Genting Singapore - UOB Kay Hian 2020-02-17: Surprising Disqualification For Osaka IR Bid

GENTING SINGAPORE LIMITED (SGX:G13)

Genting Singapore - Surprising Disqualification For Osaka IR Bid

The Osaka prefectural government announced last Friday that among the three shortlisted candidates (Genting Singapore, MGM and Galaxy) to submit the request-for-proposal (RFP) for the integrated resort concession bid, MGM and local partner Orix JV was the sole applicant that submitted a qualified bid. This surprising setback, which leaves Genting Singapore to focus on its bid for the Yokohama concession, does not change our investment thesis.

Despite keen interest in clinching Osaka’s IR previously, Genting Singapore (SGX:G13) alongside Galaxy did not submit their RFP application within the deadline and withdrew from the Osaka race, resulting in a consortium consisting of US casino operator MGM Resorts and Japan local financial group Orix Corp vaulting to the top spot of Osaka’s bid.
According to Casino.org, MGM was the only operator making promises to hit a 2025 grand opening, an important date for Osaka to host the World Expo. MGM has also been proactively boosting promotional activities and local support, such as sponsoring Osaka’s Dotonbori Festival, Tenjin Festival, Yosakoi Tournament and MLB Opening Series.

Genting Singapore will focus to compete in Yokohama’s integrated resort (IR) concession bid. Thus far, the company has not yet shared plans of its bid (Yokohama is expected to announce the winning bidder by 2H20) but competition will also be stiff among Las Vegas Sands, Melco and Wynn.

We expect Genting Singapore to consider significantly improving its capital management should it fail to clinch the costly Japan IR concession bid (Genting Singapore had made a capex commitment of up to US$10b for this project).
Genting Singapore’s current net cash of S$3.95b (33 S cents/share) would mostly be ‘unencumbered’ as the present operations (which generate annual EBITDA > S$1b notwithstanding the temporary Covid-19 outbreak impact) can mostly fund ‘RWS 2.0’, the ongoing S$4.5b expansion in Resort World Sentosa which would be fully completed in 2025. In addition, RWS 2.0 will enhance Genting Singapore’s earnings in the coming years.

Japan’s IR is challenging with stringent regulatory framework (Japan’s gaming floor cannot be more than 3% of total space, resort have to be quite sizeable to sustain a gaming floor), restricting locals by charging entrance fee and limiting number of visits (backbone of casino is always the consistent customers), labour shortage.
Japan’s current IR window term of five years is difficult for operators to realise ROI as the payback period for large IRs is 7-9 years. Oobtaining financing is also less flexible given the risk of failure to renew the licence.

Widespread public concern about a rise in gambling addiction and negative social impact are also barriers as public debate is still raging on about the potential impact on the fabric of Japanese society, including concerns over casino-related crime and the country’s organised criminals, known as Yakuza. In states like Yokohama, a public survey of citizens about the prospect of IR bid faces challenging opposition of more than 63%.

Japan’s current IR window term is likely to be set at five years, according to media reports which quoted various gaming consultants. This is well short vs other major jurisdictions (Macau: 20 years; Singapore: 10-year exclusivity) and vs the typical anticipated 7-9 year payback periods for large IRs. Hence, all eyes are on the next National Diet session commencing Sep 19 when Japan inaugurates the three planned gambling establishments and when the gaming board will be formed.

To extend its exclusivity of duopoly casino licence in Singapore, Genting Singapore has committed to invest S$4.5b in new attractions by 2025, featuring a gaming floor with 800 new slot machines capacity, two new 5-6-star hotels and several non-gaming facilities.
Our assessment on the potential EBITDA increment is S$400m/year upon completion of this expansion plan (before imputing our estimated S$50m impact from higher gaming duties) and factoring in higher gaming duties.
Our assumptions are based on higher gaming EBITDA of S$200m (assuming additional 800 slot machines with existing productivity); higher non-gaming EBITDA of S$200m (assuming 20-year EBITDA payback period for its S$4b capex invested).

Despite heavy capex of S$4.5b for RWS’ expansion and equity injection of S$3.2b (assuming 50% partnership stake) should it clinch a Japan IR concession, Genting Singapore’s net cash hoard of S$3.95b (33 S cents/share) currently and lush cash flows would continue to amply support its lush dividend payout.

Vincent Khoo CFA UOB Kay Hian Research | Jack Goh UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-17

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