UOB Kay Hian 2015-08-14: Genting Singapore - 2Q15; Down, But Not Out. Maintain BUY.

GENTING SINGAPORE PLC G13.SI

2Q15: Down, But Not Out

GENS’ 2Q15 core EBITDA of S$194m was about 25% below our original forecast (before the company issued a profit warning), but hold-adjusted EBITDA of S$266m slightly pipped our expectation.
Meanwhile, continuing derivative-related losses relate to investments in other listed gaming companies which can become strategic investments.
While GENS remains cautious, valuations are too cheap to ignore, and could quickly rebound once catalysts emerge.
BUY with a lower target price of S$1.01.

Below expectations, but some silver linings. Genting Singapore’s (GENS) core adjusted EBITDA of S$194 m (-15% qoq, -38% yoy) was below our original expectation (before last week’s profit warning) by 25%, largely due to a mere 2.1% win rate. 1H15 adjusted EBITDA of S$422m represents 38% of our and consensus’ 2015 forecasts each. However, on a normalised hold basis, 2Q15 adjusted EBITDA would have been $266m, slightly pipping our forecast. Positively on a qoq basis, receivable impairment has eased while mass GGR inched up, and management provided comforting clarity on derivative losses.
VIP segment: Rolling volume eases, but receivable impairment is lower. 2Q15’s rolling chip volume predictably dropped by 11% qoq and 36% yoy, reflecting principally lower patronage from mainland China VIP gamers as GENS choked down on credit extension. Positively, 2Q15’s receivable impairments eased to S$57m (2Q14: S$82m, 1Q15: $S76m), and should ease further as GENS also focuses on credit collection.
Mass market segment: Modest qoq GGR growth. 2Q15’s non-rolling chip drop grew 2% yoy and represented 43% of market share, thanks to GENS’ successful strategy in growing the premium mass. Mass market GGR is estimated grow 2% qoq and dropped 9% yoy. Mass market accounted for 63% of GENS’ 2Q15 total GGR (2Q14: 43%, 4Q15: 57%).

Unlike past quarters, GENS’ derivative financial instruments losses spooked investors as there was no mitigating forex gains (in fact 2Q15 suffered from a forex loss), and the losses led to a profit warning. GENS recorded derivative financial instruments losses of S$95m in 2Q15, bringing 1H15’s total loss to S$213m. Management’s clarification was somewhat comforting as these losses: a) did not arise from speculative investments but from equity-linked investments in other listed gaming/leisure-related companies which could potentially become strategic investments, and b) GENS has substantially lowered its exposure in 2Q15. However, not much more was revealed except the bulk of such investments are compounded financial instruments (CFS), and GENS has significantly reduced its position in CFS to S$701m in 2Q15 (4Q14: S$1.3b).

Likewise, it was revealed that 2Q15’s S$84m unrealised forex loss was mainly linked to its working capital needs, no thanks to the temporary strengthening of the Singapore dollar vs the US dollar and Hong Kong dollar which are kept as working capital (reserves for settling with the winning VIP gamers). GENS holds more than US$1b cash. The average Singapore dollar appreciated against the US dollar by 1.1% qoq in 2Q15.
While GENS’ win percentage has been curiously well below the theoretical rate as well as rival Marina Bay Sands’ in the recent quarters (refer to RHS table), we note that in a longer term measure (ie since the respective casino openings in 2010), the average win rates for both GENS (2.85%) and MBS (2.77%) are much tighter. We continue to look forward for GENS’ win rate to trend towards the theoretical win rate of 2.85%.
Focusing on mass premium market but cautious on neighbouring countries’ weak local currencies. GENS’ strategy of scaling down its VIP activities and growing its premium mass segment has positively grown its non-rolling chip drop by 2% yoy while lowering costs via manpower rationalisation.

Management remains cautious going into 2H15 as the weakening of other Asian currencies against the Singapore dollar could dampen patronage or spending/head. However, we believe that core EBITDA has bottomed out in 2Q15, given the exceptionally low VIP segment's contribution of 17% to net GGR.

Management remains optimistic on Japan’s prospects of legalising casinos. With the proposed casino bill having been recently presented, GENS expects legislative debates on the proposed casino bill to commence end-Sep and is hopeful that the bill would be passed in end-15. GENS’ strong balance sheet and proven track record makes it a frontrunner to clinching a gaming concession, should Japan decide to legalise casino activities.

We cut our EBITDA forecasts by 14% for 2015 and 6% for 2016-17. We tweak our 2015 win rate assumption to below theoretical rate as GENS’ win rate had below theoretical win rate over the past four quarters. For 2016, we assume lower rolling chip volume growth to 2%.

Maintain BUY but we lower our target price to S$1.01 (from S$1.17) following cuts in our earnings forecasts based on our target 2015 EV/EBITDA of 12x.
Note that GENS now trades at only a prospective 2016F EV/EBITDA of only 6.4x, the lowest valuation among the global large-size casino operators.

Vincent Khoo CFA | Yeoh Bit Kun | http://research.uobkayhian.com/ UOB KH 2015-08-14

BUY Maintain BUY 1.01 Down 1.17