News

GenS and Landing International Development Ltd (LIDL) are entering into a 50:50 JV to develop and operate a 2.3m sq m integrated resort (IR) known as Resorts World Jeju (RWJ) in Jeju Island, Korea.

GenS and LIDL will jointly own, manage and operate the IR when it opens progressively from 2017.

The total estimated costs for the IR is approximately US$2.2bn (SG$2.8bn), which would include luxury hotels, shopping mall, a theme park, residential facilities and a 27,000 sq m gaming floor, consisting of 800 gaming tables.

Comment

We are positively surprised with the latest announcement given that the Japanese market has always been the main target for GenS. By entering into a new market, it could be another earnings booster for GenS.

We believe the IR’s business model in Jeju Island would likely be similar to GenS’ IR in Singapore. Currently, South Korea has a total of 17 casinos, of which 8 of them are located in Jeju. (Figure 1).

With GenS’ net cash position of more than SG$2bn, we believe GenS has the capacity to spend about SG$1.4bn (US$1.1bn) over 3 years.

However, there are still doubts on whether RWJ would be successful, as it is highly dependable on whether it is open to only foreigners (similar to other existing casinos in the country except Kangwon Land Casino) or to locals as well.

Based on historical data in Figure 2, we could conclude that locals makes up a large volume of players and controls more sizeable market share (Kangwon Land itself contributes 51.2% of S.Korea’s gross gaming revenue in 2011).

Hence, we strongly believe that it would be better if the government would consider lifting Kangwon Land’s monopoly status (which expiry was extended from 2015 to 2025), as it would benefit both RWJ as well as S.Korea’s gaming revenue.

Risks

1) Regulatory risk; 2) Further decline in RWS’ market share to MBS; 3) Weaker-than-expected hold percentage in the VIP segment; 4) Worsening in economic condition; and 5) Failure in casino license renewal.

Forecasts

Unchanged, pending further information from the company as well as GenS’ 4QFY13’s results and conference call on 20 Feb 2014.

Rating

HOLD

Positives – (1) Duopoly industry; and (2) Lower tax rates compared to regional peers.

Negatives – (1) Highly regulated industry; and (2) Earnings from gaming operations are highly dependable on luck factor and hold rates.

Valuation

Maintain HOLD with unchanged TP of SG$1.67 based on FY15 EV/EBITDA multiple of 9.5x.

Source: Hong Leong Investment Bank Research - 10 Feb 2014