Genting Singapore’s (GS) one-cent of dividend for the fourth quarter ended 31 December 2011 has shocked the market given its strong cash and cash equivalent of over $3 billion as at end-2011.
Not ending the bombshell, GS continued to surprise the market with the issuance of $0.5 billion perpetual bonds – a second round of fund raising in 2012 after its bond issuance in mid-March. Consequently, this has pushed GS’ total equity offering this year to $2.3 billion, with investors starting to cast doubt on its ability to service the large amount of interest payments that come with such debt-based financing. A reduction of dividend payments to common shareholders is also a wildcard as a total of $36 million will be distributed to the new perpetual security holders annually.
Mongolia For Next Expansion
GS’ bond issuances certainly come with an agenda. As the growth in Singapore’s gaming market is significantly constrained by regulations and land-use restrictions, the ample fund supply reinforced by the bond issuances, therefore, may enable the firm to continue expand its business beyond Sentosa, and facilitate its next phase of growth.
Earlier, GS stated that it may venture into virgin markets such as Japan and South Korea. Yet, the complicated legislative process to liberalise gaming in Japan and Korea may set Mongolia as its first target, as a total of US$0.5 billion to US$4 billion has been allocated for investment study in the region, according to Maybank Kim Eng Research. As a recap, GS has incorporated four Mongolian companies in the fourth quarter of 2011.
Will Mongolia generate a lofty return for GS? It is too early to say for sure. One point to note though is that the foray into Mongolia may serve as an opportunity for GS to attract more high net-worth gamblers from the other provinces, given Mongolia’s close proximity to other main cities, taking examples of Beijing, Tianjin, Shenyang and even Russia.
Mixed Reviews On Singapore Junkets
Much to the enchantment of investors, Casino Regulatory Authority of Singapore had in March 2012 approved two licences to Malaysian junkets. While this could be viewed as GS’s next phase of growth, analysts are of the view that the move is unlikely to carry great weight in the short term, citing that most of the junkets’ clients are ASEAN-based and overlap with Resort World Sentosa’s (RWS). Furthermore, the absence of channel for Renminbi to be transferred into Singapore could further impede the attraction of high net-worth gamblers from China.
Yet, there are always two sides to every story. Notably, some of the rejected Macau junkets are said to be reapplying for the license again in 2013, cited Malayan Banking in its report. Hence, we expect more junket licenses could be issued in the near future, particularly to junkets based in China and new markets yet to be penetrated.
Not to mention, with the opening of 172-room Equarius Hotel and 22 exclusive Beach Villas in February 2012, RWS, therefore, is expected to gain more market share in the VIP segment. In addition, the newly opened Equarius Hotel and Beach Villas may also allow RWS to well capture the potential new stream of VIP players from the two Malaysia-based junkets.
Something Worth Waiting For?
As at the end of 2011, GS’ gross borrowing and cash and cash equivalent stood at $3.2 billion and $3.3 billion respectively, putting the gaming operator in a net cash position. In addition, as the nature of perpetual bonds is equivalent as equity, we are of the view that the bond issuance will not impose any additional debt burden for GS. To top it off, GS was able to generate an operating cash flow of more than $1 billion in 2011.
If you are one of the shareholders that are dismissive of its peanut dividend, be patient as it may take mid to long term to see a good capital return on GS’ big expansion plan. As for now, stay tuned for GS’ first quarter financial results which will be announced on 10 May 2012.