Gaming – Regional - UOB Kay Hian 2020-08-21: Genting Hong Kong’s Payment Default Triggers Concerns

GENTING SINGAPORE LIMITED (SGX:G13)

Gaming - Regional - Genting Hong Kong’s Payment Default Triggers Concerns

Genting Hongkong (GENHK)’s abrupt temporary payment suspension to all its financial creditors has stoked up fears that its sister companies would be forced to bail out GENHK. Nevertheless, it is more likely to be a prelude to GENHK’s restructuring of its US$3.4b debt, coupled with additional fund raising within the financial community.
Maintain OVERWEIGHT on regional gaming, although gaming stocks can only stage strong recoveries with a vaccine discovery or containment of COVID-19 pandemic.

Non-rated Genting Hong Kong (GENHK)’s subsidiary Dream Global Limited defaulted on a EUR3.7m ship construction fees due on 17 August and triggered a temporary suspension of payment to all creditors. The group intends to preserve its liquidity to maintain critical operation services, and is in the midst of negotiation with related parties for debt restructuring proposals. GENHK’s outstanding financial indebtedness is at US$3.37b as of 31 July.

Meanwhile, GENHK had warned in an earlier filing that its 1H20 unaudited losses are expected to be not less than US$600m, as compared with 1H19 net losses of US$55.2m. This is mainly due to suspension of its casino cruise ships, shipyard operations and also other businesses such as Resorts World Manila and Zouk nightclub in Singapore on the devastating impact of the COVID-19 pandemic.

We expect GENHK to reach a pragmatic agreement with its creditors and to also secure additional financing to stay afloat in the interim period, until a vaccine for the COVID-19 virus is discovered, or until the pandemic is reasonably contained to allow GENHK to fully resume its cruise operations.
We envision that GENHK would be able to eventually issue fresh debt and/or equity, albeit at high interest costs and significant equity discounts, just like the US peers which have done so in 2Q20.

We do not envisage GENHK’s sister listcos to be forced to bail out GENHK, and creditors of the Lim family’s pledged GENHK shares do not have alternative recourse... GENHK’s debt obligations are ring-fenced to only its assets (e.g. cruise ships), and the current default does not trigger any cross defaults on Genting Berhad (GENT), Genting Malaysia (GENM) and Genting Singapore (SGX:G13). However, we note that Genting Singapore has minor direct dealings with GENHK which leases office space from Genting Singapore (see overleaf in PDF report attached below).
In terms of share margin, while the Lim family has already pledged most of its direct 76% controlling stake in GENHK, creditors have no recourse beyond the GENHK share collateral in the case of a margin call default (GENHK shares plunged 38% yesterday).

Our anticipation for modest to moderate downside reactions by Genting Malaysia’s and Genting Berhad’s share prices are supported by the fact Genting Singapore's share price fell only 2.1% yesterday. However, Genting Berhad shares could be more impacted (purely due to soft investor sentiment) vs Genting Malaysia, noting that the Lim family has also pledged 32% of the controlling stake in Genting Berhad (up from 4% in 2019).

We maintain our view that GENHK will reach a deal with bankers, and to successfully raise capital to avert bankruptcy. Even in the hypothetical situation of GENHK’s solvency being in question, the sister companies are not financially obligated to bail GENHK out. A bailout of this magnitude would most likely require approvals of the respective listcos’ minority shareholders, who would most likely reject the deal.
Rather, to help strengthen the Lim family’s cash flows, we continue to envision that financially healthier operating subsidiaries Genting Malaysia and Genting Singapore will cascade up their surplus reserves as dividends, and for Genting Berhad to distribute relatively healthy dividends to shareholders (including the Lim family).
See Genting Singapore Share Price; Genting Singapore Target Price; Genting Singapore Analyst Reports; Genting Singapore Dividend History; Genting Singapore Announcements; Genting Singapore Latest News.
(Genting Hong Kong (SGX:S21) used to dual-listed on SGX Mainboard and has been delisted since 2018-04-17.)
(Genting Hong Kong owns ~26% of SGX listed Grand Banks Yachts (SGX:G50).)

Vincent Khoo CFA UOB Kay Hian Research | Jack Goh Tooan Orng UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-21

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