Investors’ hopes fade as Genting struggles with bad debt and deteriorating returns

The downgrade cycle will continue for the unlucky gaming giant.

Hope may spring eternal, but holding on to hope can hurt for many of Genting Singapore’s investors. Many shareholders are clinging to their stocks with the expectation that the gaming firm will soon improve returns, but analysts now warn that this dream may well be in vain.

According to a report by Macquarie Research, the stage is set for disappointment as Genting will be unable to navigate through a mature domestic gaming market while its overseas projects are only marginally accretive.

“We think the SG gaming market cannot grow and GENS will be pushed into extending more credit to VIP players to protect market share, leading to more bad debts and deterioration of returns. Also, overseas expansion will remain in question as legislations are pushed out.

In addition, consensus is too bullish (profit estimates 11-19% above ours) and valuations are too expensive (23x P/E, 2x P/B, 9x EV /EBITDA). We thus think that the downgrade cycle will continue,” noted the report.

Here’s more from Macquarie Research:
GENS has already lost ground to MBS in “mass market” (40:60 now). It is thus pushing for “VIP volume growth” by extending more credit (AR up 81% in 3 years) leading to high bad debt expenses (20% of AR and 11% of VIP GGR now).

This is shaving off 7-8% of its EBITDA margins while ROEs have halved in 3 years.

The US$2.2bn JV has run into delays due to reviews by the new governor. Even if all falls into place for GENS, we see only 3% upside to valuations. We think the existing competition (16 casinos in Korea, 8 in Jeju) and the ‘foreigners-only’ limitation on gambling in Korea will limit value upside from this project

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