Odds look good for Genting in Japan

This article first appeared in The Edge Malaysia Weekly, on May 27, 2019 - June 02, 2019.

Bursa Malaysia-listed Genting owns casino properties in Malaysia, Singapore (above), the UK and the US, and is now eyeing Japan. Photo by AFP

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IT is no secret that gaming tycoon Tan Sri Lim Kok Thay believes the odds are good for Genting Singapore Ltd to be awarded a casino licence by the Japanese. His optimism stems from the Japanese government’s public pronouncement that it will employ the Singapore casino model.

As Genting Singapore operates the successful Resorts World Sentosa on the island state, the Genting Bhd chairman and chief executive believes Genting’s 52.75%-owned subsidiary has the upper hand in Japan — incidentally one of the world’s last major untapped casino markets.

More importantly, Genting Singapore is among the very few candidates in a net cash position, observes Maybank Kim Eng Holdings Ltd regional gaming analyst Samuel Yin Shao Yang.

“Las Vegas Sands Corp and many other American casino operators are mostly in a net debt position, but Genting Singapore is huge in net cash. For that, the Japanese would probably prefer them,” he tells The Edge in an interview at Maybank’s Invest Asia 2019 conference in Singapore.

Yin pointed out that Las Vegas Sands stopped the construction of Sands Cotai Central in Macau during the global financial crisis (GFC) in 2009, owing to cash flow problems.

“This time around, given that there may be another GFC brewing with the ongoing trade war, the Japanese probably want to work with someone who is in a net cash position. So, Genting will be in a favourable position,” he says.

At least seven foreign casino giants have openly sounded their intention to bid for one of the three integrated casino resort licences up for grabs in Japan.

Four — Las Vegas Sands, MGM Resorts International, Wynn Resorts Ltd and Caesars Entertainment Corp — are based in Nevada, the US.

The remaining three are based in Asia and comprises Genting Singapore, Galaxy Entertainment Group Ltd and Melco Resorts & Entertainment Ltd.

Bursa Malaysia-listed Genting owns casino properties in Malaysia, Singapore, the UK and the US, whereas Galaxy Entertainment and Melco operate casinos in Macau.

Yin reiterates Genting Singapore’s past experience and track record in Resorts World Sentosa puts it in good stead to build a Singapore-style integrated resort (IR) in Japan.

Genting has operated for nearly a decade in Singapore, having won the right to build a mega casino resort on Sentosa, Singapore, in 2006 after besting two consortiums — a group led by Las Vegas developer Eighth Wonder that included Hong Kong-listed Melco International Development, and a joint venture between Bahamas resort operator Kerzner International and Singapore’s CapitaLand Ltd.

“Singapore is quite stringent on social safeguards for casinos. Japan has been making so many references to Singapore’s casino model that I almost lost count. But to me, being in a net cash position is another plus point,” Yin remarks.

A quick check on Bloomberg reveals that all the US-based casino operators — Las Vegas Sands, MGM Resorts International, Wynn Resorts and Caesars Entertainment — are in a net debt position.

Caesars Entertainment and Wynn Resorts are highly geared, with a net debt-to-shareholders’ equity ratio of 5.25 times and 3.97 times respectively. MGM Resorts International and Las Vegas Sands have debt-to-equity ratios of more than 100%.

Of Genting’s Asian rivals, Nasdaq-listed Melco Resorts & Entertainment, spearheaded by Lawrence Ho Yau Lung — the oldest living son of Macau casino kingpin Stanley Ho Hung Sun — is also in a net debt position.

In comparison, Genting Singapore and its parent company, Genting, are are in net cash position of S$3.17 billion (RM9.64 billion) and RM1.76 billion, respectively (see bar charts).

“Generally, Asian companies are more conservative. Yes, Galaxy is also in a net cash position, but the Hong Kong operator might have some disadvantages because China and Japan are not the best of friends at the moment,” says Yin. Hong Kong-listed Galaxy Entertainment is ultimately controlled by the family of Dr Lui Che Woo, the sixth-richest man in the former British colony.

“If you look at the whole situation purely from a logical point of view, it totally makes sense (to bet on Genting). However, things can change very fast in global politics, we will never know,” Yin cautions.

The bidding contest for a Japanese casino licence is expected to commence by the fourth quarter of this year, with the results anticipated to be announced by the second quarter of next year.

“The thing about Japan is that it can be a very big market, but the gaming tax rate is going to be high. Then, they still have sales tax and corporate tax. The land cost is not going to be cheap either. We understand that just to test the land in Japan (for earthquakes) is going to cost them US$200 million to US$300 million. There are a lot more investments to be made,” Yin adds.

He states that Genting remains his top pick in the sector, as it is cheaper than Genting Singapore and Genting Malaysia Bhd.

Yin recalls when Genting Singapore won an IR licence in 2006, Genting was trading at a 20% premium to its realised net asset value (RNAV) per share. Presently, Genting is trading at a 50% discount to its RNAV per share.

“Genting is cheap. In the event that they win the casino licence in Japan, from a 50% discount to a 20% premium, that is 70% upside potential; you can do the math,” Yin concludes.

Year to date, shares in Genting have gained 4% to close at RM6.28 last Friday, valuing the company at RM24.18 billion. The counter is currently trading at a price-to-book ratio of 0.7 times, against its net assets per share of RM8.86.

Last Thursday, Genting announced a 7% drop in net profit to RM561.64 million, or 14.59 sen per share, in the first quarter ended March, against RM602.7 million, or 15.74 sen per share, a year earlier. However, revenue was 6% higher to RM5.57 billion, from RM5.25 billion in 1QFY2018.

Genting attributed the weaker profit to the provision for the termination of contracts related to its outdoor theme park at Resorts World Genting amounting to RM198.3 million, as well as a loss on a discontinued cash flow hedge.



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