Genting Singapore PLC - Who are the gamblers who are long-term debtors?

19/11/2014 – Genting Singapore Plc says it is ‘encouraged by the positive response’ of the local government in Jeju, Korea, to its proposal to build an integrated resort there.

The casino operator says it remains optimistic about its plans in Japan, which are contingent on the outcome of the on-going debate on the Casino Promotion Bill at the Diet – Japan’s bicameral legislature.

The company just announced earnings for Q3 FY2014:

Revenue: -17% to S$644.8 mln
Profit: -50% to S$97.4 mln
One-off gains/(losses): Nil vs S$31.6 mln
Cash flow from operations: S$234.4 mln vs S$121 mln
Dividend: Nil
Order book: Not relevant

Gaming revenue was down 21% to S$477.3 mln as its premium player business underperformed due to a low win percentage.

In other words, the house won less often.

Non-gaming revenue was also down, but by only 2% compared to the previous year to S$167 mln.

However, compared to the previous quarter non-gaming revenue was up 8.7% due to 10% growth in average daily attractions’ visitors.

It recorded an average 17,000 daily visitors to its attractions in Q2.

Also, the occupancy at its hotels in Resort World Sentosa improved to 95% in Q3, from 94% in Q2, and its guests paid on average S$408 per night, up from S$390.

Genting Singapore recorded an adjusted EBITDA of S$253.9 mln in Q3.

It says the adjusted EBITDA would have been about S$397 mln had it achieved its theoretical win rate during the quarter.

So far in 2014, it has paid a net total of S$153.9 mln for quoted securities, unquoted equity investments and compound financial instruments.

Also, its equity injection and shareholder loan to its associate, Landing Jeju Development Co Ltd, amounted to S$195.4 mln.

The company has repaid S$393.8 mln bank borrowings so far this year.

Analyst Carey Wong at OCBC Research finds Genting Singapore’s Q3 revenue and net profit to be 8% and 18% short of his forecast.

He feels the muted earnings were due to fewer China inbound visitors and a lower-than-expected win rate of less than 2%.

The nine months’ earnings of the company constitute about 69% of the broker’s full-year estimate.

In its report, the broker says Genting Singapore believes there are still significant challenges for the Asian gaming and tourism industry, at least in the near term.

It adds, the company notes that the Casino Promotion Bill is likely to be heard in the Japanese Diet towards the end of H1 2015.

However, we couldn’t find any such statement in the just-released Q3 earnings report of the company.

Moreover, a report in The Japan Times said that the Casino Promotion Bill was likely to be cleared in the Lower House last month.

OCBC Research feels the opening of Genting Singapore’s 550-room hotel in Jurong in the first half next year would increase its hotel inventory by 30%, which could significantly add to the daily visitors figures at its casino and other attractions.

The broker also reveals that the resort owner is planning to refresh is attractions.

Despite all these positives, the broker has cut its earnings estimates for FY14 by 6.1%-7.3% and for FY15 by 2.9%-3.3%.

OCBC Research maintains a HOLD rating on the stock with a lower fair value estimate of S$1.01 compared to S$1.03 earlier.

The broker anticipates a knee-jerk reaction in the near term but sees value emerging closer to S$0.90.

Analyst Vincent Khoo at UOB KayHian finds Genting Singapore’s Q3 earnings to be in-line with his expectations.

He reveals that the VIP volumes at its casino fell 12% and the win rate was below 2% compared to a theoretical rate of 2.85%.

He feels the drop in VIP volumes is consistent with the weakness in gross gaming revenue in Macau, due to economic slowdown and graft crackdown in China.

The broker notes that Chinese players contribute about 50% to Genting Singapore’s VIP business.

Despite a 12% drop in VIP volumes in Q3, Genting Singapore maintains its leadership position with 61% market share, it adds.

It also takes positive cues from an almost 50% QoQ drop in the company’s receivables impairment in Q3 which, the broker says, alleviated fears about its earnings quality.

The broker expects the VIP volumes to hold steady in Q4.

UOB KayHian estimates the VIP segment to contribute about 30% of the company’s EBITDA.

Of that, 50% is contributed by Chinese VIPs.

For every 10% drop in footfall of Chinese VIPs, the company’s earnings will be hit by a ‘modest’ 1.5%, it adds.

Apart from such low sensitivity to Chinese VIPs footfall, the broker isn’t worried much about the company’s VIP segment as ASEAN VIPs (who contribute the remaining 50% VIP footfalls at the company’s resort) are still growing in single-digits.

UOB KayHian says management shared that the Casino Promotion Bill will now be tabled in the next session of Japanese Diet which is scheduled to meet during January to June next year.

The broker notes that a casino opening in Japan is a ‘long-dated’ event, but it feels the share price will react positively to any favourable news regarding the liberalisation.

Regarding its US$2 bln integrated resort in Jeju, Korea, the broker says the company has reduced its hotel and residential component of the resort by 20% and increased the MICE (meetings, incentives, conferences, exhibitions) facilities.

It expects to obtain construction approval in the first half of next year.

Regarding the mass market segment, the broker expects a ‘modest’ improvement in the mass-market volumes when the company launches the Jurong hotel in Q2 next year.

It highlights that the new hotel is located opposite the proposed high-speed rail terminal linking Singapore with Kuala Lumpur.

Assuming a 30% conversion rate (hotel guests entering the gaming hall), it could increase casino patronage by 3%, adds the broker.

As a result, UOB KayHian maintains a BUY rating on the stock with a target price of S$1.32.

The broker feels the stock is trading at ‘cheap valuation’ and ‘low institutional holdings’ of 20%, compared to 40% for Genting Malaysia, points to some recovery in the price.

Its target price estimate of S$1.32% includes a 10% Japan ‘option value’.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How much more will it invest and/or borrow for the integrated resort in Korea?

While the company has not revealed the total cost of its integrated resort project in Jeju, Korea, UOB KayHian estimates the project to cost about US$2 bln.

So far, it has transferred S$195.4 mln to its 50%-owned associate Landing Jeju Development Co Ltd, which would develop the resort.

In February, Genting Singapore announced it would invest S$194.2 mln in Landing Jeju Development Co Ltd, based on the cost of land, estimated development cost and projected cash flow from the resort.

Back then, Landing International Development Ltd - the owner of the remaining 50% stake in Landing Jeju Development Co Ltd – also committed to invest S$135.3 mln in it.

Put together, the contribution by the shareholders of Landing Jeju Development Co Ltd is less than 20% of the estimated cost of the integrated resort.

Therefore that makes us wonder how they plan to bridge the gap for the remaining funding needs.

More importantly, how much of that will Genting Singapore have to contribute?

Question

2. How long will it take to develop the integrated resort in Jeju, Korea?

As the management expects to obtain the construction approval by the end of the first half next year, we wonder how long it would take to develop the resort.

(Read the full story to get all 5 questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

In its reply, the company asked us to refer to its announcements to SGX.

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