Genting Singapore - Maybank Kim Eng 2019-04-04: Visionary RWS 2.0 But Expect Short Term Pain Before Long Term Gain


Genting Singapore - Visionary RWS 2.0 But Expect Short Term Pain Before Long Term Gain

Cut to HOLD from BUY and Target Price by 11% to SGD1.12

  • We like GENTING SINGAPORE LIMITED (SGX:G13)’ SGD4.5b reinvestment programme for Resorts World Sentosa (RWS) which we dub ‘RWS 2.0’. That said, we fear the casino entry levy and tax rate hikes will weigh on short term earnings before its potential is realised in 2024-2025.
  • Cut earnings estimates by 6-16% and ascribe lower 8.0x FY19E EV/EBITDA (9.0x previously) to cut our EV/EBITDA based Target Price to SGD1.12 from SGD1.26.
  • Cut to HOLD from BUY.
  • Catalysts are potential expansion into Japan and more international market agents being approved at RWS.

To reinvest SGD4.5b in RWS over 5 years

  • The SGD4.5b investment commitment is larger than the initial guidance of SGD1b-SGD2b but construction will not start until end-2020.
  • Coupled with its plan to debt finance 2/3 of the investment, Genting Singapore will not cut DPS or retreat from expanding into Japan. Most of the developments and enhancements will be ready by 2024-2025.
  • We are most positive on the additional 1,100 hotel rooms (+50%) asthere is a strong historical correlation between room nights sold and gaming revenue.

Cut earnings estimates by 6-16%...

  • That said, casino entry levies for Singaporeans and PRs (SC/PRs) were raised 50%to SGD150 for the daily levy and to SGD3,000 for the annual levy this morning. This is negative to mass market GGR as we understand that SC/PRs account for ~1/3 of visitor arrivals but ~2/3 of mass market GGR.
  • We cut our FY19/FY20/FY21 EPS by -6%/-16%/-16% as we cut our FY19/FY20 mass market GGR growth forecast from +5%/+5% to +0%/-5% (retain FY21 mass market GGR growth forecast at +5%).

… but there may be more cuts before RWS2.0 opens

  • Furthermore, RWS will be subject to higher casino tax rates come Mar 2022 . This will also be exacerbated by the 2ppt GST hike to 9% expected to take effect between 2021 and 2025.
  • On balance, we gather that the effective casino tax rate will be hiked by 5ppts. Thus, we fear that Genting Singapore earnings will structurally contract again come Mar 2022 before growing as the new RWS2.0 development and enhancements come on-stream by 2024-2025.

RWS to reinvest SGD4.5b over 5 years

  • Genting Singapore has committed to invest SGD4.5b to renew and refresh RWS over 5 years. This will expand RWS GFA by ~50%, adding 164,00 sqm of leisure and entertainment GFA. Development and enhancements that will be carried out include:-
    • Expansion of Universal Studios Singapore, with two new highly theme and immersive environment – Minion Park and Super Nintendo World;
    • Expansion of the S.E.A. Aquarium to be re-branded as "Singapore Oceanarium";
    • Conversion of the Resorts World Theatre into a new Adventure Dining Playhouse;
    • Expansion of in-resort accommodation with up to 1,100 more hotel rooms at a new waterfront lifestyle complex and within the central zone of RWS;
    • An enhanced waterfront promenade to be lined with restaurants and retail outlets, and a spectacular public attraction;
    • Expansion of MICE facilities which will bring in more events into Singapore; and
    • Development of a driverless transport system which will enhance last-mile connectivity to bring greater footfall to RWS and rest of Sentosa Island.
  • Of the SGD4.5b investment commitment, Genting Singapore will finance SGD3.0b with debt and SGD1.5b with internally generated cash. Construction is expected to commence in end-2020. Most of the developments and enhancements will come on-stream from 2024-2025.

Exclusivity period and gaming floor area to be expanded

  • The exclusivity period for RWS and MBS will be extended to end-2030. No other casinos will be introduced during this period.
  • RWS will be given an option to deploy an additional 500sqm (+3%) of approved gaming area and 800 gaming machines (current limit: 2,500).
  • The additional gaming area and gaming machines are to be targeted at higher tier-foreign VIPs.
  • The additional gaming area and gaming machines can only come on-stream after the non-gaming developments and enhancements are completed.

Casino entry levies and gaming tax rates to be hiked

  • Casino entry levies for Singaporeans and PRs will be raised by 50% to SGD150 for the daily levy and to SGD3,000 for the annual levy effective 4 Apr 2019.
  • After the expiry of the current moratorium in Feb 2022, a tiered casino tax structure with higher tax rates than today will be introduced.
  • If RWS fails to meet its investment commitments, a flat tax rate of 12% will apply on the entire amount of VIP GGR and a flat tax rate of 22% will apply on the entire amount of mass market GGR.

Valuation and Recommendation

  • We cut our Genting Singapore earnings estimates by 6-16% to account for lower mass market GGR dealt by the casino entry levy hike.
  • That said, we have not cut our earnings estimates to account for the casino tax hike effective Mar 2022 as it is beyond our investment horizon. To account for this risk, we ascribe a lower 8.0x FY19E EV/EBITDA (close to -1SD to LT mean of 8.2x) versus 9.0x previously.

Yin Shao Yang Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-04
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.12 DOWN 1.260