GENTING 2Q12 CONF CALL NOTES

Management cautious regarding near-term growth



The Group adopted a cautious approach in its business dealings towards the end of 2011, when an uncertain global economic environment began to present challenges to the Asian economies. Notwithstanding this, the Group continues to deliver a set of sustainable financial results that demonstrates healthy return on capital employed

CONF CALL NOTES

  • Gained market share QoQ, which is commendable given their disadvantageous location
  • Will continue to see similar EBITDA margins this past Q

Q&A

  • GGR market share 49%
  • Casino Control Act Amendment: Draft went public where you can find a lot of details. They don't think that there will be any significant impact on their business. They believe that the financially vulnerable that gamble is a small minority.
  • 3.1% hold rate for VIP this quarter
  • Collections: receivables have come down.  In 4Q, they spoke about slowing down the granting of credit and they did what they said. The have been more careful in who they credit to.  Incentives to collect are given to less than 1% of people that they need to collect from.
  • The higher commission has almost a negligible impact; i.e. there were no material changes in commission rate
  • RC volume QoQ change: it has come down by slightly more than 10% but less than 15%
  • Mass revenue was marginally down QoQ
  • Split between VIP/MASS 
    • 49% at the gross gaming revenue
    • 35% of the net revenue gaming revenue
  • Receivables: Casino receviable is all in current receivables S$734MM (Group level).  $269MM is the bad debt provision. 
  • Continue to maintain that the Echo investment is a portfolio investment
  • Labor expense inflation was basically flat YoY.  However, they added 1,300 employees to the West Zone.  With the Singapore government tightening up foreign labor they will be squeezed in two ways: difficulty in finding talent and wage inflation. They are focused on acheiving productivity gains.
  • Have 13,600 total employees now
  • There is no dividend policy for the company. They plan on continuing pay something similar in absolute terms as last year if things continue to go well.  Growth is primary and dividend is secondary for them.  Don't expect big dividends from them.
  • There was no material change in their bad debt expense this quarter.  They were impacted by Marine Life Park -which had very high electricity expenses and new employee expenses without any new revenue.  Over the next 2 quarters, they will have similar issues. The 45% margin should be the worst that they see and then see significant margin improvement next year when the Marine Life Park opens in earnest in 2Q13.  So the margin will be in the 45-50%. 
  • High impairment level (bad debt expense) is a prudent approach to provisioning given the state of the world economy at this time.  They would rather provision conservatively then see a big charge offs.
  • Net gaming revenue share was marginally lower QoQ
  • Not all the expenses for the Marine Life Park are in pre-opening: electricity, security, and other expenses difficult to breakout. The expenses in pre-opening relate to Marine Life Park specific personnel.
  • The slowdown from Chinese patrons was not huge but significant.  Chinese patrons are usually in their top 5 contributors.
  • RC volume market share: 48%
  • Mass market share: 47% (GENT didn't specify whether it was win or drop)
  • Junkets are called IMA's - they have two and their contribution to revenue is negligible at this point.  They are deliberating managing this on a low basis to take it slowly.  Both of the IMAs are Malaysians. Don't see a material contribution from IMAs for at least 2012.
  • Continues to be optimistic that something will get passed in the next 12-18 months in Japan.  The first legislation will allow casino legislation to get formed (i.e. legalize casinos). Then the second draft will decide locations of the casinos. There has been some talk about putting a Casino in the area of where the nuclear disaster happened.   
  • YoY trend in VIP RC:  close to sequential trend
  • 562 tables; Slots: 1017; ETGs: 710
  • How are the perpetual securities accounted for?  See on page 2. It's treated as equity and not a bond and is therefore entitled to a % of NI of the company. So it's a balance sheet item and not a P&L item.
  • EBITDA margins:
    • Gaming has the best margin
    • Non-gaming margins are not that great but that's part of the deal
    • West Zone- will not have great margins but it will have positive cash flow at steady state. Will not be a margin margin contributor for first 12-18 months.
  • Their new show will open in November but won't be as big as the previous one - Magic Illusion Show. They have learned in terms of what works and doesn't in terms of genre and pricing. Think it will be a lot more profitable than last one.
  • Were opportunistic about raising cash. They are confident that they will announce something in the next 12-18 months. Will not rush into anything but if the opportunity presents itself, they will be able to pounce on it. They are obviously looking at Japan and several other greenfield projects. In the worst case, they make enough to just pay interest on the securities and hopefully they will make a big ROI investment.
  • Their investment hurdle rate is 15%.  They have just rejected a greenfield project where the ROI didn't meet their expectation. They will only look at investments of S$500MM or greater. 
  • What is happening on the Mass side? It is difficult because the local population is small. The Singapore market will either be stagnant or deteriorate. They are not hopeful about getting growth from the local market. They are working with the government to be responsible. They need to work a lot harder in bringing overseas players. They are also working to add a few potential partners to bring in mid-segment patrons from overseas.
  • They need more hotel rooms to grow the Mass business. They are looking for more land in the vicinity to add hotel rooms. Would cost north of S$350MM.
  • The per cap at USS is down a little YoY. People aren't spending as much in the park as they used to. However, their non-gaming revenue is trending up. In a steady state, expect non-gaming revenue to comprise almost 30% of their total revenue.
  • Has the Singapore gaming market reached maturity or is it just an economic issue? 
    • Doesn't think that they have reached maturity. They still have a ways to go into growing their overseas market but it requires a lot of work and it will take time: 12-24 months
    • The local market is not likely to grow
  • 50% are gaming customers in the Beach Villas and Equarius. So they can improve how well they yield those rooms.

HIGHLIGHTS FROM THE RELEASE

  • Genting Singapore net revenues of S$702.2MM and Adjusted EBITDA of S$311MM
  • RWS revenue of S$696.3MM and adjusted EBITDA S$313MM
  • Equarius Hotel and Beach Villas in the beginning of 2012, and overall room inventory increased by 8%
  • Hotel occupancy: 92%; ADR: $432
  • USS average daily visitation: 9,560 and S$86 spend per day
  • 2Q was impacted by "an increase in expenses for the Marine Life Park. The Park is under various stages of completion and incurring pre-opening operating costs without corresponding revenue generation."
  • "The high-end Equarius Hotel and Beach Villas are seeing good occupancy ever since opening just 6 months ago. The newly opened luxury spa ESPA and two exclusive treetop lofts are our latest luxury products. The Marine Life Park will soft open by the end of the year."
  • "RWS Invites, the non-casino loyalty programme was launched in April to drive loyalty and repeat visitation to our non-gaming products, offering the best the Resort has to offer. The card and its usage has been gaining momentum since"
  • "With the anticipated completion of the West Zone, we will be gearing up for our Grand Opening celebrations in the last quarter of this year."
  • "The Singapore government is set to make amendments to the Casino Control Act and we fully support its aim of protecting financially vulnerable persons. We will continue to work closely with the authorities on implementing responsible gambling measures."
  • "The global economy looks increasingly unfavourable. As we move into the pre-operations phase of the Marine Life Park over the next few months, we will continue to see similar narrower EBITDA margins as in the current quarter."
  • "The Group’s cash position today is healthy. In an economic challenging environment, such a good cash standing presents significant advantage for the Group to capitalise on any suitable investment opportunities."
  • "On 12 March 2012 and 18 April 2012, the Company issued S$1,800 million 5.125% perpetual subordinated capital securities (“Institutional Securities”) and S$500 million 5.125% perpetual subordinated capital securities (“Retail Securities”) respectively at an issue price of 100 per cent. The perpetual subordinated capital securities were issued for the Group’s general corporate purposes as well as to finance capital expenditure and expansion of its business."
  • "During the financial period ended 30 June 2012, the Group invested in a portfolio of quoted securities, unquoted equity investment and compounded financial instruments amounting to S$1,148.9 million. The Group also spent a total of S$315.1 million for construction work-in-progress and other property, plant and equipment during the financial period."