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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for holding, and welcome to the Galaxy Entertainment Group management update for the third quarter results of 2021. Joining us today are Mr. Michael Mecca, GEG Board Non-Executive Director; Mr. Robert Drake, Group CFO; Mr. Roland To, Senior Director of Strategic Planning; and Mr. Peter Caveny, Assistant Senior Vice President of Investor Relations. [Operator Instructions]
I would now like to pass to Mr. Drake for a presentation. Mr. Drake, please go ahead. Thank you.
That's great, operator. Greetings, everyone, and thank you for joining us for the update on GEG's Q3 2021 results. 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, especially as vaccination rates continue to rise.
As you know, Macau recently experienced a COVID-19 outbreak in late September where the Macau Government demonstrated yet again its ability to react incredibly swiftly to minimize public health and safety risk, as they have throughout the entire crisis. We again [ thank ] 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 the choppy market while, at the same time, supporting the all-important public policies, which is certainly cause for optimism. Believe it or not, the month of October was a prime example of this. 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 we remain as confident as ever in its medium- and long-term future. To be clear, GEG remains as committed as ever to 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.
There was also a very important and highly anticipated regulatory event in Macau during the third quarter. In mid-September, the Macau Government launched a 45-day public consultation program on revising the Macau gaming law, which has not been updated in 20 years and is arguably the precursor to the forthcoming concession tendering process.
The key points listed in the consultation paper were not a surprise to those who closely follow Macau. We believe that the suggested proposals, if implemented, would improve the regulatory oversight of the industry, increase the sector's transparency and secure the long-term viability of Macau's most important economic pillar. We are waiting for an update about the revised gaming law as well as the concession reissuance process, just like everyone else.
Let's move on to our Q3 2021 performance where our effective cost control efforts continued to yield results in a choppy revenue environment while, at the same time, we continue to make progress with our enhancement project at our existing properties as well as with our game-changing development project in Cotai Phases 3 and 4.
GEG's Q3 2021 EBITDA improved by $1.4 billion year-on-year from a $900 million loss in 2020 to a positive $500 million in 2021 and declined 56% sequentially due to the impact of the highly publicized COVID-19 outbreaks on visitation and revenue.
The group also played unlucky in Q3 2021, which reduced EBITDA by $47 million, as playing unlucky in mass was partially offset by playing lucky in VIP. As a reminder, we also played lucky in Q2 2021, which improved EBITDA by $74 million and modestly unlucky in Q3 2020. If you adjust for luck, normalized EBITDA improved by $1.5 billion year-on-year and declined 48% quarter-on-quarter.
We mentioned earlier that there was some cause for optimism during a choppy third quarter where our mall operations delivered another solid performance despite significant disruption during the quarter due to COVID-19 outbreaks. We continue to enhance our mall offerings by introducing highly recognizable, world-class brands. This is certainly an important KPI which indicates healthy demand and bodes well for an overall market recovery.
We also continue to work hard at managing our cost structure, and we'll continue to deliver operating leverage, especially as business gradually improves. To that end, our Macau OpEx burn rate has declined by 32% from approximately USD 3.4 million per day under normal operating conditions and declined 4% in Q3 2021 to the $2.3 million range.
We would like to pause here, like we have previously, and make a very important point on fiscal management, especially during these challenging times. We certainly acknowledge that OpEx burn rate is an important part of the expense equation, but there's 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 again in Q3 2021 at approximately USD 300,000 per day. If you deduct the $300,000 per day of interest income from the $2.3 million per day in OpEx burn, you get approximately $2 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 for the long-term best interest of the company.
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 programs. 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 have previously reported.
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 our 450 all-suite tower and is targeted to open when market conditions improve during 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 markets. And finally, we are proceeding with the construction of Cotai Phase 4, Macau's only next-generation integrated resort, which will complete our ecosystem in Cotai. As you can see, we remain highly confident about the future of Macau as we continue to invest literally billions of dollars 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 in 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 Centre of Tourism and Leisure.
Next up is Hengqin and the Greater Bay Area, where Macau and Hengqin's integration into the GBA continued with a monumental announcement during the third quarter. In September 2021, the Macau and Guangdong governments announced the formation of the management community of the Guangdong-Macau Intensive Cooperation Zone in Hengqin, which will be led by Macau's CE and Guangdong's governor. This is exciting news indeed and signals strong support from the Central Government for Macau, Hengqin and the rest of the GBA.
We continue to pursue our project in Hengqin and are also expanding our focus to potentially include opportunities within the rapidly expanding Greater Bay Area. And finally, Japan, where we continue to pursue opportunities with our partner, SBM in Monaco, we'll continue to update you on these initiatives and situations as we move forward.
Let's move on to our balance sheet, which continued to remain strong, liquid and virtually unlevered. Cash and liquid investments decreased from $43 billion at the end of June to $38.4 billion at September 30, 2021. Our net cash position declined from $31.6 billion to $27.8 billion due primarily to investing in our development projects, including Cotai Phases 3 and 4; a decrease in the value of our Wynn Resorts shares; and reduction in our gaming chip liability.
Total debt declined from $11.4 billion to $10.6 billion, which primarily reflects $10.2 billion of borrowings associated with our treasury yield enhancement initiatives. Our core borrowings remain virtually unchanged between $400 million and $500 million, which includes 0 debt associated with our Macau operations. Yes, to be clear, we said 0 debt with our Macau operations.
Moving on to our outlook, where we continue to remain optimistic that Macau's gradual and managed recovery will continue despite the recent choppiness, especially with the recent increases in vaccination rates. Greater China continues to remain diligent in effectively containing COVID-19 outbreaks and continue to execute vaccination programs. And we are very confident that Macau will continue to navigate through the pandemic.
Furthermore, we are particularly pleased with the significant improvement in infrastructure in Q3. In early September, the Qingmao Checkpoint commenced operation, which has the capacity to process up to an additional 200,000 visitor crossing per day via 50 inbound and 50 outbound automated inspection channels. Again, this represents yet another positive signal from the Central Government for the long-term support of Macau.
We were also encouraged that we see strong signs of healthy demand and are quite confident that the leisure and tourism sector will bounce back. In the interim, we remain well capitalized and investing in our development initiatives, including our game-changing Cotai Phases 3 and 4, as the fundamentals in Macau and our operating business continue to improve. 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.
In closing, we would also 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 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. So back to you to kick off the Q&A session.
[Operator Instructions] Our first question is from Bank of America, Billy Ng.
Bob, my first question, actually, I want to have Mike to answer that. Just want to get any update on Japan situation right now. Any more update would be appreciated.
Thanks for the question, Billy. Since we spoke last, following GEG's Q2 financial results, there's been a major development in Japan with the election of a new Prime Minister, Mr. Fumio Kishida. We welcome the fact that the new Kishida administration remains committed to the IR development process as a means to support the ongoing tourism and economic development in Japan.
As we all know, Japan is the third largest economy in the world. It has a large population of 120 million plus whom enjoy tourism, leisure and travel. So this fits well with the development of an integrated resort. We continue to carefully evaluate the investment market conditions in Japan. GEG is one of a select few IR operators who continues to maintain an office and staff in Japan, and we continue our dialogue with government officials, prefectures and our business partners.
We believe that given the right circumstances, GEG and our European partner, SBM of Monaco, can add significant value to Japan and support their economic and international tourism ambitions. We look forward to announcements by the Japanese government in the future. Thank you.
And I also want to ask about like the latest on-the-ground color. We understand Macau, after October 19, they removed the quarantine requirement. So like we should see more traffic coming back. But in terms of ramping up again this time compared to, like, let's say, back in July or April, May, how do you see the traffic path different? And how long do you think we will see the business will be more like the April, May level?
Great question, Billy. October was a microcosm, really, of the pandemic in the form of choppiness. As we all know that we're all pretty excited about going into Golden Week, and we thought we're going to have a very solid holiday season, only to go back into restrictions being reinstated. But around the 19th of October, they eased them, and what we saw that we bounced back quite nicely, almost to the volumes that we're doing in July right before the next -- the previous outbreak.
So it's -- and we're pretty encouraged by that. Hotel occupancy jumped up immediately. Gaming volumes in both VIP and mass bounced back. Retail was pretty strong. So -- but believe it or not, through the first 20 days, it was pretty hard on the financial statement, but we almost crawled back to breakeven for the month of October. We were just that close.
So -- and going into November, I think we're plateauing a little bit as we see there's more restrictions going on in Northern China with the recent COVID outbreak. But what we're doing now is really focusing on our cost control efforts. And when the revenue comes back, we're quite confident that we'll emerge a much stronger operator and continue to generate operating leverage.
I see. And also, I would like to ask some questions on Hengqin. Given in September, the government has announced the master plan of the cooperating zone and also some of the chatter out there suggesting that one of the license renewal requirement will be involving Hengqin development. Since Galaxy is the only one already has a piece of land in Hengqin, do you think the latest development that we just mentioned will expedite your Hengqin project? And are there any latest change or development that you can share with us?
Well, we all saw it in the news. We saw that as very positive signals on many levels, including continued support from the Central Government. For those of you who hasn't visited Macau and if you looked across the Hengqin Island, it's just remarkable how much real estate development has gone on. It's just remarkable. And yes, we continue to pursue our project there and maintaining a dialogue with the government.
Now they're going through this new formation of the council that's going to manage Hengqin Island. As I said earlier, that is going to be, at the top, managed by the CE of Macau and the Governor of Guangdong. So we're working through that process and hopefully have some more updates for you in the future. And of course, we're expanding beyond that as we explore opportunities within the Greater Bay Area. So again, we're still in the infantile stages there, but we are exploring opportunities there. And as the situation warrants, we'll certainly update you.
[Operator Instructions] There are currently no more questions.
Okay. Well, thank you very much, everyone, for listening, but we'll just pause 1 second to see if there's another question or 2.
We will take our next question from Alpha Wang at Goldman Sachs.
My question is that -- so following -- yes, following in the end of public consultation at the end of last month, so could you provide more clarity regarding the next step? And any expectations on this front?
The highly publicized public consultation process for the revised gaming law really wrapped up at the end of October. We certainly -- the government asked for opinions, and we certainly submitted ours and some feedback. And I guess the next step in the process is to wait some feedback from the government on the public consultation. And then I'm sure they'll launch through the LegCo process. And we all know this is pretty much the precursor to the concession bidding process in advance of the license concessions expiring in June of next year.
So like everyone else, we're watching very closely and remain pretty confident about the future of Macau. We continue to invest in Phases 3 and 4, and that's a $50 billion commitment by Galaxy and the Luis. And we have a lot of confidence in the long-term prospects for Macau, and we're quite confident that in the interim that we can navigate through the pandemic.
The next question is from Billy Ng at Bank of America.
I hope you don't mind I ask a question again. I think some of my peers have difficulties dialing in. The system of the line is not that sturdy. But anyway, I have 2 questions I want to ask. One is like for the Phase 3 development, when we looked at the presentation, the Raffles towers and also the Galaxy International Convention Center, it looks very complete to us. So can you tell us, have you guys already got the necessary approval? And in terms of the opening or timing, has that come down to market condition? As market conditions improve, you can open quite quickly, is that the condition that we are seeing? That's my first question.
Thanks for the question, Billy. Yes, we're very excited about Phases 3 and 4 and Raffles at Galaxy Macau and the Galaxy International Convention Center and Arena. The projects are virtually complete. So it really comes down to the timing of the opening. And given that we're pretty disciplined operators, and we just want to see evidence that there's a recovery, so we'll be very flexible. We're at that part of the project where you go from completion to opening, that within a very short period of time, we could ramp up and be ready to align the openings with hopefully an improving market -- overall market. So that's where we are. And of course, on Phase 4, as you will hear, and I think we have some photos in the press release, that we continue to move forward with Phase 4 to complete our ecosystem here in Cotai.
And just to follow up on that. The usual approval process that require DICJ and MTO, the Tourism Board, is that normally, it still takes 6 months, 3 months to get clear? Or this is already ongoing, so it won't need to be that long?
Yes. We don't see the inspections as an obstacle to opening. So it's the -- I think the government has a pretty good idea of what's going on in the market as well. We're working closely with them. And we'll just time the inspections at the -- when it's at the right time.
Okay. And then my second question is maybe related back to the first one. The market conditions, supposedly, we believe they will improve, and Hong Kong and Macau border can reopen. And we heard about some updates, some news from the Hong Kong side that they are talking about having a pilot program or testing as early as mid-December to allow maybe up to 1,000 people crossing the border between Hong Kong and China. And what's your expectation between Macau and Hong Kong and most your -- I know like it's hard to tell, but any color or any insight you can share would be appreciated, yes.
Billy, we would welcome you with open arms. But as we've said many, many times before, the primary focus is public health and safety. And we'll work closely with the authorities to just conform with their policies and support them through the entire process. Of course, we will welcome that sooner rather than later, but we want to do it in a sustainable way. And of course, that's Hong Kong, and the same would apply to Greater China, which where they demonstrated that they can effectively deal with the outbreaks in their way. And so we just have to stay the course, focus on cost control. And when they're ready to open, we'll be ready to receive our guests.
Okay. And my last question is on the daily OpEx. Do you expect for the fourth quarter and first quarter next year, it will remain largely the same as the third quarter level?
It's a great question. But actually, if our OpEx burn rate increases, it will be on the back of business improving as we incur some variable expense. The real trick for us as we're coming out of this, Billy, is to convert temporary savings to permanent savings. And with the way that we've optimized our labor force that hopefully, especially our nonlocal labor force, we won't have to bring back as many as we had before, where we can do more and deliver a better experience for our customer, which ultimately translates into operating leverage. And we're quite confident we can deliver that.
So that's really what we're focused on here is creating operating leverage as it comes back. So if OpEx burn rate ultimately increases, that's not a bad sign. The question is, is it rising at a rate that is accretive once the incremental revenue is welcomed back into Macau. And we're quite confident we can deliver that.
The next question is from Andrew Lee at Jefferies.
My first question is on the license renewal, right? Do you think that would be concluded by June? Or do you think it will need to be extended?
That's a great question. I think it remains to be seen. We're preparing for the bidding process like everyone else is, and we'll move when the government asks us to move. And everyone is watching it very closely. They just completed the consultation process. It has to go through the LegCo. We'll see how long that takes. And then following up with that, I'm sure they'll be in a position to launch the concession bidding process. But it's a lot to get done. So could there be an extension? That's a possibility, but there's also a possibility that they can launch right into the tendering process. So we're gearing up for either eventuality.
Okay. And then my second question is on Hengqin Island. Could you give me a little bit more detail about the development details, right, in terms of how much more development do you need to do? How long will it take? I'm just trying to get a sense of the expansion.
Sure. It's a very large piece -- I will say it's huge. It's like -- has 1.5 miles of waterfront coastline, 3-plus square kilometers. But we're still in the initial stages there. We've been at this quite a long time, if you've been following the company. And the -- we're very encouraged by the recent update. And really, as Hengqin really comes into its own as they work out the -- all the details of running Hengqin Island, of course, we're in a dialogue with the government. And as they work through the details on the administrative end, we continue to push along our deal. And hopefully, we'll have more to update you in the future.
And how much CapEx have you allocated or will be allocated?
A minimal amount. But again, it's -- we've always said it's a longer-term development opportunity. And as you can see, there's a lot of progress in Hengqin Island. So we continue to pursue that as well as expand into the Greater Bay Area with potential opportunities there as well.
[Operator Instructions] There are currently no more questions.
Let's give them another second, operator.
The next question is from Alpha Wang at Goldman Sachs.
Just one small follow-up. Regarding the balance sheet, I think this quarter, we also generated positive operating cash flow. So why is the cash balance reduced around $5 billion?
Yes. The real thing to focus in on, guys, is really the net cash position and the variance there. So what happened during the quarter is that we continued to invest in Cotai Phases 3 and 4. That was about $1.4 billion to $1.5 billion. We actually had a reduction, a working capital adjustment, particularly through our gaming chip liability, which was reduced by $1 billion or so. And then we actually -- the value of one of our investments in Wynn Resorts actually declined as well. So that really accounts for the variance between net cash at June 30 and September 30.
Got you. And just one more follow-up. Then how much is the remaining CapEx for Galaxy Phase 3?
That's a great question. As I just said, we invested about $1.4 billion in the quarter in Cotai Phases 3 and 4, brings the total to about $18 billion of the $50 billion that were budgeted for the projects. That leaves about $32 billion to go. As you can see, we're in a very strong net cash position and very well capitalized to move forward. And any modicum of a rebounding market, we still plan on not raising any external capital to fund our projects. So it will come from internally generated funds.
The next question is from Praveen at Morgan Stanley.
Quick question from me. The timing of opening of Hong Kong or loosening of China travel is kind of unknown, but we'd love to hear your thoughts if there is any. But my question was more if Hong Kong, China, Macau opens up without further loosening of China and Macau, meaning no e-visa and no group visa, what additional percentage of revenue and EBITDA do you expect to bring in to your business?
That's a great question. I think as we've always said, Praveen, it's going to be a gradual, managed recovery. It's not going to be a light switch. It will be a gradual recovery. So -- but of course, if Hong Kong opens up, that would certainly be an immediate boost to the business. But again, that's probably going to be in a gradual basis. It's walk as you run -- before you run type of scenario.
Ultimately, the best signal would be the conversion of going from manual to the electronic IVS. But I think there are so many levers that they can pull to support the market here. And in the interim, all we can do is really welcome our customers when they do come, but really focus on driving efficiency, particularly in our cost structure.
So -- and then on top of that, it's also supporting the local community and the government about really -- and other policies about containing the pandemic. So I think Galaxy, in particular, is well capitalized and we're able to ride out the storm, as is probably the rest of the market. So we just have to hang in there and navigate through the balance of the pandemic. We still believe it will be a gradual, managed and hopefully not choppy, but we're prepared for a choppy recovery.
If I have a follow-up. I looked at the picture of Phase 4, which clearly looks like there's a lot of activity. My question was, if the current environment, which has been going on for 2 years almost, sustains, could you have slowed down the development of Phase 4? Or what is giving you comfort around keep spending on 4, on top of, of course, 3 is obviously almost completed? That's it for me.
Well, that's a great question in the midst of the pandemic. So it's the -- short term, on the operations side, as you know, it's had a dramatic effect on the operations part of our business, but we really do believe in the medium- and long-term potential of Macau. We've been here a long time. The initial thesis in Macau has only been validated over time. We continue to serve a grossly underpenetrated market. We continue to believe that it will migrate towards the mass part of the market in support of the Macau vision to become a global tourism and leisure destination. We're building our MICE facilities to support the government and the diversification of the Macau economy.
So we take -- on its own merits, it's a very encouraging sign. But what -- that's from a bottoms up. If you look from the top down, the Central Government just continues to support the Greater Bay Area in general and Macau and Guangdong and Zhuhai specifically. So not a lot of notoriety about the new checkpoint that just opened, but that's huge. That's -- they didn't have to do that. And the -- and people don't appreciate that the second-largest underground train station in China is in Hengqin Island.
But there's a long-term plan here. And we're just -- if you're reading the tea leaves, you can see what the master plan is for the Greater Bay Area, and we just keep peeling back the onion down into Macau and Hengqin Island that you can see that we play a pivotal role. And so we're very comforted by the support from the Central Government. We've got the long-term prospects for the market, and that's why we continue to move forward with Phases 3 and 4.
We really do think Phase 4 is a game changer for the market. It will be the only next-generation integrated resort in the market that completes our ecosystem. So I think we're well positioned for future growth relative to the competition. And the reason we're so bullish is because we're getting support from the government's broadly defined.
Bob, can't wait to see Phase 4 and 3 coming out and we can travel to Macau someday and visit for ourselves.
Welcome you with open arms, my friend.
The next question is from GEG. [Operator Instructions]
I'm from [ Investors Securities ]. I'm [ Grace ]. I only have one question about the competition situation for now. Because it seems that the premium mass has recovered faster, I'm wondering what's your insight for the [ GEG ] structure in the future? And also, what's our -- do you have any special arrangements or strategy in premium mass for our Phase 3 or Phase 4?
Sure. As we've seen over the last few years, there's been a structural change in the market migrating away from VIP to mass. And we -- for those of you who follow the market, the mass market has been definitely more profitable, lower volume, but higher-profit margin in the mass segment of the business. And if you think back 20 years ago when they initiated the liberalized gaming and opened up Cotai, it's really focused to focus on the mass market and to really achieve, at that time, the vision of becoming a global tourism destination.
And eventually, if you fast forward to now, I think if you look at the integrated resorts in Macau, especially Galaxy and the rest of the market, we're really servicing the mass segment of the market and expanding into more non-gaming areas like MICE and entertainment and retail.
So within that, of course, our premium customers get a lot of notoriety, but we have to service all our customers, and that ranges from mid-tier customers to our core customers. And I think any mass-centric market caters to all those segments. And I think one of the reasons that we've been so successful, particularly at Galaxy Macau, which continues to lead the market for a number of years in the face of significant new competition, most importantly in terms of property EBITDA, is that our retail business has done pretty well in the pandemic. So it's the -- with strong -- it would send a signal that there is strong pent-up demand out there.
So we have to offer a little bit of everything to everybody, and I think we've done a great job of doing that. And that's very consistent with what the development mandate is from the Macau Government. And what we're building in the future certainly complements what the Macau Government wants with the Convention Center and the Arena and the Andaz Hotel. And of course, our next-generation Phase 4 integrated resort caters to all that as well. Yes, we're targeting to the premium segment, but it's -- we're offering every segment something that would invite -- make them feel that they can have a great experience in Macau.
[Operator Instructions] There are currently no more questions.
Another second. Great, operator, why don't we just wrap it up. Thank you, everyone, for joining us on the Q3 call. We look forward to updating you on our Q4 results probably in the month of February in 2022.
Thanks, everyone. Stay safe and healthy.
This is the end of GEG Conference Call. Thank you for joining us today. You may now disconnect.