Go down gambling: Genting struggles to stay afloat as VIPs vanish

VIP volumes will plunge in 2H.

Genting Singapore is struggling to stay afloat as its ultra-rich gamblers vanish, with analysts warning that its VIP volumes will likely plunge in the second half of the year.

According to Maybank Kim Eng, Genting’s VIP volumes are driven mainly by mainland Chinese. However, these players are disappearing due to the lack of junkets in the island, who extend credit and collect debt from VIPs.

“With Macau’s VIP volumes falling 19% YoY in Aug 2014 and likely slipping even more in September, we turn a wary eye to Singapore. Singapore derives half of its VIP volumes from mainland Chinese (Macau: 80-90%). We observe that when Macau’s VIP volume growth YoY decelerated in 3Q11-3Q12, Singapore’s decelerated by a larger magnitude and even fell YoY. Singapore’s integrated resorts extend less credit to VIPs and thus, generate lower VIP volumes when the Chinese economy weakens, for fear that VIPs may not be able to repay them,” noted Maybank Kim Eng.

Here’s more from Maybank Kim Eng:

Over the last two weeks, we spoke to many parties on GENS’s prospects. 2H14 VIP volumes are likely to fall markedly YoY, no thanks to tight credit conditions in China.

However, we believe volumes will recover in 2015 as the Chinese government has begun to ease credit conditions. What we are a tad worried about is the continuous slide in Singapore’s property prices. This could hurt mass-market gross gaming revenue (GGR) in the next two years.

We cut FY14E-16E EBITDA by 1%/13%/16% which leads to a larger 2%/22%/26% reduction in earnings, due to negative operating leverage from depreciation and perpetual securities distribution.

We believe EBITDA is a better gauge of the FCF required to finance new ventures and hence, a better valuation metric for GENS. We lower TP from SGD1.24 on 10x FY14E EV/EBITDA to SGD1.13 on 9x FY15E EV/EBITDA, in view of its slower earnings growth.