Bring in the High-rollers!

Salvatore Dali has a take on Genting Singapore and the Resort world Sentosa today. A really auspicious day; 9th September in the Year of our Lord 2009.

He wrote:

Genting Singapore has had a tremendous run over the past few weeks, so much so that it even dragged Genting Berhad higher as some analysts think its a cheaper way to play Genting Singapore.

Testing of some of the Universal Studio rides have already begun while 4 hotels scheduled for opening in phase 1 have been topped up. Resorts World Sentosa (RWS) should be able to open on time, if not earlier. A sly indication, there is a charity concert to be held at the Festive Hotel, and that has been been scheduled for December 19th - that would surely steal some thunder from Marina Bay Sands.

Genting Singapore's principal activities are in developing integrated resorts, operating casinos, offering international sales and marketing services to Genting Highlands Resorts and providing IT application related services. Genting Singapore is currently the largest casino operator in the UK.

Let us look at the share-holding spread of its majority shareholders:

Genting Singapore
Paid Up: 9.637bn shares

Genting Overseas Holdings (Genting Berhad) 54.44%
Resorts World Limited 6.16%
DBS Vickers Securities Pte. Ltd. 5.73%
DMG Pte. Ltd. 3.33%
UOB Kay Hian Pte. Ltd. 2.48%
Citibank Nominess Singapore Pte. Ltd. 2.06%
DBS Nominees Pte. Ltd. 1.63%

Free Float: 30%
Market Cap: S$11.2bn / RM27bn
52 week range: S#0.32-S$1.18

RWS is still targeting for a soft launch in 1Q10, but some talks have emerged that its casino may open before the end of 2009. RWS has increased its investment from S$6b to S$6.59b, but it expects the additional investment to be funded by operating cash flows once the IR opens. It has awarded over S$4.7b in project costs but it expects capex to remain under S$6.0b by the time of opening. Some of the attractions will only be opened by end 2011.

Management affirmed that the project remains on track for a 1Q2010 opening. But it is still unable to commit to an official opening date as yet given the uncertain time-line associated with the crucial testing and commissioning of Universal Studios Singapore’s (USS) attractions. Installation works for most of the rides are currently ongoing and testing and commissioning works are slated to begin in Oct-09.

The casino licence application in progress. Management reiterated that both international resorts would need to satisfy three criteria before submitting their respective casino licence application. Particularly, RWS would need to:

i) spend 50% of its committed investment amount
ii) build 50% of the gross floor area
iii) build 50% of the site area.

It is estimated that RWS would reach the necessary milestones by end-3Q09. The casino licence, upon award, is for 30 years with renewals required once in every three years. It must have a competitive edge to attract VIP players. With industry players expecting the Macau government to cap VIP gaming commission rates at 1.25% by year-end, this could be a blessing in disguise for Singapore’s two upcoming casino operators in an attempt to get a slice of the Mainland Chinese VIP gaming pie. Management acknowledged the need to be competitive regionally and depending on market conditions, it would not discount the possibility of paying more attractive commission rates to attract the high rollers. Singapore’s more favourable VIP gaming tax of 12% (including 7% value added tax) vs. Macau’s 39% also pave way for such a possibility.

Infrastructure has been put in place to cater for IR traffic. Completion of the 3rd lane (per direction) on the vehicle bridge linking mainland to Sentosa (from 2 lanes to 3) has been confirmed. Vehicles from mainland can also enter car park of RWS from the bridge without having to drive into Sentosa. A 620m pedestrian bridge with travellators (capacity of 8,000 guests / hour / direction) will also be constructed. Management is gunning for 13MM visitors in 1st year of operations. Universal Studios Sentosa (USS) will be a major draw. along with the casino business is a volume business and USS, the Resort World at Sentosa should draw the crowd. Of the 13MM visitors, 40% is expected to be locals and 60% foreigners.

What will be the expectation of the casino? For one, casino revenue is expected to contribute 70% of total revenue.It will open with slightly more than 500 tables, a little baove the number at Genting Highlands in Malaysia but less than the 1,000 tables indicated by Marina Sands.

What is i nstore for high rollers? What are the junkets? Junket commissions is one, naturally.The lower tax structure in Singapore should give operators the flexibility to be pay above Macau's commission rate of 1.25% if need be.Indonesia and Thailand are important markets for them. The Genting Group has long standing relationships with junket operators in the region.Singapore will have a formal process of registering the junkets but junket rules not out yet.

“The upside in Genting Berhad lies in two key angles. First,the explicit re-rating of Genting Singapore as a subsidiary and second, the narrowing of the “discount to entry” as a parent (company). The current share price is pricing in a value of S$0.63 per share for Genting Singapore and Salvador thus advocate a buy call on Genting Bhd on the premise that investors are paying around 50 per cent “discount to entry”

Malaysian gaming stocks are also playing catch-up with their regional peers, which rose sharply last week on reports gaming revenue in Macau, the world’s top gambling market, rose to a new high in August.

Genting Berhad is trading at 14x FY11F PE and 6x EV/EBITDA vs Genting Singapore's 29x and 11x respectively (strongest earnings growth in the sector). Every 1% rise in Genting Singapore's value would boost Genting Berhad's SOP valuation by 0.4%.

According to Salvadore, much of what was written by him was a summary of what been printed in most research reports. He has this to say," I am beginning to like Genting Singapore but I frown on Genting Berhad being a tag along play. The big difference is that Kien Huat Realty holds only 32% of Genting Berhad. As usch. there is a humungous free float, while the shareholding is curiously tight in Genting Singapore. If one look closely at the substantial shareholders, there are plenty holding 2%-3% stakes but held under nominees. My view is that the Lim family and owner/managment probably think that Genting Singapore is the most exciting vehicle to be invested in (among the array of Genting companies) for now and over the next 2 years.

Genting Berhad is there as an anchor controlling the vast array of listed entities. I would stick with Genting Singapore. Many are already revising upwards their targets from the S$1.10-S$1.28 levels. It is too complicated to put the spreadsheet in this blog but at those levels, the visitors to RWS is more in the range of 10m a year, I think there is a good chance that it will be exceeded. I would not be surprised if Genting Singapore rides the wave to S$1.50, and even that is not terribly expensive, really.

Is he terribly optimistic?