Genting Singapore and its sister company Genting Hong Kong have soared over the past few weeks on enormous trading volume. In fact, the two stocks have held the top spots on the volume league tables for several days in a row. At first glance, both stocks look horribly speculative. Yet, they have interesting stories behind them. And, in the short term, there is probably as much chance of them continuing to climb as correcting. So, should investors feel like taking a punt, which of the two stocks should they buy?
Image: Genting Singapore’s casino at Sentosa Island covers 15,000 sq m and has more than 19 varieties of games across more than 500 tables. Credit: Samuel Isaac Chua, The Edge Singapore
Much depends on the kind of risk you want to take. Genting Singapore is much less of a concept stock than Genting Hong Kong. Not only is its casino fully operational and its resort facilities mostly functional, the company appears to have made a very good start pulling in the crowds. Indeed, its earnings for 1H2010 spurred a series of upgrades by analysts. What appears to have surprised them is the size of the local gaming market and Genting Singapore’s market share lead over its competitor Marina Bay Sands.
STRONG START IN SINGAPORE
By all accounts, the Singapore gaming market is roughly $4 billion a year now. But forecasts of its growth vary widely. CLSA is among the most bullish, forecasting industry casino revenues of US$6 billion ($8 billion) in 2011. “We forecast 76% growth in 2011 — largely due to the full-year impact, followed by 26% in 2012 and 20% thereafter,” CLSA says in a report. The research house expects Genting Singapore to collar a 66% share of the market next year. “Management has clearly demonstrated their superior ability to read the Singapore market,” CLSA says. “We believe gaming spend will rise from the locals, as the appetite for gaming in Asia is strong.”
With its cash flows surging, Genting Singapore could pay down its debts quickly and begin paying dividends shortly. “[The] capital structure of the company is improving rapidly, turning net cash by 2012,” CLSA says. By 2012, it expects the company to be in a net cash position. By 2013, the company would be generating free cash-flow yield of 10%, CLSA says. On CLSA’s upbeat 2010 forecasts, Genting Singapore has an EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) valuation of about 18 times. The research house says the stock could eventually hit $3, up 50% from current levels.
It’s also worth noting that Genting Singapore is now completely focused on operating its integrated resort (IR) in Singapore, after selling its loss-making Genting UK unit to Genting Malaysia, a sister company in the Genting group, for $688.8 million. Genting Singapore chalked up a loss of $1.17 billion from the sale, but it has effectively rid itself of something that was a distraction for investors.
Not everyone agrees that Genting Singapore’s IR will grow as fast as CLSA is forecasting, though. Citi expects industry-wide revenues to grow only 15% next year to US$4.5 billion. The research house notes that gaming volume in Singapore in the 3Q2010 “so far has been slightly weaker than it was in 2Q2010, mainly attributable to the Hungry Ghost month, when players tend to cut down their gaming activities”. Meanwhile, Nomura doubts that Genting Singapore will be able to maintain its significant market share lead over Marina Bay Sands for long. It sees Genting Singapore’s market share slipping to 60% eventually as Marina Bay Sands fights back in the coming months.
TOUGHER REGULATION
Then, there is the risk of tougher regulation by the government, which appears to have grown uncomfortable with the marketing tactics employed by the two casino operators. Genting Singapore was recently instructed to halt the free bus services it began providing five months ago. “We believe the government will gradually step up measures to control social gaming problems. IR operators are not allowed to provide incentives in any form for Singaporeans to patronise the casinos,” CLSA says in a report. “This is the key risk to our positive view.” According to analysts, about 40% of visitors to Genting Singapore’s resort are locals, and 60% are foreigners.
As things stand now, however, local regulations aren’t likely to have much impact. “Only 5% of the casino’s visitors travel there by the free shuttle,” Citi notes. “The extra cost players incur on transportation is small compared with their average spending at the IRs and the $100 levy that Singaporeans have to pay.” Citi has a price target of $2.48 for Genting Singapore. Much more bearish is Nomura, which sees the stock tumbling to $1.01.
Against that wide range of expectations, the performance of Genting Singapore’s casino and theme park in the next month, as visitor arrivals in Singapore surge during the Formula One races, could have a big impact on its stock. Genting Singapore’s casino at Sentosa Island covers 15,000 sq m and has more than 19 varieties of games across more than 500 tables. It also has 1,300 electronic game machines boasting more than 300 choices of games. At full capacity, its casino could accommodate 600 tables.
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THE NEXT GENTING SINGAPORE?
Genting Hong Kong hasn’t yet shed its concept stock image, and is still in the process of being “discovered” by the market. Formerly known as Star Cruises, the company has been trying to recast itself as an up-and-coming casino play in the vein of Genting Singapore. It owns a 50% stake in Resorts World Manila (RWM), which opened in August 2009 and is now apparently seeing its revenues surge.
The full cost of developing RWM is said to be just US$550 million, a fraction of the $6.5 billion that Genting Singapore spent here. Yet, when it is completed, the Manila property could dwarf what Genting Singapore has built on Sentosa. To date, only 213 tables and 1,200 slot machines are operational in Manila and the resort is 55% completed. This month, a third gaming floor will be commissioned, hosting an extra 40 to 50 tables.
RWM has already opened the Maxim’s Hotel, and will be completing the Crockfords Villas soon. In addition, some 30,000 sq m of retail space is being opened and a 1,500-seat theatre has been commissioned. The 712-room Remington Condotel will open in 1Q2011. “These ancillary facilities should meaningfully lift daily visitorship from the 6,500 to 7,000 presently,” says local research house UOB KayHian in a recent report.
By year-end, 300 tables and 1,300 slot machines will likely be up and running. RWM will have 2,000 tables and 7,000 slot machines when fully completed. Moreover, RWM is just across the highway from the soon-to-be-opened Ninoy Aquino International Airport’s new terminal. Genting Hong Kong is exploring the construction of a walkway connecting RWM to the airport with the airport authority, UOB Kay- Hian says.
For 1H2010, Genting Hong Kong reported Ebitda of US$50.5 million. According to the UOB KayHian report, Genting Hong Kong received about US$10 million in dividends from RWM. Assuming Genting Hong Kong achieves a similar Ebitda in 2H2010, its shares are now trading at a EV/Ebitda valuation of 42.6 times. But analysts say Genting Hong Kong’s management is actually guiding for a much higher Ebitda of US$156 million this year, rising to US$200 million in FY2011. That would put its FY2010 and FY2011 EV/Ebitda ratios at 27.6 and 21.5 times, respectively.
COMPETITION, ASSET SHUFFLING RISKS
On the face of it, the somewhat higher valuations of Genting Hong Kong’s shares versus Genting Singapore might be justified, given the former’s possibly stronger growth potential. But shareholders of Genting Hong Kong face many more unfathomable risks than those of Genting Singapore. For one thing, RWM faces more competition. According to UOB Kay- Hian, there are three other mega casinos in Manila Bay that are scheduled to start operating in 4Q2012.
Moreover, Genting Hong Kong still has a very large but barely profitable cruise business. Will the company shunt this business to its parent or another company in the group as Genting Singapore did with Genting UK? Or, will it be its 50% stake in RWM that is eventually hived off elsewhere? With the Genting group’s history of asset-shuffling, it’s impossible to tell. Interestingly, the family of the late Lim Goh Tong owns a much larger proportion of Genting Hong Kong than Genting Singapore, 79.7% versus a deemed 51.7% stake in Genting Singapore through Genting Bhd.
Also, officials at Genting Hong Kong are clearly eager to promote the company, actively engaging investors through local securities firms. In fact, one local brokerage firm chartered a private jet to fly 10 fund managers to RWM for an overnight visit last week. And, if they liked what they saw, the positive buzz around Genting Hong Kong may well continue in the weeks ahead.
Last Updated on Friday, 17 September 2010 16:58
Written by Goola Warden
Monday, 20 September 2010 16:44
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