Genting Singapore

Kim Eng on 26 Mar 2012

Some good news for a change. Two junket licences have been awarded for operation at the Resorts World Sentosa (RWS) only. Our rudimentary calculations indicate that they may bolster Genting Singapore’s (GENS) earnings by 18-26%. We leave our earnings estimates unchanged for now but the licences are definitely a positive development. Maintain Buy and DCF-based target price of $2.10.

Two “junkets” approved. Last Thursday night, the Casino Regulatory Authority awarded two International Market Agents (IMAs) licences, a euphemism for junket licences. They are Huang Yu Kiung and Low Chong Aun, sponsored and authorised to operate at RWS only. The licences will be valid for one year and the IMAs can operate immediately. They are not allowed to target Singaporeans.

Scenario analysis (1): +26% to earnings? Our rudimentary calculations reveal encouraging results. The Macau junket VIP GGR is worth US$21-22b p.a.. Assuming very conservatively that RWS captures just 5% of this market, some US$1b or S$1.3b will accrue to it. Assuming 24% EBITDA margin on gross revenue, the two new IMAs will add S$310m to GENS’ EBITDA or S$260m to net profit.

Scenario analysis (2): +18% to earnings? We understand that there are more than 190 licensed junkets in Macau of which the top 40 account for some 80% of VIP GGR. Assuming 60 are active junkets, another rudimentary calculation reveals that each junket controls US$350m of VIP GGR. With two IMAs at RWS, RWS stands to capture US$700m or S$900m. Assuming 24% EBITDA margin again, the two new IMAs will add S$220m to GENS’ EBITDA or S$180m to net profit.

Maintain Buy and DCF-based TP of $2.10. We leave our earnings forecasts unchanged for now as it is difficult to quantify the IMAs’ exact impact. Under our scenario 1 analysis (+26% to earnings), our 2012 net profit forecast will surge to $1.3b and DCF-based TP to $2.62. Other re-rating catalysts will be the establishment of Singapore as a renminbi trading hub, thereby facilitating junket operations, and GENS obtaining a Japanese casino licence.