Genting Singapore (GENS SP) - Maybank Kim Eng 2016-11-14: D/G to SELL, Rally over done.

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GENTING SINGAPORE PLC G13.SI

Genting Singapore (GENS SP) - D/G to SELL, Rally over done.

EPS growth outlook uncertain 

• Amid weak gaming volume - prefer Genting Malaysia With gaming volumes at record lows, 50% of RWJ disposed and the Japan growth ‘option’ uncertain, we believe the recent rally in the shares due to the maiden 1.5sen interim DPS is unwarranted. 
• Downgrade GENS to SELL from HOLD. 
• GENS will dispose its 50% stake in Resorts World Jeju (RWJ). We did not impute any contributions from RWJ as it has not opened yet. 
• We maintain our core earnings forecasts, but tweak our TP up by 1cent to SGD0.73 to account for the disposal gain. TP based on 8x FY17E EV/EBITDA (-1 SD to LT 12M forward EV/EBITDA mean).

Disposes 50% of Resorts World Jeju to JV partner 

• GENS will dispose its 50% shareholding in RWJ to its JV partner, Landing International Development Limited (582 HK, Not Rated) for USD420m (SGD588m) in cash. The consideration will be paid in two tranches: USD220m (SGD294m) in 1Q17 when the disposal is completed; and the remaining USD220m (SGD294m) in 3Q17. 
• The consideration translates into a 10% premium to GENS’ contribution to RWJ of USD380.8m (SGD533m). GENS will recognise SGD81m in disposal gains.

Foray into Japan far from certain, we understand 

• GENS said it will focus on entering Japan, but with just two weeks before the extraordinary session of the Diet ends, we understand from Japanese sources passage of the Promotion Bill is unlikely this year. 
• Even if the bill is debated, but not passed in this session, it will not be considered first when the regular session reconvenes early next year. This is because the Promotion Bill is a members-backed bill and cabinet-backed bills always take precedence over members-backed ones.

>30x FY17E PER too rich for our comfort 

• Even if the Promotion Bill is passed, the Implementation Bill has to be passed within 12 months before bidding can commence. 
• With see no rerating ahead for GENS, based on: 
  1. 3Q16 gaming volumes at records lows and unlikely to recover in 4Q16 due to the weakening economies of Southeast Asia; 
  2. growth driver in 50% shareholding of RWJ disposed; and 
  3. growth ‘option’ in a Japanese integrated resort far from certain. 
• Prefer Genting Malaysia (GENM MK, BUY, TP MYR5.50).

RWJ would have been a good backup plan, in our view 

• We understand that if Japan were to liberalise its casino industry, Korea would follow and open more casinos to its locals for fear they will travel to Japan to gamble. 
• Currently, Koreans can only enter Kangwon Land (035250 KS, Not Rated) to gamble. We understand that if Korea were to open more casinos to its locals, it would be those located on Jeju, as it is an island and far away from major population centres and this will benefit RWJ greatly. 
• We fear that if Japan does liberalise its casino industry, but GENS does not win a bid, and Korea opens Jeju casinos to locals, GENS will be ‘left out’ after disposing its 50% stake in RWJ.

Swing Factors

Upside

• VIP hold rate: if this rate is above theoretical levels, it can positively influence earnings.
• Rise in local mass market base. Singaporeans account for the majority of mass market gamblers and are more resilient.
• Tilt towards mass market away from VIP will expand margins due to less commissions and rebates.

Downside

• VIP hold rate: if this rate is below theoretical levels, it can negatively influence earnings.
• Bad debts: Chinese account for the majority of VIPs, but gambling debts are not enforceable in China.
• Regional expansion: new jurisdictions often require high capex commitments without guaranteeing returns.

Yin Shao Yang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-14

Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 0.73 Up 0.720