Genting Hong Kong (GENHK SP) - UOB Kay Hian 2017-12-15: Ceasing Coverage With Delisting From SGX

GENTING HONG KONG LIMITED S21.SI

Genting Hong Kong (GENHK SP) - Ceasing Coverage With Delisting From SGX

Genting Hong Kong (GENHK)’s aggressive expansion of its cruise capacity through to 2020, coupled with ongoing investments in in-house ship-building capabilities, would only bear fruit over the longer term.
Meanwhile, earnings visibility and operating cash flows would remain unexciting amid high start-up costs.
As GENHK is delisting from SGX by Apr 18, we cease coverage on GENHK with our HOLD call retained. Target price: US$0.24. Entry price: US$0.22.

Genting Hong Kong (GENHK) will be delisting from the Main Board of Singapore Exchange Securities Trading Limited (SGX) on (estimated) 17 April. After the delisting, GENHK’s shares will only be traded on the Main Board of Stock Exchange of Hong Kong Limited (HKSE) (678 HK) - its primary listing.
GENHK’s share price has been on the downtrend and has dropped 8% since the first announcement of delisting from SGX was made on 3 October.
Although GENHK shares are technically fungible between the two exchanges, the tedious transfer process could have prompted some GENHK minority shareholders to dispose their stakes on SGX ahead of the delisting.
Singapore-listed GENHK currently trades at 3% discount vs the Hong-Kong listed GENHK, based on the exchange rate of HK$7.81/US$1.

With the sail of the Dream Cruises’ class’ first cruise ship, Genting Dream (GD) at end-16, the ship’s occupancy rate is on course to meet its 2H17 target of 110-130% (vs 1H17’s occupancy of only 80%). Booking visibility for Genting Dream is high in Singapore, where it was redeployed after it made way and relocated from its Guanzhou and Hong Kong dual home ports, for sister cruise ship World Dream (WD).
GENHK’s top-line is expected to continue seeing strong growth due to higher capacity days with the full-year contribution from WD and improved occupancy from GD.

Having said that, we expect earnings to continue to be depressed (despite improvement) at EBITDA level, reflecting:
1. start-up losses for WD (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.
To recap, 1H17 EBITDA was at a loss of US$91m.

To fund its massive expansion in cruise fleet, GENHK has recently divested its investment in listed companies, receiving net aggregate proceeds of about US$860m. The three disposals in 2H17 were:
1. 5.6% stake in Australian Securities Exchange listed Star Entertainment for A$235m in July,
2. 3.3% stake in US-listed Norwegian Cruise Line (NCL) for US$428m in August, and
3. 2.2% stake in NCL for US$275m in November.
We expect GENHK will monetise its remaining 5.6% stake in NCL, which is worth US$691m, based on the current market cap.

GENHK envisages that maintaining a single primary listing on the HKSE will potentially increase the trading volume of GENHK shares and will enhance GENHK’s profile to North-Asian investors (North-Asia being the key focus market for GENHK’s cruise ship operations),
eliminates additional administrative overhead and costs of compliance associated with SGX requirements, and
increases the liquidity of GENHK shares on the HKSE, thereby improving the effectiveness of any future capital raising activities.

None.
Two key risks to note:
1. patronage and occupancy for GENHK’s mega cruise ship could slip post ‘novelty’ period,
2. turnaround of shipyard operations remains uncertain, amid sharp rises in shipbuilding material costs (eg the recent run-up in steel costs).

We are ceasing coverage on GENHK while maintaining our HOLD call. However, we reduce our SOTP-based target price to US$0.24 (previously US$0.26), after updating the balance sheet, reflecting the disposal of investments in NCL and Star Entertainment and widening the SOTP-discount to 40% (from 30%).
We cease coverage on GENHK due to:
1. limited interests from our Hong Kong-based investors, and
2. the company’s unexciting earnings outlook in the near- to mid-term.
We note that the familiarity and trading liquidity of GENHK shares had been higher in Singapore vs that of Hong Kong (3-month average turnover of US$0.68m in Singapore, vs US$0.03m in Hong Kong).
Entry price is US$0.22.

Vincent Khoo CFA UOB Kay Hian | Yeoh Bit Kun UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-15

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.24 Down 0.260