, and PowerPoint presentation are available on our website, which also include our customary disclaimers. On behalf of our Chairman, Dr. Lui, Francis Lui, and the entire GEG family, we greatly appreciate everyone's continued contributions and sacrifices throughout the pandemic, as well as our heartfelt sympathies to everyone globally who have been impacted by this crisis.
We are confident that the world, including Greater China, will successfully navigate through the ups and downs of the pandemic in the near term, where we remain upbeat and positive that brighter days are indeed ahead. As you know, Macau recently experienced more COVID-19 cases in early August, where the Macau government demonstrated, yet again, its ability to react incredibly swiftly to minimize public health and safety risks as they have throughout the entire crisis. We again salute the Macau government for its proactive, decisive, and effective leadership during the pandemic. Despite sporadic outbreaks in Greater China in 2021, Macau has demonstrated an ability to bounce back quickly in a choppy market, while at the same time supporting the all-important public policies, which is certainly cause for optimism. No one ever said this would be easy or that the recovery would be like a light switch or a straight line.
As we have mentioned many times before, we continue to believe that the Macau market recovery will be gradual, managed, and choppy in the near term, where the green shoots we spoke about last quarter are well-positioned for continued growth and remain as confident as ever in its medium and long-term future. To be clear, GEG remains as committed as ever to the health and safety of the community, our team members, and our guests, as well as the economic and social stability of Macau, where the continued containment of the virus remains the highest priority. Let's move on to our Q2 2021 performance where our effective cost control efforts introduced throughout 2020 continued to yield results in a gradually improving, but choppy revenue environment.
While at the same time, we continue to make progress with our enhancement projects at our existing properties, as well as with our game-changing phase III and phase IV development projects in Cotai. GEG's Q2 2021 EBITDA improved by HKD 2.5 billion year-on-year from a HKD 1.4 billion loss in 2020 to a HKD +1.1 billion in 2021 and grew 32% sequentially. The group also played lucky in Q2 2021, which benefited EBITDA by HKD 74 million, and as a reminder, also played lucky in Q1 2021, which improved EBITDA by HKD 169 million, and modestly lucky in Q2 2020.
If you adjust the luck, normalized EBITDA grew 53% quarter-on-quarter to HKD 1.1 billion, and also improved significantly versus prior year's HKD 1.4 billion loss. We mentioned earlier that there was some cause for optimism during a choppy second quarter, and that is our mall operations, which delivered an all-time record performance.
This is certainly an important KPI which indicates strong demand and bodes well for an overall market recovery. We also continue to work hard at leveraging our cost structure as business gradually improves. To that end, our Macau OPEX burn rate has declined by 30% from approximately HKD 3.4 million per day under normal operating conditions, but ticked up very modestly to the HKD 2.4 million mark in Q2 2021 even as business ramps up, where we are certainly generating operational leverage. We would like to pause here like we have previously and make a very important point on fiscal management, especially during challenging times. We certainly acknowledge that OPEX burn rate is an important part of the expense equation, but there is certainly more to the overall cost picture than that. Daily cash burn is more indicative of the cost structure as it includes interest expense.
We are very fortunate that we are the only concessionaire in Macau that generates net interest income, not interest expense. In fact, our net interest income also remained virtually unchanged in Q2 2021 at approximately HKD 300,000 per day. Deduct the HKD 300,000 per day interest income from the HKD 2.4 million per day in OPEX burn to get approximately HKD 2.1 million per day in cash burn, excluding CAPEX. It's a powerful example of how conservative balance sheet management really pays in challenging periods in general, and in our case, significantly differentiates us from the competition as well as contributes to making prudent decisions which are in the long-term best interest of the company. Just for the record, we will be the only concessionaire in Macau to report positive NPAS for the H1 of 2021.
We would like to thank everyone on the GEG team, as well as our valued suppliers who continue to support the company in these difficult times by contributing to our cost management program. Everyone's support has truly been inspiring. We have also contributed millions of dollars to the COVID-19 relief efforts to support the community as we previously reported, including most recently to the Henan flood relief efforts in China. Let's move on to our development update, beginning in Cotai, where we continue to invest in Macau as well as Galaxy's future. You may recall that back in early March 2021, we announced that we will be welcoming Accor's legendary Raffles brand to Macau with Raffles at Galaxy Macau, which will feature a 450 all-suite tower and is targeted to open in early 2022.
We intend to follow this with the opening of the Galaxy International Convention Center and Andaz Macau, in anticipation of the recovery of the MICE and entertainment market. Finally, we are proceeding with the construction of Cotai phase IV, Macau's only next-generation integrated resort, which will complete our ecosystem here in Cotai. As you can see, we remain highly confident about the future of Macau as we continue to invest literally billions of HKD into our business. Our Cotai development activities, along with our existing property initiatives, also demonstrate our support of Macau during the pandemic by continuing to invest billions of HKD into the economy, providing jobs, and supporting local SMEs, as well as our long-term commitment to help Macau achieve its vision of becoming a world center of tourism and leisure.
Next up is Hengqin in the Greater Bay Area, where we note that the central government has currently joined the strategic master plan of Hengqin, which was revised by the Zhuhai and Macau government. We are also expanding our focus to potentially include opportunities within the rapidly expanding Greater Bay Area. Finally, Japan, where we continue to pursue opportunities with our partner, SBM. We're also monitoring the impact of the pandemic in Japan, which has also caused highly publicized delays to our IR process, and we'll continue to update you as the situation moves forward. Let's move on to our balance sheet, which continues to remain strong, liquid, and virtually unlevered. Cash and liquid investments increased modestly from HKD 42.4 billion at the end of March to HKD 43 billion at June 30th, 2021.
Our net cash position declined from HKD 33.6 billion- HKD 31.6 billion, due primarily to investing in our development projects, including Cotai phases III and IV, and a reduction in our gaming chip liability. Total debt grew from HKD 8.8 billion- HKD 11.4 billion, which primarily reflects an HKD 11 billion of borrowings associated with our treasury yield enhancement. Our core borrowings remain virtually unchanged between HKD 400 million-HKD 500 million, which includes zero debt associated with our Macau operations. Moving on to our outlook, where we continue to remain very optimistic that Macau's gradual and managed recovery will continue despite the recent choppiness. If Greater China continues to remain diligent in effectively containing COVID-19 outbreaks and executes vaccination programs, then we are very confident that our green shoots will continue to strengthen as we navigate through the pandemic.
We are also encouraged by the rebounding Chinese economy and are quite confident that the leisure and tourism sector will continue to recover on the back of the overall economy. In the interim, we remain well-capitalized to invest in our development initiatives, including our game-changing Cotai phases III and IV, as the fundamentals of Macau and our operating businesses continue to improve and generate cash. We also remain upbeat and very positive about the long-term prospects for Macau and the Greater Bay Area, where the underlying fundamentals continue to remain incredibly compelling. Finally, we'd like to extend our sincere appreciation to the Macau government for their outstanding performance, as well as the community, which has rallied under their leadership during the pandemic.
We would also like to thank all of the GEG team members again, who have been extraordinarily supportive of the community and the company during this challenging period. Operator, that concludes our opening remarks, let's open up the line to Q&A. Thank you.
We'll now begin our question and answer session. If you have questions for today's speakers, please press star one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Once again, please press star one on your telephone keypad to ask question. Our first question is from Sharon Chang from Bank of America. Please go ahead.
Hi.
Hello
This is Billy. Hello.
I thought it was you, Billy.
Good afternoon, first of all, congratulations on a very solid interim result. I have a few questions. First question.
Sure.
Just want to ask Mike about the Japan bidding process and situation right now. We understand Galaxy has mentioned that they may not be interested in the Yokohama bidding. Can you tell us the latest situation there and also the company's strategy in terms of Japan, whether you guys will continue to focus on big cities, potentially Tokyo, or will you look into other smaller prefecture or cities?
Billy, thanks for the question. While we have not participated in the current RFPs, Galaxy continues to remain interested in Japan, and we believe that Japan does offer a good long-term opportunity. Our Japan-based team remains active in their efforts, and we are just keeping a very close eye on all the opportunities in the market.
All right. Thank you. Another question, just wonder, a little bit short term, but just curious. We understand that Macau went through some cases last week, and as a result, the border was kind of locked down in a semi-lockdown mode. I guess my question is, have you seen some turnaround given that I saw from the news some of the border restrictions have been relaxed and it no longer requires 12 hours of negative test visits in order to cross border? In another word, do you think the worst is behind us, and have you seen a little bit of recovery of the traffic?
Thanks for the question, Billy. Of course, as you know, and we've said this many times before, the primary focus of Macau, including the concessionaires, is always public health and safety. Again, we applaud the Macau government for doing an outstanding and very commendable job throughout the crisis, including the most recent challenge of executing a mass testing program where they screened 700,000 people. Thankfully, there were no positive cases. I think just to be judicious, they want to continue to monitor the situation very diligently and daily, and they give us daily updates as well. You're right, they did relax one of the entry requirements by extending the validity of the NAT from 12- 48 hours. It's going to take some time for that to trickle down into visitation.
If we continue to remain very vigilant, then hopefully we can bounce back pretty quickly here. As you can see, it's a very choppy recovery, as we've been saying all along. Even when there are mild cases in Guangdong and it impacts visitation, you can see that for the quarter, we've had our best month of the pandemic post-IVS reinstatement in May. Unfortunately, with the cases in China that broke out in late May, had an impact on visitors. You can see that we quickly bounced back in July. It's one of our best performances during the pandemic. We still think it's going to be choppy. It's going to take some time. I think we're well capitalized to ride out the storm. We've really been creating a lot of operational leverage here, and you can see it in our results.
A, our business mix has been shifting from VIP to mass. We're leveraging our cost structure. We've used this time to really focus on processes and procedures, and it does translate to operational efficiency. One of the highlights of the quarter was the fact that our retail business reported all-time record results. It was materially above our record performance in Q4 of 2019. That's actually a key KPI and a strong indicator that there's a lot of demand out there and that certainly bodes well for the overall recovery of the market. We're looking this for the long term. We're continuing to invest billions of HKD in Cotai phases III and IV. Although it may be choppy in the near term, our outlook for the medium and longer term remain very bright.
Thanks. My last question, just wondered. The company turned net profit in the first half, so again, congratulations on that. I don't think there's any expectation of dividend. I'm just curious, are there any threshold there before the company can get to certain level of profitability then they will consider pursuing the dividend?
As you know, the Chairman and the board run a very conservative balance sheet and operation from that perspective when it comes to fiscal management. Yes, we're very proud that we are the only concessionaire to report positive GBAF for the H1 of the year for a lot of different reasons that we just talked about in my opening remarks. Having said that, even the Chairman said at the press conference that at some point, if we have more clear visibility on the recovery, then we would be more than delighted to pay a dividend, and that would be a great signal to the market. In the interim, we're going to be very conservative and not surprisingly so, given the pandemic, that we just want to be conservative during this period.
As we have more clear visibility on navigating through the final stages of the pandemic, I'm sure the board will be supportive of the dividend.
Correct. Thanks a lot. Thank you very much.
Our next question comes from DS Kim from JP Morgan. Please go ahead.
Hey, DS Kim.
Hi, Bob. Hi, everyone. Good afternoon. Hey, how are you? I just have a quick one regarding the competitive landscape. How do you see today's promotion environment given where the borders are, and what do you think would be the most important driver, especially for the premium mass, if and when the borders open and recovery kicks in?
As I said earlier, we've seen some positive indications. I think our retail business in the second quarter was just very encouraging for us, frankly. It reinforces that A, there's strong demand. We continue to believe it's going to be a premium mass-led recovery, which we've actually seen filter down into the middle and to the lower stakes as well, which is equally as encouraging. Given that everyone's pretty well capitalized in Macau, there's certainly a lot of pressure on everyone's balance sheet. I don't mean to assume that we're not feeling it as well. As you can see, our cash balances are, although they're healthy, they are declining somewhat. It does create financial pressure, but it's not enough to really, given the current state of the market, start acting irrationally.
You're always going to have some, and we hear a little bit here, we hear a little bit there, but given the visitation levels, that it's not going to move the needle, and we encourage everyone to act rationally. Ultimately, given the market structure that we're essentially the only legal place in Greater China for just trying to compete in games, that's very unique. We don't want to compete on price. We want to compete on the experience that we offer here in Macau, which is world-class. There's really no real reason to start buying business.
Thank you. That's really helpful. Just a follow-up on our modeling. Can you share the level of that provision over the past few quarters, and how does it compare to pre-COVID-19 level? Could you also share how many employee staff we have at the moment versus, I think we had about 18,000 at the end of last year. That's it from me, and congrats again on the good result.
Bad debt hasn't really changed that yet. We're adequately provisioned. When you look across the business lines where we extend credit. Let's start with premium direct. That's our in-house, it's the only house where we actually offer patrons credit. We still do way more cash than we do credit. We're more than adequately provisioned there, and that really didn't change materially over the quarter. VIP, we still lend our balance sheet, but I think everyone in the market has learned from previous experiences that they've dialed that down, and our VIP exposure is very manageable. We're very comfortable with that and have not adjusted the reserves there. On the non-gaming side, it's not really material. We feel pretty comfortable with that. I'm sorry, your second question? Employees. The headcount hasn't really changed that much. It's down a little bit.
We were down, you said 18,000. We're in the high 17, but again, part of being a concessionaire and promoting economic and social stability, we're very protective, supportive of local staff, and at the same time, they've been very cooperative in supporting a lot of the programs that we've introduced. They are 100% voluntary. So we're very pleased with the cooperation, and it's inspiring the sense of teamwork that we're getting across the community versus the government, the concessionaires, and the locals as well. And we're also supporting local SMEs, and we're all in this together, and we're quite confident we can navigate through this.
Thank you. If I may follow up one thing about our retail earlier. Can I ask how was the actual turnover tenant level sales compared this quarter versus second quarter 2019 or fourth quarter 2019?
Yeah, it was very strong. We've had some of our best months. I did a little analysis here the other day. Of our 10 best months, five of them have been in 2021. The top of the market was May. We've had a strong July, we had a strong April, we had a strong May, as I said, record. It was well north of 20%.
Wow. Thank you very much.
We're doing that with less tenants. I think that what we're also doing is taking this as an opportunity, as everyone is, to really focus on the existing properties and introduce some new enhancements. One of the things that we've done is really changed the whole profile of our mall. We've added some very attractive brands. We've repositioned the whole portfolio, and performed some upgrades. If you were here and walking around, if you were in our diamond lobby or, right where phase III is going, where Raffles is going to be, I think that you can see that we've introduced some new products there, and we're just very excited. Everyone's using this time to the highest and best use.
A lot of this stuff is normally disruptive, and so given the state of the business, this is really the time to do some of the more disruptive things that won't really impact.
Thank you, sir.
Our next question comes from Praveen Choudhary from Morgan Stanley. Please go ahead.
Hey, Praveen.
Hey, Bob. Thanks. Thanks for taking my call. First of all, congratulations. Great results. As you mentioned, the only one with net profit in H1 2021. I hope everybody gets the net profit eventually. I have two questions. One is related to Shanghai. Sorry, not Shanghai.
What? I'm sorry.
I meant, what I meant is Hengqin. In Hengqin Island, you have a big piece of land. I am not sure how much money you have already spent on it, but there was a news article, I just wanted you to confirm whether that was a correct article or not. It talks about how Hengqin will be given under the provision of Macau government to run it. First of all, is it true? Second, if it's true, how does it impact your decision to expedite the process of building the project, and what is the realistic timeline of that project? That's the first question. The second question is related to The Raffles Hotel, which we are all eagerly waiting to open. Could you tell us what may have driven the opening from end of this year to early next year?
Is it proactively looking for the right market, or is it some construction delay? Thank you so much.
Thanks, Praveen, for the question. I'll take the last one first on Raffles and the construction. No, we're just trying to align more to the prevailing market conditions and whether we open in the latter part of the year or the early part of next year, in the long run, really doesn't matter. We want to get the experience right. We are not experiencing construction delays. It's more about the lining with the overall market. Of course, we want to introduce new capacity and then creative ways to the market. Longer-term, we're quite confident not only phase III, but phase IV will be accretive to the market as well. We're very excited about that. Of course, once the MICE and the entertainment market bounces back, we'll follow Raffles up with the opening of the GICC and Andaz Macau as well.
If you were here, you would see that phase IV is moving right along. We can see that it's definitely the only next generation product in Macau, and we're very excited because it really does complete our ecosystem here. Really, for folks on the call, translates into future earnings potential. We're very excited about that. Projects like Hengqin that you mentioned, we read the same stuff in the paper that you guys do about what the CE came out. We're awaiting yet a further update on the overall relationship between Macau and Hengqin. All of that sounds to me is it's something that's very positive. The impact on our project remains to be seen, but we're waiting to hear the feedback as you guys are. It will definitely be a non-gaming development.
We have not invested a lot of capital there as of today. We continue to pursue the project, and it's an evolving situation, and we'll just continue to update you.
Thank you. May I follow up with one question?
Sure.
Would you be able to tell us if there is any number of tables or slot machines which are inactive? Meaning you're trying to keep it closed simply because you can save some more extra cost of labor and so on. Is that 10% less than the peak or 20% less than the peak or any such number?
Tables are still a very valuable commodity here in Macau. I'm sure you saw that another concessionaire opened up, and were granted new-to-market tables. You can see how dear a commodity they are here. We are a long way from operating at optimum capacity. In the quarter, we're doing 35% of what revenue we did in the fourth quarter of 2019. It's not a huge leap of faith to think that we have a long way to go until we hit the optimal capacity level. We are not taking tables out of service. We value them highly, and we just have to be patient. We continue to pay the tax on them, and especially if we're carrying the local labor as well. We still have spacing constraints that we're dealing with.
We're a long way from hitting that Rubicon where we have to add accretive new capacity.
Wonderful. Thank you so much again, and congratulations on the whole thing.
Sure.
Our next question comes from Julie Zhang from Sunbridge Capital Partners. Please go ahead.
Thank you.
Hello there.
I just got one question. Hi. Would you like to share August to date GGR versus the same period in 2019? Would you share current hotel vacancy if the data is available, and how will the situation, would you see to recover to at least July levels? How's the visibility, and what would be the key driver or key concerns before we get there? These are. Thanks.
Okay. If I miss some, just remind me what you asked. As far as Galaxy's gross gaming revenue performance, we're operating at basically 35% of what we did in the fourth quarter of 2019. You can do the math and figure it out. As far as hotel occupancy, obviously, we used to run at virtually 100% occupancy all the time. Right now, Galaxy was in the 50s, and I think StarWorld was in the 70s during the second quarter. Of course, when we had the recent outbreak, occupancy has declined significantly. As you can see, throughout 2021, we've had a very choppy performance, and it's tied a lot, with all due respect to immigration policy and visitation. Of course, that leads to revenue. We believe that it'll take some time to navigate through this pandemic.
It will probably be a gradual managed recovery, and we still believe it's going to be choppy. We're being very supportive of the government, which has done a great job. If we can continue to contain the pandemic in Greater China and certainly here in Macau, and execute vaccination programs, then I think, hopefully it'll be over sooner than later. At the same time, I think Macau in general, and Galaxy specifically, are well capitalized to weather the storm. We're certainly supportive of all the local government policies, and it really comes down to the primary focus is public health and safety. The longer term and the medium term, we're very upbeat, positive, and bullish on Macau. We continue to invest billions of dollars into the market. Cotai phases III and IV is a HKD 50 billion commitment by the company and the Lui family to Macau.
Longer term and medium term, we're very bullish as that's possible. Just have to make it through the pandemic.
Yes, very clear. Thanks.
Just a reminder, to ask a question, please press star one. Our next question comes from Alpha Wang from Goldman Sachs. Please go ahead.
Hello? Alpha Wang, please go ahead. Your line is open.
Hello, can you hear me? Hello?
Yes, sir. Yeah.
Yes. Thank you for taking my question. I have two questions. The first one is, could you please share some updates regarding the gaming license renewal?
Sure. As far as the gaming license renewal process is concerned, you're seeing more about it in the press lately. The concessions expire technically in June of next year. The government has said they would intend to launch the first steps of that process or the public consultation of the gaming law, be followed by the tender process for the reissuance of the gaming licenses. What we can assure you is that it certainly appears that there's a lot of work going behind the scenes. You're reading the papers is what you guys do. All we can do in the interim is, continue to do what we've been under our existing concession, is really support Macau, as far as employment and local SMEs, as well as assist them in achieving their vision to become a world-class tourism destination. We continue to do that.
Continue to watch the news wires like we do, and we'll update you as we move forward.
Noted. Thank you. Thank you for sharing. The second question is regarding the Hengqin and Greater Bay Area development. Besides the item you mentioned that will be about non-gaming development, do you have some other initiatives around this area? If so, what is the potential investment timeframe? Thank you.
Thanks. Great question. As far as Hengqin is concerned, again, we'll wait to hear once we get some feedback from the central government on the revised master plan for Hengqin Island. It's been in the news lately a lot and seeing how Macau and Hengqin can potentially work together. We'll continue to pursue our project there as I just stated. As far as the GBA is concerned, we're out looking at deals and exploring different opportunities. It's a rapidly growing area. It would definitely be non-gaming, as you rightly pointed out. We think it's one of the highest growth areas on the planet, and we're certainly out there looking at deals. When we have something announced, we'll be happy to share that with you.
Thank you. Just to be clear, so far, we don't have a concrete investment timeframe yet. The updates will be provided.
We're very flexible. We're very opportunistic. One of the things that's unique about Galaxy is that we're not chasing growth. We have Cotai phases III and IV. We're essentially doubling what we have in Cotai in terms of GFA. We're very excited about the future. With Hengqin Island, that's a longer-term development opportunity. The Greater Bay Area is certainly part of that mix, as well as other international opportunities that we continue to look at. Our plate's pretty full. We're very excited about the future prospects organically here in Macau, which we still think represents the best return potential in this industry on the planet. We're also exploring other things. The board is keeping us very busy.
Thank you. Thank you for sharing.
There are currently no further questions in the queue. As a final reminder, if you wish to ask a question, please press star one. We'll pause for just a moment to allow you to signal. We have a follow-up question from the line of Sharon Chang from Bank of America.
Hi. Just have a follow-up question. Just wonder if you are willing to share a little bit more detail about second quarter. I just wonder if we can break down into the monthly contribution of EBITDA. I imagine we will see a very different picture from April to June. My question is that, how bad June was and how big of a drag because of June outbreaks in Guangdong, and how much has dragged the overall EBITDA? I just want to see if things were okay, what kind of run rate of EBITDA the company is achieving.
Sure. Billy, as you can see that what the market numbers were for the second quarter in terms of monthly GGR and the first month of the third quarter, you went from HKD 8 billion- HKD 10 billion- HKD 6 billion- HKD 8 billion. Certainly our EBITDA kind of mirrors that trend. I would say that given our cost initiatives and the performance of our retail business and our break-even point is significantly lower than it was historically. It's probably in the 20% range.
We continued to make money in June and July. We'll kind of mirror the trend there. Again, we are carrying a lot of labor, as you know. We're doing our best to manage through that. Hopefully, at some point, as we navigate through this little hiccup here in Macau, that we'll bounce back just like we have historically, because you see that even in June to July, we bounced back very quickly. Then hopefully, as we navigate what are hopefully the final stages of the pandemic, that we could get back to normal here.
I see. Just want to clarify, you guys were able to break even in June?
Yes. More so. We made money.
All right. Okay, great. Thanks. Thanks a lot. That's very helpful.
There are currently no further questions in the queue.
That's great. Operator, thank you very much for leading the call here, and thanks everyone for listening. We look forward to updating on our Q3 results, sometime during the early part of the fourth quarter. Thank you very much, and stay safe.
This is the end of GEG's conference call. Thank you for joining us today. You may now disconnect.
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