This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.
AS the Lim family controls more than 50% of Genting Hong Kong Ltd, it would be hard for Genting Malaysia Bhd to sell its stake in the Hong Kong entity at above market price to a third party, says Tan Sri Lim Kok Thay.
“The business in the highlands [Genting Highlands] still remains one of the core businesses for the Malaysian company and it is making fantastic profits. So, it is very difficult for me to say that the cruise business will make more than the Malaysian business,” Lim says when asked why Genting Malaysia is looking to sell the stake even as Genting Hong Kong invests more heavily in cruise liners to capture the burgeoning Chinese tourist market.
Genting Malaysia, with RM4.52 billion cash in its coffers and continuing to generate strong cash flow every year, is far from desperate, although it has made a RM10 billion commitment to expand its flagship highlands resort and theme park. According to Lim, the question is whether Genting Malaysia can get better returns by reinvesting the proceeds from the sale of the stake.
That will be asked on June 1, when Genting Malaysia shareholders will again decide whether the company will be mandated to sell its 16.87% stake in Genting Hong Kong — including to related parties such as its controlling shareholder, the Lim family — for at least US$415 million (RM1.62 billion) for working capital and investments.
The gross proceeds from the 1.43 billion shares is based on the proposed minimum price of 29 US cents (equivalent to RM1.13 at the exchange rate of 3.9035 to the greenback used in the company’s circular to shareholders).
The new minimum price is less than the 33 US cents or RM1.23 apiece for each of the 1.43 billion Genting Hong Kong shares under the prevailing one-year stake sale mandate. The existing mandate, if not renewed, expires on July 1. The same number of shares were equivalent to a higher 17.81% stake, and could have fetched at least US$472.25 million or RM1.76 billion around this time last year, when the suggestion of a sale first was first made.
It is worth noting that Genting Hong Kong closed at 32.5 US cents in Singapore and HK$2.50 in Hong Kong last Friday.
The Singapore closing price is 12% above the new proposed minimum sale price of 29 US cents suggested for the mandate renewal but is below the minimum for the existing mandate.
The new mandate, if passed, allows for the sale price to be at a discount (of up to 20%) to the five-day volume weighted average price as long as it is above 29 US cents.
It will be hard for Genting Malaysia to recoup all of its investments in the near future as a sale did not take place at 33 US cents, let alone 42 US cents (RM1.64 each) — being the original cost of investment of US$604.1 million (RM2.36 billion) in the stake made between 1998 and 2006.
The original cost is also above the valuation of 25 US cents and 34 US cents (98 sen and RM1.33) for the shares, as ascribed by Morgan Stanley, which was hired to advise the board. The carrying value of the stake as at Dec 31, 2015, was US$457.9 million (RM1.79 billion).
If the shares were sold at the minimum price of 29 US cents, Genting’s accounting treatment might show some sort of “gain on disposal” despite it being below the carrying value.
Yet, even as its cash increases from RM4.52 billion to RM6.3 billion (sizeable versus RM4.62 billion borrowings), Genting Malaysia’s net assets per share would fall from RM3.37 as at end-2015 to RM3.34, pro-forma numbers show. The latter is consistent with a loss on disposal, when a stake is sold below its carrying value.
Genting Malaysia’s total shareholders’ funds would also be slightly lower because any expected increase in retained earnings would be negated by falls in other reserves, its circular shows.
By selling the Genting Hong Kong shares, Genting Malaysia would lose out if the shares were to appreciate in future, thanks to the billions being invested to boost the cruise business. But before any returns can be seen, dividends are likely to remain, in Lim’s words, “not too generous”.
The RM53.6 million dividend income received from Genting Hong Kong in 2015 was 4.3% of Genting Malaysia’s net profit of RM1.26 billion.
The Lim family’s Kien Huat Realty Sdn Bhd owns about 40% of Genting Bhd, which holds 52.9% of Genting Singapore and 49.3% of Genting Malaysia. The Lim family’s exposure in Genting Hong Kong is larger at about 60%, excluding its deemed interest in the stake held by Genting Malaysia.
That makes Lim an interested party. Genting Malaysia can decide not to sell the Genting Hong Kong shares if it does not get the price it wants, he says. “[Not selling] is not necessarily a bad thing,” he adds, explaining that the mandate gives Genting Malaysia another option to raise cash should the need arise.
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