Galaxy Entertainment’s Interim Results Review

Galaxy Entertainment (GEG) reported improved 2017 Q2 numbers, thanks to
strong revenuegrowth in the mass segment, which more than compensated
for the sluggish VIP Baccaratbusiness. For H1, GEG’s EBITDA was up 37%
YoY. However, the Q3 figures will be affected bytyphoon damage and last
year’s strong base numbers. While GEG is the most attractively
valuedstock in the gaming sector, at 15x EV/EBITDA, its valuation is not
inexpensive, and furtherupside may be limited. Upside risk would be
higher-than-expected GGR growth in Macau.

    Non-GAAP EPS was RMB4.35, in line with our estimate of RMB4.26.
Gross margin was 60%, flatYoY, with cost of revenue increasing by 62% on
higher content cost for the video business,consolidation of Lazada and
logistics costs for Tmall Supermarket business. Adjusted EBITDAmargin
was 43%, in line with our estimate, down 4ppts on a YoY basis, due to
consolidation ofnew businesses, partially offset by improved operating

1Q17 revenue beat; profit in line. Total revenue was RMB38.6bn, up 60%
YoY, exceeding ourestimate and consensus by 8%, on better-than-expected
e-commerce business performance.

    Ali Cloud business grew rapidly; loss margin narrowed. Ali Cloud
continued strong growthmomentum, with revenue reaching RMB2.2bn, up
23%/103% QoQ/YoY, driven by the increase inthe number of paying
customers as well as their usage of cloud services, partially offset by
pricecut. The number of paying customers reached 874k, with a net add of
over 100k from theprevious quarter. Driven by economies of scale,
adjusted EBITDA margin for the cloud businessnarrowed from -16% in 1Q16
to -8%. We expect to see Ali Cloud’s margin improvement goingforward.
Ali Cloud will focus on expanding customer base in new sectors, and
providing morevalue-added services to increase the usage of cloud
services by existing customers. Digitalcontent and entertainment revenue
grew by 234% YoY to RMB3.9bn, due to the consolidation ofYouku Tudou and
growth in ad revenue from UCWeb. Revenue from innovation
initiativesincreased by 88%, driven by increased revenue from YunOS and
AutoNavi. The loss margins forboth digital content and entertainment
segment and innovation initiatives segment are likely tonarrow in
FY2018, in our view.

    Valuation. We lift our revenue estimate for FY2018E/19E by 5%/3% on
strong monetizationcapability on marketplace with growing ad budget
allocation and various types of promotionactivities and cloud revenue
forecast. Given continuous video content investment and reducingloss in
cloud business and new initiatives at the current stage, we adjust
bottom line forFY2018E/19E by 0.6%/1.1% respectively. On the back of the
new forecast, we lift valuation fore-Commerce and cloud business, to
US$260bn and US$50bn, implying 27x 2017E PE fore-Commerce and 32x 2017E
PS for cloud. Lift TP from US$124 to US$139, maintain buy rating.

    Healthy growth for e-commerce business (22% in GMV, and 43% in
revenue for FY2017), drivenby traffic growth and more personalized
content recommendation. Revenue of the corecommerce business increased
by 47% in 1Q17 to RMB31.6bn, contributing 82% of total revenue,compared
with 89% in 1Q16. Online marketing revenue from China retail e-commerce
businessincreased by 44% YoY, thanks to increased number of clicks, as a
result of 1) traffic growth: thenumber of mobile MAU reached 507mn, up
24% YoY; and 2) more personalized and relevantproduct recommendation
supported by intelligent data processing capability. Mobile
revenueincreased by 69% YoY, contributing 85% of total China e-commerce
retail revenue, with averagespending per mobile MAU reaching RMB179, up
46% YoY. Adjusted EBITDA margin for the corecommerce business remained
flattish at 59%, despite continuous investment. For Fiscal Year 2017,GMV
of the China retail e-commerce business increased by 22% to RMB3.8bn,
with the growthdriven by more active buyers as well as higher spending
per user and more frequent orders.