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SI Research: 4 Main Points That Could Pressurise Genting’s Share Price Gains
Corporate Digest | 20 November 2015
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By: Louis Kent Lee
Articles (199) Profile

Genting Singapore, the market darling that many have followed, and closely watched upon, is one of the two casinos in Singapore.

In this duopoly market, it is easy to see a strong moat. After all, the ability to operate casinos in Singapore are governed by a ten-year guarantee from the Singapore government until 2017.

Although the guarantee would allow competition to step into this space through a third entrant, given the current market saturation, new competition is unlikely at this stage.

Broader macro issues have cast a shadow over the gaming industry as a whole and the gaming market in Singapore has shown signs of stagnation since 2011.

As a result of un-encouraging tailwinds, and probable near term downside catalysts, we think the reasons listed below could probably explain its current share price and further pressure we anticipate moving forward.

First Down Cycle In Gaming Revenue Scene

Since the opening in 2010, Genting is now facing its first Gross Gaming Revenue (GGR) down cycle.

The anti-corruption measures in China has dented gaming revenues in the Macau strip, which also saw a direct impact on VIP gaming revenues here in the coffers of the two casinos.

The pressure from this anti-corruption measure is expected to remain on the Singapore VIP gaming market scene.

Interestingly, we noticed about half of Genting’s VIP revenues come from ASEAN.

Given the high correlation between Singapore’s VIP gaming market with the Indonesian and Malaysian stock markets, the bearish economic outlook of these two countries will be expected to create some overhang for the VIP gaming market segment.

The weakening of currencies from Indonesia and Malaysia is also concerning, as this adds pressure of spending ability from these regions, directly pressuring Genting’s Mass GGR segment. It is now four percent and 17 percent more expensive for Indonesian and Malaysian tourists to visit Singapore.

According to CEIC, Indonesian visitors fell 14 percent year-on-year (y-o-y) and accounted for 47 percent of ASEAN tourists in 1H15.

Singapore Market Share Rivalry, Las Vegas Sands In The Lead

The GGR of 2014 stood at some $7.6 billion. In terms of the splitting of market share, Marina Bay Sands, run by Las Vegas Sands, has taken over Genting’s Resorts World Sentosa since 3Q11.

It has been maintaining a marginal lead in market share advantage over Genting since.

MBS’ market share stands at 56 percent as of data represented in 2Q15, while Genting’s market share stands at some 44 percent.

While we did see rising revenue per room and average occupancy rates in the Singapore hospitality scene probably due to Singapore’s inaugural SG50 jubilee celebrations and events, this did not seem to translate into corresponding GGR for Singapore casinos.

In fact, although MBS did achieve good 3Q15 results, this could have been at the expense of Genting, considering how MBS have taken market share from Genting vividly.

Regulatory Mandate, Resulting In Higher Opex Costs

Because Genting uses a natural attrition human resource policy, cost control is effectively a cost control measure instead.

Staff costs currently represent some 17 percent of Genting’s annual revenue between 2010- 2014. In addition, Genting is under obligation by the Singapore government to have a minimum 70 percent local hire in its workforce, making it difficult for Genting to do any massive cuts to control cost measures ahead of the license renewal in 2017.

As of FY14, Genting’s key management costs stood at some 8.3 percent of core profits. From 2010 – 2014, key management costs have risen some 71 percent.

This reveals a possibility of Genting’s ongoing need to compellingly retain senior staff, considering the strategic know-hows and execution of this pool of people. On a grainier note, this suggests the importance of Genting’s talent retention move, despite the possible impact that will be seen on earnings even in the eye of fallen revenues.

Notably, as a result of the amended Casino Control Act, which was added for consideration in determining the casino license application that highlighted on keywords related to the promotion of the integrated resort that contributes to the tourism industry in Singapore, we opine extra spending on advertising and promotional budget from Genting ahead of the 2017 license renewal.

Jeju, A Catalyst Reserved For Only 2017 and 2018

Albeit the venture into Jeju, South Korea are some of the key long term catalysts for Genting, it is possible the market is forgetting and overdiscounting the potential start up risks involved, which includes operational headwinds.

A key point of Jeju’s allure lies in the proximity between China and South Korea, and the potential flow of Chinese players previously. With the macro picture unfolding that was seen clearly in the Macau strip and also on the VIP segment when it comes to Chinese players, we feel this headwind overspilling to Jeju’s scene might also be felt.

However, considering the lead time there is till the opening of Jeju’s integrated resort, this headwind still has ample time to be diminished should the macro scene improves for the gaming sector.

Nevertheless, we think that Jeju’s catalyst on Genting should only be reserved when we are in the soft opening phase, and more appropriate to be factored in during 2017 – 2018.

Conclusion

We feel that Genting is currently facing headwinds from the macro side (evident from the spill over seen in Macau), and from the legislative nature of how the gaming scene is structured in Singapore.

However, it is undeniable that Genting is backed by an extremely strong balance sheet, in a net cash position with a heavy cash vault, commands a relatively high profit level (Net profit margin: 22.2%), and has strong free cash flow generation abilities (Levered free cash flow yield : 9.5%).

At the time of writing, Genting is currently trading at $0.83 with a forward PE of 27.39x, while most of its sector peers across the ASEAN region and Hong Kong listed casinos are trading at forward PE of less than 20x.

This suggests the expensive pricing of the stock when decked with the incoming headwinds.

The street is giving a mean target price of $0.88, with a wide range between $0.50 – $1.40. We think downside movement is likely and agree with a lower band of the tracked range.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

Genting Singapore  0.940 -0.010 -1.05%   
Business: Develops, operates & mkts casinos & IRs globally, including Australia, M'sia, Philippines & UK. [FY17 Turnover] Gaming (73%), non-gaming (26.9%), others & invs (0.1%).

Insight: Nov-18, 9M18 revenue rose 3.4% to $1.9b. Correspon... Read More


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