Genting Hong Kong - UOB Kay Hian 2016-03-21: Still On Trial

GENTING HONG KONG LIMITED S21.SI

Genting Hong Kong (GENHK SP) - Still On Trial

GENHK’s 2015 results were dragged down by its cruise operations (weak gaming volume and high operating costs), and lacklustre performance at Travellers International (RWM).
We see no catalyst for GENHK in the near term, with the risk of step-up operating costs from new builds and its recently acquired shipyards.
Also, no dividends have been declared.

Genting Hong Kong’s (GENHK) 2015 results briefing revealed that despite 2015 revenue improving 23% yoy in cruise-related activities (due to the contribution from Crystal cruises from May 15 onwards), earnings performance was dragged down by weakness in the gaming industry. In line with the regional casino gaming trends, the VIP segment’s 2015 volume declined 16% yoy, and GENHK saw a poorer luck factor in 2015 with a win rate of 3.1%, vs 3.4% in 2014. Meanwhile, the mass market drop volume was flattish yoy in 2015.
Last Thursday, GENHK reported a headline net profit of US$2.11b for 2015, which included some US$2.18b in gains from the reclassification of the Norwegian Cruise Line (NCL) and from its partial sale of its stake in NCL (see overleaf). 2015 core EBITDA dropped 80% to US$10m (after adjusting for Dream Cruise’s pre-operating expenses of US$4m), as the improvement in net revenue (+18.1% yoy) and savings from favourable fuel costs were offset by the high operating expenses from Crystal Cruises and higher provision for trade receivables. We note that the EBITDA contribution from Crystal Cruise was not disclosed.
The weaker performance from cruise-related activities, coupled with the lacklustre performance from associate Travellers International Hotel Group (RWM PM) and the absence of earnings contribution from NCL in 2H15 (which ceased to be an associate after GENHK lowered its stake), resulted a core net loss of US$68m in 2015.

Over the longer term, GENHK plans to progressively transform itself into a comprehensive cruise-focused company (with a portfolio of three brands to cater to the luxury, premium and contemporary market segments of the cruise business.) with inhouse capability in ship-building.
Moving forward, GENHK’s capacity of newbuilds by 2H16 is expected to lead to an increase in passenger ticket sales and onboard revenue but we are cautious that its core earnings growth could be dampened by step-up in operating costs from its newbuilds as well as newly-acquired shipyards.

... recall that Travellers International, GENHK’s 45% associate that operates Resorts World Manila (RWM), posted 2015 EBITDA of P6.2b, down by 22% yoy.
For the gaming segment, despite VIP win rate improving to a theoretical win rate of 2.8% in 2015 (2014: 2.5%), VIP rolling chip volume dropped significantly by 31.7% yoy in 2015 while mass market drop volume retraced by 2.7% yoy in 2015.
Overall, we do not foresee near-term catalysts for RWM as we expect:
1. the mass segment’s crowd to continue shifting to Entertainment City,
2. a continued weakness in VIP business volume, and
3. a potential hike in operating expenses due to an increase in promotional allowances incurred to attract foot traffic.

Since late-15, GENHK has been moving upstream by acquiring four shipyards in Germany with an aggregate amount of EUR265m. Management highlighted that these acquisitions were essential to ensure timely delivery of its mega cruise ships (citing concerns over shipbuilders' unwillingness or financial inability to expand capacity). However, our forecasts assume zero contribution from the shipyard division, noting the lack of guidance over the required capex and earnings from this division.

Despite of its strong cash pile of US$1.8b, with a net cash position of US$1,247m (Dec 14: US$260m, Jun 15: US$786m) as at 31 Dec 15, GENHK did not declare any dividend in 2015 (2014: US$0.01). Unsurprisingly, its cash raised from the NCL stake disposal would be channelled to its fleet expansion activities, instead of rewarding shareholders.

We have lowered our 2016-17 earnings forecasts, as we cut our forecasts for both RWM (following the lower-than-expected 2015 results) and cruise business (forecasted higher operating cost).
EBITDA is revised downwards by 37%/20% in 2016/17.
We forecast GENHK to achieve a net loss of US$19m in 2016 and turn profitable to US$36m in 2017 (previous forecast: 2016: US$38m, 2017: US$108m).

Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-21

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