Opening of the theme park is pending the first hearing session from the court which has not been set. As such, the issue is likely to be a prolonged saga. 1Q will be the first quarter with the impact of the gaming tax hike. The worst case scenario would be for EBITDA margin to fall 10%, however we only take into account a 7% fall (still more conservative vs street). Our optimism arises from the group’s cost saving measures which started last year. Reiterate HOLD with lower SOP-derived TP of RM3.36.

We Recently Met Up With the Management on GenM With the Following Key Takeaways:

Delayed until further notice. To recap, back in Nov 2018, GenM filed a lawsuit against Fox (and Disney) for pulling out of an agreement to sponsor the 20th Century Fox Theme Park in Genting Highlands. While the theme park is nearing completion, GenM has decided to hold back on its opening (originally targeted for mid-2019) to wait for the first hearing from the court. This step has been taken to not jeopardise the chances of its USD1bn lawsuit against Fox. However, the first hearing date is still uncertain, casting risk that the theme park’s opening may be delayed indefinitely. To reflect this risk, we project visitors to total 26.6m in FY20 vs management’s original target of 30.

Worst-case scenario. To recall, GenM was hit by a 10% casino duty hike (to 35% from 25%). Theoretically, GenM’s EBITDA margin should be hit by a 10% reduction which if we assume other variables remain constant; i.e. EBITDA margin would fall from a usual ~27% to ~17%. However, we choose to be more optimistic and have a EBITDA margin projection of ~20% for FY19/20/21 as the GenM has adopted several cost saving measures such as (i) manpower optimisation (will reduce expensive theme park marshal and maintain headcount at about 14k workers at RWG) and (ii) reduce marketing expenses.

Cautious on visitor upside. Last year, the group witness an impressive 10% growth to 25.9m visitors. Management shared that during this year’s Chinese New Year (Feb), it saw another daily record high visitor footfall of 130k in RWG. Given the high base in FY18, coupled with uncertainties on the theme park’s opening date, we choose to remain cautious on visitor numbers and assume only 1% growth for FY19.

RWNYC. For the uninitiated, Resort World New York City (RWNYC) had committed to an expansion plan of USD400m and is slated to be open in phases starting by end of 2019. This project includes 400 hotel rooms, additional gaming machines, retail and F&B space. The group has thus far spent USD80m, the remaining capex will be spread between 2019 and 2020 (USD160m each year). However, significant earnings contribution should only flow earliest in 2021.

Forecast. Unchanged

Maintain HOLD, TP: RM3.36. Despite no changes to our earnings forecast, we lower the EV/EBITDA multiple for RWG in our SOP valuation from 7.5x to 7x. This reduces our TP from RM3.51 to RM3.36 We reckon that this is warranted to reflect the continued uncertainty on the opening of the outdoor theme park (as elaborated previously) which would undermine the growth from the GITP expansion. Furthermore, the upcoming 1QFY19 results (in May) would reflect the first quarter impact from the gaming tax hike.

Source: Hong Leong Investment Bank Research - 16 Apr 2019