Highlights

We re-visited Genting Bhd’s (GenT) business model and adjusted accordingly based on the latest changes in its ongoing as well as upcoming operations.

Resorts World Las Vegas (RWLV): As the gaming environment in Las Vegas Strip continues to improve with yoy growth of 3.4% in net gaming revenue for 1H14, signalling that growth is now entrenched and sustainable.

Hence, we take this opportunity to revise our assumptions on the potential gaming and non-gaming revenue for RWLV, benchmarking it to MGM Grand, Las Vegas Sands and Wynn Las Vegas.

Our calculations of three case scenarios (conservative, base and optimistic) resulted to higher earnings of between 4.9-16.3%. RWLV’s newest fair value to GenT would be at RM0.46/share, an incremental of RM0.12/share vs. previous fair value of RM0.34.

Power Division: Post-completion of the 51% stake disposal by GenT in Fujian Power Electric Company Ltd (FPEC), the 49% earnings contribution from Meizhou Wan power plant will now be recognised under associate level.

With the absence of the 51% stake, the group’s power division is now left with a total effective capacity of 714MW. However in FY17, GenT will experience a boost from the division again as they plan to develop a new 2 x 1000MW power plant in China, which is expected to commence in FY17, coupled with the 95%-owned 660MW power plant in Banten, Indonesia.

With the inclusion of these three power plants, total effective capacity will total to as much as 2,320MW in FY17 onwards.

Risks

1) Regulatory risk; 2) Weaker hold percentage; 3) Pandemic breakouts; 4) Appreciation of RM; 5) Higherthan- expected cannibalisation from Marina Bay Sands (MBS) and Macau casinos; 6) Annual renewal on RWS’s junket license.

Forecasts

We tweaked our forecasts accordingly to reflect: 1) lower stake in Meizhou Wan power plant; and 2) minority interests’. Hence, FY14-16 EPS is adjusted downwards by 10.0%, 9.6%, and 7.0% respectively.

Rating

BUY

Positives – (1) Defensive stock; and (2) New sources of earnings from international markets to drive earnings growth.

Negatives – (1) Highly regulated industry; and (2) Leisure and hospitality’s earnings highly dependable on luck factor and hold percentage.

Valuation

Target price is reduced to RM11.73 (previously RM12.08) based on SOP valuations. Despite higher fair value of RWLV, it is more than offset by lower value from power division.

We are keeping our BUY call in GenT as we stay optimistic for its’ promising long-term prospects and strong fundamentals. Also, we believe GenT will experience a significant boost in earnings FY17 (beyond our forecast) when contribution from RWLV and 3 power plants kicks in.

Source:Hong Leong Investment Bank Research - 8 Aug 2014