Genting Hong Kong (GENHK SP) - UOB Kay Hian 2017-08-21: Calmer Waters For Genting Dream

GENTING HONG KONG LIMITED S21.SI

Genting Hong Kong (GENHK SP) - Calmer Waters For Genting Dream

Post results briefing, we upgrade GENHK to HOLD.
GENHK’s outlook has significantly improved as Genting Dream sails into 2H17 with a better revenue and occupancy outlook. Although significant losses would persist through 1H18, we expect EBITDA losses to narrow sequentially before turning positive in 2019, partly reflecting the likelihood of the shipyard division achieving profitability.

We were pleasantly surprised by the sharp improvement in occupancy for Genting Dream (GD) in 3Q17. We understand that GD’s occupancy has improved to 125% for August, and it is on course to meet its 2H17 target of 110-130% (vs 1H17’s occupancy of only 80%). Net ticket revenue per available lower berth day (ALBD) was at US$155 for GD, according to management.
As a comparison, US cruise operator NCL’s average occupancy and net ticket revenue per ALBD were at 106% and US$161 in 2016. Booking visibility for Genting Dream is impressively high in Singapore, where it will be redeployed after it makes way and relocates from its Guanzhou home port, for sister cruise ship World Dream.

The 1 US cent interim DPS was certainly a surprise, and we reckon that Genting Hong Kong (GENHK) could also dole out a similar quantum for its final year.
Balance sheet remains healthy with net gearing at 8.5% (net cash after taking into account its remaining stake in NCL) in 1H17. Having said that, 1H17 cash flow remained subdued, as EBITDA was still in a huge loss of US$91m in 1H17. However, earnings will remain depressed through 1H18, reflecting:
1. start-up losses for World Dream (indicatively, 1H17’s estimated start-up losses for GENHK’s cruise division was at US$16m-17m),
2. start-up losses for its German shipyards, and continuing EBITDA losses for the Star Cruise (somewhat crowded out by the Dream class) and potentially, Crystal Cruise.

While the shipyard division’s losses would remain significant 1H18, it is expected to turn profitable in 2H18 as it rampsup production to meet deliveries in 2019-20.

World Dream replacing Genting Dream in Guangzhou and Hong Kong homeports in November will further strengthen the Dream brand with Genting Dream making Singapore its new homeport.
Meanwhile, SuperStar Gemini will move from Singapore to her new homeport in Bangkok, Thailand and with the repositioning of the SuperStar Libra to the homeport in Port Klang, the Star Cruise and Dream Cruise brands will have homeports and destinations that will cover the entire East Asia, including China, Japan, Singapore, Malaysia, Thailand, Philippines, Indonesia, Myanmar, Cambodia and Vietnam.

GENHK’s cruise division should post sharply lower losses in 2H17, given the significant occupancy improvement at Genting Dream, although GENHK will have to incur significant start-up losses for Genting Dream.
We estimate that Genting Dream could add US$50m to GENHK’s top-line.

We cut our forecast for GENHK’s 2017 EBITDA by US$39m, to take into account the larger-than-expected losses in 1H17.
On the other hand, we upgrade our 2018 outlook as we are now more optimistic about GENHK achieving a small yet positive EBITDA of US$7m (vs previous EBITDA forecast for a loss of US$75m).
Two key risks to note:
1. a sharp steel price hike could be a risk that hinders the turnaround of shipyard operations and could result in a potential capex overrun; and
2. patronage and occupancy for GENHK’s mega cruise ship could slip post the “novelty” period.

Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-21

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