• GENTING SINGAPORE LIMITED (SGX:G13)'s 1Q19 adjusted EBITDA down 8%– below expectations -to S$303m due to 20% drop in VIP rolling chip.
• Management guiding for more cautious extension of credit and maintaining current quarterly run rate; cut FY19-21F adjusted EBITDA by 7-9%.
• Trading close to -2SD EV/EBITDA; maintain BUY on lower Target Price of S$1.20.

Trading Close to -2SD EV/EBITDA

• We maintain our BUY call on GENTING SINGAPORE LIMITED (SGX:G13) with a revised Target Price of S$1.20.
• We expect volatility in Genting Singapore’s share price near term due to weaker than expected 1Q19 results and cautious outlook commentary for its VIP business. However, the share price is buffered by the fact that Genting Singapore already trades on an EV/EBITDA of 6.5x, which is close to -2SD EV/EBITDA of 5.7x which provides valuation support and an attractive entry point for value oriented and long term focused investors.

Where We Differ – More Positive on Growth Plans

• Despite acknowledging the market’s cautious view on Genting Singapore’s S$4.5bn redevelopment of Resort World Sentosa (RWS) given the large capex and uncertainty over returns in 5-6 years’ time, we are more positive on Genting Singapore ability to generate a return due to its strong track record since RWS was opened close to 10 years ago.
• Furthermore, we believe the market is underappreciating the impact from a near doubling of its hotel room inventory at RWS which translates to more guests staying at the property, boosting both gaming and non-gaming income. Thus, we believe Genting Singapore deserves to trade closer to -1SD EV/EBITDA at 9x as implied by our Target Price compared to close to -2SD currently.

Potential Japan IR

• Beyond upside potential from an enhanced RWS, we believe the potential launch of a request for proposal (RFP) for a Japan integrated resort (IR) in Osaka at end 2019 could act as a re-rating catalyst.

Valuation

• On the back of a weaker near-term outlook, we reduced our DCF-based Target Price to S$1.20 from S$1.55 (cut FY19-21F EBITDA by 7-9%, beta adjusted from 1.0 to 1.2).

Key Risks to Our View

• Decline in VIP and mass businesses. The key risk to our positive view is slower-than-expected recovery or decline in Genting Singapore’s VIP and mass divisions.

What's New - Long Term Opportunity

Impacted by drop in VIP rolling chip

• Genting Singapore's 1Q19 adjusted EBITDA fell 8% y-o-y to S$329.7m which was below expectations. The underperformance was largely due to an estimated 20% y-o-y drop in VIP rolling chip volumes to US$5.6bn as Genting Singapore's VIP market share fell to 44% from 47-50% over the last few quarters. We understand given the uncertain macro environment, Genting Singapore has decided to be more selective in extending credit to its VIP customers.
• Partially offsetting the lower VIP volumes was a higher than average VIP win rate of 3.3% which was also marginally higher than the 3.2% achieved in 1Q18.
• Due to weaker adjusted EBITDA, normalised 1Q19 profit (excluding exceptional items) fell 12% y-o-y.

Mass business also dipped marginally

• The mass business did better than the VIP business.
• However, we estimate gross gaming revenue (GGR) for the mass business would have dipped 3-4% y-o-y.
• We understand Genting Singapore is facing increased competition from other casinos in ASEAN.

Bad debts under control.

• Impairment on trade receivables fell to S$11m following a spike in 4Q18 to S$36m.
• At S$11m, bad debts are tracking below our assumed S$15m quarterly run rate.

Strong balance sheet maintained

• Genting Singapore remains in a strong financial position with a net cash balance of S$3.4bn.
• Post balance date, Genting Singapore announced that it had prepaid $680m worth of borrowings, which leaves the group with S$260m worth of debt and US$3.7bn of cash.

Updates on Redevelopment of Resort World Sentosa

• Based on recent disclosure by the Singapore government, out of the S$4.5bn cost associated with the development of Resort World Sentosa, S$1bn relates to the acquisition of land and/or increasing the plot ratio at the property.
• Genting Singapore guided that payment for this “land” will be made in 1Q20 and mainly funded with Genting Singapore’s existing cash balances to maintain a more efficient balance sheet.
• Thereafter, capex will peak in 2022-2023 before tapering off ahead opening of the new hotel rooms at end 2024.
• We understand Genting Singapore will target to fund the initial capex in the first 1-2 years with its cash balance and operating cashflows. Subject to timing of a Japan IR and operating cashflows, Genting Singapore also guided it may not need to rely on project financing to fully fund the project, although we have conservatively assumed Genting Singapore draws down $1-2bn during the peak construction period in 2022-2023.
• Furthermore, given the healthy annual operating cashflows of S$1bn a year, strong balance sheet and timing of any construction for an IR in Japan at earliest by only 2022, Genting Singapore guided that it does not need to undertake a rights issue to fund its RWS redevelopment and Japan IR, contrary to rumours from some market participants.

Resort World Sentosa (RWS) Redevelopment Overview

• The RWS S$4.5bn renewal and refresh of Resort World Sentosa (RWS) will take over five years and will result in 50% increase in gross floor area (GFA), adding 164,000 sqm of GFA of leisure and entertainment space.
• The developments and enhancements include:
  • Expansion of Universal Studios Singapore (USS) - Two new attractions - Minion Park and Super Nintendo World - are slated to open in 2022 and 2024 respectively, which should increase visitors to USS and RWS in general.
  • Expansion of the SEA Aquarium to be re-branded as “Singapore Oceanarium” - The existing Maritime Museum will be closed in 4Q19, and the new ‘Singapore Oceanarium’ will be 3x the size of the existing aquarium with a scheduled opening in 2021. Currently the aquarium attracts 2m visitors a year with capacity constrained by the number of fire exits as a large part of the existing aquarium is underground. The new Oceanarium will alleviate this issue, potentially boosting visitor numbers by 50%.
  • Addition of up to 1,100 new hotel rooms - 900 new rooms are targeted to be added in 2024 and another 200 rooms in late 2025/early 2026 at a new waterfront lifestyle complex. The ability of Genting Singapore to generate additional gaming revenues has been constrained by:
    1. lack of hotel rooms and
    2. gaming guests not staying in Sentosa, thus reducing time spent in the casino.
  • More rooms should enhance Genting Singapore’s gaming revenue. Genting Singapore currently has 2,120 hotel rooms (1,570 at RWS and 550 rooms in Jurong). An additional 1,100 new rooms represents a 47% increase.
  • An enhanced waterfront promenade - The existing waterfront promenade has struggled to draw large numbers of visitors and a refresh is expected to enhance the attractiveness of RWS as a destination. The new waterfront promenade will be lined with restaurants, retail outlets and a “spectacular” public attraction.
  • Expansion of Meetings, Incentives, Conferences and Exhibitions (MICE) facilities – It is anticipated that there will a 20% increase in MICE facilities (c.11k sqft) which should lead to more events coming to Singapore. Benefits from an increase MICE facilities should start from 2024 onwards. We understand that MICE visitors – compared to aquarium and USS visitors - have a higher propensity to visit the casino.
  • Development of a driverless transport system (DTS) – A new DTS is expected to enhance last mile connectivity and bring greater footfall to RWS and the rest of Sentosa. We understand that the new DTS (potential opening in 2024) could boost transport capacity to and around Sentosa by 30-40%.

Extension of Exclusivity Period to End-2030 But 3% Higher Gaming Taxes

• On the back of Genting Singapore’s S$4.5bn investment in RWS and Marina Bay Sands’ (MBS) commitment to spend S$4.5bn to build a 1,000 room luxury hotel, new 15,000 seat arena and additional MICE space, the Singapore government recently announced the extension of the exclusivity period for the two casinos to end 2030 (i.e. no new casinos until 2030).
• MBS and RWS will also be given an option to deploy (subject to payment of additional land costs) an additional 2,000 sqm and 500 sqm of Approved Gaming Area (AGA) respectively. Currently, MBS and RWS are allowed 15,000 sqm of AGA.
• Furthermore, MBS and RWS will be given an option to increase their allowable gaming machines by 1,000 and 800 respectively. These machines are used to target higher-tier non-mass market players who are mainly tourists. The additional AGA can be exercised only after the various new attractions are completed. We also understand that Genting Singapore’s S$4.5bn capital expenditure (capex) already includes the potential 500 sqm of extra AGA. RWS targeted a smaller increase in AGA compared to MBS to minimise overall capex.
• However, the casino entry levies for Singaporeans and permanent residents (PR) will be raised by 50% from S$100 to S$150 for the daily levy and from S$2,000 to S$3000 for the annual levy, with a 5-year moratorium. The increase in levies is effective 4 April 2019.
• In addition, the casino tax will be increased by 3% from March 2022. The tax rate for premium gaming (VIP business) will be lifted from the current flat 5% to 8% for the first S$2.4bn of gross gaming revenue (GGR) and 12% for GGR in excess of S$2.4bn. For mass gaming, the flat 15% rate will be revised to 18% for the first S$3.1bn of GGR and 22% of GGR in excess of S$3.1bn. If an integrated resort (IR) fails to meet its investment commitments (i.e. S$4.5bn), then a flat tax rate of 12% will apply to the entire GGR from premium gaming and a flat tax rate of 22% will apply on the entire GGR from mass gaming. Nevertheless, the effective casino tax for Singapore’s IR remains relatively low compared to the 39% gaming tax for casinos in Macau.

Japan IR Inching Closer

• Genting Singapore guided that it in the process of preparing a proof of concept (RFC) for a potential integrated resort (IR) in Osaka as the city has issued a request of concept to various potential operators.
• Following submission which is non-binding, a potential request for proposal (RFP) may occur later in the year with the city picking a preferred partner in 2Q20 before seeking submission and approval from the Japanese federal government. This process may take another 6-9 months with planning permission and regulatory approvals resulting at earliest any construction work in 2021 or early 2022. Thus, there are no capex needs for Japan until 2022 should Genting Singapore win the right to build an IR in Japan.

Revising Earnings Estimates on the Back of More Cautious Guidance

• On the back of weaker than expected 1Q19 results and guidance that Genting Singapore intends to be more cautious with extending credit in its VIP business in an uncertain macro environment, we now assumed a 9% y-o-y drop in VIP rolling chip in FY19 from a 3% increase previously. Thereafter, we expect 3% recovery p.a.
• In addition, due to the recent increase in the casino entry levy for Singaporeans and increased competition from regional casinos, we assume 3% dip in the mass business, down from 2-3% increase iously. This leads us to cut our FY19-21F adjusted EBITDA by 7-9%.
• On the back of lower earnings and an increase in beta from 1.0 to 1.2, we lowered our DCF-based Target Price to S$1.20 from S$1.55. Our Target Price now implies a EV/EBITDA multiple of 9x which is close to -1SD EV/EBITDA of 8.6x.
• Given Genting Singapore track record of developing and managing RWS, we believe Genting Singapore is in a strong position to create at minimum a NPV neutral or better outcome from its S$4.5bn investment. This is underpinned by near doubling of rooms at the property (1,100 extra rooms on top of the existing 1,570 rooms) which will not only improve income from the hotels directly but more importantly result in more guests staying at RWS, translating to higher gaming and non-gaming income.
• Historically, with the lack of available rooms (hotel occupancy typically in the mid-90s), RWS was unable to offer sufficient rooms to attract more casino guests or host larger conventions and meeting groups. Furthermore, with guests not being able to stay RWS causing them to typically leave in the late afternoon, this resulted in missed opportunities to generate sales in the various F&B outlets and also spend time in the casino.
• However, due to the disappointment over the 1Q19 results and some investors being unable to envision the benefits from the investment 5-6 years away, in our view it will be difficult for Genting Singapore to re-rate closer to average EV/EBITDA multiple we had previously assumed, with a -1SD multiple being more realistic.

Maintain BUY With a Revised Target Price of S$1.20

• Given 26% upside to our revised Target Price of S$1.20, we maintain our BUY call.
• While there may be some short-term volatility in Genting Singapore’s share price, we believe this should provide an attractive entry point, given the attractive valuations on offer, with Genting Singapore trading close to its -2SD EV/EBITDA, with medium upside from the redeveloped RWS and potential investment in a Japan IR.

Source: DBS Research - 10 May 2019