K. Wah Construction Materials has entered into a HK$18.4-billion agreement to acquire 97.9 per cent stake in Galaxy Casino SA, becoming the only Hong Kong-listed company to hold an operating licence in Macao.

K. Wah said yesterday it would settle the deal by handing over 1.84 billion of its new shares (at HK$8.00 each) and issuing HK$3.68 billion worth of fixed-rate notes and cash to Galaxy.

The deal is a major step forward for K. Wah in its quest to become a leading leisure and entertainment firm in the world's second largest gaming market. It also represents a reshuffling of assets by tycoon Lui Chee-woo and his family, which controls the casino, K. Wah Construction and its parent body K. Wah International. The transaction raised the family's stake in K. Wah Construction from 73 per cent to 76 per cent.

The company, earlier engaged in the sale of construction material, will now re-invent itself and be known as Galaxy Entertainment Group. It takes under its wing the casino in Macao's Waldo Hotel that has 73 gaming tables, with a market share of 14 per cent of net gaming wins.

It expects a bigger slice of the pie once its HK$5.7-billion expansion plan materializes with the opening of the Galaxy StarWorld complex in 2006 and on the completion of its monolithic Galaxy Cotai Mega Resort that would have about 348 tables and 6,300 hotel rooms.

Mainland visitors are seen as the key growth vehicle for casinos such as Galaxy because Macao is the only legal gambling centre in China. About 57 per cent of Macao's 16.7 million visitors were mainlanders last year, when the enclave earned HK$40 billion in gaming revenue.

Shares in K. Wah Construction surged to a new 52-week high of HK$11.00 yesterday, before closing at HK$9.00, as investors looked to get in on the firm's gaming move, in the offing for over a month now.

Castor Pang strategist Sun Hung Kai said: "I think the purchase of Galaxy casino will bring profitable returns to the company... K. Wah will probably restructure its new business by expanding its gambling foothold through hotel projects or tourist-related business in the future too."

Some analysts, however, said the transaction was overvalued and ambitious because K. Wah Construction's net asset was only worth HK$1.45 billion last year while the purchase price is many times that of Galaxy casino's net asset value. One analyst said: "It's like a snake trying to swallow an elephant."

KGI Asia Associate Director Ben Kwong said: "We need to be more prudent as the growth momentum of the industry would not be as fast as the past two years." He feared the outlook of the gambling sector was not all that rosy.

But "I think the share prices of K. Wah Construction would still go upward in the short term as the market is still in a frenzy over gambling stocks," Kwong said.

Macao's gaming market has opened up considerably from its earlier offerings of prosaic casinos after Stanley Ho's 40-year gaming monopoly ended in 2002. US entrants competing with Galaxy include the Sands casino, run by Las Vegas mogul Steve Wynn, and the Venetian Macao, controlled by US billionaire Sheldon Adelson. Galaxy and the Venetian had originally planned to run their business jointly in Macao but with the deal falling through earlier this month, Galaxy would now go it alone.

Galaxy Waldo Casino and Hotel, the company that owns the property housing the Galaxy casino is planning an IPO worth HK$1.5-2 billion in the second half of this year.

(HK Edition 04/20/2005 page3)