Genting Singapore - Even odds

RWS could beat consensus forecasts in its maiden year of operation in 2010, and boost GENS’ earnings by 210.0% and 50.3% in 2010-11. Recommend HOLD due to limited upside to fair price of S$0.95.

We initiate coverage on Genting Singapore (GENS) with a HOLD call and a DCF-based fair price of S$0.95/share, which implies a target 2011 EV/EBITDA of 12.7x. While we believe Resorts World@Singapore (RWS) could trounce consensus forecasts in its maiden year as a casino operator in Singapore in 2010, a peakish market outlook could prompt investors to cash in following GENS’ 98.9% ytd price appreciation. We expect GENS to trade in the S$0.90-0.95 range, with the top end having already factored in continuity of the Singapore casino licence and scarcity premium for comparable Asian gaming-consumer plays. As our fair price has limited upside potential, we recommend HOLD with an entry price of S$0.80.

Earnings on a roll. We project GENS’ earnings to surge 210.0% and 50.3% to S$295.2m and S$443.8m in 2010-11 as RWS’ casino operations go into full swing by 1Q10, ahead of rival Singapore casino operator Marina Bay Sands. GEN could beat consensus forecasts of S$105.3m given its firstmover advantage, and with the partial deferment of expansion of the less profitable non-gaming operations.

Leveraging on Asia’s sizeable VIP and Singapore’s domestic gaming markets. RWS should be able to capture 5.0% of Asia’s VIP market (estimated at US$9b-10b p.a.) and 12.5% of Singapore’s gaming market (estimated at S$9b-10b p.a.). This excludes the full grind market potential which RWS could tap from neighbouring countries such as Malaysia, Indonesia, and possibly even China. This is based on the premise of RWS’ strong global network, favourable tax structure and strategic location in Asia.

Quick wins and high margins at RWS. The S$5.6b RWS project promises a good payback period of 8-9 years, riding on Singapore’s favourable gaming tax structure which gives RWS an advantage over its competitors in Australia and Macau in the high roller segment. Meanwhile, the non-gaming division (principally Universal Studios) should eventually attain decent returns, judging from Universal Studios Japan’s achievements in recent years.

UK business’ run of bad luck should turn by 2011. GENS’ UK business is projected to recover only in 2011 due to the UK’s prolonged economic slowdown and adverse regulatory environment. Still, earnings could post a positive surprise as 2008’s streamlining and restructuring exercises could save up to £10m annually, but the upside is not significant to group earnings. For details, please refer to our blue-top on Genting Singapore.

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Genting Spore: Raise TP $1.40 (pre rights) $1.30 (post rights)

1-for-5 renounceable rights at 80cent (33% discount to 8-Sep-2009 closing price of S$1.19), fully underwritten. 40% of S$1.63b proceeds would be used to pare down borrowings (reducing 2009F net gearing to 2.5x from 4.0x) and 60% for future investments (could include Resorts World at Sentosa's S$600m Western Zone which was supposed to be funded by operating cashflows). We believe GENS' immediate focus would be to complete RWS (still on-track and within budget), while keeping the option to look at potential opportunities.

Marginal dilutive impact, although share base would increase by up to 2m shares or 21% to 11.7b. If 40% of proceeds is used for reducing borrowings, we estimate a 9-11% dilution to 2010-11F EPS (potentially less if future acquisitions are accretive), supported by S$29m of interest savings. If the entire amount is used instead, we expect 2-7% dilutive impact. More importantly, the rights issue would reduce financial risk and interest cost pressure on earnings/cashflow.

Remain positive on RWS' prospects. We have revised our 2009-11F earnings to factor in a 12-month contribution in the first year of operations (vs 11 months) and a lower depreciation rate (assuming capex would be equally spread over 30 years vs 7% based on Genting Malaysia's used previously). Maintain BUY, and raise sum-of-parts TP to S$1.30 (assuming 7% WACC, 1.5% long-term growth). GENS remains the cheapest gaming stock on PEG basis (0.41x vs sector average 0.65x).

Important Relevant Dates for Renounceable Rights By Genting

Ratio : 1 : 5
Rights Issue Offer Price : S$0.80
Theoretical ex-rights price : S$1.017 (based on share
price of S$1.06)

Important dates
Shares trade ex-Rights : 18 Sep 09, from 9.00 a.m.
Book Closure date : 23 Sep 09 at 5.00 p.m.
Commencement of trading of "nil-paid" rights : 28 Sep 09, from 9.00 a.m.
Cessation of trading of "nil-paid" rights : 6 Oct 09 at 5.00 p.m.
Listing date of the Rights Securities : 21 Oct 09 from 9.00 a.m.

Last date and time for
Acceptance and payment : 12 Oct. 09 at 5.00 p.m.
Excess share application and payment : 12 Oct. 09 at 5.00
p.m. (9:30 p.m. for Electronic Applications)

Genting Singapore - Get set for Casino Royale

A flurry of activity at the construction site; working 24/7 – We visited RWS’ construction site last week. Testing of some of the Universal Studio (USS) rides have already begun while 4 hotels scheduled for opening in phase 1 have been topped up. In our view, RWS should be able to open on time, if not earlier. Note that a charity concert, to be held at the Festive Hotel, has already been scheduled for December 19th.

High quality project, in our view: The project site is sizeable – 49 ha in total with USS occupying 20 ha. USS, when opened fully will have 24 attractions of which 18 are unique to Singapore. USS will open with 20 attractions next year. A variety of rides will be present - with some appealing to younger crowd while others appealing to older crowd. A few public attractions such as the Crane Dance, a pyrotechnic show will further enhance the resort site and landscape. The project is led by experienced management team - CEO Tan Hee Teck joined the Genting Group in 1982 and has been significantly involved in management of Genting Highlands in the past.

Infrastructure being put in place to cater for IR traffic: Completion of the 3rd lane (per direction) on the vehicle bridge linking mainland to Sentosa (from 2 lanes to 3). Vehicles from mainland can also enter car park of RWS from the bridge without having to drive into Sentosa. A 620m pedestrian bridge with travellators (capacity of 8,000 guests / hour / direction) will also be constructed.

Management’s visitor arrival guidance closer to our bullish case: Management is guiding for 13MM visitors in 1st year of operations (vs. their initial guidance of 12-13MM, our estimates of 10MM). USS will be a major draw - casino business is a volume business and USS should draw the crowd. Of the 13MM visitors, 40% is expected to be locals and 60% foreigners. Our current June-10 PT of S$1.20 is based on our base case assumptions. However, if numbers come in closer to our bullish case assumptions, share price could rerate closer to the S$2 level.

Genting - Another buying opportunity

In a surprise announcement, Singapore-listed GENS is proposing a S$1.63bn 1-for-5 rights issue at S$0.80 each. In a statement, GENS said the rights issue was being undertaken to pro-actively strengthen its balance sheet, enhance its financial flexibility and competitive position, and facilitate future business expansion. We think otherwise. Given the anticipated strong cash flow from the IR project, GENS is not in urgent need of cash, in our view.

The rights issue is the second for GENS in the past two years and comes after the controlling shareholder, the Lim family, completely divested its direct stake in the company at around S$0.71/share.

It is a different story for Genting. It will get to raise its investment in GENS at a 33% discount to the market price by subscribing to its portion of the rights shares at S$0.80/share.

We maintain our view that GENS’s IR will be a great success. At the S$0.80/share rights issue price, GENS’s EV is roughly about S$17bn. Strong cash flow from the IR project could easily help Genting raise funding for its portion of the rights issue at around S$0.88bn. As of December 2008, Genting’s own cash reserves, excluding those held by subsidiaries, are estimated at less than S$400mn.

Genting shares have reacted negatively to the rights issue. However, we view this as another opportunity to buy the stock.

Genting Proposes 1-for-5 rights issue - BUY $1.28 TP

Maintain BUY with higher DCF-based fair value of S$1.28/ share versus S$0.90/share previously. Our DCF valuation for Genting Singapore plc (GenS) has been raised to account for higher revenue coming from an increase in visitor arrivals at Resorts World at Sentosa (RWS).

We have also revised GenS’s FY11F earnings projection upwards by 33% for this reason. Our FY09F-FY10F earning forecast for GenS remains unchanged. Due to our higher fair value for GenS, our RNAV-based fair value for Genting Bhd has been raised from RM7.46/share to RM8.95/ share.

Previously, we had assumed that visitor arrivals would only expand 5% to 11.4 million in FY11F and 4% to 11.9 million in FY12F driven by traffic to RWS’ non-casino attractions. We had assumed that the number of casino patrons would remain constant throughout the 10 years from FY10F.

We are, now, assuming that the number of visitors would expand 18% to 12.9 million in FY11F and 15% to 14.8 million in FY12F. We are keeping our assumption of 10.9 million visitor arrivals for FY10F versus management’s guidance of 12-13 million.

GenS yesterday proposed a 1-for-5 rights issue at S$0.80/ share. This is at a 33% discount to GenS’s closing price of S$1.19/share. Total proceeds from the rights issue would amount to S$1.63bil. The theoretical ex-rights price is estimated at S$1.13/share and GenS is expected to trade exrights on Friday, 18 September.

About 60% of the rights proceeds would be used to fund investments/acquisitions while the balance 40% would be used for working capital (including repayment of bank borrowings).

Interest income from the rights issue of an estimated S$41mil could turn GenS into a profitable position in FY10F based on our estimated net loss of S$10mil for the group.

However, looking ahead to FY11F, then GenS’s fully diluted EPS would shrink 7% to 3.14 cents Singapore due to the increase in number of shares from its rights issue.

Genting Bhd would have to fork out about RM2bil or S$839mil to subscribe for its portion of GenS’s rights issue. We estimate Genting Bhd’s FY10F net profit to decline by 7% if the group were to borrow fully to finance its subscription of the rights issue.

Genting - Another rights issue, looking to raise up to S$1.6bn; retain Sell

Genting Singapore announced today a fully underwritten 1-for-5 rights issue at S$0.80 per share, a 33% discount to the closing price as of Sept 8. The rights issue will result in c.1.9bn new shares, potentially reaching as many as 2bn new shares assuming full conversion of its existing in-themoney convertible bonds. Gross proceeds could amount to S$1.63bn, of which the group plans to use 40% of proceeds for working capital and pay down debt, remainder of cash is to be deployed for future investments.

Shares will trade ex-rights on 18 Sept. The rights issue will be its second post its Singapore Integrated Resort win; the first was back in 2007, when S$2bn was raised to partly finance the project. Major shareholder Genting (54.3%) has agreed to subscribe to its pro rata share in full.

On a pro forma basis, our net debt to equity estimate for 2010E (first year of operation of its Singapore Integrated Resort) would be reduced from 144% to 83%, more comparable to our GS gaming coverage universe’s 2010E industry median 74% net gearing levels. There would likely be someEPS dilution assuming interest savings (1.2%/5% in 2010E/2011E), partly mitigated by the pretty comparable cost of equity vs. debt, in our view. We see the rights issue as pre-emptive move to strengthen its balance sheet, especially the planned 40% rights proceeds deployment: c.S$650m would be very useful to help bridge the funding gap for the Integrated Resort. Recall Genting Singapore secured only S$6bn funding vs. a project cost S$6.59bn, and management had earlier planned for a strong first year cash flow generation to help meet the funding gap, assuming no cost overrun. We think the market may be too optimistic on Singapore gaming demand and the competitive outlook.

Shares having risen substantially, much inflated by undue investor optimism on the Singapore Integrated Resort, and we think the rights issue is likely to weigh on Genting Singapore shares. Retain Sell rating and target price.

Genting - S$1.63b rights issue.

S$1.63b rights issue. Genting Singapore (Genting) has proposed a renounceable 1-for-5 rights issue at S$0.80 each to raise S$1.63b. According to management, the issue is undertaken to pro-actively strengthen its balance sheet, enhance its financial flexibility and competitive position, and facilitate future business expansion. Based on the last traded price of S$1.19, the rights discount is about 33%; it is also at a 29% discount to the theoretical ex-rights price of S$1.125. Genting also said it intends to use 60% of the net proceeds for funding of future acquisitions/investments, or JVs/strategic collaborations, and 40% for working capital (which includes repayment of bank borrowings).

Why now? Given the recent run-up in its share price, we believe it may be an opportune time to raise some cash from the market to add to its kitty. While there have been some concerns about the cost over-runs at RWS (Resorts World @ Sentosa) as well as its payment of its syndicated loan obligations of S$4b in 2011 and its S$450m convertible bonds (CB) in 2012, we think that these concerns may be overwrought. Instead, we see the move as more of a insurance, should there be any hiccups in the global financial system again. Genting has also previously said that it will fund the extra S$590m of over-runs with its internal operating cashflows once the casino opens its door; we do not see any issues with this as we understand that some of its attractions would only be completed in 2011/2012.

Potential acquisitions and strategic collaborations. Going forward, industry watchers expect the Asian gaming market to be the most promising- growing at 15.7% CAGR for the next five years. As such, we believe that Genting would focus on making acquisitions or forming JVs in this region. We note that possible targets could be in the Philippines (Subic Bay), Macau (not related to Stanley Ho), or even potential new markets such as Japan and Taiwan where Genting can step in to provide the technical expertise.

Adjusting our fair value to S$1.05. In view of the possibility of RWS opening before end 2009 and also the more upbeat regional economic outlook, we have further refined our estimates, raising our FY10 revenue by 11.4% and reducing our loss forecast by 66.7%. We have also bumped up our fair value from S$0.85 to S$1.05 (S$1.01 adjusted). But given the limited upside, we maintain our HOLD rating.

Genting - A $3 stock?

We are very bullish on Singapore’s forthcoming casino market and our estimates are well above consensus. However, we have erred on the side of caution for each individual assumption. Discussing our bottom-up estimates with investors, we have concluded that there exists significant further upside. As an example we have assumed an ebitda margin of 40% vs. management guidance of 50%. We have run a number of blue sky scenarios which implies the stock could be worth as much as S$3.

We currently forecast Singapore gaming revenues of US$3.2bn. This suggests that Macau will be four times the size. We believe this implies our estimates are conservative if we consider the large potential of the South East Asian including the local Singaporean market. If we assumed Macau to be 3x or 2x the size of Singapore, then our new price targets would be S$1.61 and S$2.45 respectively.

In our recent report titled Handful of aces, we provide a bottom-up framework for estimating the size of the market – looking at number of casino visitors and average spend by customer group including locals; foreign visitors, VIPs and Malaysian day-trippers. In each case, we have erred on the side of caution. Should we take slightly less conservative assumptions for a number of these parameters we end up with a range of new price targets from S$1.32 to S$1.80.

Should we boost our Ebitda margin assumptions to management guidance of 50% (from 40%) then our price target would be S$1.40. Market share of 50% vs. 46% would boost our price target to S$1.20.

Should we add up a number of our more aggressive revenues assumptions and apply higher margins, we arrive at a price target of $2.37. We have assumed 12x ebitda. Applying 15x to existing estimates results in a price target of S$2.37. Then applying this multiple to our sum of our bottom-up blue sky assumptions we arrive at a target S$3.

Genting Singapore - Request for trading halt - Right Issues??

Genting Singapore (GENS) has requested a trading halt pending for further announcement. Market speculation is that the company will be announcing a rights issue exercise to raise funds, to pare debt (GENS' total debt stood at S$2.4b as at 30 Jun 09), or even perhaps to beef up its war chest for future business expansion in the region. In the short term, we foresee share price weakness for both GENS and parent company Genting Berhad (GENT) should a rights issue materialize at GENS, although downside could be limited by the excitement over the listing of Wynn's and Las Vegas Sand's planned listing of their Macau casinos, as well as a potential early opening of the Resorts World Singapore.

Reuters reports that Casino operator Genting Singapore is planning to raise more than $1 billion through a rights issue, sources familiar with the matter said on Wednesday. "It's a big issue. Over $1 billion," one source with direct knowledge of the deal told Reuters. Genting shares were suspended earlier on Wednesday. Genting Singapore, a unit of Malaysia Genting, is building one of the city-state's two integrated casino resorts and is also the largest casino operator in the United Kingdom.

Genting Singapore (Genting International): Notable recent fund raising exercises

------------------------------------------------------+--------+--------
2005 2007 S$m S$m
------------------------------------------------------+--------+--------
Convertible bonds
------------------------------------------------------+--------+--------
2007: Issuance of S$425m Convertible Bonds due 2012
425.0
------------------------------------------------------+--------+--------
2007: Issuance of S$450m Convertible Bonds due 2012
450.0
------------------------------------------------------+--------+--------

------------------------------------------------------+--------+--------

------------------------------------------------------+--------+--------
Rights issue
------------------------------------------------------+--------+--------
2007:Renounceable rights issue of 3,611,360,700 new ordinary shares on the basis of 3 rights shares for every 5 exisitng ordinary shares, at an issue price of S$0.60
2,166.8
------------------------------------------------------+--------+--------
2005: Rights issue of 2,365,745,405 new ordinary shares on the basis of 5 rights shares for every 3 ordinary shares held at US$0.13/share
511.3
------------------------------------------------------+--------+--------

------------------------------------------------------+--------+--------
IPO
------------------------------------------------------+--------+--------
2005: IPO for 800m new shares via placement at S$0.35/share
280.0
------------------------------------------------------+--------+--------

Other sources also told us that it may be on a 1-for-5 basis at a price of S$0.80 (translates to 33% discount).

Market is also saying that the fund raising may be related to 1) cost over-runs at its casino and 2) accumulating cash ahead of the repayment of its S$4.2b syndicated loan in 2011 and S$450m CB due in 2012.

Earlier Genting had raised the budget for its RWS from S$6.0b to S$6.59b, with the increase of S$0.59b funded internally by operating cashflows - we believe the internal funding is possible as we understand that some of the attractions are only slated to be completed in 2011/2012.

Genting - Understanding The Trajectory

Bank of China is reported to have been forced to withdraw from the US$2.5 bln IPO of Macau Sands, due to political pressure. Other Chinese investment banks as well as state-owned corporations (eg the sovereign wealth fund CIC) are also said to be under similar pressure, either as underwriters or as cornerstone investors.

Sheldon Adelson’s firing of 11,000 construction workers when he suspended work on the Cotai project last November, was also cited as a reason. As we had earlier noted, Adelson’s focus on Marina Sands at the expense of Macau augured very well for Singapore. (Adelson is the founder of LA Sands, and Macau Sands and Marina Sands are part of it.)

China’s policy towards Macau has been rather whimsical. Just look at the flip-flop on the visa policy for the mainlanders.

It seems like what is negative for Macau may be good for Singapore’s IR ambitions, and Genting Singapore offers the only direct exposure. This is best reflected in how quickly the 1.18 bln shares or 12.3% sold by the late Lim Goh Tong’s family on May 27th were snapped up, with talk that some or a good part went into the hands of Stanley Ho and related parties. (There has however been no confirmation on this.)

Genting has 9,637,768,746 shares on issue as at end May ’09. KL-listed Genting Bhd remains the largest shareholder with a 54.4% stake.

A total of 3,895 mln shares were traded from May 20th to Jun 30th, during which more than 100 mln shares were traded a day on 8 trading days, totaling 2690 mln shares or 70%. (A whopping 1.73 bln shares were traded on May 27th.) Genting’s share price hit 92 cents on May 26th, just before the share transactions, then dropped to 63 cents on Jun 16th, and has not looked back since, almost doubling to $1.17 yesterday, in under 3 months.

Genting International - Sentosa’s blue skies

Raise forecasts. We have raised our earnings forecast for 2010 by 160% because we now assume a full year of earnings from Sentosa, as opposed to our old assumption of six months of earnings. We have also doubled our assumption of VIP revenue from S$300m pa to S$600m pa, following our recent visit and reassessment of the regional VIP market (see Regional Gaming, Two if by land, three if by sea dated 15 July 2009).

Raise target price. We have lifted our target price from S$0.70 to S$1.14 to take into account the earnings upgrades, and also because we have rolled our DCF valuation forward to 2010.

Blue skies ahead. There is still potential upside to our forecasts. We are still assuming a conservative mass market size of S$2.4bn (US$1.6bn) of which we assume Sentosa will conservatively capture 50%. There are no data points currently for the mass market, so we have refrained from making more aggressive assumptions.

However, in Malaysia, the mass market is worth some US$1.0-1.1bn (out of total gaming revenue of US$1.2bn). Singapore has double the addressable population, and three times the income level in Malaysia. Even if Singaporeans had half the Malaysia propensity to gamble, we would be looking at a mass market size of some US$3-3.3bn (S$4.5-4.9bn). If this turned out to be true, we would have to raise our EPS forecast for 2010 by more than double and our DCF valuation would rise to S$2.66. Earnings and target price revision

We have raised our 2010 earnings forecast by 160% and 2011 by 17%. 12-month price target: S$1.14 based on a DCF methodology. Outperform reiterated. We raise our DCF-based TP to S$1.14. We conservatively assume a 10% WACC and terminal growth rate of 2%. The implied target EV/EBITDA is 12x 2011E, in line with global peers. A cheaper entry is via parent Genting (GENT MK, RM6.68, Outperform, TP: RM7.50).

Genting - Best proxy to Singapore’s flourishing tourism industry

We are optimistic that Singapore's first IR start strong in less than six months. In our opinion, Genting Singapore offers exposure to Singapore's flourishing tourism sector and seems well placed to tap the underserved Southeast Asian gaming market. Already the most liquid Asian gaming stock, current premium valuation is sustainable near term given its unique offering, pre-opening premium and stable regulatory regime. Initiate with Buy, S$1.26 target price.

Genting Singapore’s Resorts World Sentosa (RWS) is on track for a soft opening by January 2010. We believe RWS is positioned to capture a 40-50% share of the US$3.0bn casino market, making Singapore’s market one-fifth the size of Macau’s and two times larger than Malaysia’s. Singapore’s excellent air connectivity and attractive gaming tax rate should appeal to VIP high rollers. Domestic population also has a high propensity to gamble, spending an estimated S$9.5bn/year. This should be further complemented by its growing tourist arrivals.

The opening of the two IRs in 2010 should further cement Singapore’s aspiration to become the premier tourist destination in Asia. We expect RWS, home to the first Universal Studios theme park in Southeast Asia, to welcome 11m visitors in 2010 and generate S$0.76bn and S$1.1bn of EBITDA in FY10-11E. Deutsche Bank’s EBITDA estimates are 21% and 50% above the street.

Our target price of S$1.26 values RWS at 14x 2012E time-weighted EV/EBITDA (see pp. 3, 6-7). We do not believe this is excessive considering the pre-opening premium of the Macau plays, tourism scarcity value in Singapore, stable regulatory regime/contained competition and its own historical 2010 EV/EBITDA band of 10- 20x. Key risks are opening delay of RWS; another downturn in the regional economy; intensifying regional competition; and stringent junket licensing process.

Genting Singapore: Less muted 2Q09 results

Less muted 2Q09 results. Genting Singapore (Genting) posted a less muted set of 2Q09 results last Friday evening. While revenue fell 3.1% YoY to S$120.1m, it was up 14.0% QoQ, thanks to improved luck factor and increase in business volume at its UK casino operations. However, net loss widened from S$1.8m in 2Q08 to S$50.7m - it was also up 59.0% QoQ, mainly due to its share of associates loss of S$20.7m; this arising from a reduction in values of a property owned by a jointly controlled entity in London, as well as higher pre-operating expenses for RWS.

However if we strip out this item and also its fair value adjustments, its core loss would have widened 101.0% YoY but shrunk 13.5% QoQ to S$20.7m. For the first half, revenue fell 21.7% to S$225.5m, meeting about 38.4% of our FY09 estimate, while Genting swung from a net profit of S$4.2m in 1H08 to a net loss of S$82.5m; excluding fair value adjustments and associate loss, core loss came up to S$44.6m, meeting 44.8% of our FY09 forecast.

UK operations remain wild card. Although its UK operations have picked up somewhat QoQ, aided by improvement in business volume, as well as significant cost control on its end, management noted that the outlook for its UK operations remain uncertain. Besides the still uncertain economic environment, there are also several new measures by the UK government to raise gaming taxes; Genting expects the higher taxes to have an impact of less than £0.5m in 2009 but will continue to mitigate the impact of revenue reduction via vigilant cost reduction measures.

RWS on track for 1Q10 launch. As for Singapore, RWS is still targeting for a soft launch in 1Q10, but some talks have emerged that its casino may open before the end of 2009. RWS has increased its investment from S$6.0b to S$6.59b, but it expects the additional investment to be funded by operating cash flows once the IR opens. It has awarded over S$4.7b in project costs but it expects capex to remain under S$6.0b by the time of opening; we understand some attractions will only be opened by end 2011.

Maintain HOLD with improved S$0.85 fair value. In view of the improving economic outlook for Singapore and Asia, we have raised our FY10 revenue forecast by 10.1% and reduced our loss estimate by 48.9%; this will in turn improve our fair value from S$0.76 to S$0.85. Maintain HOLD.

Genting Singapore - Even odds

RWS could beat consensus forecasts in its maiden year of operation in 2010, and boost GENS' earnings by 210.0% and 50.3% in 2010-11. Recommend HOLD due to limited upside to fair price of S$0.95.

We initiate coverage on Genting Singapore (GENS) with a HOLD call and a DCF-based fair price of S$0.95/share, which implies a target 2011 EV/EBITDA of 12.7x. While we believe Resorts World@Singapore (RWS) could trounce consensus forecasts in its maiden year as a casino operator in Singapore in 2010, a peakish market outlook could prompt investors to cash in following GENS' 98.9% ytd price appreciation. We expect GENS to trade in the S$0.90-0.95 range, with the top end having already factored in continuity of the Singapore casino licence and scarcity premium for comparable Asian gaming-consumer plays. As our fair price has limited upside potential, we recommend HOLD with an entry price of S$0.80.

Earnings on a roll. We project GENS' earnings to surge 210.0% and 50.3% to S$295.2m and S$443.8m in 2010-11 as RWS' casino operations go into full swing by 1Q10, ahead of rival Singapore casino operator Marina Bay Sands. GEN could beat consensus forecasts of S$105.3m given its first-mover advantage, and with the partial deferment of expansion of the less profitable non-gaming operations.

Leveraging on Asia's sizeable VIP and Singapore's domestic gaming markets. RWS should be able to capture 5.0% of Asia's VIP market (estimated at US$9b-10b p.a.) and 12.5% of Singapore's gaming market (estimated at S$9b-10b p.a.). This excludes the full grind market potential which RWS could tap from neighbouring countries such as Malaysia, Indonesia, and possibly even China. This is based on the premise of RWS' strong global network, favourable tax structure and strategic location in Asia.

Quick wins and high margins at RWS. The S$5.6b RWS project promises a good payback period of 8-9 years, riding on Singapore's favourable gaming tax structure which gives RWS an advantage over its competitors in Australia and Macau in the high roller segment. Meanwhile, the non-gaming division (principally Universal Studios) should eventually attain decent returns, judging from Universal Studios Japan's achievements in recent years.

UK business' run of bad luck should turn by 2011. GENS' UK business is projected to recover only in 2011 due to the UK's prolonged economic slowdown and adverse regulatory environment. Still, earnings could post apositive surprise as 2008's streamlining and restructuring exercises could save up to £10m annually, but the upside is not significant to group earnings.

Impacts on Genting. We expect Genting's earnings growth to gain momentum in 2010 and 2011, boosted by RWS' contributions. We forecast Genting's 2010 and 2011 EBIT growth at 80% and 17% yoy, mainly as RWS' contribution to group EBIT rises to 32.9% and 37.5% respectively (reversing losses in 2009). We recommend buying into share price weakness (with target price of RM7.60) as Genting will be the cheaper entry point to RWS' future earning growth potential.

Genting - Playing it forward

We initiate with OW and a Jun-10 PT of S$1.20, implying 47% potential upside: We believe Genting Singapore (GS) is in a dominant position as it is one of the only two companies with the right to develop and operate an integrated resort (IR) in Singapore (and will maintain this duopoly at least for the next 10 years).

Building bullish expectations on IRs: (1) We believe IRs help the objectives of the Singapore government, which aims to double visitor arrivals by 2015; (2) with annual tourist arrivals of 10MM (+35MM transiting), Singapore already has the numbers to support two IRs (RWS expects 60% foreign visitors); and (3) a wide catchment area of 700MM people living within a 5-hour flight. Based on the Macau and Las Vegas experience, new casino openings should grow the casino industry pie.

Run-up to the RWS opening could prompt a share price re-rating: LVS, Galaxy, and Wynn’s share prices rose 14-85% before and after their casino openings (see page 12). We believe Genting Singapore’s share price could see a similar trend. RWS can leverage Genting Group’s established customer network and management expertise while RWS’s Universal Studios is also the only branded theme park in Southeast Asia. For FY12, we estimate RWS to have casino revenue of US$1.7B (when the IR is fully completed). Assuming a market share of 40%, this translates into a Singapore casino market size of US$4.3B, which is 4x the size of Malaysia’s and a quarter of the size of Macau’s. We also assume 7.5MM visitors to Universal Studios in FY12 (compared to 8-9MM visitors to Universal Studios, Osaka).

Valuation, PT, and risks: Our June-10 PT of S$1.20 is based on our SOTP valuation, in which we value its Singapore business at 14x FY12E EV/EBITDA. This is a concept stock which we think could trade over S$2 using bullish assumptions (see Table 5). Key risks to our PT include intense competition between RWS and Sands, a slower-than-expected recovery in the global economy, and unexpected health scares such as swine flu.

Genting Singapore - UK business on the mend, brighter prospects at RWS

Genting Singapore (GENS) reported a 2Q09 net loss of S$50.7m (-59% qoq; -2,925% yoy). The higher loss is mainly attributed to a write-off of bad debt (S$3.1m) and a reduction in property value of a property owned by a jointly controlled entity (808 Holding Pte Ltd) in London. Its share of the property value loss is valued at S$20.7m. Excluding these two items, the net loss would be S$26.9m, an improvement of S$5m as compared with previous quarter.

The revenue was up 14% qoq (but down 3% yoy) contributed by higher drop (7% qoq) and better win percentage of 14.5% (vs 13.4% in 1Q09) at casinos in UK. Management has indicated that casino attendance has stabilized, particularly at provincial casinos.

UK casino operations on the mend. UK casino operations registered an operating income of S$5.3m (before net foreign exchange gain/loss and interest expense) for 1H09, as compared a loss of S$7.4m in previous corresponding period. The improvement is largely attributed to measures put in place by management in streamlining and restructuring the business, which includes a reduction of 600 staff and stringent cost controls.

Another S$675m drawndown. GENS has drawndown another S$675m from its S$4.b credit facility and bring the total drawndown amount of S$1.7b as at 30 Jun 09 to finance the construction of Resorts World Sentosa (RWS).

Increase in pre-opening expenses. S$14.5m pre-opening expenses for RWS were incurred in 1H09, mainly associated with the acceleration of recruitment, training, sales and marketing programmes prior to RWS' opening. As at 30 Jun 09, about 400 personnel had been recruited for RWS' operations.

Universal Studios Singapore (USS). Management guided that testing and commissioning of USS will commence in few weeks time, and that due diligence testing and safety of the rides is management's priority. Management will not rush these issues to achieve an earlier opening date. RWS' soft opening target remains unchanged at 1Q10, as indicated previously.

The 2Q09 results suggest that the adverse operating conditions in UK have stabilized, given the higher drop and stabilised attendance registered at UK casinos. For RWS, we expect pre-opening expenses to accelerate in 2H09. Going forward, GENS' prospects will be driven by continuous positive news flow from RWS, such as a possible earlier-than-expected opening of RWS (before the targeted 1Q10), further delay of Marina Bay Sands' opening, and a better regional economic outlook, which will drive Singapore's tourist arrivals. We are going to initiate coverage on this stock with a preliminarily target of S$0.95 per share based DCF valuation, which implies 2011 EV/EBITDA of 12.7x.

Impacts on Genting. GENS' 1HFY09 loss is within our expectations. Our forecasts for Genting Berhad already imputes higher 2H09 pre-opening expenses incurred at RWS. Maintain BUY on Genting Berhad. Our target price of RM6.15 per share is under review.

Singapore Integrated Resorts: High stakes; money off the table

Our gaming demand analysis indicates 2010 market at $2.8bn-$3bn The countdown to the opening of Singapore Integrated Resorts has begun, and with about six months to go, the market is excited about “unconstrained revenue potential” type factors ie: the significant tourism potential, a wealthy domestic population, and low gaming tax rates helping to boost demand. Notwithstanding some continued uncertainties surrounding the actual opening, our detailed gaming demand analysis indicates that the market has the potential to be worth US$2.8bn-US$3bn. On a comparative basis this is similar to Malaysia and Korea combined or a fifth of Macau’s gaming market.

Duopolistic market, but subpar returns may drive up competition Market expectations are for a benign competitive market, a duopoly shared with Las Vegas Sands. However, when compared with Macau, Singapore’s gaming pie is much smaller, and we think casino operators may be under pressure to increase returns, especially after significant project capex. Based on our 2011E forecasts, we estimate average project ROIC to be 14%, vs. Macau’s average of 20+% and Venetian Macao’s 15%. Competition could surprise on downside.

Malaysian casino likely to face significant cannibalization risk Genting Malaysia’s casino is likely to face real competition for the first time in Southeast Asia, and our visitor profile analysis suggests that up to 20% of its arrivals could be at stake. We see potential -27% earnings decline in 2010E, after this year’s 10%, 2010E core earnings decline being its worst on record. The market seems to take a more benign view, but we see significant downside risk.

Downgrade Genting Singapore and Genting Malaysia to Sell Conventional wisdom would suggest buying Genting Singapore. However, we think the market is pricing in a very positive outcome for Integrated Resort, hence our downgrade to Sell from Neutral. Our 12-m SOTP-based TP is revised to S$0.65 from S$0.44. For Genting Malaysia, we think the market may be taking an overly optimistic view of its Malaysian casino operations, where we see significant cannibalization risk. Our earnings are significantly below I/B/E/S consensus and, as a result, we downgrade Genting Malaysia to Sell from Neutral with a revised 12-m SOTP-based TP of MYR2.60 from MYR2.80. We maintain our Neutral rating on Genting, but raise our 12-m NAV-based TP to MYR6.60 from MYR4.80. Key upside risks to Genting group: better-than-expected Singapore Integrated Resorts opening, lower-than-expected cannibalization risk at its Malaysian casino. Downside risks for Genting: poor non-gaming earnings.

Genting Singapore: New Starlet in Town

Proxy to Singapore casino market. Genting Singapore (GENS) has the largest exposure to Singapore's US$3b gaming market (89% of SOP, virtually 100% of 2011 EBIT). Resorts World at Sentosa (RWS) can tap on Singapore's existing domestic gaming market, rising regional tourism and leverage on Singapore's transformation into a global city.

Synergistic partnership: Genting+Universal Studios. We expect gaming revenue to come mainly from the more resilient and higher-margin grind segment (60:40 grind-VIP distribution, almost similar to Genting' 70:30). Universal Studios should help draw in the mass-market to RWS - differentiating it from Marina Bay Sands' MICE/business visitors focus as well as help diversify revenue base (non-gaming: 25-30% of revenue).

Potential first mover advantage. RWS could open earlier than expected, possibly in Dec 09/ Jan 10 to coincide with the Chinese New Year peak season. It could overtake Marina Bay Sands (launch postponed to 1Q10 from end-09) - an advantage in locking in local market share (S$2,000 annual pass in lieu of S$100/entry to be paid by Singaporean residents is exclusive to one casino). RWS' construction is on-track: 71% of project cost has been awarded to date with testing/ commissioning of ride equipments scheduled for Nov 09.

Potential catalysts: a) Award of casino licence in 4Q09 (already fulfilled requirement of >50% commitment spending and GFA construction), b) announcement of exact soft opening date, c) encouraging response for hotel bookings, and d) recovery in UK casino operations.

Sum-of-parts of S$0.98, valuing RWS at S$0.87/share (based on DCF assuming 7.8% WACC, 1.5% long-term growth). We expect RWS to be profitable in the first year of operation and earnings to grow at a 5-year CAGR of 37% (assuming no. of tables increase progressively from 500 to 1,000).

Genting Singapore: Placing bets too early

Genting's phenomenal winning streak. Genting Singapore (Genting), after hitting a low of S$0.41 in mid-February, has been on a winning streak ever since, chalking up gains of nearly 116%; this despite posting a wider 1Q09 net loss of S$31.9m vs. net loss of S$12.7m recorded in the year ago quarter. One possible reason could be growing optimism from the opening of its integrated resort - Resorts World @ Sentosa (RWS) - in early 1Q10, which should coincide with the expected recovery in the global economies going by most economists' forecasts.

Asia gaming market - most promising. In addition, many investors are probably upbeat about its potential market here in Asia, which industry watchers believe is without doubt the most promising - growing at 15.7% CAGR for the next five years1. According to a PricewaterhouseCoopers' (PWC) report, gaming revenue in Asia hit US$15.6b in 2007 and is expected to grow to US$30.3b in 2011. However, PWC noted that competition is also widely expected to heat up, as more countries mull the possibility of either setting up their own casinos (like Taiwan, Japan and even Thailand) or expanding the number of existing ones (South Korea).

UK operations may continue to languish. On the other hand, Genting's UK operations could continue to languish, given the dismal economy there. Latest official data showed that UK's economy shrank by 1.9% in 1Q09, while household spending fell by 1.2%, the biggest drop since 1980. Theofficial forecast is for the UK economy to contract by 3.5% this year. As such, we continue to pencil in a loss for its operations there this year.

Maintain SELL. In line with the recent re-rating of global equity markets as well as the improvement in risk appetite, we have bumped up our FY10 estimates and in the process, raised our fair value from S$0.45 to S$0.76.But realistically, we think that the turnaround would probably come in FY11. In the meantime, Genting may have to also content with higher interest payments as it continues to draw down its S$4b loan. Meanwhile, we do not think that Genting will be making a bid for the MGM Mirage Macau asset sale, as the issue can be quite sensitive. Back in 2007, Genting and Star Cruises had proposed a casino venture in Macau with Stanley Ho but the deal was later called off after the group received an adverse response from the Singapore government. Maintain SELL.