Genting Hong Kong (GENHK SP) - UOB Kay Hian 2017-03-20: Yet To Make A Comeback

Genting Hong Kong (GENHK SP) - UOB Kay Hian 2017-03-20: Yet To Make A Comeback GENTING HONG KONG LIMITED S21.SI

Genting Hong Kong (GENHK SP) - Yet To Make A Comeback

  • GENHK’s cruise operating statistics improved in 2016 but inflated costs remain a concern as aggressive fleet expansion would have the group taking more time to achieve normalised earnings. 
  • Share price is expected to remain stagnant till better earnings visibility. DPS of 1 US cent came as a surprise given its huge capex requirement. 
  • Maintain HOLD with a target price of US$0.28. Entry price: US$0.24.



WHAT’S NEW


Positive EBITDA for cruise-related business but other losses widen. 

  • Genting Hong Kong’s (GENHK) 2016 EBITDA for cruise-related activities (excluding pre-operating cost for new ships) came in at US$63m (2015: US$43m) vs the reported EBITDA loss of US$91m (2015: US$6m). 
  • The loss of US$154m (2015: US$37m) at the EBITDA level in 2016 reflects non-cruise activities (such as one-off reorganisation cost for shipyards acquisition) and whopping pre-operating costs incurred (for new Dream and Crystal ships). 
  • While cruise operating statistics have improved, earnings remain uncertain due to GENHK’s on-going one-off expenses related to its yards and continuing pre-operating costs with its ambitious fleet expansion.

Improvement in cruise operating statistics. 

  • GENHK’s cruise-related revenue improved by 39% yoy with passenger ticket sales and on-board revenue improving by 74% and 13% yoy respectively due to the 19% increase in capacity days and 17% increase in net yield, primarily due to Crystal fleet’s full-year contribution and the launch of Genting Dream in Nov 16. Overall occupancy rate was higher at 82% in 2016 (2015: 73%).
  • Cruise-related EBITDA margin improved slightly from 6.9% in 2016 (2015: 6.6%).

Dream cruise well received thus far. 

  • Dream cruise’s first ship, Genting Dream, set sail in Nov 16 from its homeport in Guangzhou. Reception towards the cruise ship has been good thus far with the ship having seen an occupancy rate of 115% during the Chinese New Year festivities. 
  • On a normalised basis, management expects the ship’s two-night itinerary programme to see a occupancy rate of 80-100% and the five-night itinerary to see a rate of between 70% to >100%, depending on seasonality. Gaming revenue made up 28% of Genting Dream’s total revenue in 2016. 
  • GENHK’s second vessel, World Dream, is currently under construction and is expected to be delivered in Nov 17.

Resorts World Manila (RWM), posted a 2016 EBITDA of PHP6.4b

  • Over in Manila, Travelers International, GENHK’s 45% associate that operates Resorts World Manila (RWM), posted a 2016 EBITDA of PHP6.4b, up 4.4% yoy – due to increased revenue from hotel and retails operations and lower promotional allowances (- 23% yoy) – primarily due to fewer revenue-sharing arrangements with junkets.
  • Meanwhile, gross gaming revenue eased by 2.3% yoy. Overall gaming volume drop in 2016 declined 10.4% as the 8.3% yoy increment in mass market drop volume was offset by the 17.4% yoy contraction in VIP rolling chip drop. Blended win rate was higher at 5.2% (2015: 4.8%). On its prospects, although the opening of the pedestrian link bridge that connects Ninoy Aquino International Airport and Newport City in 1H17 is expected to benefit RWM, concerns on stiff competition remain. 
  • RWM may be losing market share as the crowd may continue to shift to casinos in Entertainment City. The latest addition to Entertainment City, the $2b integrated resort casino - Okada Manila, is set to have a grand opening later this month.


STOCK IMPACT


Expecting losses to narrow in 2017. 

  • Overall, we expect GENHK to still incur losses in 2017, given that it will see heavy pre-operating and marketing cost during the year, due to the launch of World Dream and two river cruises by Crystal Cruise. However, the quantum could be smaller yoy due to the absence of one-of costs related to yard acquisition.

Cruise-centric strategy with upstream capability: Long-term benefits but shortterm pain. 

  • Over the longer term, GENHK’s cruise-focused strategy (with a portfolio of three brands to cater to market segments ranging from contemporary to ultra-luxury) with in-house capabilities in ship-building is deemed positive, but the step-up in operating costs from newbuilds will still be a key concern for near-term earnings growth. 
  • GENHK has aggressive fleet expansion plans for all three brands (see sidebar for details).

Deteriorating cash pile. 

  • As at Dec 16, GENHK had a cash pile (includes restricted cash) of US$1.2b (Jun 16: US$1.5b, Dec 15: US$2.0b), with a net cash of merely US$9.3m (Jun 16: US$ 965m, Dec 15: US$1.4b). 
  • The decline in cash is primarily due to capex, which includes US$40m for existing Star Cruises fleet, US$831m for Dream Cruises’ new build vessels, US$162m for Crystal Cruises’ vessels and aircraft, US$279m for the acquisition of shipyards in Germany. 
  • We believe GENHK’s cash pile will continue to erode given the massive capex required for fleet expansion until 2022.

A surprise 1 US cent dividend. 

  • Similar to other Genting Group companies, GENHK’s dividend came as a surprise. Despite its heavy capex commitment, it announced a US 1 cent dividend for 2016 (2015: nil), representing a 3.2% yield.


EARNINGS REVISION/RISK

  • We have lowered our 2017 net profit forecast to a loss of US$38m, from US$33m profit previously, as we adjust our cost assumption. 
  • We also introduce 2019 forecast for GENHK to achieve modest profitability, although earning visibility remains low.


VALUATION/RECOMMENDATION

  • Maintain HOLD with unchanged SOTP-target price of US$0.28. The stock’s share price is expected to languish in the absence of near-term catalysts.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-20
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.280 Same 0.280





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