Genting Hong Kong - UOB Kay Hian 2016-08-25: Still Waiting For Materialisation Of Catalyst

GENTING HONG KONG LIMITED S21.SI

Genting Hong Kong (GENHK SP) - Still Waiting For Materialisation Of Catalyst

We maintain our view that GENHK’s inflated cost could hurt its bottom-line as its aggressive fleet expansion would take time to achieve normalised earnings. Hence, we cut our forecasts. Share price is expected to remain soft until there is better earnings visibility.

Genting Hong Kong’s (GENHK) results briefing revealed that its 1H16 core EBITDA would have been US$3.5m (reported EBITDA net loss of US$28m) after adjusting for one-off start-up marketing costs for the launch of Dream and Crystal cruise brands as well as one-off expenses related to yard acquisition.
Despite the positive “core” EBITDA, the results is unimpressive given that 1H16’s EBITDA has full 6-month contribution form Crystal Cruises (incorporated since May 15), and we note that part of the “one-off” expenses in 1H16 is recurring due to the on-going launch of new ships till 2020.
With only a one-month contribution from Crystal in 1H15, GENHK recorded EBITDA of US$30m.

GENHK’s cruise-related revenue improved by 45% yoy (flat hoh) with passenger ticket sales improving by 103% yoy, due to the 21% increase in capacity days and 17% increase in net yield, primarily due to the inclusion of Crystal fleet. However, rising cost, particularly in payroll (yards facilities added 1,400 employees to GENHK), onboard cost and advertising cost, outweighs the revenue enhancement.
We believe that Star Cruises’ redeployment activities to China ports also raised costs.

Dream Cruises is GENHK’s premium cruise brand that focuses on the Chinese and Asian markets, and will have its first ship, Genting Dream, start sailing in Nov 16 with homeport in Guangzhou. The second vessel World Dream is under construction and is expected to be delivered in Oct-17.
Meanwhile, Star Cruise, which targets the contemporary markets, will also add two ships with 5,000 berths each in 2020 with the Chinese market being the focus. Separately, Crystal will also have a fleet of ships come on-stream in 2017-18 (see overleaf sidebar for details).

Over in Manila, recall that Travelers International, GENHK’s 45% associate that operates Resorts World Manila (RWM), posted 1H16 EBITDA of PHP3.0b, down 15% yoy. Despite being aided by the mass market’s 2.8% increment in non-rolling chip drops, 1H16 GGR dropped by 5.6% due to overall lower blended win rate of 4.8% (1H15: 5.2%). VIP segment’s rolling chip volume was flat yoy in 1H16 but the win rate was lower at 2.5% (1H16: 3.3%).
Notwithstanding the GGR drop, we are positive that 1H16 net revenues including non-gaming segments was flat yoy, driven by the significant decrease in revenue sharing contracts with junket operators. Moreover, we are positive that 1H16’s VIP segment’s chip volume has stabilised.
Meanwhile, although the mass market segment also recorded a mild volume growth, RWM may be losing market share as the crowd may continue to shift to Entertainment City.

Management shared that marketing cost in 2H16 will be higher hoh, given that Genting Dream will commence sailing in Nov 16 and strong marketing activities are required.
With only 1.5 months’ contribution from Genting Dream and heavy marketing cost, we expect GENHK will still incur losses in 2H16 but the quantum could be smaller due to the absence of one-of cost related to yard acquisition.

As at Jun 16, GENHK had a cash pile of US$1.5b (Dec 15: US$2.0b), with a net cash position of US$965m (Dec 15: US$1.4b). The cash outflow is predominantly due to:
1. US$150m capex, of which US$99m was due to newbuild ships,
2. US$279m shipyard acquisition, and
3. US$42m loan repayment.
We believe GENHK’s cash pile will continue to erode given the massive capex required for fleet expansion (eg Genting Dream costs €700m) and €100m required to upgrade its yards.

Over the longer term, GENHK’ cruise-focused strategy (with a portfolio of three brands to cater market segment from contemporary to ultra-luxury) with in-house capability in ship-building is deemed positive, but the step-up in operating costs from newbuilds will still be a key concern on near-term earnings growth.

We have lowered our 2016-17 earnings, as we cut our forecast for cruise business (forecast higher operating cost) and RWM (following the lower-than-expected 1H16 results).
We forecast GENHK to achieve a net loss of US$74m in 2016 (previous forecast: US$19m loss) and revise 2017 earnings downward by 8%.

We change our valuation methodology for the cruise segment to book value base (from EV/EBITDA), given the low earnings quality from the cruise segment in the near term.
Our new SOTP-target price is lowered to US$0.28 (previous TP: US$0.35). The stock will continue to languish without new catalysts, and we also note GENHK’s high stakes in its expansion strategy.

Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-25

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.28 Down 0.350