UOB Kay Hian 2015-08-24: Genting Hong Kong - Not Out Of The Woods Yet.

GENTING HONG KONG LIMITED S21.SI

Out Of The Woods Yet 

  • GENHK’s core 1H15 results were dragged down by its Asian Cruise operations (on poorer VIP volumes and hold), and a slow 1H15 at Travellers International (RWM). 
  • We adjust down our forecasts to impute slower gaming revenue, lowered forecasts for RWM and cessation of NCL as an associate. Also, no special dividends are expected. 
  • Maintain HOLD, with a lower RNAV-based target price of US$0.35, which values GENHK at 11.2x 2015 adjusted EV/EBITDA. 
  • Entry price: US$0.30. 


WHAT’S NEW 


• Takeaways from results briefing. 

  • Genting Hong Kong’s (GENHK) 1H15 results briefing revealed a weak VIP segment, in-line with regional casino gaming trends. VIP volumes fell 16% yoy, which, coupled with the poor luck factor (with a VIP hold of 3.0% vs 3.4% in 1H14) outweighed a 10% yoy increase in mass volumes. Consequently, gaming revenues fell 15% yoy to US$141m in 1H15. 
  • Recall that last Thursday, GENHK had reported a net profit of US$2.165b in 1H15, which included some US$2.158b in gains from the reclassification of the Norwegian Cruise Line (NCL) and from its partial sale of its stake in NCL. 
  • EBITDA was up 46.8% at US$29.6m, lifted by about 1.5 months’ contribution from Crystal Cruises’ results, although core net profit (-85% yoy) disappointed on lower contributions from NCL (which ceased to be an associate after GENHK lowered its stake), and one-off costs associated to its acquisition of Prestige Cruises. Stripping out distortions from NCL and taking into account the expected earnings lift from Crystal in 2H15, GENHK’s 1H15 net profit was about 30% below our expectation. 
  • Over in Manila, recall that based on Travellers’ results which were released over a week earlier, Resorts World Manila’s (RWM) 1H15 results missed expectations mainly due to a poor run of luck in 2Q15 (which included two months of negative hold), which masked a 20% qoq rise in VIP volumes. That said, on a cumulative 1H15 basis, volumes were still down 31% yoy, mainly as RWM turned more selective in its sourcing of VIP patrons. 

• Not out of the woods yet. 

  • Looking forward, we expect good earnings recovery in 2H15 with full contribution from Crystal, bigger impact from bunker cost savings, and a cruise-centric strategy which should lift 2016 gaming volumes. However, 2016’s core earnings growth will be only modest, dampened by soft regional gaming trends and pre-operating costs of its first new-build.
  • GENHK is refocusing on the cruise segment, with the acquisition of Crystal Cruises and disposal of its Korean casino venture. We gather that it is moulding itself in the model of the North American cruise operators as it grows its presence in the luxury cruise segment (via Crystal Cruises), and creates a presence in the premium market (via its incoming newbuilds which will be branded separately from Star Cruises). 
  • Growing Crystal. Crystal is expanding beyond just ocean cruising, with plans to enter the luxury yacht, river and air travel space. It will take delivery of the refurbished Crystal Esprit (formerly Star Cruises’ laid up ship Megastar Taurus) in Dec 15 as part of Crystal Yacht Cruises. Thereafter, Crystal River Cruises and Crystal Air are poised to take off in 2017, before a whopping three new Crystal Executive Class ocean-going vessels come on stream from late-18 onwards. The newbuilds will have a capacity of about 1,000 guests (similar to its existing Crystal vessels), but capex outlay has yet to be finalised. 
  • In the premium segment, the group plans to deploy its two newbuilds under a separate brand, positioning them as a premium product offering. It is currently still using the Star Cruises fleet to explore deployment options ahead of the delivery of the first newbuild, Genting World, in Oct 17, and its sister vessel in Oct 18. Competitor Royal Caribbean’s (RCL) commentaries have been very positive on their Asian deployments, both in terms of yields and take up, which augurs well for demand potential for GENHK’s newbuilds. However, we do note that there will be added competition from both RCL and Carnival Corp in Asia in 2016. Thus, the execution of the new vessels’ deployments is key for GENHK. 


EARNINGS REVISION/RISK 


  • We trim our 2015-16 EBITDA forecasts for its Asian Cruise operations by 4% and 1%, but nevertheless we note that there is upside to our 2017 forecasts as Crystal finalises its plans to roll out its luxury river cruises and luxury air travel, ahead of the delivery of its ocean-going new-builds from 2018 onwards. We also lower our forecasts for RWM by 10-11%, to reflect the disappointing 1H15 results. 
  • At net profit level, we have a steeper 75%, 79% and 60% downward adjustment to our core 2015-17 net profit forecasts respectively, which mainly reflects the exclusion of contributions from NCL, following the reduction and subsequent reclassification of GENHK’s pared down stake in NCL (to 13%) from associate to an available-for-sale asset. 


VALUATION/RECOMMENDATION 


Maintain HOLD; target price lowered to US$0.35. 

  • While the recent share price retracement has left the stock trading at a wide 39% discount to its SOTP value, we note that on an adjusted EV/EBITDA basis, it is still not cheap vs regional casino plays. Our revised RNAV-based target price of US$0.35 applies a wider, 30% discount to our RNAV, and values GENHK at 11.2x 2015 EV/EBITDA. 
  • We also reckon GENM’s impending disposal of its stake in GENHK will continue to weigh on GENHK’s share price. Our current target price values GENHK at 0.69x P/SOTP – at about +0.5SD above its 2-year average. Given the current global equity retracements, we provide a sensitivity analysis of our target price to lower valuations, where our target price falls by about US$0.02 or 6% for every 0.5SD fall in its P/SOTP. 
  • Entry price: US$0.30. 

No near-term foreseeable catalysts, and untested market. 

  • We do not foresee GENHK being more generous on capital management given the high capex requirements of rolling out two newbuilds over 2016-17 (costing €700m each) and given Crystal’s expansion plans (management did not specify the planned capex). And, while we appreciate the group’s foray into the high-end China cruise market, China’s economic shakeup coupled with intensifying industry competition/capacity expansion could be near term dampeners to the strategy.


Vincent Khoo CFA | http://research.uobkayhian.com/ UOB KH 2015-08-24
HOLD Maintain HOLD 0.35 Down 0.38


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