Results

Genting Singapore’s (GenS) 1HFY14 core PATAMI of SG$258.9m came in below our expectations (41.1%) but fall within consensus’ estimates (51.5%).

Deviations

Weaker-than-expected VIP market.

Higher-than-expected impairments on trade receivables.

Highlights

GenS’ 1HFY14 topline was up by 14.7% from improved volume in VIP segment as well as higher average hold rate (1HFY14: 3%; 1HFY13: 2.3%). Mass market volume on the other hand remains flattish.

Visitations to GenS’ aquarium have slowed down as novelty effect wears off. However, the group will be introducing new exotic marine species in hope to revive the volume in FY15.

Management highlighted that it expected the business environment to continue to be challenging in the next 2-3 quarters given the softening in its core markets.

Impairment loss on trade receivables of SG$81m is expected to be a one-off as it does not expect the quantum to continue going forward and it hopes to normalize back to between SG$40-60m.

The group’s hotel in Jurong is currently progressing well and is on schedule for a soft opening in 2QFY15.

GenS continues to eye three locations for an IR in Japan, namely Tokyo, Osaka and Okinawa. We confirmed with management that the group will be happy to have a local operator as a partner in its venture in Japan, but denies the potential collaboration with Universal Studio Japan (USJ) which has been reported previously, as they have not been approached by USJ.

The Korean government has been very supportive of GenS’ IR development plans in Jeju Island, a 50:50 JV with China’s Landing International Development Ltd. Details of the IR are still work-in-progress and the group expects to begin construction by 1QFY15. GenS’ share of capex will not be more than US$500m (SG$623m; MYR1.59bn).

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

We tweaked our forecasts downwards to reflect softer VIP market going forward, as well as the higher impairments on trade receivables (only for FY14). As such, FY14-16 EPS is adjusted downwards by circa 13%.

Rating

BUY

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

Post-revision, target price is subsequently reduced to SG$1.54 (previously SG$1.68) based on unchanged FY15 EV/EBITDA multiple of 9.5x. Maintain BUY.

Souce: Hong Leong Investment Bank Research - 15 Aug 2014