GENTING SING: GOOD>BAD

The receivable balance doesn't concern us. Mass slowdown does but we can't overlook the huge VIP volume growth and impressive operating cost control. 

We think Genting's Resorts World Singapore (RWS) may be in a better spot relative to expectations and valuation than LVS's Marina Bay Sands (MBS).  The valuation disparity is obvious but the higher VIP growth profile, particularly with junkets coming online, could allow RWS to continue to grow its market share.  On the negative side, the market appears to be focused on the growth in receivables but we'll tell you why we don't think this is an issue. 

The recent quarter was solid and the outlook is pretty favorable.  We've got a lot of detail in this note because we think the company and financials are very misunderstood by the analysts.  For instance, the Street seems to be assuming that all the tax revenue was accounted for in expenses.  In fact, Genting Singapore actually deducts Goods and Services Tax (GST: 6.54%) from revenues which is the correct methodology according to IFRS.  The incremental gaming tax (5% for VIP and 15% Mass) is accounted for in expenses.  For this reason, on an apples-to-apples basis, RWS revenues will be lower than MBS's with EBITDA unaffected, thus resulting in higher margins for RWS.

Details & thoughts:

• On the topic of Genting’s rather large receivable, we are less concerned than our sell-side brethren.  The S$450MM credit receivable (approx 75% of the trade & other receivables balance) is no doubt large.  However, it’s important to put the receivable in context of the massive amount of direct VIP business that RWS does every quarter.  RWS did almost 6x the direct play volume of Wynn Macau.  Wynn Macau’s quarterly receivable has ranged from 2.1-2.7% of direct RC volume – in comparison, RWS’s receivable of 2% quarterly RC doesn’t seem so out of whack.  Once the filings come out for the Macau names, we will spend more time analyzing the receivable issue. On the surface though, growing the receivable in-line with RC growth doesn’t seem to raise any red flags.
• On the call, management said that RWS’s share of gross gaming revenues was 58%, which given what MBS reported, implies that the property produced about S$1BN.  According to our estimates gross gaming receipts were S$982MM, with gross VIP receipts closer to 65% than the 60% management stated on the call.
  • VIP gross win of S$639MM
    • Drop of S$22.8BN. Mgmt said volumes were up 40% QoQ
      • On the 3Q call management sited that they had at least 53% market share of RC volume – which implies that 3Q had at least S$16.3BN RC volume
    • Hold of 2.8%. Management sited that hold was on the low end of 2.8-3.0%.
  • Net VIP win of S$331MM
    • Rebate rate of 1.25%. While on the call, management sited that rebate rates had not changed sequentially, offline they elaborated that they had a large mix of “high rollers” which earn a higher rebates (rebates are based on volumes) and stated that the rebate rate in the quarter was between 1.2-1.3%
    • GST of S$23MM
  • Net VIP was 51% of total net gaming revenues – in-line with management commentary
• Gross Mass Revenue of S$343MM and net mass revenues of S$321MM
  • Gross slot win of S$120MM and gross mass table win of S$223.4MM
  • Mass revenues declined in the single digit range sequentially according to management – primarily due to weaker holder comparisons on mass play
  • We also understand that Slot handle was flattish sequentially and that win per device was down
  • We assume that Mass tables held at 16% compared to guidance of 16-18% for last quarter. As an aside, RWS will typically have lower hold then MBS given that only 60% of their table games are baccarat – a much lower mix than MBS.  They are adjusting that mix this quarter, so hopefully there will be some improvement.
• We estimate that net gaming revenue was S$652MM or 84% of total net revenues, which is in-line with the 80-85% number that management sited on the call
• For the other nerds out there – the correct tax calculations are as follows:
  • GST (contra revenue):  (Gross gaming revenues – Rebates)* (7/107)
  • Gaming taxes (expense): (Gross gaming revenues – GST)* appropriate mass or VIP tax rate
• As we’ve written about in the past, it does appear that almost all the gaming growth has come from VIP market while Mass volumes appear to have barely budged since 2Q2010. This is obviously not ideal since the VIP business has lower margins (rebates) and carries more credit risk – which is definitely the topic of concern and focus in the analyst community with the 40% increase in Genting’s trade and other receivables balance.
• Despite having a cap of 8,000 daily visitors, Universal’s average daily visitation exceeded the cap since there were many open dated tickets issued to travel agents that were expiring by year end and were therefore redeemed. On February 21st, concurrent with the opening of Battlestar Galactica, Genting removed the visitation cap completely – so the visitations numbers going forward should reflect true demand.  The company expects that average daily visitation will exceed 10,000 per day in 2011. 
• On the hotel side, this past quarter saw a shift in business focus from travels agents to FIT.  Going forward, RWS will continue to focus on growing their FIT business, and therefore, we should see rates and ADRs go up a bit.  When the West Zone rooms open in the later part of 2011, they will be largely focused on the VIP customers and growing the VIP business.
• Total costs remained flat at $390MM, despite a 6% sequential net revenue
  • We estimate that fixed costs declined sequentially due to some one-time provisions that were made in the third quarter.
  • Gaming taxes and other variable expenses should have all increased given the increase in volumes.
• Other stats:
  • Gross casino revenues per day: S$10.7MM
  • EBITDA per day: S$4.2MM

 

Outlook:

• While management concedes that the focus was on VIP this quarter, they insist that they are catching up on Mass and that we should see nice sequential growth in Mass drop in 1Q2011.
• Management also alluded to both volumes and luck being better in 1Q2011
• Currently, RWS has 1,400 slots but plans to get to 1,600-1,700 slots by year-end with roughly 500 Electronic Table Games
• Junkets are now expected to come online in the 2H2011 vs previous guidance of end of 1Q2011. The holdup in approval is related to the upcoming elections in Singapore, which are expected to occur in May.  Typically, the government avoids any controversial decisions during the election period.
• 1Q2011 preliminary projections:
  • Net Revenues: S$890MM
  • EBITDA: S$482MM
• 2011 preliminary projections:
  • Net Revenues: S$3,581MM
  • EBITDA: S$1,850MM