Business Times - 04 Aug 2010

Hock Lock Siew
Genting HK: a gem that's undervalued

By VEN SREENIVASAN

THE biggest game in town - and the region - in recent months has been the gaming sector. The successful openings of the Singapore integrated resorts (IRs) and the continuing buoyancy of the Macau gaming scene seem to have captured the market's imagination.

Marina Bay Sands (MBS) recently reported an impressive US$94.5 million in adjusted Ebitda (earnings before interest, tax, depreciation and amortisation) during its first 65 days of operations. Meanwhile, Goldman Sachs last week noted that Genting Singapore's Resorts World Sentosa (RWS) is proving to be a strong competitor, retaining 60 per cent of the market share post-Sands opening, and chalking up quarterly gaming revenue of some US$3 billion. Further north, the Macau casinos have powered past the most optimistic expectations, posting revenue growth in excess of 60 per cent this year.

Little wonder that gaming stocks have been soaring despite the market volatility. Genting Singapore is already up 50 per cent in less than two months, while the Macau gaming counters have gained some 50-80 per cent since February.

And valuations reflect the bullishness. The Macau casinos are trading at core 2010 price-earnings multiples of over 24 times and a price-book value of over four times, while Genting Singapore is currently trading at some 28 times FY2010 earnings and 3.5 times its book value.

But there is one gaming company which has been somewhat overlooked: Genting Hong Kong (Genting HK). Formerly known as Star Cruises, Genting HK is now a three-pronged gaming entity comprising Star Cruises in Asia, Norwegian Cruise Line (NCL) in the US, and Resorts World Manila (RWM) in the Philippines.

At its closing of 26 US cents yesterday, the stock of Genting HK is trading at a significant discount to those of its peers and just close to its own net book value. It recently started stirring after a UOB-Kay Hian report two weeks ago, which said the company was on the verge of a take-off.

Indeed, Star Cruises started operating the Hong Kong-Taipei route in May 2009 and is seeing a sharp earnings recovery, thanks to savvy restructuring and an occupancy of 90 per cent. The fleet, valued at almost US$5 billion, gets two-thirds of its gaming revenue from the non-Singapore cruise business and its operating profit is expected to reach US$50 million this year.

Meanwhile, 50 per cent-owned NCL is back in the black, thanks to aggressive cost management and a strong wave of bookings. UOB-Kay Hian noted that its yields are now comparable to the world's largest cruise companies. The latest vessel - the US$1.3 billion Norwegian Epic, which was launched in July - is expected to contribute to earnings this year, with a six-year payback.

But the jewel in Genting HK's crown has to be its 50 per cent-owned Resorts World Manila (RWM). Built at a cost of US$400 million - less than a tenth of what it cost to build each of the two IRs here - this is a pure casino play. The property, which is three times the size of its Sentosa sister, has been raking in the big bucks, thanks to its ability to leverage on the Genting group's network of high rollers and significantly lower gaming taxes (at 25 per cent).

With a current daily gross win at its casino of US$1 million a day, Genting HK is expected by analysts to see a payback period of under five years - a truly remarkable return on investment. With its 30,000 square metres shopping mall due to open later this year, RWM is also seen by industry observers as being able to contribute almost US$40 million to Genting HK's bottom line this year, and some US$70 million net profit in 2011. This is even before it builds its planned mega casino-cum-theme park on its 37 hectare site. If it delivers on its potential, RWM could become the most profitable casino operator in the Asia Pacific in short order.

There is speculation that Malaysian gaming tycoon Lim Kok Tay, who controls 72 per cent of Genting Hong Kong, could - at some point - decide that Genting HK's three profitable and independent businesses (Star Cruises, NCL and RWM) should be demerged and listed separately.

Such a move would significantly boost shareholders' value.

Goldman Sachs recently upgraded the Genting group as an undervalued proxy to global gaming on the back of its much stronger franchise following the successful launch of RWS, which it estimates will earn S$855 million in 2011.

Genting HK, whose RWM has a domestic market base of 100 million people (versus 29 million for Genting Malaysia and five million for Genting Singapore), should in time replicate RWS's potential and further add to the group's value proposition.

Based on the numbers, Genting HK appears to be an under-recognised and undervalued gem that investors should take note of - especially those who have missed the boat on Genting Singapore.

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