1Q14 results beat expectations largely due to VIP volume share gain which we do not think is sustainable.

Industry VIP volume and mass market GGR continued to fall YoY but high base effect will wear off from 2Q14 onwards.

Upgrade to HOLD with only 5% downside risk to share price. TP unchanged at SGD1.24, based on 10x FY14E EV/EBITDA

What’s New

GENS reported a higher-than-expected 1Q14 core net profit of SGD213.3m (+184% YoY, +132% QoQ), accounting for 35% of our full-year estimate. The outperformance was due to a 10% YoY growth in VIP volume (assumption: +0% YoY) and a 2.90-3.00% rise in VIP hold rate (assumption: 2.85%). The good cheer, however, was tempered by an estimated 11% YoY fall in mass market GGR.

What’s Our View

The 10% YoY VIP volume growth in 1Q14 helped to raise Resorts World Sentosa’s (RWS) share of VIP volume to an abnormally high 59%. We think this is unsustainable as in the past neither operator held substantially more share of VIP volume over the other for long. The share gain has helped to compensate for a 9% YoY decline in industry VIP volume (RWS and Marina Bay Sands). Industry mass market GGR in 1Q14 also fell 4% YoY, its fourth consecutive quarters of contraction. Management still expects this year to remain challenging despite the good 1Q14 results. With the high base effect from 4Q12 and 1Q13 likely to wear off from 2Q14 onwards, YoY comparisons for VIP volume and mass market GGR will be easier going forward.

For now, we keep our earnings estimates unchanged and maintain our TP of SGD1.24, based on 10x FY14E EV/EBITDA. Given that there is only 5% downside risk to its share price, we upgrade GENS from SELL to HOLD. At current levels, we believe the share price has reflected most, if not all downside risks to earnings.

Source: Maybank Kim Eng Research - 6 May 2014