Genting Singapore

Kim Eng on 9 Jul 2012

No respite from its unlucky streak. The Singapore government has proposed three amendments to the Casino Control Act which we deem likely to be detrimental to GENS’ VIP volumes if passed. This is likely to offset any benefit to GENS from the establishment of Singapore as a CNY hub. It will also cap upside potential to GENS’ share price until there is further clarity, rendering the stock, at best, a HOLD for now. We downgrade GENS from BUY with a lower SGD1.40 TP after migrating our valuation basis and factoring in potential downside risk to earnings.

A much stricter Casino Control Act is bad for business. Last Friday saw two Chinese banks getting full banking licenses to operate in Singapore, one of which will clear CNY transactions. Experience from
Hong Kong-Macau shows a positive flow through to Macau’s gross gaming revenue (GGR) when HK was established as a CNY trading hub back in Jun 2010. That said, the Singapore government on the same day proposed three amendments to the Casino Control Act which we deem onerous. Public consultation will start today and end on 6 Aug. The government hopes to pass the amendments by YE.

Our concerns. (i) If financial penalties are raised to <10% of GGR from SGD1m currently, they will erode GENS’ profits; we estimate that the penalties may amount up to SGD370m or 25% of EBITDA (versus <1% in 2011). (ii) If IMA commissions, which the CRA may be empowered to cap, are set below regional averages (Macau: 1.25%, Malaysia: 1.2- 1.3%), IMAs will encourage their VIPs to gamble elsewhere. (iii) If VIPs have to draw down their SGD100k deposits first before the casinos can extend credit, VIPs will likely reduce length of play.

Downgrade to HOLD and TP to SGD1.40. We retain our below consensus earnings estimates pending further clarity on the proposed amendments. In light of this near-term uncertainty, we migrate our valuation basis for GENS from DCF to 11x current year EV/EBITDA (Macau average), and slash our TP from SGD2.00 to SGD1.40. Investors will be more concerned with this near-term uncertainty rather than its long-term prospects for now.