Genting Singapore traded south yesterday to close at $1.11, down 1.3% for the day. Just before markets opened, Macquarie Equities Research (MER) released a research report with a ‘Underperform’ rating and a 12-month price target of $0.95, some excerpts can be found below….
 
Chinese VIPs, which make up more than 50% of Singapore casinos’ VIP volumes have been on a declining trend in 2014. VIP volumes, the bread and butter of SG casinos, have gone down by 14% in 2014 year to date and consensus is banking on the VIP volumes improving on a lower base next year.
 
Impact
 
Chinese “shadow bank tightening” is cramping SME bosses: MER believes more than 90% of Chinese VIPs are small, medium enterprises (SME) bosses who have benefitted from “shadow bank lending” in China. Since 2008, there has been strong correlation between shadow bank lending growth and Macau’s gross gaming revenue (GGR) growth. The tightening in shadow bank tightening in China is thus the major reason behind the VIP volume decline in 2014.
 
Best days for China’s shadow banking industry are behind and so are the glory days for casinos: MER thinks that China’s clampdown will continue to release pressure on a debt-burdened economy, which implies that the VIP play glory days may never come back.
 
Chinese VIPs are ‘bread and butter of SG casinos”: In the absence of junkets in Singapore (unlike Macau), Chinese VIPs are even more important for SG casinos’ growth. SG casinos make up ~80% of total volumes and 50% of GGR through VIP play. One of the key reasons for the profit decline in 2014 for the SG casinos has been the 14% decline in VIP volumes in 2014 year to date.
 
Consensus building 10-15% VIP growth in 2015; set to be disappointed: For the SG market, while MER is building 0% VIP volume growth in 2015 at around US$107bn VIP volumes for the overall market, consensus is building 10-15% growth to go back to the US$123bn VIP volume level of 2013.
 
Price catalyst
12-month price target: S$0.95 based on a DCF methodology.
Catalyst: 4Q14 results
 
MER’s action and recommendation
 
Less Chinese VIP = Lower profitability=More downgrades=Expensive multiples: MER believes, in the advent of Chinese VIPs slowing down even further in Singapore, SG casinos’ profitability could take a serious hit. GENS at 9.2x 2015E  enterprise value/ earnings before interest, tax, depreciation and amortization (EV / EBITDA), in a mature market, with no growth and no use of cash, is an expensive stock, in MER’s view. MER sees 16% downside from current levels as consensus continues to downgrade estimates (~15% above MER’s).

Source: Macquarie Research - 5 Dec 2014