Genting Singapore - DBS Research 2019-04-04: Resorts World, Transform!


Genting Singapore - Resorts World, Transform!

  • GENTING SINGAPORE LIMITED (SGX:G13) announces S$4.5bn plans to renew and refresh Resorts World Sentosa. 
  • Significant upside to revenues on the back of new hotel rooms, expansion of theme parks and benefits to casino. 
  • Net positive development despite near-term headwinds from increase in entry levies and 3% higher gaming taxes from March 2022. 
  • Maintain BUY, Target Price of S$1.54. 

What's New - Resorts World Sentosa 2.0 

  • Genting Singapore announced a S$4.5bn renewal and refresh of Resort World Sentosa (RWS). 
  • The expansion will take over five years and will result in c.50% increase in gross floor area (GFA), adding 164,000 sqm of GFA of leisure and entertainment space. We understand that Genting Singapore has been able to gain an increase in plot ratio from c.0.7x to 1.0x with the maximum height of buildings at RWS raised from 12 floors to c.18 storeys. 
  • The developments and enhancements include:
    • Expansion of Universal Studios Singapore (USS) – Two new attractions Minion Park and Super Nintendo World are slated to open in 2022 and 2024 respectively, which should increase visitors to USS and RWS in general. 
    • Expansion of the SEA Aquarium to be re-branded as “Singapore Oceanarium” – The existing Maritime Museum will be closed in 4Q19 allowing the Oceanarium to be triple the size of the existing aquarium with a scheduled opening in 2021. Currently the aquarium attracts c.2m visitors a year with capacity constrained by the number of fire exits as a large part of the existing aquarium is underground. The new Oceanarium will alleviate this issue, potentially boosting visitor numbers by 50%. 
    • Addition of up to 1,100 new hotel rooms – 900 new rooms are targeted to be added in 2024 and another 200 rooms in late 2025/early 2026 at a new waterfront lifestyle complex. The ability of Genting Singapore to generate additional gaming revenues has been constrained by;
      1. the lack of hotel rooms and,
      2. gaming guests not staying in Sentosa reducing time spent in the casino.
    • More rooms should enhance Genting Singapore’ gaming revenue. Genting Singapore currently has 2,120 hotel rooms (1,570 at RWS and 550 rooms in Jurong). An additional 1,100 new rooms are equivalent to a 47% increase.
    • An enhanced waterfront promenade – The existing waterfront promenade has struggled to draw large numbers of visitors and a refresh is expected to enhance the attractiveness of RWS as a destination. The new waterfront promenade will be lined with restaurants, retail outlets and a “spectacular” public attraction.
    • Expansion of Meetings, Incentives, Conferences and Exhibitions (MICE) facilities – It is anticipated that there will be a 20% increase in MICE facilities (c.11k sqft) which should lead to more events coming to Singapore. Benefits from the increased MICE facilities should start from 2024 onwards. We understand that MICE visitors – compared to aquarium and USS visitors - have a higher propensity to visit the casino.
    • Development of a driverless transport system (DTS) – A new DTS is expected to enhance last mile connectivity and bring greater footfall to RWS and the rest of Sentosa. We understand that the new DTS (potential opening in 2024) could potentially boost transport capacity to and around Sentosa by 30-40%. With Genting Singapore in discussions about a potential reduction of the entry levies for Sentosa, this combined with better accessibility should further boost the number of visitors to Sentosa and potentially into RWS.

Development cost and funding sources

  • The S$4.5bn development cost includes construction costs, development charges and land costs. Approximately S$3bn of the S$4.5bn will be sourced from project finance debt, with the remainder from the annual S$700-1,000m free cash flow. This would allow the current S$4.2bn cash to be set aside for a potential integrated resort in Japan. While construction will commence in 2H20, the bulk of the construction works and draw down of capital will only occur in 2023 and 2024.
  • We understand that Genting Singapore is targeting in excess of 10% returns for the development.

Extension of exclusivity period to end-2030 but 3% higher gaming taxes

  • On the back of Genting Singapore’s S$4.5bn investment in RWS and Marina Bay Sands’ (MBS) commitment to spend c.S$4.5bn to build a 1,000 room luxury hotel, new 15,000 seat arena and additional MICE space, the Singapore government has agreed to extend the exclusivity period for the two casinos to end 2030 (i.e. no new casinos until 2030).
  • MBS and RWS will also be given an option to deploy (subject to payment of additional land costs) an additional 2,000 sqm and 500 sqm of additional Approved Gaming Area (AGA) respectively. Currently, MBS and RWS are allowed 15,000 sqm of AGA.
  • Furthermore, MBS and RWS will be given an option to increase their allowable gaming machines by 1,000 and 800 respectively. These machines are used to target higher-tier non-mass market players who are mainly tourists. The additional AGA can be exercised only after the various new attractions are completed. We also understand that Genting Singapore’s S$4.5bn capital expenditure (capex) already includes the potential 500 sqm of extra AGA. RWS targeted a smaller increase in AGA compared to MBS to minimise the overall capex.
  • However, the casino entry levies for Singaporeans and permanent residents (PR) will be raised by 50% from S$100 to S$150 for the daily levy and from S$2,000 to S$3000 for the annual levy, with a 5-year moratorium. The increase in levies will start from 4 April 2019.
  • In addition, the casino tax will be increased by c.3% from March 2022. The tax rate for premium gaming (VIP business) will be lifted from the current flat 5% to 8% for the first S$2.4bn of gross gaming revenue (GGR) and 12% for GGR in excess of S$2.4bn. For mass gaming, the flat 15% rate will be revised to 18% for the first S$3.1bn of GGR and 22% of GGR in excess of S$3.1bn. If an integrated resort (IR) fails to meet its investment commitments (i.e. S$4.5bn), then a flat tax rate of 12% will apply to the entire GGR from premium gaming and a flat tax rate of 22% will apply on the entire GGR from mass gaming.
  • Nevertheless, the effective casino tax for Singapore’s IR remains relatively low compared to the 39% gaming tax for casinos in Macau.

Some potential short-term headwinds but long-term positive

  • As Genting Singapore has not disclosed the exact proportion of its mass business from Singaporeans/PRs, it is difficult to assess the impact of an increase in the entry levies. Assuming we moderate our growth rate for the mass business from 3% growth to zero, we estimate a 1- 2% impact to our FY19F adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA). However, we believe that over time Singaporeans and PR guests would be desensitised to the increase in entry levies, with gaming activities of Singaporean/PRs normalising close to their original levels.
  • Given that a large proportion of the new hotel rooms and attractions are expected to be opened after 2022 when the 3% increase in gaming taxes is implemented, there may be a short 1-2 year window when Genting Singapore’s earnings are tempered. However, we understand that the increase in tax rate may be offset by the opening of some attractions such as the Oceanarium and growth in the overall gaming business. For FY22, assuming no offsetting revenue, on an annualised basis we estimate c.6% downside risk to our adjusted EBITDA estimates.
  • Nevertheless, we believe the development of RWS 2.0 is a transformative event for Genting Singapore with potential for its gaming and non-gaming revenue to reach new levels beyond 2025. Given that Genting Singapore’s theme park attraction capacity could increase by up to 50%, total room inventory jumping c.50%, MICE floor space rising c.20% and additional transport capacity to Sentosa boosted by 30-40%, we believe there is potential for Genting Singapore’s revenues to rise by at least 20- 30% (if not more), offsetting the impact of the higher gaming taxes.
  • For now, we maintain our BUY call on Genting Singapore with a street high target price of S$1.54 which is pegged to Genting Singapore’s average enterprise-value (EV)/EBITDA multiple of c.12x, pending the release of Genting Singapore’s 1Q19 results in a few weeks’ time.

Mervin SONG CFA DBS Group Research | https://www.dbsvickers.com/ 2019-04-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.540 SAME 1.540