Gaming – Regional - UOB Kay Hian 2020-09-02: No Group Contagion Effect On Genting Group From GENHK’s Financial Ails


Gaming – Regional - No Group Contagion Effect On Genting Group From GENHK’s Financial Ails

  • Genting Hong Kong (GENHK)’s results briefing provides reasonably good assurances that the financially ailing GENHK can raise sufficient capital from the investment community, and dismisses investor misgivings that other listed entities in the Genting group may need to bail out GENHK.
  • Re-rating catalysts abound for Genting Bhd (GENT) and Genting Malaysia (GENM), eg GENHK achieving various capital-raising milestones and a COVID-19 vaccine discovery.
  • Maintain MARKET WEIGHT on the sector with GENT promising the sharpest near-term rebound.

Genting Bhd (GENT) and Genting Malaysia (GENM) deep in value after knee-jerk sell-downs on investor misgivings.

  • Genting Bhd (GENT) and Genting Malaysia (GENM) share prices have plunged 8.7% and 2.2% respectively since 20 Aug 20 when GENHK temporarily suspended all payments to the group’s creditors, thus triggering concerns of GENHK’s solvency and investor misgivings of GENHK’s sister listcos of needing to directly or indirectly bailing out the Lim Family.
  • Such misgivings have been directed at the Malaysia listcos (in contrast, Genting Singapore's share price has eased only 0.7% over the same period), particularly GENM which had bought a 49% stake in US casino operator Empire Resorts from the Lim family.
  • The larger fall in GENT’s share price may be reflecting investor concerns of margin calls to the Lim family which has increased its share margin pledge (to about 32% of the controlling block in 2019 from < 10% in 2018).

Such investor misgivings on bailouts and margin calls are unsubstantiated.

  • We note that GENM’s stake acquisition of Empire Resorts was a relatively smaller bet on an entity which was making a turnaround (until tCOVID-19 hit). We point out that:
    • GENHK should be able to secure fresh capital from private equity investors, including pension funds, with its appeal of having a unique presence in the Asian cruise business, including its ownership of luxury cruise liner Crystal Cruise.
    • GENHK’s German shipyard should be able to secure funding from Germany’s COVID-19 relief fund (Economic Stabilisation Funds).
    • Bankers’ agreement to a 12-month moratorium on principal debt repayment. The asset values of GENHK’s cruise ships and PPE (US$5.8b) are significantly more than gross debt of US$3.2b.
    • GENHK also noted that the US cruise industry has collectively raised US$20b in funding.
    • Encouraging signs of operational viability, with its sole operational Dream class ship (in Taiwan) achieving 96% occupancy rate, well above the EBITDA breakeven occupancy of < 80%.

Redesignation of roles within Genting group an ESG friendly move.

  • Meanwhile, GENT has seen some redesignation of roles, with Tan Sri Awi Jantan replacing Tan Sri Lim Kok Thay as the chairman. The move is consistent with the corporate governance guidelines for separation of chief executive and chairman which many minority shareholders have been lobbying.
  • Meanwhile, Tan Sri Lim’s son, Lim Keong Hui, has stepped down as GENHK’s deputy CEO.

GENHK confident of sailing through COVID-19 financial pressures...

  • GENHK management is confident of securing sufficient capital to fulfill its US$200.4m financial obligations scheduled to be repayable within the next 12 months. This is supported by its existing cash position of US$397.5m and proposed raising of fresh capital from sovereign funds and private equity firms.
  • Coupled with aggressive cost cuts (staff and haircut reduction) and short-term suspension of capex (excluding cruise maintenance), we deem GENHK should be spared from bankruptcy or default of its US$2.9b net debt and have adequate cash flow to maintain its current operating cash outflow (1H20: US$252m).

…as business recovery is on track.

  • Furthermore, we understand that GENHK have resumed one of its cruise lines to Taiwan in July, where occupancy rate has recovered progressively from 50% to about 96% on the August cruises. This further reiterates our view that the cruise operation is recovering gradually and has achieved EBITDA breakeven at current occupancy level, given its more efficient cost structure where cost per capacity day has fallen by one-third from July cruises with new staffing and service standards.

Disposing stakes in Zouk.

  • GENHK is also selling Zouk Greoup, a night club operator for HK$79.3m to Tulipa Limited as part of its effort to offload non-core assets and enhance liquidity of the group.

No RPT or bail out from sister listcos.

  • While GENHK’s debt obligations are ring-fenced to only its assets (eg cruise ships), there shall not be any form of guarantee or collateral from sister listcos in its restructuring or fund raising plans. Management has also reaffirmed that there is no plan for GENT, GENM or Genting Singapore (SGX:G13) to inject liquidity or bail out GENHK as GENHK can stay afloat by securing funding from and negotiations with external creditors.

Maintain BUY on GENM and GENT, and HOLD on Genting Singapore (SGX:G13).

Vincent Khoo CFA UOB Kay Hian Research | Jack Goh Tooan Orng UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.690 SAME 0.690