• Genting Singapore's Share Price should trend up as the bidding process for the Japan gaming concession progresses to its finale in 2020. Genting Singapore is a shortlisted candidate for Osaka, which promises a good payback period. Failure to clinch the concession could also mean better dividends from the cash-flushed company.
• Meanwhile, Resort World Sentosa’s 5-year expansion plan is on track and we continue to project a moderate GGR contraction for 2H19.
• Maintain BUY. Target price: S$1.11.

What’s New

Japan integrated resort (IR) development ‘option value’ to emerge as GENS’ bid progresses.

• GENTING SINGAPORE (SGX:G13) was one of three bidders shortlisted following Osaka’s request-for-concept (RFC) exercise. Next, Osaka will call for a request-for-proposal (RFP) which closes in Feb 20 followed by the awarding in 1H21. The bidding cities will then submit their proposals to the federal government in 2H20, and the federal government is expected to name the three winning cities by 1H21.
• We were recently more assured that the IR concession will feature a good payback period, after noting that the concession period will be for 10 years with a 7-year exclusivity period.
• See Genting Singapore Announcements; Genting Singapore Latest News.

Flattish to slightly lower earnings in 2H19.

• Recall that Genting Singapore’s 1H19 EBITDA fell 0.1% y-o-y to S$624.1m as a recovery in VIP volume and exceptional high win rates (3.30-3.40% vs theoretical level 2.85%) were offset by a mid-single-digit contraction in mass volume.
• We expect a slightly softer 2H19 EBITDA, incorporating the following hoh assumptions for 2H19 - lower VIP GGR contribution (lower win rate) and lower mass market GGR (which shrank 10.3% q-o-q in 2Q19 amid rising regional gaming and impact of higher entrance levy for local gamers).

$4.5b expansion plan on track…

• Recall that Resort World Sentosa (RWS) has committed to the Singapore government to allocate capex of S$4.5b over five years to elevate the resort’s vibrancy and appeal. Planned launches include Singapore Oceanarium (a rebranding of the Aquarium-cum-Maritime Museum) in 2022, new attractions in Universal Studio Singapore which will feature Minion Park (with 3D motion-simulator thrill ride) and Super Nintendo World as early as 2022-24, two new destination (5-star and 6-star) waterfront lifestyle hotels. The entire expansion is scheduled to be completed in 2025.
• Meanwhile, the government’s plan to convert the neighbouring Pulau Brani area into a destination theme park would not compromise but compliment RWS’ appeal.

…would not affect planned dividend practice.

• RWS’ capex will peak towards 2022-24 apart from the initial S$1b payment needed for land acquisition premiums. Even should it clinch the Japan concession which could require an equity injection of S$3.2b, capex would only peak in 2024-25. Genting Singapore’s cash hoard and lush cash flows can amply support present dividends.

Stock Impact

One step forward for the Japan IR development bid.

• While our valuation has conservatively not imputed an option value, we guesstimate that winning an IR concession in Osaka could lift DCF by S$1.5b. With only three bidders in the running for Osaka, and that Osaka is a frontrunner for one of Japan’s three IR concessions, investors would surely impute some option value in valuing Genting Singapore (although we note that competition will still be stiff).

Moderately weaker GGR and EBITDA in 2H19 amid tougher regional competition and higher entrance levy.

• We expect 2H19 EBITDA to fall 8.6% hoh and 5.7% y-o-y, reflecting tougher regional competition (which chips away at its premium mass segment) and lower local patronage (full and lingering impact of the 50% increase in casino entry levy to S$150/entry in Apr 19).
• While local patronage is expected to partially recover after a 2-3 quarter effect, more problematic is the regional competition from IndoChina which typically offers better perks to premium mass players or commissions to premium players.

Hopes for spill-over of China tourists amid Hong Kong protests.

• Hong Kong’s past four months of violent anti-government protests have re-channelled Chinese tourists from Hong Kong to other Asian countries, resulting in a surge in Chinese visitors to Singapore (Chinese tourist arrivals surged 46% m-o-m in Jul 19). While we understand that the surge has not translated into a noticeable rise in casino patronage for RWS, we still expect a mild feed through into higher grind and premium mass gaming volumes, apart from better non-gaming revenues.

Impairment of receivables to normalise in 2H19.

• In 2Q19, Genting Singapore recorded a high provision of S$47m as management has taken an unusual prudence of partly providing for fresh receivables arising from that quarter’s exceptionally high luck factor.
• Moving forward, provision is expected to have a quarterly run rate similar to the average of 1H19, which is around S$29m (1Q19: S$11m; 2Q19: S$47m).

Ample cash flow to fund RWS capex and Japan concession, while sustaining dividends at 3.0-3.5 S cents.

• We expect Genting Singapore’s DPS to sustain at 3.0-3.5 S cents in 2019- 20, representing decent prospective yields of 3.3-3.8% based on current share price. See Genting Singapore Share Price; Genting Singapore Dividend History.
• Genting Singapore’s existing net cash of S$3.6b, combined with the expected cumulative net inflows of S$6.8b through 2025, is more than sufficient to fund annual dividends of 3.0-3.5 S cents,
• RWS’ planned S$4.5b capex and S$3.2b equity commitment (assuming 50% partnership stake) should it clinch a Japan IR concession. Peak capital equity outlay for RWS and Japan IR are not expected to overlap.

Earnings Revision / Risk

• None.
• Catalyst: A key catalyst continues to be the progress in the Japan IR concession.

Valuation / Recommendation

• Maintain BUY and target price of S$1.11, implying 7.6x 2020F EV/EBITDA. Our valuation conservatively excludes option value of Japan IR opportunity (assumption: 30% success rate, US$10b development cost with IRR 13% and 50 % JV stake). See Genting Singapore Share Price; Genting Singapore Target Price.
• Meanwhile, current valuations are well supported by prospective dividend yield of 2.7-3.2%.

Source: UOB Kay Hian Research - 25 Oct 2019