Genting Hong Kong (GENHK SP) - UOB Kay Hian 2017-06-16: Choppy Waters Ahead

Genting Hong Kong (GENHK SP) - UOB Kay Hian 2017-06-16: Choppy Waters Ahead GENTING HONG KONG LIMITED S21.SI

Genting Hong Kong (GENHK SP) - Choppy Waters Ahead

  • Tough competition at the Asian cruise segment, the shipyard’s continuing losses and the uncertain length of RWM's operations suspension (following the unfortunate robbery/arson incident on 2 June) have prompted us to downgrade the stock to SELL. 
  • Resort World Manila (RWM), held by associate Travelers International, was the only earnings contributor to Genting Hong Kong (GENHK). 
  • The cruise segment’s EBITDA loss may widen. Balance sheet quality is deteriorating on massive cruises investments. 
  • Target price: US$0.26.



WHAT’S NEW


Downgrade to SELL. 

  • We downgrade Genting Hong Kong (GENHK) to SELL with a lower target price of US$0.26 (previously US$0.28). 
  • We expect GENHK’s share price to slide over time to partially reflect the situation at 45%-owned associate company Travelers International’s (RWM PM) cessation of gaming operations, pending the Philippine Amusement and Gaming Corporation’s (PAGCOR) investigation into the recent robbery/arson incident. 
  • More importantly, competition in the Asian cruise market remains steep and we foresee widening losses at the cruise business.

Expecting widening losses for cruise segment. 

  • We expect GENHK’s losses from the cruise segment to further widen in 2017, from 2016’s reported EBITDA loss of US$91m.
  • On top of the pre-operating costs from the new Dream and Crystal ships (which debuted in 2H16), the newly acquired shipyard operation could have extended its operating losses (the shipyard represented the bulk of the group’s losses in 2016). Most of GENHK’s new ship building plans are still in the designing stage and would not translate into revenue for the shipyard. 
  • Meanwhile, EBITDA contribution cruise operations are still hampered by slow occupancy ramp-up at the Dream (amid stiff competition) and significant pre-operating costs for new ships that would generally extend over the next five years (in line with the group’s ambitious fleet expansion program).

Timing of RWM reopening unknown. 

  • Following PAGCOR’s suspension of casino license for GENHK’s 45%-owned RWM last week, GENHK lost its only income source.
  • RWM contributed US$33m to GENHK’s PBT in 2016. As the timing for the reopening of RWM remains unknown, we brace for an extended investigation period.


STOCK IMPACT


Stiff competition in China’s cruise market. 

  • The China cruise market, which was originally GENHK’s targeted market for its upcoming mega ships, is currently seeing a price war as new industry capacity growth outstrips demand. 
  • We gauge that GENHK’s first mega cruise ship, Genting Dream, managed an average occupancy rate of only c.80% (in contrast, a US cruise ships typically commands an occupancy rate of > 100% of lower berth capacity). This implies that Genting Dream would need to significantly lift its occupancy rate to reach EBITDA breakeven.

Ship redeployment strategy should enhance revenue but also raise costs. 

  • GENHK has redeployed Genting Dream to serve the Singapore market in end-17, and has changed/diversified its upcoming itineraries in mid-17 to boost ticket sales. 
  • While potentially revenue enhancing, changes to itineraries with varied home ports would incur higher costs (eg downtime during redeployment, compensation to customers on the change in itineraries).

Shrinking cash pile… 

  • As at Dec 16, GENHK had a cash pile (inclusive of 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 was 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 and US$279m for the acquisition of shipyards in Germany.

…on massive capex investment. 

  • We believe GENHK’s cash pile will continue to erode given the massive capex required for fleet expansion until 2022. 
  • We estimate that GENHK’s fleet expansion plan requires at least US$1.2b of annual capex over the next three years, which could well exceed the existing fleet’s cash flow generation, hence requiring it to fully monetise its remaining 11% stake in US-listed NCL (worth US$1.3b based on the current market cap).

PAGCOR suspends Resorts World Manila’s Casino Permit. 

  • To recap, pursuant to the robbery/arson incident at the Resort World Manila (RWM) on 2 June that resulted in 37 fatalities, PAGCOR suspended the Provisional License to operate casinos and other gaming facilities issued to Travelers international Hotel Group Inc, doing business under the name of RWM. 
  • PAGCOR also mentioned that the incident exposed serious lapses and deficiencies in RWM’s safety and security procedures and put the Philippines’ gaming, tourism and hospitality in a bad light. 
  • Given the potentially lengthy investigative process, it could be a while before RWM be allowed to re-commence gaming operations, thereby making it hard for us to forecast RWM’s 2017 earnings.


EARNINGS REVISION/RISK

  • We have slashed our 2017/ 18/ 19 net profit forecast to losses of US$303m/ US$293m/ US$223m (previous assumptions: -US$38m in 2017 and profits of US$24m/US$65m in 2018/19). 
  • We now conservatively assume: 
    1. RWM would be allowed to resume operations only in Jan 18, 
    2. lower gaming revenues for 2018 and 2019, and 
    3. higher “on-going” non-core cost assumption for the cruise segment.


VALUATION/RECOMMENDATION


Downgrade to SELL. 

  • We downgrade GENHK to SELL, with a lower SOTP-based target price of US$0.26 (previously: US$0.28) as we have revised our earnings forecasts downward on associate contribution.
  • Nevertheless, instead of a rapid and sharp decline, we opine that GENHK’s share price would only slide over time on the massive negative developments. 
  • Note that hitherto GENHK’s share price has not reacted negatively since the unfortunate robbery/arson incident at RWM, given the low free float (the Lim family controls 75% stake of Genting Hong Kong) and low trading volume in the market (3-month volume turnover: US$0.3m). This contradicts to Travelers International’s share price which plunged 7% since the robbery/arson incident happened.




Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-16
UOB Kay Hian SGX Stock Analyst Report SELL Downgrade HOLD 0.26 Down 0.280



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