Genting Singapore - UOB Kay Hian 2018-08-06: 2Q18 VIP Volume Growth Remained Strong But Mass Market Was Weaker

Genting Singapore - UOB Kay Hian Research 2018-08-06: 2q18 Vip Volume Growth Remained Strong But Mass Market Was Weaker GENTING SINGAPORE LIMITED SGX:G13

Genting Singapore - 2Q18 Vip Volume Growth Remained Strong But Mass Market Was Weaker

  • Genting Singapore 2Q18 results were within expectations. VIP volume growth remained strong but this was offset by a low VIP win rate and soft mass market. We expect Genting Singapore’ valuation to trend up over time on the development of its Japan IR bidding.
  • Genting Singapore could be a strong candidate given its experience in operating in a highly-regulated casino environment and track record in contributing to the country’s tourism.
  • Maintain BUY. Target price: S$1.38.



RESULTS


Within expectations.

  • Genting Singapore (GENS) reported a 2Q18 adjusted EBITDA of S$266m (-9.2% y-o-y, -25.9% q-o-q), bringing 1H18 adjusted EBITDA to S$625m (+8.5%yoy), representing 49% of our full-year forecast. 
  • 2Q18’s win rate of 2.6% is below the theoretical win rate. Adjusting for luck, 2Q18’s EBITDA would be at S$293m.


~ SGinvestors.io ~ Where SG investors share

VIP: Strong RCV growth sustained.

  • Genting Singapore (GENS)’ rolling chip volume (RCV) recorded an impressive 27% y-o-y growth in 2Q18, after strong 34% y-o-y growth in 1Q18. 2Q18 is the fourth consecutive quarter in which GENS saw positive y-o-y growth in RCV (recall that GENS’ RCV fell y-o-y for 12 consecutive quarters prior to 3Q17). Despite the lower win rate of 2.6% in 2Q18 (2Q17: 3.0%), we estimate 2Q18’s VIP gross gaming revenue (GGR) grew 9% y-o-y. 
  • Notably, GENS’ RCV market share has steadily increased from 2Q17’s 34% to 2Q18’s 50%. In contrast, rival Marina Bay Sands’ (MBS) 2Q18 RCV plunged 35% y-o-y.

Mass market: GGR contracted on competition from emerging casinos.

  • On the other hand, we estimate that the 2Q18 mass market (table and slot) dropped close to 5% y-o-y and 12% q-o-q (although 1Q18 are seasonally stronger). 
  • Interestingly, management cited that the weak mass market was largely due to the competition from casinos in Cambodia and the Philippines.


STOCK IMPACT


Continues to loosen credit policy for VIP segment but closely monitoring impact from trade war.

  • Similar to 1Q18, the strong VIP volume growth in 2Q18 was due to Genting Singapore (GENS)’ loosening credit policy to attract existing and new VIP gamblers. GENS guided that it will continue to loosen up its credit extension. 
  • Nevertheless, GENS emphasised that it remains diligent in monitoring macro risks, particularly the potential impact from trade war which could affect the VIP players’ debt repayments.

Mass market could be challenging in the near term due to competition; refurbishment of RWS properties is essential.

  • We believe that one of the key competitors is Naga Corp, with its mass market non-rolling chip drop having recorded 53% y-o-y growth in 1H18, driven by the capacity from new Naga2 casino which is seeing strong growth in visitor arrivals, particularly from China. 
  • As such, we see that the refurbishment of Resorts World Sentosa (RWS) properties is key to attracting visitor arrivals to the Singapore Integrated Resort (IR). GENS shared that it is currently working with consultants for design architecture. Details will only be disclosed in end-18.

Impairment of receivables at all-time low.

  • Genting Singapore (GENS)’ impairment of gaming receivables was at an all-time low in 2Q18, merely at S$0.5m (1Q18: S$9.1m, 2Q17: S$14.7m), due to the write-back of impairment receivables. The quantum of the impairment which has been written back remains undisclosed, but we expect impairments to remain low at less than S$10m in the near future.

Declares interim dividend of 1.5 S cents per share.

  • Genting Singapore (GENS) has declared an interim 1.5 S cents DPS, the same as that in the previous year. 
  • We expect GENS to declare a final dividend of 1.5-2.0 S cents DPS, representing yields of 2.4-2.8%.

Gearing up efforts in preparation for Japan IR bidding, targeting Osaka and Yokohama…

  • In Japan, the highly anticipated IR Implementation Bill was enacted by the Japanese Diet on 20 July. Genting Singapore (GENS) is setting up subsidiaries and hiring new teams in Japan, preparing for the bid of IRs for Osaka and Yohoma. GENS believes that the chances of these two cities being selected as IR locations are strong.

…but RFP may only take place in 2H19 and selection of winners in 1H21.

  • Detailed information on the Japan IR business model (such as land issue and partnership of Japanese) is still scarce for now but GENS is looking for a hurdle rate of 10-15%. We note that the request for proposal (RFP) stage may only come in 2H19 (after the formation of casino authority in 1H19) and the selection of the winner would only take place in 1H21 (see sidebar for expected timeline).


EARNINGS REVISION/RISK

  • None.


VALUATION/RECOMMENDATION


Maintain BUY with a target price of S$1.38.

  • Genting Singapore (GENS) trades at an attractive 9.0x/8.9x EV/EBITDA in 2018/19, under -1SD to its 8-year mean EV/EBITDA. We expect valuations to trend up over time, supported by stable Singapore operations and as its bidding for Japan’s IR concession builds up to the RFP stage.
  • Recall that Genting Singapore’s share price was on the uptrend from the RFP stage in 2006 until the opening of RWS in Feb 10. Genting Singapore traded at mid-teens EV/EBITDA since RWS’ commencement until 2H15 as its strong growth delivery fueled optimism for further growth, but derated thereafter as it was affected by low gaming volumes and mounting bad debts tied to mainland China VIP gamblers.
  • Our S$1.38 target price for Genting Singapore has imputed a Japan “option value” of 10 S cents for the Japan greenfield opportunity (assumption: 30% success rate, US$10b st with IRR 13% and 50% JV stake). The target price of S$1.38 implies EV/EBITDA of 10.5x in 2018.





Vincent Khoo CFA UOB Kay Hian Research | Yeoh Bit Kun UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-06
SGX Stock Analyst Report BUY Maintain BUY 1.38 Same 1.38



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